Insurance is a risk management technique that transfers some or all of the potential financial consequences (liability) for certain loss exposures from an insured to an insurer. The goal of insurance is to indemnify (make whole) the insured who has suffered a loss.
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Insurance regulation occurs primarily at the state level and is considered necessary to protect consumers, to maintain insurer solvency, and to avoid destructive competition. Every state has an insurance department, headed by a commissioner, that is responsible for regulating insurance in that state. Insurance regulators belong to a trade association, the National Association of Insurance Commissioners (NAIC), which has no regulatory authority of its own but has substantial influence in coordinating the regulatory activities among the various insurance departments. To learn more about insurance regulation in the State of Texas, go to
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Guarantee Funds are state-established funds that provide for the payment of unpaid claims of insolvent insurers licensed in that state. Under the Guarantee Fund, claims are subject to maximum limits that vary by state (usually the lesser of $300,000 or the policy limit). In most states, a deductible applies to unpaid claims, and the funds do not cover all types of insurance. Also, self-insured groups are not protected by the Guarantee Funds. There is also a significant delay in claim payments from Guaranty Funds.
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There are three traditional marketing systems that insurance carriers use to market their products and services to consumers:
- Independent agency and brokerage system: producers (agents or brokers), who are independent contractors, sell insurance through several carriers
- Exclusive agency system: agents, who are independent contractors, sell insurance exclusively for one carrier
- Direct writer system: uses sales agents who are direct employees of the insurer
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Underwriting is the process of determining what loss exposures will be insured, for what amount of insurance, at what price, and under what conditions. The purpose of underwriting is to develop and maintain a profitable book of business (all in-force policies) for the insurer.
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First an insurer must calculate rate based on the following four components:
- An amount needed to pay future claims and loss adjustment expenses
- An amount needed to pay future expenses , such as overhead, acquisition expenses, and premium taxes
- An amount for profit and contingencies
- An amount earned from investment income
Then the calculated rate is multiplied by the appropriate number of exposure units to produce a premium.
Ultimately, the insurer’s goals in this process are to: a) earn a profit, b) meet customer needs c) comply with legal requirements and d) fulfill duty to society.
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The claim function is to satisfy the insurer’s obligations to the policyholder as set forth in the insurance contract. The claim adjusting process involves four steps:
- Determine whether the loss is covered by the applicable policy
- Determine the cause of loss and legal liability
- Determine the amount of damages or extent of loss
- Settle the claim
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The insured has a duty to do the following:
- Report the loss to the insurance company in a timely manner
- Prevent further loss or damage
- Cooperate with the insurer in evaluating and settling the claim
- Provide proof of loss
- Submit to examination under oath
- Comply with abandonment provision which indicates that the insured has no contractual right to abandon damaged property and turn it over to the insurer
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Subrogation is the process by which an insurer recovers payment from a negligent third party who caused a property or liability loss that the insurer has paid to, or on behalf of, an insured.
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- Personal insurance: home, auto, medical, dental, disability, life, umbrella, boat insurance
- Business insurance: property, general liability, umbrella, commercial auto, worker’s compensation, professional liability, crimes, bonds, ocean marine, inland marine, contractors’ equipment, bailee coverage, builder’s risk, garagekeeper’s, etc...
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Insurable interest is an exposure to financial loss that a person must possess for the property insurance coverage to be legally enforceable. An insurable interest must exist at the time of the loss for coverage to be provided. Without an insurable interest, an insurance contract is a gABMling contract and thus cannot legally be enforced. Insurable interest can be created by property ownerships or legal contracts.
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Every person’s situation is unique. Determine what coverages you want and need in order to avoid a major financial loss should something happen to you, your family member, or your property, but don’t buy more coverage than you need or can afford to pay. Also read insurance policies for exclusions, limitations, or extended coverages.
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Note: Most of the information provided at this Learning Center is extracted from various text books written by the American Institute for Chartered Property Casualty Underwriters (AICPCU).