1. Introduction to Insurance Chapter 1 InVEST Textbook

2. How Insurance Began Began in the late 1600s in a London coffee house owned by Edward Lloyd Wealthy merchants would make arrangements with each other to share risks of loss of a shipment If there was a loss (ship sinks, damage, etc.) each person would reimburse the shipper for his/her percentage of the value. But, if the voyage was successful, each would receive a bonus or profit.

3. Ben Franklin Credited as the inventor of the U.S. insurance industry In 1752, he organized one of the first fire insurance companies which is still in operation today

4. Firemarks Franklin’s company, the Philadelphia Contributorship for the Insurance of Houses from Loss by Fire sold insurance and would place a plaque near the front of the owners door indicating they purchased insurance form the fire company

5. Firemarks When a fire occurred, all the fire companies (including Franklins) would get in their fire trucks (horse drawn) and go by the house looking for the symbol If the house had the same symbol that appeared on the truck, the fire company would extinguish the fire If not, they kept on going!

6. Benefits and Cost of Insurance Today, insurance functions as a way to reimburse people when their property is damaged or they suffer some other kind of unforeseen loss. Helps individuals and businesses resume their normal standard of living and operations

7. Benefits and Cost of Insurance If your home burned down and you didn’t have insurance, you may not have the means to pay for the repairs, and would be unlikely to have funds to make other purchases. Not only would you be affected, but others from whom you ordinarily buy things from would also be impacted. There would be a negative ripple effect on the economy.

8. Benefits and Costs of Insurance Encourages activities and devices that will reduce the amount of losses and their economic impact For instance, seatbelts! Insurance companies were the major force behind requiring seat belts as standard equipment in all cars.

9. Benefits and Costs of Insurance Sometimes, insurance can encourage loss for financial gain For instance, the crime of arson. An unscrupulous person could intentionally burn down their own house to gain access to their insurance policy proceeds. This wouldn’t happen if there wasn’t an insurance policy, so its considered a cost of insurance

10. How the Insurance Industry is Organized Divided into two major divisions – Property & Casualty – provides protection to individuals and businesses for loss to their assets – Life & Health – protects people from financial loss due to premature death, sickness or disease

11. General Principles of Insurance Insurable interest – exist whenever the occurrence of a certain event, such as a fire or theft, results in a financial loss to a person or organization. In order to purchase legally valid insurance, one must posses an insurance interest in the item being insured

12. General Principles of Insurance Indemnity – determines how much you can collect Let’s say your car is damaged in an auto accident. Although you may want the insurance company to replace your car with a new one, this would violate the principle of indemnity since a new car is more valuable than an older one. The insurance company determines the value of the damaged automobile (including a deduction for depreciation) and pays you that amount.

13. Contracts of Indemnity Insurance policies are designed to put someone back in the same general financial condition he or she was in before the loss occurred. You shouldn’t be able to profit by collecting the insurance

14. Basic Insurance Terms Among the most fundamental insurance concepts are the meanings of the words risk, peril, hazard, loss, insurance and insurance policy

15. Risk A risk exists whenever there is uncertainty about the outcome – Pure risk exists whenever there are only two possible outcomes: loss, or no loss. This is the type of risk insurance deals with. – Speculative risk there is a third possible outcome, gain.

16. Peril A peril is the cause of a loss – Fire – Flood – Theft – Earthquake

17. Hazard A hazard is a condition that makes a peril more likely to happen or that increases the seriousness of a loss.

18. Loss Loss is a simple decline in value – Reduction in quantity, quality or value of something, a loss is said to occur

19. Insurance Insurance is a social and contractual device that transfers the risk of a financial loss from individuals or businesses to an insurer.

20. Insurance Policy An insurance policy is a document issued by an insurance company to its policy holder that provides details about what is covered under the contract.

21. Activity Using your computer, go to the InVEST Student Center at www.learninsurance.orgwww.learninsurance.org Click on Learning Insurance on the left side of the screen Click on What is Insurance on the right, then How Insurance Works Read the entire section