1

Insurance 101

The Basics

2

What is Insurance?

• Methods of addressing uncertain risk• Avoid (don’t purchase)

• Keep (don’t insure)

• Transfer (purchase insurance)

• Insurance is the “transfer” of uncertain

financial consequences for a certain financial

cost (e.g., premium)

3

How does it work?

• Policy is a legal “contract of adhesion”

• Insurance is for accidental/“fortuitous” events

• Insurance rates “shall not be excessive,

inadequate, or unfairly discriminatory”

4

Why does it work?

• Risks are shared among a large group

of “similarly” classified insureds

• Premiums are “conservatively” invested

in “liquid” instruments

• “Spread of risk”

• Reinsurance

5

How does society benefit?

• Payment for losses

• Reduction of uncertainty

• Loss control

• Long-term investments

6

What are the types of insurers?

• Stock

• Mutual

• Reciprocal exchange

• Lloyd’s

• Fraternal benefit societies

7

How is insurance marketed?

• Independent agents

• Brokers

• Exclusive agents

• Direct

• Direct mail

• Internet

8

Why regulate insurance?

• Complex promise for future performance

• Solidity

• Equity and Fairness

• Freedom from governmental restraint

• Freedom of access to the market

9

Who regulates insurance?

• States

• McCarran-Ferguson Act

• Federal interest

• Federal Insurance Office

• Judicial impact

10

How is insurance regulated?• System types

• Open competition - “no file”

• “File and use” or “Use and file”

• “Prior approval”

• State mandated/controlled

• Why should policyholders care?

• Freedom to choose/purchase

• Affordability/Availability

• Market responds to competition

11

What is the process?

• Company established

• Selection of market segment

• Development of product

• Policy

• Jurisdiction

• Rating/Underwriting

• Sale of product

• Claims Settlement

12

How are rates developed?

• Law of large numbers

• Probability distributions

• Review of past losses

• Frequency

• Severity

• Review of expenses

• Loss adjustment expenses

• Overhead expenses

13

How are rates developed?

• Predictability of future losses and expenses

• Large number claims over a period of time -

commonly 3 to 5 years

• Medical costs, legal costs, jury awards

• Reasonable degree of certainty

• Spread of Risk

14

What is underwriting?

• Risk classifications

• Application of rules/classifications

• Risk selection

• Pricing

15

How does it work?

• Agent/Company Representative,

Independent Agent, Internet, Phone• Application/completion

• Information - DMV report, etc.

• Underwriters

• Application/classifications

• Additional info (financial, loss)

• Risk Selection

• Pricing

Part II

Countrywide and State Industry

Results

17

Countrywide Homeowners

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* & Dividends $17,102,484 $17,620,718 $17,611,348 $18,819,625 $19,298,262 $19,757,387

Incurred Losses $46,028,625 $39,404,404 $41,949,158 $54,447,645 $44,528,802 $37,212,883

Written Premiums $65,202,888 $67,663,068 $70,960,176 $73,649,271 $77,832,844 $82,644,747

$0

$10,000,000

$20,000,000

$30,000,000

$40,000,000

$50,000,000

$60,000,000

$70,000,000

$80,000,000

$90,000,000

Source: NAIC Annual Statement database via SNL Financial LC

*Expenses include allocated and unallocated loss adjustment expenses; commissions; taxes, license and fees.

18

Countrywide Personal Automobile

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* and Dividends $38,126,734 $38,560,262 $38,577,529 $38,678,569 $40,773,760 $42,109,761

Incurred Losses $103,083,708 $103,922,996 $104,289,185 $111,306,628 $112,939,688 $116,686,431

Written Premiums $161,820,924 $161,685,448 $164,113,628 $166,498,262 $172,278,015 $180,179,456

$0

$40,000,000

$80,000,000

$120,000,000

$160,000,000

$200,000,000

Source: NAIC Annual Statement database via SNL Financial LC

*Expenses include allocated and unallocated loss adjustment expenses; commissions; taxes, license and fees.

19

Countrywide Total Property Casualty

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* and Dividends $124,911,990 $125,909,114 $121,911,249 $125,387,357 $130,259,832 $134,412,934

Incurred Losses $327,042,541 $285,403,010 $278,111,865 $313,204,295 $319,989,792 $294,287,587

Written Premiums $485,918,150 $469,799,552 $469,824,399 $487,080,496 $509,525,311 $537,618,692

$0

$100,000,000

$200,000,000

$300,000,000

$400,000,000

$500,000,000

$600,000,000

Source: NAIC Annual Statement database via SNL Financial LC

*Expenses include allocated and unallocated loss adjustment expenses; commissions; taxes, license and fees.

20

Property Casualty Industry Combined Ratio

90.0%

95.0%

100.0%

105.0%

110.0%

115.0%

120.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

115.7%

107.5%

100.1%

98.4%

100.8%

92.5%

95.7%

103.9%

100.7%102.0%

107.8%

103.1%

Source: PCI based on A.M. Best’s Aggregates & Averages

21

P/C Net Income 2004-2013(after taxes in $ millions)

-$15,000

-$5,000

$5,000

$15,000

$25,000

$35,000

$45,000

$55,000

$65,000

$75,000

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$38,722$43,230

$65,777$62,496

$3,043

$28,672

$34,670

$19,456

$35,074

$63,784

Source: PCI/ISO Industry Financial Results

22

Kentucky Homeowners

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* & Dividends $130,610 $136,480 $147,256 $149,429 $169,482 $167,432

Incurred Losses $839,641 $939,308 $416,674 $579,558 $1,202,56 $375,928

Written Premiums $735,734 $780,736 $844,178 $899,221 $956,706 $1,019,40

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

Source: NAIC Annual Statement database via Highline Data LLC

*Expenses include allocated loss adjustment expenses; commissions; taxes, license and fees.

23

Kentucky Personal Automobile

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* & Dividends $301,195 $293,783 $308,925 $308,769 $318,438 $337,510

Incurred Losses $1,379,073 $1,509,196 $1,557,683 $1,535,478 $1,670,066 $1,524,109

Written Premiums $2,122,721 $2,136,254 $2,225,266 $2,283,800 $2,377,796 $2,465,790

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

Source: NAIC Annual Statement database via Highline Data LLC

*Expenses include allocated loss adjustment expenses; commissions; taxes, license and fees.

24

Kentucky Total Property & Casualty Lines

Insurer Cost & Written Premium Trends($000)

2008 2009 2010 2011 2012 2013

Expenses* & Dividends $1,039,509 $992,300 $1,051,628 $1,051,310 $1,120,978 $1,162,200

Incurred Losses $3,940,454 $4,086,749 $3,433,249 $3,747,160 $5,113,322 $3,237,834

Written Premiums $5,715,526 $5,659,834 $5,695,535 $5,946,929 $6,184,778 $6,477,347

$0

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

$7,000,000

Source: NAIC Annual Statement database via Highline Data LLC

*Expenses include allocated loss adjustment expenses; commissions; taxes, license and fees.