FOI - Chapter 1 - New Slides

Introduction to Insurance

• Insurance is a formal risk-sharing system.
• Its purpose is to minimize the financial impact of unexpected events.
• The core principle is pooling resources for collective protection.

Early Risk-Sharing Practices

• The earliest known example is from Chinese boat operators in 5000 BC.
• Cargo was redistributed among boats to reduce individual losses.
• This practice involved collective responsibility and mutual protection.

Growth of Marine Insurance

• Increased overseas trade led to greater risk exposure.
• Informal agreements developed into structured marine insurance.
• Marine insurance was the first formalized risk-sharing model.

The Great Fire of London and Fire Insurance

• In 1666, a major fire destroyed much of London, leading to significant financial losses.
• Fire insurance was introduced in response the following year.
• Merchants transitioned to professional underwriters.

Transition to Professional Insurance

• Merchants initially provided insurance alongside other businesses.
• Growing demand led to the specialization of full-time underwriters.
• Insurance became a recognized and organized industry.

The Modern Insurance Industry

• Canada has 109 general insurers (non-life and health).
• The top 10 insurers control over 67% of premiums.
• Key sectors include auto, property, and liability insurance.

Early Practices' Influence on Modern Insurance

• Early risk-sharing practices laid the foundation for today's insurance industry.
• Risk sharing remains a core principle.
• Modern systems enhance ancient practices with data and regulations.

The Role of Risk in Insurance

• Risk is the possibility of financial loss.
• Insurance addresses risks like natural disasters, accidents, and liabilities.
• Insurance plays a key role in personal and economic stability.

Evolution of Risk Sharing

• Communities historically pooled resources to support each other.
• These early systems evolved into formal insurance systems.
• Today's insurance formalizes and expands upon these historical principles.

Economic Impact of Insurance

• Insurance provides financial security for individuals and businesses.
• It encourages risk-taking and economic growth.
• It delivers stability during uncertain times.

Development of Modern Insurance Systems

• Marine insurance formed the foundation for modern systems.
• Fire insurance spurred specialization in the field.
• Modern insurance combines historical practices with innovative approaches.

Insurance Today – A Snapshot

• Insurance applications range from homes and businesses to governments.
• It covers risks like natural disasters and liability claims.
• Insurance is an integral part of societal functioning.

How Insurance Works

• Policyholders pay premiums into a shared pool.
• The pool covers operating costs and claims.
• Insurers use sophisticated tools to manage risk.

The Importance of Risk Modeling

• Risk modeling predicts potential losses.
• Actuaries analyze probabilities and costs.
• Data-driven decisions lead to improved outcomes.

Functions of Insurance Overview

• Five key functions of insurance are:
  • Risk spreading.
  • Basis of the credit system
  • Encourages entrepreneurship.
  • Promotes loss prevention.
  • Source of employment and investment capital.
• The central purpose is supporting individuals, businesses, and society.

Function 1 – Spread of Risk

• The losses of a few are shared by many.
• Premiums contribute to a shared pool.
• Natural disaster claims are distributed among policyholders as an example.

Mechanism of Risk Spreading

• Insurers diversify their risk portfolios.
• Risk assessments and modeling ensure the solvency of insurers.
• Many participants allow for a fair distribution of risk.

Benefits of Spreading Risk

• Provides financial stability to policyholders.
• Reduces individual exposure to catastrophic losses.
• Encourages riskier ventures.

Function 2 – Basis of the Credit System

• Insurance protects lenders' investments.
• It secures loans for homes, cars, and businesses.
• Without insurance, credit access would be significantly restricted.

Example: The Butler Family

• The Butlers finance their home and vehicles through loans.
• Insurance protects lenders.
• Access to credit enables the Butlers to acquire valuable assets.

Function 3 – Encourages Entrepreneurship

• Reduces anxiety about financial uncertainties.
• Small premiums cover potentially large losses.
• This encourages risk-taking, like for small businesses expanding operations.

Function 4 – Promotes Loss Prevention

• Insurers work with communities on safety measures.
• Examples include campaigns addressing road safety, fire prevention, and anti-theft measures.
• Fraud detection is a significant focus for insurers.

Function 5 – Employment and Investment Capital

• Insurance employs over 100,000 Canadians.
• It indirectly creates jobs in various industries such as auto repair and construction.
• Insurers control a substantial amount of assets (as of 2015).

Economic Contributions of Insurance

• Claims inject billions into the national economy annually.
• Investments by insurers drive economic growth.
• Insurance strengthens confidence during periods of uncertainty.

Definition of Insurance

• Legal definition: Indemnification for losses from specific risks.
• Key principles include transferring responsibility for losses to insurance companies and paying contingent on risks.
• Goal is financial security for individuals and businesses.

The Principle of Indemnity

• Purpose: Restore the insured to their pre-loss financial position.
• Prevents profit from claims.
• Example: Compensation based on the pre-loss value of property.

Deliberate vs. Accidental Losses

• Insurance only covers accidental losses.
• Deliberate damage and pre-existing conditions are excluded.
• This distinction maintains fairness and prevents misuse.

Property and Casualty Insurance in Canada

• Includes auto, property, and liability insurance.
• Auto insurance is a significant segment, accounting for over 50% of premiums.
• Property insurance protects residential and business assets.

Organization of Insurance Providers

• Private insurers (stock and mutual companies)
• Government insurers (offering services in select provinces).
• Lloyd's of London (specialised marketplace for particular risks).

Private Insurers

• Stock companies are owned by shareholders seeking profit.
• Mutual companies are owned by policyholders, focusing on affordability.
• Dividend payments to policyholders are an example.

Government Insurers

• Provide compulsory auto insurance in specific provinces (e.g., BC, SK, MB, QC).
• Often compete with private insurance companies for additional coverage.
• Offer property insurance as an example.

Lloyd's of London

• A marketplace for underwriters, not an insurance company.
• Syndicates (groups of underwriting members) manage risks.
• Underwriting agents appoint expert underwriters for specific risk classes.

Lloyd's Global Impact

• Lloyd's underwriters handle diverse global risks, from satellites to natural disasters.
• Specialised in high-value risks including those for celebrities, oil rigs and other niche needs.
• Provides a critical solution for risks that traditional insurers cannot cover.

The Lloyd's Slip – An Overview

• The slip is a folded document encompassing underwriting information.
• It facilitates the evaluation of risks for underwriters.
• Essential for placing policies with syndicates at Lloyd's.

The Slip Process

• Brokers submit the slip to Lloyd's' underwriters.
• Underwriters agree on a specific percentage of the overall liability limit.
• Once fully subscribed, the slip gets forwarded to the Policy Signing Office.

Insurance Distribution Methods

• Direct writing system: Insurers use their own employees to sell policies.
• Independent brokers: These brokers represent several insurance companies.
• Agency system: Business owners represent a single insurer.

Independent Brokers in Canada

• Approximately 6,500 brokerage offices employing around 33,000 people.
• Brokers are responsible for around 80% of property and casualty insurance sales.
• They provide personalized service and own their businesses.

Direct Writers

• Examples include Belair, RBC Insurance and Desjardins.
• Employees sell only their respective company's products.
• All administrative tasks are handled by the insurer.

The Agency System

• Agents represent a single insurer, sometimes overseen by the Facility Association.
• Brokers represent multiple insurers.
• Key features include small business owners with compensation tied to commissions and bonuses, owning the business' book of business.
• Examples include Desjardins and Cooperators General Insurance Company.

Checkpoint Challenge

• A series of checking questions is presented.

Explore the fundamentals of insurance, including its purpose, historical practices, and the evolution of marine and fire insurance. Understand how these practices emerged from risk-sharing among early societies to the transition into professional insurance. This quiz covers a comprehensive overview of how modern insurance has developed.