Fundamentals of Insurance - Chapter 1 PDF

 Fundamentals of Insurance Chapter 1 Introduction to General Insurance FOI Introduction to Insurance Insurance: A formal system of risk sharing. Purpose: Minimize financial impact from unexpected events. Core principle: Pooling resources fo...

 Fundamentals of Insurance Chapter 1 Introduction to General Insurance FOI Introduction to Insurance Insurance: A formal system of risk sharing. Purpose: Minimize financial impact from unexpected events. Core principle: Pooling resources for collective protection. FOI Early Risk-Sharing Practices Earliest example: Chinese boat operators in 5000 BC. Cargo was redistributed across boats to minimize individual losses. Concept: Collective responsibility and mutual protection. Growth of Marine Insurance Overseas trade increased risk exposure. Informal agreements evolved into structured marine insurance. Marine insurance: The first formalized risk-sharing model. The Great Fire of London and Fire Insurance 1666: Fire destroyed much of London, leading to severe financial losses. In response, fire insurance was introduced the following year. Merchants transitioned to professional underwriters. Transition to Professional Insurance Merchants initially provided insurance alongside other businesses. Demand grew, leading to the specialization of full-time underwriters. Insurance became a recognized and organized industry. The Modern Insurance Industry Canada: Home to 109 general insurers (non-life and health). Top 10 insurers control over 67% of premiums. Key sectors: Auto, property, and liability insurance. Early Practices’ Influence on Modern Insurance Early practices laid the foundation for today’s industry. Risk sharing remains the core principle. Modern systems enhance the ancient idea with data and regulations. The Role of Risk in Insurance Risk: The possibility of financial loss. Insurance addresses risks like natural disasters, accidents, and liabilities. Central to personal and economic stability. Evolution of Risk Sharing Communities historically pooled resources to assist each other. These early systems evolved into formalized insurance. Today’s insurance formalizes and expands on these principles. Economic Impact of Insurance Insurance enables financial security for individuals and businesses. Encourages economic growth by allowing risk-taking. Provides stability in uncertain times. Development of Modern Insurance Systems Marine insurance: A foundation for today’s systems. Fire insurance: A catalyst for specialization. Modern insurance is a blend of historical practices and modern innovation. Insurance Today – A Snapshot Wide-ranging applications: From homes to businesses to governments. Covers risks from natural disasters to liability claims. Integral to societal functioning. How Insurance Works Policyholders pay premiums into a shared pool. Pool covers operating costs and claims. Insurers use advanced tools to manage risk. The Importance of Risk Modeling Risk modeling predicts potential losses. Actuaries analyze probabilities and costs. Data-driven decisions improve outcomes. Functions of Insurance Overview Five key functions of insurance: 1.Spread of Risk. 2.Basis of Credit System. 3.Encourages Entrepreneurship. 4.Promotes Loss Prevention. 5.Source of Employment and Investment Capital. Central purpose: Support individuals, businesses, and society. Function 1 – Spread of Risk Losses of the few shared by the many. Premiums contribute to a shared pool. Example: Natural disaster claims distributed across policyholders. Mechanism of Risk Spreading Diversification of risk portfolios by insurers. Risk assessments and modeling ensure solvency. Large numbers of participants enable fair distribution. Benefits of Spreading Risk Provides financial stability to policyholders. Reduces individual exposure to catastrophic losses. Fosters confidence in engaging with riskier ventures. Function 2 – Basis of the Credit System Insurance protects lenders’ investments. Secures loans for homes, cars, and businesses. Without insurance, credit access would be severely restricted. Example: The Butler Family The Butlers finance their home and vehicles through loans. Insurance ensures their lenders are protected. Access to credit allows the Butlers to own valuable assets. FOI Function 3 – Encourages Entrepreneurship Reduces worry about financial uncertainty. Small premiums cover potentially large losses. Example: A small business owner expanding operations. Function 4 – Promotes Loss Prevention Insurers work with communities on safety initiatives. Example campaigns: Road safety, fire prevention, anti-theft measures. Fraud detection: A key focus for insurers. Function 5 – Employment and Investment Capital Insurance employs over 100,000 Canadians. Creates indirect jobs in industries like auto repair and construction. Insurers control over $114 billion in assets (2015 data). Economic Contributions of Insurance Claims inject billions into the economy annually. Investments by insurers drive economic growth. Insurance sustains confidence during financial uncertainty. Checkpoi nt Challenge FOI Definition of Insurance Legal definition: Indemnification for losses from specific risks. Key principles: Transfer of financial responsibility to insurers. Payment contingent on the occurrence of a specified peril. Goal: 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 actual property value before loss. Deliberate vs. Accidental Losses Insurance covers only accidental and future losses. Excludes deliberate damage and pre-existing conditions. Rationale: Maintain fairness and avoid misuse. Property and Casualty Insurance in Canada Includes: Auto, property, and liability insurance. Auto insurance accounts for over 50% of premiums. Property insurance protects habitational and business assets. Organization of Insurance Providers Private insurers: Stock and mutual companies. Government insurers: Offer health, auto, and other coverage in select provinces. Lloyd’s of London: Specialized marketplace for unique risks. Private Insurers Stock companies: Owned by shareholders seeking profit. Mutual companies: Owned by policyholders with a focus on affordability. Example: Policyholder dividends in mutual companies. Government Insurers Provide compulsory auto insurance in BC, SK, MB, and QC. Often compete with private insurers for additional coverages. Example: Saskatchewan government offers property insurance. Lloyd’s of London Not an insurance company but a marketplace for underwriters. Syndicates manage risks for diverse exposures. Examples: Satellites, oil rigs, and celebrity body parts. Insurance Distribution Methods Direct writing system: Employees sell insurer-specific products. Independent brokers: Represent multiple insurers. Agency system: Small business owners representing a single insurer. Independent Brokers in Canada Over 6,500 brokerage offices employing 33,000 people. Account for 80% of property and casualty insurance sales. Brokers own their business and provide personalized service. Direct Writers Examples: Belair, RBC Insurance, and Desjardins. Employees sell only their employer’s products. All administrative functions handled by the insurer. The Agency System Agents vs. Brokers: Agents represent a single insurer and the Facility Association. Brokers represent multiple insurers. Key Features of the Agency System: Agents are small business owners. Compensation through commissions and bonuses. Ownership of their book of business. Examples of Agent Companies: Desjardin Insurance Company. Cooperators General Insurance Company. Checkpoi nt Challenge FOI Lloyd’s of London – A Unique Marketplace Lloyd’s is not an insurance company but a specialized marketplace. Established in the late 17th century to address marine insurance needs. Operates as a global platform for underwriters to assume specialized risks. The Role of Syndicates at Lloyd’s Syndicates: Groups of underwriting members who pool resources to manage risks. Each syndicate operates independently within Lloyd’s framework. Managed by underwriting agents who appoint expert underwriters for specific classes of risks. Lloyd’s Global Impact Lloyd’s underwriters handle risks worldwide, from satellites to natural disasters. Known for insuring unique and high-value risks (e.g., celebrity body parts, oil rigs). Provides a vital solution for risks that conventional insurers cannot cover. The Lloyd’s Slip – An Overview The "slip" is a folded document containing underwriting information. Used to present risks to Lloyd’s underwriters for evaluation. Essential for placing risks with syndicates at Lloyd’s. The Slip Process The broker provides the slip to Lloyd’s underwriters. Underwriters subscribe to a portion of the total liability limit. Once 100% of the risk is subscribed, the slip is sent to the Policy Signing Office. Questions? FOI LINKED IN HANDLE – FACEBOOK HANDLE – FOLLOW/SUSCRIBE ETC.