seminar for oklahoma state legislators march 20, 2013
DESCRIPTION
INFORM+INSPIRE. Basic Principles of Insurance & Risk Management University of Central Oklahoma Finance – Insurance and Risk Management Stuart MacDonald, Gerald Wilkins, Allen Arnold. Seminar for Oklahoma State Legislators March 20, 2013. Seminar Agenda. - PowerPoint PPT PresentationTRANSCRIPT
INFORM+INSPIRE
The Griffith Insurance Education Foundation
Basic Principles of Insurance & Risk Management
University of Central Oklahoma
Finance – Insurance and Risk Management
Stuart MacDonald, Gerald Wilkins, Allen Arnold
Seminar for
Oklahoma State LegislatorsMarch 20, 2013
Seminar Agenda Overview of Insurance Principles Types of Insurance Regulation and Legislation
The Griffith Insurance Education Foundation
Overview of Insurance Principles
Definition of Risk The Role of Insurance Risk Pooling Adverse Selection Concept of Moral Hazard
The Griffith Insurance Education Foundation
Definition of Risk Risk refers to uncertainty An unknown or unexpected event Risk can be strategic, unintentional,
systemic, fortuitous
The Griffith Insurance Education Foundation
The Role of Insurance According to the American Risk and
Insurance Association, “insurance is the pooling of fortuitous losses by transfer of such risks to insurers, who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk” (Redja, p. 20, 2011).
The Griffith Insurance Education Foundation
Characteristics of Insurance
Pooling of Losses Payment of Fortuitous Losses Risk Transfer Indemnification
The Griffith Insurance Education Foundation
Risk Pooling Spreads the loss suffered by an
individual over the whole group Based on the Law of Large Numbers
The Griffith Insurance Education Foundation
Payment of Fortuitous Losses
Unforeseen Unexpected Result of Chance
The Griffith Insurance Education Foundation
Transfer of Risk Pure risk transferred from an insured
to an insurer for a fee (insurance premium)
The Griffith Insurance Education Foundation
Indemnification Restoring an insured to their
approximate pre-loss financial position
The Griffith Insurance Education Foundation
Concept of Peril and Hazard A peril is the cause of a loss
A hazard is a factor that creates or contributes to a loss
The Griffith Insurance Education Foundation
Physical Hazard Physical condition that increases the
frequency and/or severity of a loss
The Griffith Insurance Education Foundation
Moral Hazard Dishonest or deceitful statements or
behavior in order to defraud the insurer, thereby increasing the frequency and/or severity of loss claims
Insurance fraud causes increases in premium rates for everyone
The Griffith Insurance Education Foundation
Attitudinal Hazard Carelessness or indifference to a loss,
thereby increasing the frequency and/or severity of loss claims
The Griffith Insurance Education Foundation
Legal Hazard Characteristics of the legal system or
regulatory environment that increases the frequency and/or severity of loss claims
The Griffith Insurance Education Foundation
Adverse Selection Tendency for insurance applicant with
a higher than average loss potential (sub-standard risk) to acquire insurance protection at less expensive (standard risk) premium rates
The Griffith Insurance Education Foundation
Characteristics of an Ideally Insurable Risk Large number of exposure units Accidental and unintentional loss Determinable and measurable Not a catastrophic loss Chance of loss must be calculable Economically feasible premium
The Griffith Insurance Education Foundation
Risk Management Matrix Low frequency and severity: Retention High frequency and low severity: Loss
Prevention and Retention Low frequency and high severity:
Transfer Risk (Insurance) High frequency and high severity:
Avoidance
The Griffith Insurance Education Foundation
INFLATION-ADJUSTED U.S. CATASTROPHE LOSSES BY CAUSE OF LOSS, 1992-2011
The Griffith Insurance Education Foundation
(1) Estimated property losses adjusted for inflation through 2011 by ISO using the GDP implicit price deflator. Excludes catastrophes causing direct losses less than $25 million in 1997 dollars. Does not include flood damage covered by the federally administered National Flood Insurance Program.(2) Excludes snow.(3) Includes wildland fires.(4) Includes losses from civil disorders, water damage, utility service disruptions, and any workers compensation catastrophes generating losses in excess of PCS's threshold after adjusting for inflation.Source: The Property Claim Services (PCS) unit of ISO, a Verisk Analytics company.
Why Insurers Become Insolvent
The Griffith Insurance Education Foundation
Note that Fraud outranks Catastrophe Losses.
Types of Insurance Personal Lines
Life Health Homeowners Auto
Reinsurance and Surplus Lines
The Griffith Insurance Education Foundation
The Griffith Insurance Education Foundation
Source: SNL Financial, Inc.
$502B
$576B
$175B
2011 U.S. Net Pre-miums Written
P&CLifeA&H
Personal Lines - Life Life insurance is justified if others are
financially dependent on the insured Term Insurance vs. Whole Life Insurance Ownership Clause Incontestable Period / Suicide Clause Death benefit proceeds are tax-exempt Life Income Options / Annuities
The Griffith Insurance Education Foundation
Personal Lines - Health Patient Protection and Affordable Care
Act State Health Insurance Exchanges No pre-existing conditions No lifetime or annual limits Coverage for children to age 26
The Griffith Insurance Education Foundation
2011 Life/A&H U.S. NPW by Line
The Griffith Insurance Education Foundation
Source: SNL Financial, Inc.
Personal Lines - Homeowners Homeowners 3 (Special Form)
All-Risks Coverage, except named exclusions (Earthquake, Flood, War, Nuclear Radiation)
Homeowners 6 (Condominiums) Same as above
Homeowners 4 (Renters Insurance) Named Perils (NOT All-Risks)
The Griffith Insurance Education Foundation
Personal Lines - Auto Personal Auto Policy
Liability Coverage Medical Payments Coverage Uninsured / Underinsured Motorists Collision and Comprehensive Exclusions (intentional injury or damage,
racing, road rage, business use, etc.)
The Griffith Insurance Education Foundation
2011 P&C U.S. NPW by Line
The Griffith Insurance Education Foundation
Source: SNL Financial, Inc.
State Trends in Auto and Homeowners Pricing 2011 report by the Insurance
Research Council indicates a rapid increase in the severity of claims, and a slow but steady increase in the frequency of non-severe claims.
Commercial Auto most stable underwriting
The Griffith Insurance Education Foundation
Reinsurance Primary insurer that writes the
insurance transfers to another insurer (the reinsurer) part or all of the potential losses associated with such insurance
The Griffith Insurance Education Foundation
Reasons for Reinsurance Increase underwriting capacity Stabilize profits Reduce the unearned premium reserve Protection against catastrophic losses
(e.g. reinsurers paid a large part of the $41 billion insured losses arising from Hurricane Katrina which significantly reduced losses paid by primary insurers)
The Griffith Insurance Education Foundation
Surplus Lines Surplus lines refers to any type of
insurance for which there is no insurer licensed by the State of Oklahoma that will write the type and amount of insurance requested by the insured
Coverage must be placed by a surplus lines broker with a nonadmitted insurer which is not licensed to do business in Oklahoma (e.g. Lloyd’s of London)
The Griffith Insurance Education Foundation
Surplus Lines Surplus lines carriers are registered
with the Oklahoma Insurance Department
A 6% surplus lines tax is levied on insurance premiums for surplus lines coverage; tax is paid by the surplus lines broker placing the coverage for the insured
The Griffith Insurance Education Foundation
Regulation of Insurance National Association of Insurance
Commissioners (NAIC) All 50 states, Wash. D.C, 5 US Territories Maintain insurer solvency Regulate fair and reasonable rates Ensure availability of insurance Consumer protection and education
The Griffith Insurance Education Foundation
State Regulation of Insurance Oklahoma Insurance Department
Enforce insurance-related laws Protect consumers Promote competitive insurance markets License and educate insurance agents
and adjusters, funeral home directors, bail bondsmen, real estate appraisers
The Griffith Insurance Education Foundation
State Guaranty Funds Provide protection from losses if an
insurer becomes insolvent Life and Health Insurance Guaranty
Association Property and Casualty Insurance
Guaranty Association
The Griffith Insurance Education Foundation
Oklahoma Guaranty Associations When a licensed insurer fails, other
licensed insurance carriers are assessed according to the % of premiums they write in the State to pay the claims of the failed carrier
The Griffith Insurance Education Foundation
Oklahoma Guaranty Associations Each insurer who pays an assessment
is permitted to take the amount they pay as a credit against their premium taxes (licensed insurance carriers pay a 2.25% premium tax on all premiums they bill their insureds)
The Griffith Insurance Education Foundation
Solvency, Pricing, Rate Adequacy Insolvency result of catastrophic losses,
inadequate reserves and rates, mismanagement, bad investments, etc
Premium pricing function of expected losses, expense loading, investments
Rates regulated to balance insurer profitability and prevent consumer gouging
The Griffith Insurance Education Foundation
Regulatory Methods to Ensure/Monitor Insurer Solvency
State insurance departments utilize strict methods and requirements to maintain insurer solvency
Licensing and financial requirements Risk-based capital standards Submission of financial statements In-field examinations of insurer practices
The Griffith Insurance Education Foundation
Policy Forms Insure Consistency of Product Consistency of Interpretation of
Language Set Coverage Standards
The Griffith Insurance Education Foundation
Balance between Consumers and Insurers Government Failure vs. Market Failure Bad Faith vs. Fraud State Guaranty Funds vs. Moral
Hazard Sound Underwriting vs. Red Lining
The Griffith Insurance Education Foundation
Rate Filing Interstate Insurance Compact Must Insure Solvency McCarran-Ferguson Act Prevent “Destructive” Competition
The Griffith Insurance Education Foundation
Issues in Insurance Legislation
Tag initiative uninsured drivers loss of state revenue
Workers Compensation
Captive Insurance
The Griffith Insurance Education Foundation
Questions?
Comments?
The Griffith Insurance Education Foundation
Melissa Kuhn Wheeler, The Griffith Insurance Education Foundation, (855) 288-7743, [email protected]
Dr. Stuart MacDonald, (405) 974-2152, [email protected] Wilkins, (405) 974-5566, [email protected] Arnold, (405) 974-2171, [email protected]
INFORM+INSPIRE
The Griffith Insurance Education Foundation
Thank you for allowing us to present this seminar on Insurance and Risk Management. Please contact us if we can be of further assistance.
This presentation can be downloaded at: www.griffithfoundation.org/public-policy/resources/