1 Webinar Speakers Presenter Dr. Conrad Ciccotello Associate - - PowerPoint PPT Presentation

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Webinar Speakers

Presenter –

• Dr. Conrad Ciccotello

Associate Professor and Executive Director of the Huebner Foundation Georgia State University

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Insurance Basics

Insurance provides financial security, and it does so based on principles that ensure that all covered losses will be indemnified.

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Icebreaker:

Issues associated with which type of insurance have the greatest impact on your constituents?

• a. Healthcare insurance
• b. Homeowners insurance
• c. Workers compensation
• d. Auto insurance

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Motivating Theme:

• Given the explosion of data, have our lives become

any safer?

• How does this data impact insurers and the

insured? 5

What Is Insurance?

• A means of treating risk by transferring the

financial consequences of a loss to an insurance company

• A means of protecting financial interests

when losses occur

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How Insurance Benefits Insureds

• Pays insured’s covered losses (indemnifies)
• Reduces uncertainty
• Encourages efficient use of resources
• Helps reduce and prevent losses

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How Insurance Benefits Business and Society

• Supports credit
• Satisfies legal requirements
• Satisfies business requirements
• Provides sources of investment funds
• Reduces social burdens

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Costs of Insurance to Insureds

• Premiums
• Opportunity costs

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Costs Associated With Insurance

• Operating costs – including profit
• Fraudulent and inflated claims (moral

hazards)

• Claims caused by carelessness or

indifference (morale hazards)

• Frivolous lawsuits that are settled as

nuisance claims

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Fundamental Insurance Principles

These principles help ensure that the insurance mechanism is actuarially sound:

• Indemnification
• Law of large numbers
• Insurable interest

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The Principle of Indemnity

• Insurance should not benefit an insured

beyond the value of a loss.

• Violations of this principle can increase the

frequency and severity of losses.

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The Law of Large Numbers

• The mathematical basis of insurance.
• Insurance coverage provided is large

relative to the premium paid.

• What would be an unexpected loss for an

individual becomes an expected loss in aggregate for an insurer.

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Insurable Interest

• Means that the insured must suffer

financially should a loss occur

• Supports the principle of indemnity—one

cannot gain from an insurable loss

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Economic Issues Related to Insurance Pricing

An insurance policy is priced to reflect the loss exposures the policy covers while allowing for expenses, profit, and contingencies.

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What do you think?

What issues affect insurance market pricing?

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Key Issues in Pricing

• Adverse selection
• Moral and morale hazard
• Equity: actuarial and social
• Timing

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Adverse Selection

Adverse selection increases insurers’ costs.

• Those with the greatest probability of loss are

most likely to buy insurance.

• They tend to have more losses and higher

claims than insureds with an average loss probability. 18

Avoiding Adverse Selection: Data Collection

• Insurers need information about insureds to set

prices that reflect risks.

• Data collection raises privacy concerns:
• What information is relevant?
• How much information is too much?

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Moral and Morale Hazard

• Behaviors that increase loss frequency

and/or severity

• Moral—dishonesty
• Morale—carelessness or indifference
• Common in auto, products liability, and

general liability insurance

• Can be discouraged with policy risk-sharing

features (deductibles)

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Actuarial Equity Versus Social Equity

• Fair discrimination—equitable premium for

each insured—is essential to insurance pricing.

• State insurance laws prohibit unfair

discrimination in insurance pricing.

• Opinions vary about what is fair and unfair.

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Actuarial Equity

• Premium is directly proportional to each

insured’s loss exposures.

• Cost-based pricing—identifies every

variable unique to each insured.

• Use of some variables may be prohibited by

state law.

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Social Equity

Social equity involves two concepts:

• Pricing should relate to ability to pay.
• Factors beyond an insured’s control should

not affect premium.

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Timing

• Most losses are recognized, valued, and

settled quickly (short-tail losses).

• Some losses take a long time to manifest,

value, and settle (long-tail losses).

• The longer the tail, the greater the

uncertainty in expected losses.

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What Is an Ideally Insurable Risk?

• An ideally insurable risk has six

characteristics.

• Insurers use these characteristics to decide

which risks to insure.

• Insurers select only those risks that meet

most of the criteria.

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Characteristics of Insurable Risks

• A large quantity of similar people or objects

may be subject to a loss.

• Loss would be fortuitous.
• Loss would not be catastrophic to the

insurer.

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Characteristics of Insurable Risks

• Time, location, and extent of a loss can be

determined.

• The amount of an expected loss can be

predicted.

• Covering the expected loss is economically

feasible for the insurer.

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Characteristics of the Insurance Product

Insurance products share several characteristics that distinguish them from other types of consumer products.

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Intangibility

The insurance product

• Lacks physical characteristics
• Is more than the policy on paper
• Represents a promise (to pay in the event of

loss) 29

What do you think?

How does the complexity of the insurance product get in the way of consumer satisfaction?

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Complexity and Legal Status

• An insurance policy contains complicated

terms and concepts.

• An insurance policy is a legal contract.
• Insureds and claimants may hire attorneys

to resolve or clarify issues.

• Some issues may involve courts, regulators,
• r legislators.

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Insurance Circumstances

Product benefits become most apparent at time of loss.

• Insureds or claimants are typically facing

unpleasant circumstances.

• Heightened emotions complicate the

customer service experience 32

Insurance as a Risk Management Technique

Loss exposures with serious financial consequences typically require the purchase of insurance.

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What do you think?

What are some typical techniques people or companies use to manage risk?

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Risk Management Techniques

• Identify
• Analyze
• Mitigate
• Prevention
• Reduction
• Retain or Transfer

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Retaining Loss Exposures

• Some loss exposures have the potential to

cause financial ruin.

• Others present minimal potential costs and

can be safety retained.

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Transferring Risk

• Some loss exposures are most effectively

managed by transfer.

• The financial consequences of loss are

borne by another party.

• Insurance is a common risk transfer

technique.

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Why Insurance Operations Are Regulated

The fundamental purpose of insurance regulation is to protect the public as consumers and policyholders.

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Consumer Protection

• Regulating and standardizing insurance

policies and products

• Controlling market conduct and

preventing unfair trade practices

• Ensuring that insurance is available and

affordable

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Insurer Solvency Regulation

• Ensure an insurer’s claim-paying ability
• Protect the public interest
• Safeguard insurer-held funds

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Summary: Insurance Principles

Insurance is

• A risk management technique that involves

transfer of risk to an insurance company

• A complex legal contract
• Affected by adverse selection, moral and morale

hazard, actuarial and social equity, and timing

• Regulated to protect consumers and policyholders

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Insurance Fundamentals for Policymakers

For more information, please contact:

The Griffith Insurance Education Foundation 720 Providence Road, Suite 100 Malvern, PA 19355 Phone: 855-288-7743 Email: PPE@griffithfoundation.org 42

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