3.1 Principles and Concepts Copy
Stock Companies
Capital stock insurance companies are the leading type of insurer in the United States. They control almost 70% of all property and liability insurance premiums and about 50% of life insurance premiums. Stockholders own these companies and share profits and losses.
Mutual companies
Mutual companies have no stockholders – policyholders own the companies; have voting rights, and share profits which are distributed in the form of policy dividends. In the U.S., Mutual companies control about 30% of the property and liability insurance business and 50% of the life insurance business.
County Mutual
County Mutual Insurance Companies are companies organized for the purpose of insurance on the mutual or cooperative plan against loss or damage by fire, lightning, gas explosion, theft, windstorm and hail, and for all or either of such purposes.
Company Ratings
There are several organizations that rate the financial strength of insurance carriers, based on an analysis of a company’s claims experience, investment performance, management, and other factors. These organizations include A.M. Best, Standard & Poor’s, Moody’s, Duff & Phelps, and Weiss Research.
Self-Insurance
The retaining of risk.
Lloyd’s of London
An exchange that provides facilities for its members but does not buy or sell securities itself.
Principal
In the insurance business, the principal is the insurance company and the agent is a person authorized to act on the company’s behalf.
Authority
EXPRESS AUTHORITY- Express actual authority means an agent has been expressly told he or she may act on behalf of a principal.
IMPLIED AUTHORITY- Implied actual authority, also called “usual authority”, is authority an agent has by virtue of being reasonably necessary to carry out his express authority.
APPARENT AUTHORITY– Exists where the principal’s words or conduct would lead a reasonable person in the third party’s position to believe that the agent was authorized to act, even if the principal and the purported agent had never discussed such a relationship.
Insurable Interest
The basic rule concerning who can be insured states that before the insured can benefit from insurance, he or she must have a chance of financial loss or have a financial interest in the property. This is called an insurable interest.
Loss ratio
Method used to determine an insurance company’s success in covering current losses out of current premium income; determined by dividing incurred losses by earned premium.
Underwriting
When the application comes to the insurance company, underwriters review it for its acceptability to the company. In addition to the application, underwriters may turn to other sources of information to help them evaluate the risk.
THESE INCLUDE:
- Inspection services
- Government bureaus, such as the Bureau of Motor Vehicles
- Insurance industry bureaus, such as the Automated Property Loss Underwriting System
- Financial information services, such as Standard And Poor’s
- Previous insurers
- The company’s own claim files
Rates
Insurance premiums are derived from insurance rates. A rate is the price of insurance for each unit of exposure. Most state insurance laws prohibit rates which are excessive, or inadequate, or unfairly discriminatory.
Types of Rates
If the insurance company agrees to issue a policy, a premium must be determined. These are the basic ways in which a premium can be computed.
- Judgment rating
- Manual rating (Class rating)
- Merit rating
- Experience rating
- Retrospective rating
- Scheduled rating
JUDGMENT RATING- The oldest form of computing rates is called judgment rating. The premium is determined by considering the individual risk.
MANUAL RATING (CLASS RATING)– The company’s rates for a particular state or area are obtained by consulting a manual, which is usually stored on a computer
Calculating a Manual Rate
Formula: Rate per unit x number of units = premium
Example: An insured that purchases
$60,000 of insurance at a rate of $2 per $1,000
would pay a premium of $120 (2 x 60 = 120).
MERIT RATING– Typically, merit rating starts with the class or manual rates, which are then modified to reflect the unique characteristics of the risks that are not reflected in the manual rate.
EXPERIENCE RATING– Experience rating is a form of merit rating that modifies the manual premium based on the insured’s loss experience over some period of time.
RETROSPECTIVE RATING– Other types of merit ratings include retrospective rating, which bases the insured’s premium on losses incurred during the policy period.
SCHEDULED RATING– Scheduled rating applies a system of debits or credits to reflect the characteristics of a particular insured.
