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Basics of Insurance

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About Insurance
Insurance is a system that enables a person, family, or business to transfer the costs of losses to an insurance company. The insurance company, in turn, pays for covered loses and, in effect, distributes the costs of losses among all insured (that is, all CSC Confidential. insureds share the cost of a

Insurance : What is it ?
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contract or device for transferring risk from a person, business or organization to an insurance company that agrees, in exchange for a premium, to pay for losses through an accumulation of premium.

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Insurance : What is it ?
Insurance has three components

A Transfer Mechanism , in which one party - the

insured (a person, a business, or an organization whose property, life, or legal liability is covered by an insurance policy) - transfers the chance of financial loss to another party - the insurance company, or the insurer.

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Insurance : What is it ?
A Business System , which includes various

operations that must be conducted in a way that generates sufficient income to pay claims and provide a reasonable profit for its owners.

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Insurance : What is it ?
A Contract , between the insured and insurer

that states what potential costs of loss is transferred to the insurer and expresses the insurers promise to pay for those losses in consideration for a stated premium.

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Insurance : What is it ?
Insurance as a Transfer System

Insurance is a system of both transferring and sharing the costs of losses.

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Insurance : What is it ?
Insurance as a Transfer System

The law of large numbers is a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) based on these exposure units also increases.

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Insurance : What is it ?
An Exposure Unit is a measure of loss

potential and is used in pricing insurance Types of Loss Exposures


Property loss exposures Liability loss exposures Human and Personnel loss exposures

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Insurance : What is it ?
Ideally Insurable 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

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Insurance Jargons
Insured
Who is indemenified from losses.

Insurer
Who does insurance for Insured.

Premium
Amount charged by Insurer from Insured. CSC Confidential. on number of factors Based including kind of Risk involved ,

Jargons Conti
Loss exposure
A loss exposure, or simply an exposure, is any condition or situation that presents the possibility of a loss.

Exposure Unit
Any thing which can be insured, it can be any individual life or personal property.

Insurance Policy
An insurance policy is a contract document that states the rights and duties of both the insured and the insurer regarding the transfer of the costs of losses.

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Benefits of Insurance
What Insured gets ? Business drive for Insurer ? What society/ Government gets out of

Insurance ?

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What Insured gets ?


Payment for the costs of covered losses Reduction of the insureds financial

uncertainty
Loss control activities of insurance

companies
Efficient use of resources Support for credit Satisfaction of legal requirements Satisfaction of business requirements
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Benefits of Society and Government


Source of investment funds Reduction of social burdens Better risk management of social

system.

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Business Drive for Insurer


For Private Insurer One single motive is

to earn money.
By premium we pay. Investments through premium money.

Minus
Claims Infrastructure management

In case Mutual Insurers minimize the


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risk of business.

Government Responsibility

Insurance Companies estimate future losses and expenses to determine how much they must collect from insureds in premiums. The Law of Large Numbers. The law of large numbers is a mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) based on these exposure units also increases. CSC Confidential.

Insurance as a Business
Types of insurers Insurance operations State insurance regulation Costs of insurance

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Types of insurers
Private Insurers Stock Insurance Companies, which are

corporations owned by stockholders


Mutual insurance companies, which are

corporations owned by their policy holders inter insurance exchanges), which are unincorporated associations that provide insurance services to their members, often called subscribers.

Reciprocal insurance exchanges (also known as

Captive Insurance Companies Reinsurance Companies CSC Confidential.

Federal and Government Insurance Programs

The National Flood Insurance Program Retirement benefits to the elderly. Workers compensation insurance Fair Access to Insurance Requirements (FAIR)

plans
Disability payments for disabled workers. Unemployment insurance protections Compulsory Auto liability insurance Insurance Guaranty Fund CSC Confidential.

Insurance Operations

Marketing
process of identifying customers and selling and delivering a

product or service. Insurance marketing enables insurers to reach potential customers and retain current ones.

Underwriting process by which insurance companies decide which potential

customers to insure and what coverage to offer them

Claim handling enables insurance companies to determine whether a

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

Ratemaking

CSC Confidential. millions) of similar but independent insureds. thousand (or

process by which insurers determine the rates to charges the

INSURANCE REGULATION

NATIONAL ASSOCIATION OF INSURANCE

COMMISSIONERS (NAIC)
The NAIC coordinates insurance regulation activities

among the various insurance departments.


A Model Law RATE REGULATION To ensure that rates are adequate To ensure that rates are not excessive To ensure that rates are not unfairly discriminatory.

through CSC Confidential. which actuaries base rates on actuarially calculated loss experience and place insureds

Actuarial equity is a ratemaking concept

INSURANCE REGULATION
At Policy Generation Level
Insurance Rating Laws
Prior approval law Flex Rating Law File and use Law Use and File Law Open Competition State Mandated Rates
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Solvency Surveillance

At Claim Handling Level


Consumer Protection
Licensing Insurers Licensing Insurance Company

Representatives
Approving Policy Forms Examining Market Conduct Investigating Consumer Complaints

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Costs of Insurance
Premiums paid by insureds Operating costs of insurers
Infrastructure Cost Administrative charges Taxes Commissions

Opportunity costs

areas. CSC Confidential.

Possible use of funds in other business

Insurance : What is it ?
Insurance as Contract Insurance is a contract entered into

between two parties wherein one party viz., the insurer promises to pay the other viz., insured for a loss which is indemnifiable as per the policy terms conditions and exceptions for a return of a consideration viz., premium. (property, liability, life and health) are generally divided into two broad categories:
Property / Liability Insurance Life / health Insurance

The four basic types of insurance

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Insurance : What is it ?
Insurance as Contract

Property Insurance
Fire and allied lines Business income Crime Ocean and inland marine Auto physical damage

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Insurance : What is it ?
Insurance as Contract

Liability Insurance
Auto Liability Commercial general Liability Personal Liability Professional Liability

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Insurance : What is it ?
Insurance as Contract

LIFE INSURANCE
Whole life insurance Term Insurance Universal life insurance

HEALTH INSURANCE
Medical Insurance Disability Income Insurance

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