Characteristics of an Ideally Insurable Loss for a Commercial Insurance Company

Chapter 9

Topic nine: Characteristics of an Ideally Insurable loss for a commercial insurance company

1) Pure, not speculative risk

2) Random, accidental loss

3) A large number of similar, yet independent, exposure units (specialty insures cover such exposures)

4) Definite in time, place and is measureable

a. Most insurance claims are paid "in cash" (we get a check)

i. Flat or stated amount (such as life insurance or jewelry): use to determine actual amount going to person/claim

1. Ex: such as life insurance ($100,000) or jewelry (15,000); this stated amount is listed on the first page; the customer must monitor that the amount is still appropriate

b. Formula, such 66.7 percent of your salary in a disability insurance policy; retail store inventory

c. Fair market value: willing seller and willing buyer, each ahs a good knowledge of the market for some particular asset 9 car, house). What price would they agree upon? Works best when a lot of the same asset gets sold.

d. Replacement cost ( get a new item)

i. Not all insurance claims get paid in cash

1. Repair and replace an item (watch replacement example)

2. Retail store window replacement (glass window of store example

3. Health maintenance organization ( HMO); many of the doctors in a network of doctors get paid a set amount per month ( such as $60) for each of the people on a list who select them as their primary care doctor (for example, 100 people); we refer to this as "service"

4. Legal services: such as for defense in products liability case

5. The loss cannot be a catastrophe to the insurance company ( yet it often is to the customer)

6. The premium must be economically feasible for the insurer and the customer

End of topic 9*******************************************************