2. Insurable Loss Exposures Introduction – Not all exposures to loss are insurable - Which ones are? What criteria is used to produce a financially viable and sustainable result?

3. Characteristics of Ideal Insurable Loss Exposures Point of view of the insurance company Large number of homogeneous units Accidental and unintentional losses Definite in time and in place, measurable and of sufficient severity to cause economic hardship Non-catastrophic

4. Characteristics of Ideal Insurable Loss Exposures Point 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?)

5. 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.

6. Insurance Will Have Difficulties Or Fail To Function When.... More and more people collect Frequency and/or severity increases Price must rise Fewer people buy Risk premiums increase Pool shrinks in size and cycle starts again ! Results in small pools, many collecting and unaffordable premiums

7. Large Losses Recently Hurricane Andrew (1992) – $16.3 billion Hurricane Katrina (2005) - $60 billion (est.) Result: Companies reconsidered exposures Some did not renew policies Some went out of business Catastrophic Insurance Program examples Beach Plans Federal Flood Insurance

8. Principles of Risk Classification Used to: Minimize subsidization Minimize adverse selection Goal is to have all pay a "fair" share Provide a structure for the evaluation of classification schemes

9. Adverse Selection and Subsidization Adverse 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

10. When Subsidization Is Caused By Government Setting or eliminating classification schemes prevents competition Called mandated subsidization Example: Males vs. females Annuity Life insurance Group employee pension benefits

11. Principles of Risk Classification Factors 1) 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) Reliability Information is easily obtained and not subject to manipulation Information is verifiable 3) Incentive Value Provides incentive to act in socially and economically positive ways

12. Principles of Risk Classification Factors 4) 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

13. Important Social Issues and Subsidization Acquired Immune Deficiency Syndrome (AIDS) Automobile Insurance Pension Benefits Catastrophes

14. Branches of Insurance - Successful transactions Private Insurance Non-life - fire, marine, casualty, bonding Life - life health, annuities Other - weather, municipal bond, boiler and machine, motion picture completion

15. Liability Insurance The (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 Damages Bodily Injury Personal Injury Property Damage

16. Example Cases: BB Gun shot into crowd Home day care operator injures child

17. Legal Liability Legal liability arises out of: Torts - civil wrong done to another Breaches of contracts Criminal wrongs Which of these are insurable?

18. Torts - An Insurance Categorization Deliberate or Intentional Interference Assault, battery, liable, false arrest Can 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

19. Torts - An Insurance Categorization Negligence 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 fact Other parties can be held liable Vicarious liability Joint-and-several liability

20. Establishing Negligence Plaintiff must show: Legal duty Failure of the duty Injury Causal connection between the injury and the failure Jury must weigh the facts based upon “the preponderance of evidence” not “beyond all or reasonable doubt”

21. Types of Damages Compensation for Personal Injuries Includes medical, lost wages, future wage loss, and pain and suffering Punitive Damages Compensation to punish a defendant for outrageous acts Punitive damages against insurers When insurers act in bad faith in resisting an insured’s legitimate claim Other Damages Hedonic damages - loss of life’s pleasures Mental anguish

22. “Res Ipsa Loquitur” Tactic used in court to shift a legal burden to the defendant Requires: 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

23. Defenses in a Negligence Suit Show there was no injury, duty, or failure Contributory negligence - common law Comparative negligence - statutory modification Last clear chance rule - statutory modification Assumption of the risk - common law

24. Legal Liability Insurance Pays 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).