Objective 08.02 Interpret the nature, theory, and different types of insurance INTRODUCTION TO INSURANCE.

Objective 08.02 Interpret the nature, theory,

and different types of insurance

Objective 08.02 Interpret the nature, theory,

and different types of insurance

INTRODUCTION TO INSURANCEINTRODUCTION TO INSURANCE

Nature of InsuranceNature of Insurance

The concept of insurance involves risk pooling or spreading losses over a greater number of people.

An insurance company collects and pools premiums from many individuals or businesses for the payment of future claims.

Risk ManagementRisk Management

the process of managing one’s exposure to risk.

– Examples• Using a seat belt• Installing smoke detectors• Driving a vehicle• Playing sports• Purchasing an insurance policy

Risk ManagementRisk Management

Managing risk includes:

– Transfer part of risk of financialloss to an insurance company• Auto, life, health, disability, property insurances

– Retain (keep) the risk of financial loss using high deductible

– Abstain or choose not to participate in risky activities• Do not drive car, buy home, play sports, etc.

Decisions are based on their individuals and Risk

ADHESION CONTRACT ADHESION CONTRACT

standard form contract that is written primarily by one party (Insurance policies)

Policyholder (buyer) cannot usually change:– Policy language – Perils covered

Policyholder can change:– The dollar limit of coverage– Specific items to be covered

Unconscionable if they take advantage of one party

Insurance Insurance

Planned protection provided by sharing economic losses

• Insurance companies provide a risk management service to consumers

• Insurance does indemnify or financially repay the insured a portion of the loss

• All insurance policies have a specified limit of coverage

NC Department of InsuranceNC Department of Insurance

Insurance is a highly regulated business activity governed by the laws of each state

NC Department of Insurance (NCDOI) handles:– Consumer complaints– Fraud investigations and prosecution– Approval of requested rate increases/decreases– Regulation of agent licensing requirements– Censuring unethical/illegal actions of agents

Head of NCDOI is the insurance commissioner

Insurance – Basic TermsInsurance – Basic Terms

Insurance policy- a contract issued by the insurance company (insurer) for coverage of the policyholder

Policyholder- the person who buys or owns the policy

Insured – the person whose life or property is insured, may or may not also be the policyholder

More Basic TermsMore Basic Terms

Insurer- the insurance company thatprovides planned protection againsteconomic losses

Binder- a temporary document proving the insurance contract is in force until the actual policy is issued by the insurer

Insurable InterestInsurable Interest

A financial interest in property or a person’s life that permits someone to buy insurance to protect against the financial loss of that property or person’s life

Examples:– You can insure cars owned or leased by you, but

not a car belonging to another person

– You can purchase life insurance on someone whose death would be a financial loss to you

PremiumPremium

The amount of money the policyholder must pay for insurance coverage

1.An insurance underwriter determines the cost of the policy using risk factors and statistical data

2.An agent represents the company to the consumer

3.Equals consideration in the insurance contract

Non-Payment of PremiumNon-Payment of Premium

If the premium is not paid, the policy may lapse or cancel, voiding thecontract

If claims are made after a lapse, the claim is denied

Grace period (not required)– Late premiums are received – Policies are reinstated

ClaimsClaims

The request for payment from an insurance company to cover the financial losses

Examples:– Automobile-car accident– Medical-doctor’s appointment– Life-covered person dies– Disability-out of work for health reasons– Unemployment-laid off from job

Deductibles Deductibles

Cost of the claim paid by the insured.

– Deductible • On auto coverage, the amount the insured

pays before the insurer pays collision or comprehensive damage claims

• On health coverage, the amount the patient pays before the insurance company pays any covered medical expenses

Deductibles Deductibles

–The insured chooses the amountof risk retained by choosing the deductible amount

–The higher the deductible chosen by the insured, the lower the premium for the coverage.

Self Insurance: no insurance is purchased or purchase from your investment accounts

• 100% self insurance = 100% risk retention

ExclusionsExclusions

Limitations to policy coverage

Examples:– No coverage for flood on homeowners policy– No coverage for CD player in car unless

permanently attached to vehicle– No coverage for self inflicted injury filed as

worker’s compensation claim

Insurance FraudInsurance Fraud

False claims made to an insurancecompany

Federal prosecution is more frequent under mail and wire fraud schemes because the USPS is involved

Insurance Fraud ExamplesInsurance Fraud Examples

– Arson for profit (felony)– Staging car accidents (felony)– Inflated cost of damage repairs– Faked deaths for life insurance (felony)– Overstated health care billings or service not provided– Phony workers compensation filed when hurt at home

not work– False statements made on an application may also

create a voidable contract for the insurance company