Advanced
PowerPoint
Presentation
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-1
This Advanced PowerPoint
Presentation accompanies the
“Tools & Techniques of Risk
Management & Insurance”
textbook. Each of the 28
chapters in the textbook are
presented here in the following
sections:
Outline
Key concepts
Major sections
Chapter summary
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-2
Contents
Techniques of Risk Management & Insurance
Ch 1 Introduction to Traditional Risk Management……………1-5
Ch 2 Enterprise Risk Management…………………………….2-1
Ch 3 Risk Assessment: Identification…………………………..3-1
Ch 4 Risk Assessment: Quantification…………………………4-1
Ch 5 Overview of Risk Treatment Alternatives………………. 5-1
Ch 6 Non-insurance Transfer of Risk…………………………. 6-1
Ch 7 Insurance as a Risk Transfer Mechanism……………….7-1
Ch 8 Overview of Alternative Risk Transfer Techniques……..8-1
Ch 9 Global Risk Management…………………………………9-1
Ch 10 Loss Control Techniques………………………………..10-1
Ch 11 Emergency Response Planning………………………..11-1
Ch 12 Business Continuity Planning…………………………..12-1
Ch 13 Claims Management……………………………………..13-1
Ch 14 Monitoring Claims for Financial Accuracy……………..14-1
Ch 15 Insurance Companies and Risk Management………..15-1
Ch 16 Working with an Agent or Broker……………………….16-1
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-3
Contents
Tools of Risk Management & Insurance
Ch 17 Commercial General Liability Insurance……………….17-1
Ch 18 The Workers’ Compensation System………………….18-1
Ch 19 Commercial Property Insurance………………………..19-1
Ch 20 Directors and Officers’ Liability Insurance……………..20-1
Ch 21 Employment-Related Practices Liability Insurance…..21-1
Ch 22 Business Automobile Insurance………………………..22-1
Ch 23 Crime Insurance………………………………………….23-1
Ch 24 Capital Markets Risk Transfer Tools…………………..24-1
Ch 25 Loss Control Tools……………………………………….25-1
Ch 26 The Certificate of Insurance…………………………….26-1
Ch 27 Surety Bonds……………………………………………..27-1
Ch 28 Claim Reviews……………………………………………28-1
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-4
Chapter 7
Insurance as a Risk Transfer Mechanism
Outline
• What is it?
• Steps to Implement
• Step One: Beginning the Process
• Step Two: Choosing an Intermediary
• Step Three: Binders of Insurance
• Step Four: Receiving and Reviewing Policies
• Advantages
• Disadvantages
• Chapter Summary
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-5
Chapter 7
Insurance as a Risk Transfer Mechanism
What is it?
• Insurance is a transfer of the financing of risk
• One party agrees to indemnify another for the financial
consequences of the other party’s loss
• An exchange of a known, small amount (the premium) for an
uncertain, potentially catastrophic future amount (the loss)
• Insurance combines a large number of homogeneous,
independent exposure units into a pool
• The losses of a few are shared by the many
• The law of large numbers enables actuaries to predict an
expected outcome, loss distributions, and calculate premiums
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-6
Chapter 7
Insurance as a Risk Transfer Mechanism
Steps to Implement
1. Identify the exposures
2. Choose an Intermediary
3. Get Binders of Insurance
4. Receiving and Reviewing Policies
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-7
Chapter 7
Insurance as a Risk Transfer Mechanism
Step One: Beginning the Process
• Use a risk exposure survey (and other tools) to identify exposures
e.g., Property, Liability, Human Resources, Net Income
• Interview intermediaries (producer, agent, broker) to solicit
insurance proposals
• Give intermediary a broker-of-record letter
• Mid-term broker-of-record letters may cause the underwriter to
cancel, re-underwrite, and re-write coverages
• Broker-of-record letters may restrict brokers to specified carriers
– this enables multiple brokers to go to the market and market an
account without approaching the same insurers
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-8
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Two: Choosing an Intermediary
• Types of Intermediaries
• independent agents
• exclusive agents
• employee agents
• direct-writers
• brokers
• surplus lines brokers
• Independent Agents
• An independent business person
• Represents multiple insurers
• Agent owns the expirations
• Agent’s legal duty is to insurer
• Agent may have binding authority
• Agent usually compensated by commission
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-9
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Two: Choosing an Intermediary
• Exclusive agent
• An independent business person
• Represents only one insurer
• Agent might not own the expirations
• Agent’s legal duty is to insurer
• Agent may have binding authority
• Agent usually compensated by commission
• Employee agent
• Licensed agents
• Employees of an insurer
• Agent does not own expirations
• Agents are compensated by salary
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-10
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Two: Choosing an Intermediary
• Direct-writer agent
• Licensed agents
• Employees of an insurer
• Agents solicit by mail, telephone, or internet
• Agent does not own expirations
• Agents are compensated by salary
• Brokers
• Represents the insured
• Usually used for large commercial accounts
• May have a service agreement and be
compensated by service fees and/or commissions
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-11
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Two: Choosing an Intermediary
• Surplus Lines agent
• Licensed with non-admitted insurers
• Not subject to rate and form regulations
• Not protected by state guarantee funds
• Can write custom (manuscript) coverages
• Write coverage for non-standard exposures
• Agent paid a commission
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-12
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Three: Binders of Insurance
• Factors in choosing coverage:
• Level of service
• Insurance coverage
• Policy exclusions
• Insurer’s financial condition
• Rate credits
• Total premium
• Intermediary issues binder of temporary coverage
• Names of insured, insurer, and intermediary
• Policy forms that apply
• Effective and expiration date (30 days)
• Exposures covered
• Limits of insurance
• May be an ACORD form
• Special coverage must be clearly indicated on the
binder
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-13
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Three: Binders of Insurance
Supplement
• Additional documents provided by insurer
• Evidence of insurance
• Certificate of insurance
• Supplied at time of binding coverage or to verify
renewal or as snapshot of coverage
• These documents do not provide insurance coverage
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-14
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
• Receiving the policy
• The policy is the contract
– it overrides any binders, oral agreements, or applications
• Discrepancies should be immediately addressed
•Contract of adhesion
• Standard contracts are offered as take-it-or-leave-it
• Courts may rule any ambiguous conditions in favor of the
personal lines consumer
• Commercial consumers are expected to read their policies and
may not be protected by this precedent
• Many conditions are established by state statutes
• Insurance contracts are matters of public policy
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-15
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
• Reviewing the Insurance Policy
• Read the policy forms and attachments
• Check to be sure all policy forms are appropriate
• Are the right exposures covered?
• For the desired perils?
• At the desired limits?
• Declarations Page
• The information page (may be an ISO form)
• Named insured
• Mailing address
• Insured locations
• Forms and endorsements
• Policy period (inception and expiration – 12:01 a.m.)
• Intermediary’s name and address
• Insurer and address
• Premium
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-16
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
Supplement
• Declarations Page may also indicate:
• State-specific taxes and fees
• How to contact regulators to log a complaint
• Audit or inspection intervals
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-17
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
• Insurance Policy Coverage Parts
• Insuring Agreement
• Definitions
• Exclusions
• Conditions
• Attachments (endorsements or riders)
• Deductibles
• Insured retains and pays losses up to a limit;
insurer pays after that retention amount to the policy limit.
• Enables lower premiums
• Qualified self-insured retention (SIR) for state approved workers’
compensation, excess, or umbrella liability policies
• Higher deductibles may yield lower premiums
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-18
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
• Deductibles
• Types of deductibles:
• Flat – usually applied per each claim
• Straight - usually applied per occurrence
• Percentage - proportion of exposure value
• Policy Forms
• Bureau filed form – standard form (e.g., ISO)
• ISO promulgates insurance forms and rates for insurers to
file with state regulators
• Independently filed form – company designed forms filed with
state regulators
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-19
Chapter 7
Insurance as a Risk Transfer Mechanism
Step Four: Receiving and Reviewing Policies
• Surplus Lines Market (non-admitted market)
• A licensed insurer is admitted if the state regulator approves
their forms, rate filings, and financial strength and the insurer
pays a premium tax to the state guarantee fund.
• A non-admitted insurer is licensed to sell in the state
• Used for hard to place exposures
• FAIR plans
• State Fair Access to Insurance Requirements
• For writing property coverage in urban areas where standard
market insurers prefer not to write
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-20
Chapter 7
Insurance as a Risk Transfer Mechanism
Advantages
+ Exchange of small known cost for potential large cost
+ May satisfy a contractual responsibility
+ May satisfy loan requirements
+ Insurer handles the loss settlement procedures
+ May satisfy statutory or regulatory requirements
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-21
Chapter 7
Insurance as a Risk Transfer Mechanism
Disadvantages
– Opportunity costs – money used for insurance not invested in
business operations
– Not all losses may be covered – exclusions apply
– Intermediary fees must be paid
– Insurance contract terms may be challenging to interpret
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-22
Chapter 7
Insurance as a Risk Transfer Mechanism
Chapter Summary
• What is insurance: a risk financing tool
• Steps to Implement
• Step One: Beginning the Process – identify exposures,
broker-of-record letters
• Step Two: Choosing an Intermediary – independent,
exclusive, employee, direct-writer, broker, surplus lines agent
• Step Three: Binders of Insurance – temporary coverage
• Step Four: Receiving and Reviewing Policies – contract of
adhesion, review the contract, declarations, coverage parts,
deductibles, policy forms, surplus lines policies, FAIR plan
• Advantages – exchanges uncertain large loss for a premium,
satisfies obligations, insurer settles claims
• Disadvantages – opportunity cost, exclusions, fees, terms
©2009 The National Underwriter Company
Dr. James Kallman, ARM
7-23