RISK MANAGEMENT AND INSURANCE TOPIC 8 BONDING, CRIME INSURANCE, REINSURANCE

Bonding and Crime Insurance   Provide financial guarantees of human performance, or indemnity payments in cases where people fail to perform with integrity.

Bonding and Crime Insurance contn’d.. Fidelity bonds protect a firm against losses caused by its own dishonest employees. e.g. bank teller   Crime insurance covers losses caused by nonemployees. Reinsurance is a transaction engaged in by almost all insurance companies.

Surety Bonding A surety bond is an instrument under which one party guarantees to another that a third will performa a contract. It involves 3 distinct parties: Surety : Surety bonding requires the surety to pay a second party (insurance company). Obligee : Second party (e.g: the school board).   Principal: If it fails to fulfill an obligation to the obligee. ( e.g.construction company)

Reason for Surety Bonding When the breach of contract occurs then the board will get the satisfaction of claim promptly (compared with the court case). Litigation is avoided by the board. A new contractor may be employed to complete the school in time.

What is the Advatage of Surety Bonds to Contarctors? In today’s competitive market, a surety bond is a valuable commodity for a contractor. Obtaining a surety bond shows your company’s best face to both potential customers and lending institutions. A surety bond amounts to a seal of approval from an independent third party, the surety bond company, which has evaluated your work. The surety bond that the surety company issues shows that it believes in your ability to perform.

Comparison of Insurance and Surety

Difference in Relationships In insurance, the relationship between the insurer and the insured : If an insured`s negligence results in a claim against the insurer, the insurer normally has no recourse or a claim for damages against its own insured. (e.g. damage on insured`s home by him or her). In surety bonding, there is no result. If a contractor`s negligence or frauds result in a claim being paid by the surety to the obligee, the surety in turn will look the contractor for whatever satisfaction it can obtain.

Underwritting Bonds There are three factors to be evaluated before any suretyship agreement: the character of the principal the financial capacity of the principal the experience of the principal  

Fidelty Bonds Fidelity bonds protect employers from loss caused by dishonest acts of employees. Dishonesty includes larceny, theft, embezzlement, forgery, misappropriation of funds and other fraudulent or dishonest acts. Financial institutions are most likely to buy FIDELITY BONDS: bankers, stockbrokers, S&L Associations, credit unions, and other similar institutions in which many employees have access to valuable assets need this protection.

Commercial Fidelty Bonds Commercial Fidelity bonds are purchased by non-financial business firms, educational institutions or other groups where one or more employees handle significant of funds.

Crime Insurance It covers the losses caused by outside the firm. It typically covers theft, robbery, burglary. Banks, by their nature, present a special need for crime insurance and loss prevention. Not only burglary and robbery but for safety of deposit boxes.

Crime Insurance contn’d.. Blanket Coverage protects the banks from losses caused by any employee. Scheduled Coverage specifically named people or specific positions are identified as being capable of causing an insured loss.

Reinsurance Reinsurance is a transaction between two insurance companies in which one insurance company purchases insurance from another insurance company. Reinsurance is a separate kind of insurance transaction rather than a separate branch of the insurance industry. Reinsurance transactions occur in all branches of the private insurance system (both life and nonlife). Primary insurer( ceding company) sells insurance to the insurer. Reinsurer agrees to indemnify the primary insurer in accordance with the reinsurance contract.

Reinsurance Arrangements A Facultative Reinsurance It occurs when a primary insurer makes a separate agreement each time it desires reinsurance on a particular exposure to loss. Each time primary company will enter the reinsurance market and negotiate then terms of coverage and the premiums and commissions it will pay. A Treaty Reinsurance It is called automatic reinsurance, implies a standing relationship between a primary insurer and a reinsurer in which a portfolio of the primary insurer`s exposures is covered by reinsurance, without specific arrangements for any particular exposure.   The treaty can be renewal and non renewal, the primary insurer is committed to `cede` and the reinsurer is committed to accept all the business covered by the treaty.

Reinsurance Coverage Prorata Quota Treaty Reinsurance means that the losses, premiums and expenses are divided proportionately by the primary insurer and the reinsurer. Excess of Loss (XL) Excess of loss coverage commits the reinsurer to pay part of the claim only after the primary insurer`s coverage has been exhausted. The reinsurer pays only the excess of loss beyond what the primary insurer has retained

Catastrophe Reinsurance One particular type of excess of loss reinsurance is a special one. Catastrophe reinsurance is distinguished by very high retentions by the primary insurer before the reinsurer becomes liable.   It has very high upper limits on the reinsurance policy; millions of dollars