Risk Management and the Insurance Industry Chapter

Trieschmann,Hoyt&SommerRiskManagementandtheInsuranceIndustryChapter22©2005,Thomson/South-Western2ChapterObjectives•Indicatethesizeoftheinsuranceindustry•Describehowtheinsurancebusinessisdividedbetweentheprivateandpublicsectors•Explainwhypersonalinsurancehasalargerpremiumvolumethanpropertyinsurance•Identifyandexplainthedifferencesbetweenstockcompanies,mutualcompanies,Lloyd’sassociations,andreciprocalinsurers•Indicatewhichtypesofinsurancehavethelargestvolume•Explainhowinsuranceguarantyfundsoperate•Describehowinsuranceisdistributedfrominsurerstoconsumersandlistthedifferencesbetweentypesofagentsandbrokersininsurance•Describedtheglobalnatureofriskmanagementandtheinsuranceindustry3TheFieldofInsurance•Insurancecoveragescanbedividedintovariousopposingcategories–Personal(lifeandhealth)vsproperty(buildings,homes,autos)–Government(floodinsurance)vsprivate(productliability)–Involuntary(SocialSecurity)vsvoluntary(fireinsurance)•Thecategoriesarenotmutuallyexclusiveandtheyoverlap•Figure22-1depictsthemajorclassificationsofinsuranceandwhattheyhaveincommonwitheachother4Figure22-1:MajorClassificationsofInsurance5PersonalCoverages•Thoserelateddirectlytotheindividual•Therisktheycoveristhepossibilitythatsomeperilmayinterrupttheindividual’sincome,suchas–Death,accidentsandsickness,unemployment,andoldage–Insuranceiswrittenoneach•Privateinsurersareactiveinprovidinginsurancefordeath,accidentsandsickness,andoldage•Governmentalunitsareactiveinallcategories6PropertyCoverages•Directedagainstperilsthatmaydestroyproperty•Propertyinsuranceisdistinguishedfrompersonalinsurance–Personalinsurancecoversperilsthatmaypreventonefromearningmoneywithwhichtoacquirepropertyinthefuture–Whereaspropertyinsurancecoverspropertythatisalreadyacquired•Propertyinsuranceasusedhereincludesfire,marine,liability,casualty,andsuretyinsurance•Sometimesreferredtoasgeneralinsurance,property/liabilityinsurance,orpropertyandcasualtyinsurance7PrivateandPublicInsurance•Privateinsuranceconsistsofalltypesofcoveragewrittenbyprivatelyorganizedgroups–Consistsofassociationsofindividuals,stockholders,policyholders,orsomecombinationofthese•Publicinsuranceincludesalltypesofcoveragewrittenbygovernmentbodiesoroperatedbyprivateagenciesundergovernmentsupervision8VoluntaryandInvoluntaryCoverages•Mostprivateinsurancecomesundertherubricofvoluntarycoverage•Amajorpartofgovernmentinsuranceisinvoluntarycoverage–Itisrequiredbylawthatinsurancebepurchasedbycertaingroupsandundercertainconditions•Examplesofrequiredinsuranceincludeautomobileliabilityinsuranceandworkers’compensationinsurance9VoluntaryandInvoluntarycoverages•Table22-1showstheimportanceofprivatepassengerautoinsurance•Table22-2showsthatPPAmadeup33.1percentoftotalpremiumsin1980althoughtherehasbeenarelativedeclinesince2000–Duetothedramaticincreasesincommerciallinesinsurancepremiumsduringthehardinsurancemarket10Table22-1:NetPremiumWrittenbyLineofPropertyLiabilityInsurance–200211Table22-2:PrivatePassengerAutoasaPercentageofTotalP-LPremium12StockCompanies•Acorporationorganizedasaprofit-makingventureinthefieldofinsurance•ForcompaniesorganizedintheUnitedStates–Aminimumamountofcapitalandsurplusisprescribedbystatelawtoserveasafundforthepaymentoflossesandfortheprotectionofpolicyholders’fundspaidinadvanceaspremiums•Organizedwithauthoritytoconductcertaintypesofinsurancebusiness•Somepaydividendstopolicyholdersoncertaintypesofinsurance•Neverissuewhatiscalledanassessiblepolicy–Theinsuredcannotassessanadditionalpremiumifthecompany’slossexperienceisexcessive•Thestockholdersareexpectedtobearanylosses–Andtheyalsoreapanyprofitsfromtheenterprise13MutualCompanies•Organizedundertheinsurancecodeofeachstateasanonprofitcorporationownedbythepolicyholders•Hasnostockholders•Noprofitsaremade–Becauseanyexcessincomeisreturnedtothepolicyholder-ownersasdividends•Orisusedtoreducepremiums,orretainedtofinancefuturegrowth•Thecompanyismanagedbyaboardofdirectorselectedbypolicyholders•Manytypesofmutualorganizationsexistandoperateunderdifferentlawsandwithdifferenttypesofbusinesses14ClassMutuals•Operateinonlyaparticularclassofinsurance–Suchasfarmandproperty,lumbermills,factories,orhardwarerisks•Farmmutuals–Specializeinfarmpropertyinsurance–Insurealargeportionoffarmpropertyinsomestates,primarilybecauseofthespecializednatureoftherisks•Factorymutuals–Specializeininsuringfactories–Placeemphasisonlosscontrol–Generallydonotsolicitsmallrisksduetotherelativelyhighcostofinspection,engineeringservices,surveys,andconsultationsthatareprovidedbytheorganizationinanattempttopreventlossesbeforetheyoccur15GeneralWritingMutuals•Onethatacceptsmanytypesofinsureds•Requireanadvancedpremiumcalculatedonroughlythesamebasisasthatofastockinsurer•Operateinseveralstatesoreveninternationally•Mayormaynotpayarefundoftheportionofthepremiumofthedividendifexperiencewarrantsit•Manymutualsinsistonrelativelyhighunderwritingstandards–Takingonlythebestriskssothatadividendwillmorelikelybepaid•Somemutualsarebothparticipatinganddeviating–Theyplantocuttheinitialratesomewhatbelowstockcompanylevelsandtopaydividendifwarrante