Risk is the key factor in determining whether insurance is needed and how much it will cost. Insurance companies measure risk to decide whether to offer coverage and set premium costs. Higher risk factors generally correspond to higher insurance costs. Risk includes traits an individual can control, like where they live, and factors outside their control, like natural disasters. Insurance aims to spread risk across large groups of policyholders according to statistical analysis.

2. WHY IS RISK IMPORTANT FOR INSURANCE?
RISK IS WHAT MAKES YOU DECIDE WHETHER OR NOT YOU NEED
INSURANCE.
RISK IS WHAT INSURANCE COMPANIES MEASURE WHEN DETERMINING
WHETHER TO OFFER YOU INSURANCE AND HOW MUCH IT WILL COST.
RISK: WHAT IS IT?
Risk = the possibility of financial loss
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3. WHAT IS INSURANCE?
Insurance is a
legal contract
that transfers
risk from a
policyholder to
an insurance provider.
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4. WHAT TYPES OF RISKS DOES INSURANCE COVER?
Risk Insurance Coverage
1. You lose your job Mortgage and Credit Will cover your debts for
a fixed period while you
are unemployed
2. Your stocks lose value Stock Liability Will cover the actual
amount lost up to the
insured amount
3. You have a car crash Auto Will pay for damage to
your car and other
damaged vehicles and
property. Will pay for
medical expenses for you
and other parties.
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5. WHAT TYPES OF RISKS DOES INSURANCE COVER? (Cont.)
Risk Insurance Coverage
1. Your friend falls in your
home and breaks his leg
Homeowners, renters,
condo owners
Will pay fixed amount
for his medical
expenses
2. A pipe bursts in your
apartment building and ruins
your sofa
Renters Will pay to replace
your sofa or for the
sofa’s value
3. The police give you a
speeding ticket
None None
4. You are hurt on the job Disability; workers’
compensation
Disability: Will pay
your lost wages and
medical expenses
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6. RISK FACTORS DETERMINE WHETHER YOU WILL BE
ABLE TO BUY A POLICY AND HOW MUCH IT WILL
COST.
GENERALLY SPEAKING:
> RISK = > COST
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7. RISK FACTORS: AUTO INSURANCE
Age of driver
Gender of driver
Number of drivers on policy
Accident / Incident history
Where auto is parked
Annual mileage
Number of traffic violations
Prior insurance record
Years of driving experience
Address, City, State
How auto is used (commute, business,
pleasure)
Mileage per year
Year, make and model of car
Special safety features in car
Owned or financed
Academic performance (if currently in
school)
Credit rating of policyholder
**Amount of coverage required**
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8. RISK FACTORS FOR HOMEOWNERS/RENTERS
INSURANCE
Type of home (single family, town
home, high-rise)
Square footage
Number of rooms
Floor level (if in high-rise)
Address (city, state, county)
Pets
Pool
Proximity to fire station and fire
hydrant
Business being conducted on
premises?
Personal property (including furniture,
electronics, high value items, etc.)
Special safety features (security,
alarms, sprinklers)
Credit rating of policyholder
Prior insurance history (claims filed,
etc.)
Construction type (brick, frame, etc.)
Roof type (shingle, tile, metal, flat, etc)
**Amount of coverage required**
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9. CATEGORIES OF RISK
The things you can and cannot change that affect your insurance
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10. THE CHOICES YOU’VE MADE
(TRAITS YOU CAN CONTROL)
Where you live, own property or drive (city/state)
Property type and value
Safety precautions/features on your property
Profession
Grades in school
Driving record & habits
At – fault accidents
Personal habits (smoking, drinking)
Marital Status
Number of children or dependents
Credit history
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11. FAULT OF ANOTHER
(INCIDENTS YOU CANNOT CHANGE)
Crash
Damage to Your Property
Loss of Property, Injury or Death
Theft of Your Property
Credit History of Spouse/Dependent
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12. “ACTS OF GOD”
Flood
Hurricane
Earthquake
Windstorm
Lightening
Acts of War
Acts of Terrorism*
(*new legislation is pending on whether providers will cover terrorism)
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13. SOMR OF THE PRIME TYPE OF GI & IMPORTANT
FACTORS OF CONSIDERATION
Fire Insurance
The construction of the building, the nature of its use i.e. whether it is of concrete or Kucha having thatched roofing and whether it
is being used for residential purposes or as a godown, whether fire fighting equipment is available or not.
Motor Insurance
The type of vehicle, the purpose of its use, its age (Model), Cubic capacity and the fact that the driver has a
consistently bad driving record.
Marine Insurance
Type of packing, mode of carriage, name of carrier, nature of goods, the route.
Personal Accident
Insurance: Age, height, weight, occupation, previous medical history if it is likely to increase the choice of an
accident, Bad habits such as drinking etc.
Burglary Insurance
Nature of stock, value of stock, type of security precautions taken.
Group insurance (Differs from individual insurance in several ways)
Many people are covered under one contract
Coverage costs less than comparable insurance purchased individually
Individual evidence of insurability is usually not required
Experience rating is used
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15. BASIC INSURANCE DEFINITIONS
 RISK - Uncertainty regarding (financial) outcome (loss).
 INSURANCE - A social device for dealing with risk
 POLICY - A contract of insurance which promises to provide
protection in the event of a covered loss.
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16. MORE INSURANCE DEFINITIONS
x PERIL - the immediate, specific cause of a loss.
 Named Perils - such as fire, lightning. Burden of
proof of loss is on insured. Must be able to prove
loss occurred from a covered peril.
 All Risk - everything covered except what’s
excluded. Burden of proof is on company. Must
prove the loss was excluded or pay.
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17. MORE INSURANCE DEFINITIONS
 PROXIMATE CAUSE - a covered peril is the
proximate cause (immediate, specific) of a loss
if it initiates an unbroken chain of events
leading to a covered loss. Without it no loss
would have occurred.
 DIRECT PHYSICAL LOSS (lightning strikes building)
 INDIRECT/CONSEQUENTIAL LOSS (loss of use)
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18. MORE INS. DEFINITIONS
 HAZARD -situation that introduces or increases
chance of loss from a peril.
 Physical Hazards (mfg. fireworks in garage, child care
in home, unfenced pool)
 Moral Hazards - dishonest acts of insured which
increase chance of loss. Character, living habits,
financial responsibility. (Fake claims to get money
when out of a job).
 Morale Hazards - attitudes of insured's that increase
possibility of loss. (Fails to fix roof when needed: let
insurer pay after storm).
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19. DEALING WITH RISK
RETAIN RISK
 Can’t do anything about it (airplane falls on house)
 Choose to ignore risk (don’t buy flood insurance)
AVOID RISK
 Don’t buy in earthquake area
 Move away from flood areas
REDUCE RISK - good roof or alarm system
TRANSFER RISK - buy insurance
INDIVIDUALS
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20. SPREAD RISK
 Geographical - different. areas
 Financial - different $ ranges
REDUCE RISK
 Underwriting guidelines
 Discounts (alarms, non-smokers, defensive driving)
DEALING WITH RISK
INSURANCE
COMPANIES
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21. Insurable Interest is defined as –“The legal right to insure arising out of a financial
relationship recognized under the law between the insured and the subject matter of
Insurance”. There are four essential components of Insurable Interests
1) There must be some property, right, interest, life, limb or potential liability capable
of being insured.
2) Any of these above i.e. property, right, interest etc. must be the subject matter of
Insurance.
3) The insured must stand in a formal or legal relationship with the subject matter of
the Insurance. Whereby he benefits from its safety, well-being or freedom from
liability and would be adversely affected by its loss, damage existence of liability.
4) The relationship between the insured and the subject matter must be recognized
by law.
INSURANCE PRINCIPLES
INSURABLE INTEREST
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22. In Insurance the word indemnity is defined as “financial compensation sufficient to
place the insured in the same financial position after a loss as he enjoyed
immediately before the loss occurred.”
Indemnity thus prevents the insured from recovering more than the amount of his
pecuniary loss. It is undesirable that an insured should make a profit out of an event
like a fire or a motor accident because if he was able to make a profit there might
well be more fires and more vehicle accidents. As in the case of Insurable Interest,
the principle of indemnity also relies heavily on the financial evaluation of the loss
but in the case of life and disablement it is not possible to be precise in terms of
money.
PRINCIPLE OF INDEMNITY
INSURANCE PRINCIPLES CONT’D
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23. HOW IS INDEMNITY PROVIDED?
THE INSURERS NORMALLY PROVIDE INDEMNITY IN THE FOLLOWING MANNER AND THE CHOICE
IS ENTIRELY OF THE INSURER
1.Cash Payment
 In majority of the cases the claims will be settled
by cash payment (through cheques) to the
assured. In liability claims the cheques are made
directly in the name of the third party thus
avoiding the cumbersome process of the Insurer
first paying the Insured and he in turn paying to
the third party.
2. Repair
 This is a method of Indemnity used frequently by
insurer to settle claims. Motor Insurance is the
best example of this where garages are
authorized to carry out the repairs of damaged
vehicles. In some countries Insurance
companies even own garages and Insurance
companies spend a lot on Research on motor
repair to arrive at better methods of repair to
bring down the costs.
3. Replacement
 This method of Indemnity is normally not preferred
by Insurance companies and is mostly used in
glass Insurance where the insurers get the glass
replaced by firms with whom they have
arrangements and because of the volume of
business they get considerable discounts. In some
cases of Jewellery loss, this system is used
specially when there is no agreement on the true
value of the lost item.
4. Reinstatement
 This method of Indemnity applies to Property
Insurance where an insurer undertakes to restore
the building or the machinery damaged
substantially to the same condition as before the
loss. Sometimes the policy specifically gives the
right to the insurer to pay money instead of
restoration of building or machinery.
 Reinstatement as a method of Indemnity is rarely
used because of its inherent difficulties e.g., if the
property after restoration fails to meet the
specifications of the original in any material way or
performance level then the Insurer will be liable to
pay damages. Secondly, the expenditure involved
in restoration may be much more than the sum
Insured as once they have agreed to reinstate they
have to do so irrespective of the cost.
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24.  COINSURANCE - requirement that property be
insured to at least 80% of replacement cost or be
penalized in the event of a partial loss.
 VALUED POLICY - In Texas full policy amount is
paid in the event of a total loss.
 LIABILITY - legal responsibility for a loss to
someone else (3rd party). BI or PD. Casualty
insurance provides this type of coverage.
INSURANCE PRINCIPLES CONT’D
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25. LAW OF LARGE NUMBERS
The larger the number of separate-but-similar risks in
a group, the more predictable future losses become.
Insurance companies must predict losses on a group
basis in order to arrive at fair premiums for individuals
within groups.
INSURANCE PRINCIPLES CONT’D
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26.  BASIS OF COINSURANCE
 Actual Cash Value - what item(s) worth at time of
loss (value of used goods).
 Replacement Cost - what it would cost to replace
item(s) at today’s prices
INSURANCE PRINCIPLES CONT’D
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27.  CALCULATING COINSURANCE
 Amount of insurance the client purchased
 Divided by amount of insurance client should
have purchased
 Multiplied by the amount of the loss
 Less the deductible
 Equals the amount which will be paid on the loss
INSURANCE PRINCIPLES CONT’D
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28.  AMBIGUITY in policy language is interpreted in the
insured’s favor by the courts. The state and/or
insurance company writes the insurance contract and
it’s assumed that they write it in their favor.
 IMPORTANCE OF COURTS IN INSURANCE
DECISIONS - new policy language and provisions are
tested through court system
INSURANCE PRINCIPLES CONT’D
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29. WORKSTATION

30. Thank you