dr. james kallman, arm 7-1 advanced powerpoint presentation ©2009 the national underwriter company

Dr. James Kallman, ARM 7-1

AdvancedPowerPointPresentation

©2009 The National Underwriter Company

Dr. James Kallman, ARM 7-2

This Advanced PowerPoint Presentation accompanies the “Tools & Techniques of Risk Management & Insurance” textbook. Each of the 28 chapters in the textbook are presented here in the following sections:

OutlineKey conceptsMajor sectionsChapter summary

©2009 The National Underwriter Company

©2009 The National Underwriter Company Dr. James Kallman, ARM 7-3

Contents

Techniques of Risk Management & InsuranceCh 1 Introduction to Traditional Risk Management……………1-5

Ch 2 Enterprise Risk Management…………………………….2-1

Ch 3 Risk Assessment: Identification…………………………..3-1

Ch 4 Risk Assessment: Quantification…………………………4-1

Ch 5 Overview of Risk Treatment Alternatives………………. 5-1

Ch 6 Non-insurance Transfer of Risk…………………………. 6-1

Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1

Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1

Ch 9 Global Risk Management…………………………………9-1

Ch 10 Loss Control Techniques………………………………..10-1

Ch 11 Emergency Response Planning………………………..11-1

Ch 12 Business Continuity Planning…………………………..12-1

Ch 13 Claims Management……………………………………..13-1

Ch 14 Monitoring Claims for Financial Accuracy……………..14-1

Ch 15 Insurance Companies and Risk Management………..15-1

Ch 16 Working with an Agent or Broker……………………….16-1


Contents

Tools of Risk Management & Insurance

Ch 17 Commercial General Liability Insurance……………….17-1Ch 18 The Workers’ Compensation System………………….18-1Ch 19 Commercial Property Insurance………………………..19-1Ch 20 Directors and Officers’ Liability Insurance……………..20-1Ch 21 Employment-Related Practices Liability Insurance…..21-1Ch 22 Business Automobile Insurance………………………..22-1Ch 23 Crime Insurance………………………………………….23-1Ch 24 Capital Markets Risk Transfer Tools…………………..24-1Ch 25 Loss Control Tools……………………………………….25-1Ch 26 The Certificate of Insurance…………………………….26-1Ch 27 Surety Bonds……………………………………………..27-1Ch 28 Claim Reviews……………………………………………28-1


Chapter 7Insurance as a Risk Transfer Mechanism

Outline• What is it?

• Steps to Implement

• Step One: Beginning the Process

• Step Two: Choosing an Intermediary

• Step Three: Binders of Insurance

• Step Four: Receiving and Reviewing Policies

• Advantages

• Disadvantages

• Chapter Summary



What is it?• Insurance is a transfer of the financing of risk

• One party agrees to indemnify another for the financialconsequences of the other party’s loss

• An exchange of a known, small amount (the premium) for an uncertain, potentially catastrophic future amount (the loss)

• Insurance combines a large number of homogeneous, independent exposure units into a pool

• The losses of a few are shared by the many

• The law of large numbers enables actuaries to predict an expected outcome, loss distributions, and calculate premiums



Steps to Implement1. Identify the exposures

2. Choose an Intermediary

3. Get Binders of Insurance

4. Receiving and Reviewing Policies



Step One: Beginning the Process• Use a risk exposure survey (and other tools) to identify exposures

e.g., Property, Liability, Human Resources, Net Income

• Interview intermediaries (producer, agent, broker) to solicit insurance proposals

• Give intermediary a broker-of-record letter

• Mid-term broker-of-record letters may cause the underwriter to cancel, re-underwrite, and re-write coverages

• Broker-of-record letters may restrict brokers to specified carriers – this enables multiple brokers to go to the market and market an account without approaching the same insurers



Step Two: Choosing an Intermediary• Types of Intermediaries

• independent agents• exclusive agents• employee agents• direct-writers• brokers• surplus lines brokers

• Independent Agents

• An independent business person

• Represents multiple insurers

• Agent owns the expirations

• Agent’s legal duty is to insurer

• Agent may have binding authority

• Agent usually compensated by commission


• Exclusive agent• An independent business person

• Represents only one insurer

• Agent might not own the expirations

• Agent’s legal duty is to insurer

• Agent may have binding authority

• Agent usually compensated by commission

• Employee agent

• Licensed agents

• Employees of an insurer

• Agent does not own expirations

• Agents are compensated by salary


Step Two: Choosing an Intermediary

http://www.statefarm.com/index.asp

http://www.allstate.com/


• Direct-writer agent• Licensed agents

• Employees of an insurer

• Agents solicit by mail, telephone, or internet

• Agent does not own expirations

• Agents are compensated by salary

• Brokers

• Represents the insured

• Usually used for large commercial accounts

• May have a service agreement and be

compensated by service fees and/or commissions



https://www.usaa.com/inet/ent_home/CpHome

https://www.usaa.com/inet/ent_home/CpHome


• Surplus Lines agent• Licensed with non-admitted insurers

• Not subject to rate and form regulations

• Not protected by state guarantee funds

• Can write custom (manuscript) coverages

• Write coverage for non-standard exposures

• Agent paid a commission





Step Three: Binders of Insurance• Factors in choosing coverage:

• Level of service• Insurance coverage• Policy exclusions• Insurer’s financial condition• Rate credits• Total premium

• Intermediary issues binder of temporary coverage• Names of insured, insurer, and intermediary• Policy forms that apply• Effective and expiration date (30 days)• Exposures covered• Limits of insurance• May be an ACORD form

• Special coverage must be clearly indicated on the binder



Step Three: Binders of Insurance

Supplement

• Additional documents provided by insurer• Evidence of insurance• Certificate of insurance

• Supplied at time of binding coverage or to verify renewal or as snapshot of coverage

• These documents do not provide insurance coverage



Step Four: Receiving and Reviewing Policies• Receiving the policy

• The policy is the contract

– it overrides any binders, oral agreements, or applications

• Discrepancies should be immediately addressed

•Contract of adhesion

• Standard contracts are offered as take-it-or-leave-it

• Courts may rule any ambiguous conditions in favor of the personal lines consumer

• Commercial consumers are expected to read their policies and may not be protected by this precedent

• Many conditions are established by state statutes

• Insurance contracts are matters of public policy



Step Four: Receiving and Reviewing Policies• Reviewing the Insurance Policy

• Read the policy forms and attachments• Check to be sure all policy forms are appropriate• Are the right exposures covered?• For the desired perils?• At the desired limits?

• Declarations Page• The information page (may be an ISO form)• Named insured• Mailing address• Insured locations• Forms and endorsements• Policy period (inception and expiration – 12:01 a.m.)• Intermediary’s name and address• Insurer and address• Premium



Step Four: Receiving and Reviewing Policies

Supplement

• Declarations Page may also indicate:• State-specific taxes and fees• How to contact regulators to log a complaint• Audit or inspection intervals



Step Four: Receiving and Reviewing Policies• Insurance Policy Coverage Parts

• Insuring Agreement• Definitions• Exclusions• Conditions• Attachments (endorsements or riders)

• Deductibles• Insured retains and pays losses up to a limit;

insurer pays after that retention amount to the policy limit. • Enables lower premiums• Qualified self-insured retention (SIR) for state approved workers’

compensation, excess, or umbrella liability policies• Higher deductibles may yield lower premiums



Step Four: Receiving and Reviewing Policies• Deductibles

• Types of deductibles:• Flat – usually applied per each claim• Straight - usually applied per occurrence• Percentage - proportion of exposure value

• Policy Forms• Bureau filed form – standard form (e.g., ISO)

• ISO promulgates insurance forms and rates for insurers to file with state regulators

• Independently filed form – company designed forms filed with state regulators



Step Four: Receiving and Reviewing Policies

• Surplus Lines Market (non-admitted market)• A licensed insurer is admitted if the state regulator approves their forms, rate filings, and financial strength and the insurer pays a premium tax to the state guarantee fund. • A non-admitted insurer is licensed to sell in the state• Used for hard to place exposures

• FAIR plans• State Fair Access to Insurance Requirements • For writing property coverage in urban areas where standard market insurers prefer not to write



Advantages+ Exchange of small known cost for potential large cost

+ May satisfy a contractual responsibility

+ May satisfy loan requirements

+ Insurer handles the loss settlement procedures

+ May satisfy statutory or regulatory requirements



Disadvantages– Opportunity costs – money used for insurance not invested in

business operations

– Not all losses may be covered – exclusions apply

– Intermediary fees must be paid

– Insurance contract terms may be challenging to interpret



Chapter Summary• What is insurance: a risk financing tool

• Steps to Implement

• Step One: Beginning the Process – identify exposures, broker-of-record letters

• Step Two: Choosing an Intermediary – independent, exclusive, employee, direct-writer, broker, surplus lines agent

• Step Three: Binders of Insurance – temporary coverage

• Step Four: Receiving and Reviewing Policies – contract of adhesion, review the contract, declarations, coverage parts, deductibles, policy forms, surplus lines policies, FAIR plan

• Advantages – exchanges uncertain large loss for a premium, satisfies obligations, insurer settles claims

• Disadvantages – opportunity cost, exclusions, fees, terms

dr. james kallman, arm 7-1 advanced powerpoint presentation ©2009 the national underwriter company

Documents

insurance transfer of

loss insurance

risk assessment

financing of risk

insurance proposals

insurance companies

crime insurance

certificate of insurance