Chapter 1

Insurance: What Is It?

1/20/2018 General Insurance - INS21

 Key Terms
• Insured : is a person, a business or an
organization whose property, life or legal
liability is covered by an insurance policy

• Insurer : is an insurance company

1/20/2018 General Insurance - INS21

 What exactly is insurance ??
• Insurance is :

– A Transfer System
– A Business
– A Contract

1/20/2018 General Insurance - INS21

 Transfer System
• Insurance is a system that enables a
person, family, or business to transfer the
cost of losses to an insurance company.
• The insurance company in turn , pays for
covered losses and in effect distributes the
cost of losses among all insureds.\

1/20/2018 General Insurance - INS21

 Transfer System

• Transferring the cost of losses

• Sharing the cost of losses

1/20/2018 General Insurance - INS21

 Law of Large Numbers
• Mathematical principle stating that as the
number of similar but independent
exposure units increases, the relative
accuracy of future outcomes based on the
exposure units also increases

• This law is the foundation of insurance

1/20/2018 General Insurance - INS21

 Loss Exposures

• Property Loss Exposures

• Liability Loss Exposures
• Human and Personnel Loss Exposures

1/20/2018 General Insurance - INS21

 Property Loss Exposures
• It involves some type of property that is
exposed to potential losses

• Property is of two types:

– Real property

– Personal Property

1/20/2018 General Insurance - INS21

 Liability Loss Exposures
• Any condition or situation that presents the
possibility that liability loss will happen

• Liability Loss is claim for monetary

damages because of injury to another
party or damage to another party’s
property

1/20/2018 General Insurance - INS21

 Human and Personnel Loss
Exposures
• Human loss exposure can be defined as any
condition or a situation that presents the
possibility of financial loss to an individual or a
family by such causes as death, sickness, injury,
or unemployment

• Personnel loss exposure is a possibility of a

financial loss to the business of death, disability,
retirement or resignation of key employees

1/20/2018 General Insurance - INS21

 Ideally insurance loss exposures
• Large number of similar exposure units
• Losses that are accidental
• Losses that are definite and measurable
• Losses that are not catastrophic
• Losses that are economically feasible to
insure

1/20/2018 General Insurance - INS21

 Insurance as a Business
• Types of Insurers
• Insurance operations
• Financial performance of insurers
• State insurance regulation
• Benefits and costs of insurance

1/20/2018 General Insurance - INS21

 Types of Insurers

• Private insurers
– Stock insurance companies
– Mutual insurance companies
– Reciprocal insurance exchanges
• Federal Government insurance programs
– Social security insurance program
– The National Flood insurance program
– Federal crop insurance program
• State Government insurance programs
– Worker compensation insurance program
– Unemployment insurance plans
– FAIR plans

1/20/2018 General Insurance - INS21

 Insurance operations
• Marketing is the process of identifying customers and selling and
delivering the products or service .

• Underwriting is the process by which insurance companies decide

which potential customers to insure and what coverage to offer
them.

• Claim Handling is the process which enables insurance companies

to decide whether a covered loss has occurred and if so the amount
to be paid for the loss.

• Ratemaking is an important insurance operation , is the process by

which insurers determine the rate to charge the thousands of similar
but independent insureds.

1/20/2018 General Insurance - INS21

 Benefits of Insurance
• Payment for the cost of covered losses
• Reduction of insured’s financial uncertainity
• Loss control activities of insurance companies
• Efficient use of resources
• Support for credit
• Satisfaction of legal requirements
• Satisfaction of business requirements
• Source of investment funds
• Reduction of social burdens

1/20/2018 General Insurance - INS21

 Costs of Insurance
• Premiums paid by insureds
• Operating costs of insurers
• Opportunity costs
• Increased losses
• Increased lawsuits

1/20/2018 General Insurance - INS21

 Insurance - a contract
• An insurance policy is a contract between
the insurance company and the insured.
• Through insurance policies , insureds
transfers the possible cost of losses to
insurance companies. In return for the
premiums paid by insureds, insurers
promise to pay for the losses covered by
the insurance policy.

1/20/2018 General Insurance - INS21

 Insurance - a contract
• The four basic types of insurance are :

– Property insurance
– Liability insurance
– Life insurance
– Health insurance

1/20/2018 General Insurance - INS21

 Property Insurance
• “This provides the coverage for the costs
of accidental losses to an insured
property.”
• Examples:
– Fire and allied lines
– Business income
– Crime
– Ocean and inland marine
– Auto physical damage
1/20/2018 General Insurance - INS21
 Liability Insurance
• This is some times also called as Third-Party
insurance, this is because three parties are
involved in liability loss. (Insured , Insurer and
the party who is injured or whose property is
damaged by insured. The third party is usually
called as claimant).
• Examples:
– Auto Liability
– Commercial general liability
– Personal liability
– Professional liability
1/20/2018 General Insurance - INS21
 Life Insurance
• This insurance greatly reduces the
adverse financial consequences of
premature death by providing funds to
replace lost income and to pay expenses
associated with the final illness.
• Examples:
– Whole life insurance
– Term insurance
– Universal life insurance

1/20/2018 General Insurance - INS21

 Health Insurance
• Health insurance is designed to protect
individuals and families from financial
losses caused by accidents and sickness.
• Examples:
– Medical insurance
– Disability income insurance

1/20/2018 General Insurance - INS21