.0 Introduction to Insurance
Learning Objectives
.1 General Insurance Concepts
Insurance is a contractual agreement designed to provide financial protection when an unexpected event results in a covered loss. By purchasing insurance, an individual or business transfers the financial risk of certain losses to an insurance company, also known as an insurer or carrier. In exchange for a premium, the insurer agrees to provide compensation or benefits according to the terms and conditions outlined in the insurance policy. This process helps protect consumers from significant financial hardship and provides greater peace of mind by reducing uncertainty about future risks.
.2 Insurers
Private vs. Government Insurers
.3 Insurer Underwriting and Rate Making
The primary responsibility of an underwriter is to evaluate and select the individuals or property that an insurer is willing to insure. Underwriting plays an important role in protecting the insurer against adverse selection by identifying risks that are more likely than average to experience losses. The goal of underwriting is to accept risks whose expected losses fall within the insurer's normal and predictable range of loss experience. To maintain financial stability, underwriters seek to achieve a balanced mix of insureds across different risk classifications. If an insurer accepts too many low-risk insureds, premium income and profitability may be limited. Conversely, accepting too many high-risk insureds may result in claim payments that exceed the insurer's financial capacity.
.4 Insurer Marketing and Distribution
Financial Rating Services
.5 Insurance Agents and Producers
Law of Agency
.6 Insurance Regulation
Insurance Regulation at the State Level
.7 Federal Regulations
At the federal level, Congress has established regulatory agencies that provide oversight affecting insurance industry practices. In addition, the business of insurance is subject to various federal laws designed to protect consumer privacy, promote fair business practices, and safeguard consumers from deceptive or unfair conduct.
Recap of Chapter One
1. Insurance is a method of managing the financial risk associated with covered losses caused by specific perils. This process works by transferring the risk of loss from the insured to the insurer in exchange for the payment of a premium. Insurance operates effectively because of the law of large numbers, which allows insurers to predict future losses with greater accuracy when a large number of similar exposure units are insured. By spreading risk across many policyholders, insurers are able to estimate potential losses and provide financial protection against covered claims.