Insurable Loss ExposuresIntroduction – Not all exposures to loss are insurable -

Which ones are?What criteria is used to produce a financially

viable and sustainable result?

Characteristics of Ideal Insurable Loss ExposuresPoint of view of the insurance company

Large number of homogeneous unitsAccidental and unintentional losses Definite in time and in place, measurable and

of sufficient severity to cause economic hardship

Non-catastrophic

Characteristics of Ideal Insurable Loss ExposuresPoint of view of the insured

Does the exposure warrant protection?Is the probability of loss low? (How much is the

premium for low probability exposures?)

Insurance Works Well When.....The industry adheres to the above guidelines

resulting in:

A balance that is maintained between the number of insured exposures and the number and severity of the losses in the pool.

Insurance Will Have Difficulties Or Fail To Function When....More and more people collect

Frequency and/or severity increasesPrice must riseFewer people buyRisk premiums increasePool shrinks in size and cycle starts again !

Results in small pools, many collecting and unaffordable premiums

Large LossesRecently Hurricane Andrew (1992) –

$16.3 billionHurricane Katrina (2005) - $60 billion

(est.)Result:

Companies reconsidered exposuresSome did not renew policiesSome went out of business

Catastrophic Insurance Program examplesBeach PlansFederal Flood Insurance

Principles of Risk ClassificationUsed to:

Minimize subsidizationMinimize adverse selection

Goal is to have all pay a "fair" shareProvide a structure for the evaluation of

classification schemes

Adverse Selection and SubsidizationAdverse selection - undisclosed information

caused people to pay less than their ‘fair’ share

Causes subsidization - because included with people paying more than their ‘fair’ share

Self-selection

When Subsidization Is Caused By GovernmentSetting or eliminating classification schemes

prevents competitionCalled mandated subsidizationExample:

Males vs. females Annuity Life insurance Group employee pension benefits

Principles of Risk ClassificationFactors1) Separation and Class Homogeneity

Each classification will have a significantly different chance of loss

Each member (in a classification) will have approximately the same chance of loss

2) ReliabilityInformation is easily obtained and not subject to

manipulationInformation is verifiable

3) Incentive ValueProvides incentive to act in socially and

economically positive ways

Principles of Risk ClassificationFactors4) Social Acceptability

Mathematically fair outcome conflicts with social goals

Some rating criteria is socially or legally unacceptable because it is beyond the insured's control

Important Social Issues and SubsidizationAcquired Immune Deficiency Syndrome

(AIDS)Automobile InsurancePension BenefitsCatastrophes

Branches of Insurance - Successful transactionsPrivate Insurance

Non-life - fire, marine, casualty, bonding Life - life health, annuitiesOther - weather, municipal bond, boiler and

machine, motion picture completion

Liability InsuranceThe (English Common Law) American

legal system is based on the notion that a person should be responsible for the damage caused to others

Types of DamagesBodily InjuryPersonal InjuryProperty Damage

Example Cases:

BB Gun shot into crowd

Home day care operator injures child

Legal LiabilityLegal liability arises out of:

Torts - civil wrong done to anotherBreaches of contractsCriminal wrongs

Which of these are insurable?

Torts - An Insurance CategorizationDeliberate or Intentional Interference

Assault, battery, liable, false arrestCan result in civil as well as criminal actions

Liability Without Fault (Strict and Absolute Liability)Laws or court precedent mandate liability in

some circumstances: explosives, dangerous animals

Worker’s compensation, pure no-fault

Torts - An Insurance CategorizationNegligence

Failing to use reasonable care according to a “reasonable man” standard

A reasonable person thinks before speaking or acting, and is honest and moderate in all activities

Question of factOther parties can be held liable

Vicarious liability Joint-and-several liability

Establishing NegligencePlaintiff must show:

Legal dutyFailure of the dutyInjuryCausal connection between the injury and the

failureJury must weigh the facts based upon “the

preponderance of evidence” not “beyond all or reasonable doubt”

Types of DamagesCompensation for Personal Injuries

Includes medical, lost wages, future wage loss, and pain and suffering

Punitive DamagesCompensation to punish a defendant for

outrageous actsPunitive damages against insurers

When insurers act in bad faith in resisting an insured’s legitimate claim

Other DamagesHedonic damages - loss of life’s pleasuresMental anguish

“Res Ipsa Loquitur”Tactic used in court to shift a legal burden

to the defendantRequires:

The defendant has exclusive use of the instrument or process that caused the loss and the plaintiff did not

Use of the instrument or process does not normally cause injury unless there was negligence

Defenses in a Negligence SuitShow there was no injury, duty, or failureContributory negligence - common lawComparative negligence - statutory

modificationLast clear chance rule - statutory

modificationAssumption of the risk - common law

Legal Liability InsurancePays for a person’s legal liability as outlined

in the insurance contract up to policy limits.Provides a defense for persons who could be

liable under the insurance contract (defense costs).