History of Insurance:
a potential for loss, or that you’ll not have enough $ when you need it.
4 ways to
Insurance: transfers the risk
Understand & Accept Risk:
Evolution of Insurance:
Gild: spreading the risk. Only good if the others are willing to pay.
Fire Insurance: after the fact assessment
Gambling Club: Last to die club where you basically bet against yourself
Benjamin Franklin’s model:
· before the fact assessments;
· inspect property before issuing policy to make sure the risk was ok and he mitigated risk,
· developed insurance policy/contract.
· Based premiums on potential losses
Underwriting the Risk:
the agent does subjective underwriting
what an insurance co does in back office, they don’t get all info, must make decision based on criteria
4 factors for underwriting risk (Franklin): underwriting is used to determine premium
· (1) physical (2) moral (3) morale (4) legal
o Physical risk: if fire insurance, look at trees, etc. living near the coast, having a bad driving record
o Moral risk: usually criminal, if you’ve burned your house down…
o Morale risk: your responsibility, credit score measures
o Legal: what the legal system could do to the amount of risk you present -> UIM, UM. . . . court-created methods to help get more coverage
Types of Insurance Companies:
è Ben Franklin’s type
è Company is operated and owned for benefit of its policyholders.
è Usually when a marketplace need that is not served by normal insurance. . .. ex cattle farms want insurance against barn fires.
è Company operated for benefit of policyholders to negate punitive damages.
è Flaw with mutual companies: $ comes from members based on premiums… if they need more $ (mass disaster), no way to raise capital…, only way to grow is by more members and only in good times…. So if there’s a claim after a storm, mutual company will run out of cash fast.
è for profit entity.
è If you sue a stock co, you try to show that they are only interested in making $ by screwing over policy holders .
è based on guild…
è all policy-holders are of a specific trade.
è If they cant pay a claim, then they assess their members -> it is assessment based as opposed to getting everything up front
è based on good-will, set up around societies (help the poor)
è assessment based…
è Developed from Lloyds of London concept -> like a bookie, underwriter holds all money in a pot and he decides when to pay out
è betters = reciprocal inter-insurance exchange -> they give $ to attorney in fact (
apply to insurance (only state insolvency laws) because McCarran Ferguson
· State laws say that a confidential administrator is appointed to take over the company by he Department of Insurance. Department of Insurance may either liquidate or rehabilitate.
· Guaranty associations protect consumers when companies go insolvent.
· They operate under a statutory framework
· Made of all companies that are in business of insurance for the type of insurance they deal with
Property & Casualty Insurance Company:
Ø Domestic Insurance Department will declare a company insolvent and then the company must go before a court and be declared insolvent to trigger the guaranty association -> then a liquidator is appointed to run the insolvent insurance company -> then the claims go to the guaranty association
Ø Claims must be a covered claim -> cant be a line of business that’s excluded; has to involve SC resident is main limitation
Ø Claims must be filed timely,
Ø Also if there is other insurance available, must exhaust all other remedies
Ø Don’t pay extra-contractual damages
Ø Don’t pay non-claim expenses (atty fees)
US Dept of Treas. v. Fabe: