Meeting Plan Presentation

START

principles of Insurance

Let’s look at the four principles that shape insurance today. They are:

The Priciples

transferring the loss exposure

sharing the cost of losses

indemnification

reinsurance

transferring the loss exposure

• There is a possibility that a loss could occur.

• This means that the insured is ‘transferring’ to the insurance company the financial responsibility that could result from a considerable loss.
• In turn, the insured makes periodic, smaller payments for this assurance.
• Loss exposures have three elements:
• The item subject to loss
• The cause of loss (peril)
• The potential financial impact of the loss

Back to the principles

Damage that causes financial impact is where the concept of transferring the loss exposure comes in.

Sharing the cost of losses

• Creating a Loss Fund
• Each insured pays a premium but not all have losses.
• All of the premium is pooled together in a loss fund.
• When insureds have losses, they are paid from this fund.
• Law of Large Numbers
• Because of the large number of insureds around the country, insurance companies can make predictions about losses.
• Essentially, the more similar units there are, the better insurance companies can predict losses.

Back to the principles

Sharing the cost of losses explains that insurance works by sharing the cost of losses among all the insureds.

Before Loss

After Restoration

After Loss

indemnification

• Restoring Prior Conditions
• The insured will be restored to the same financial position that would have existed if no loss had occurred; no better and no worse.

For example, if you have a 2000 Ford F150 and you total that truck, you will not get a brand new car. The insurance company will indemnify you and give you the value of your 2000 truck, no more and no less. It works the same for homes as well.

Back to the principles

You are put back in the same condition you were before the loss.

reinsurance

• Insurance for Insurance companies
• Similar to a basic insurance contract, an insurance company that purchases reinsurance has a contractual agreement with another insurer to transfer certain loss exposures in exchange for help with paying claims if the specified loss occurs.
• For example: Because our company is a single-state operation and hurricanes are a major risk to our state, NCFB purchases reinsurance to help reduce our exposure to a major financial loss.

• Workflow
• First, a policy is issued through the primary insurer.
• Then, part of the exposures are ‘transferred’ to another insurance company.

This is the end of the principles

If a loss occurs, the primary insurer is able to split the cost with the reinsurer.