Ch.

3 & 5 Pentecost

CSM 400-500: Personal Risk Management

Risk Control
• Avoidance
• Reduction

Risk Financing
• Retention
• Transfer

Rules of Risk Management

 Don’t risk more than you can afford to lose
 Consider the odds
 Don’t risk a lot for a little

Risk Characteristics as Determinants of Tool

Common Errors in Buying Insurance

 Buying too much
 Buying too little
 Buying too much and too little at the same time

Priority Ranking for Insurance Coverages

•Essential - insures against losses that could cause bankruptcy
•Important - insures against losses that would require resort to credit
•Optional - insures against losses that could be met from assets or
cash flow

Extras

Large Loss Principle

• Probability that a loss may or may not occur is less important than
potential severity of the loss.
• Important question is not “can I afford the insurance?” but “can I
afford to be without it?”
• When available dollars cannot provide all the essential and important
coverages required, a part of the loss may be assumed through
deductibles.

Tax Considerations and Risk Retention

• Business firms may deduct uninsured losses as an expense of
operation.

Page 1 of 5
Ch. 3 & 5 Pentecost

• For the individual, casualty losses are deductible only to the extent
that each loss exceeds $100 and the aggregate for all losses
exceeds 10% of adjusted gross income.
• Medical expenses are deductible to the extent they exceed 7.5% of
adjusted gross income.

Selecting the Agent

• Most important service provided by the agent is probably advice.
Professional Designations

Selecting the Insurer

 Major consideration should be financial stability
 Cost
 Other considerations include attitude toward claims and cancellation
A.M. Best Policyholders Ratings
 A++, A+ Superior  C, C- Marginal
 A, A- Excellent  D Below min. standards
 B++, B+ Very Good  E Under state
 B, B- Good supervision
 C++, C+ Fair  F In Liquidation

Types of Company by Product

1. Life insurers write life, annuities, and health insurance
2. Property and Liability insurers write property & casualty (including
health)
3. Health and Accident insurers
o Monoline health insurers
o Blue Cross and Blue Shield organizations
o Health Maintenance Organizations

Types of Insurers by Form of Ownership

1. Capital Stock Insurers
•Organized as profit-making ventures with stockholders who assume
the risk that is transferred by insureds.
•Premium charged by insurer is final--there is no form of contingent
liability for policyholders.
•Earnings are distributed to stockholders as dividends on their stock
2. Mutual Insurers

Page 2 of 5
Ch. 3 & 5 Pentecost

•Owned by policyholders
•Any money left after paying costs is returned to policyholders as a
dividend.
•Broadly speaking, mutuals are divided into three classes
• pure assessment mutual
• advance premium mutuals with assessable policies
• advance premium nonassessable mutuals

3. Reciprocal Insurers (Exchange)

•Unincorporated aggregation of individuals, called subscribers, who
exchange risks.
•Each member is both insured and insurer.
•Administrator of the program is known as the Attorney-in-fact.
4. Lloyd’s Associations
The insurance is written by members of underwriting syndicates
who individually assume liability for risks insured.

5. Health Expense Associations

• Originally Blue Cross and Blue Shield organizations organized to
provide for prepayment of hospital and physicians services
• Now include Health Maintenance Organizations
•Physician-Hospital Organizations are provider owned delivery
6. Government Insurers. Reasons for Government Insurance:
•Fundamental risks that require compulsion and lack equity
•Hazard considered too great by private insurance
•Adverse selection against private insurers
•Tools of social change by government
•Mistaken notion that government can repeal the law of averages

Page 3 of 5
Ch. 3 & 5 Pentecost

Extra: Federal Private (Voluntary) Programs

•War risk insurance (WW I, WW II)
•Post Office insurance coverages
•Federal crop insurance
•Mortgage loan insurance (FHA, VA)
•Federal Riot Reinsurance Program
•National Flood Insurance Program
•Federal Crime Insurance Program
•SBA surety bonds
•Federal Fidelity Bonding Program
•Export-Import bank
•Overseas Private Investor Corporation
•Servicemen's and Veteran’s life insurance
Agent - an individual authorized by an insurer to create, modify, and
terminate contracts of insurance. Contrast with term broker in text.
o Express authority from the agency contract or agreement
o Ostensible (implied) authority

Marketing Systems: Life Insurance

1. General Agents
•General agent is empowered by company to operate in a given
territory and to appoint subagents.
•G.A. receives an overriding commission on business produced by
subagents, out of which it pays expenses.
•Most general agents receive some additional financial support from
the insurer.

2. Branch Office System

 Branch office manager is an employee of the insurance
company.
 Expenses of branch office are paid by insurer, since branch office
is simply an extension of the home office.
 Branch manager may receive additional compensation based on
production of agents supervised.

3. Personal Producing General Agent

•Operate under contracts that give them greater compensation than
other agents.
•PPGAs have authority to appoint subagents, but usually
concentrate on personal production.

Page 4 of 5
Ch. 3 & 5 Pentecost

Property & Liability Distribution Systems:

1. American Agency System
a. Agency represents multiple companies
b. Agent is said to “own the expirations”

2. Direct Writing System operates through exclusive agents (State

Farm) and captive agents (Allstate)

3. Direct response distribution

i. mass media advertising
ii. direct mail

Competition in the Insurance Industry

Costs Common to All Insurers

1. Losses and loss adjustment expense
2. Acquisition expense
3. Administrative expense (company overhead)
4. Taxes
5. Profit and contingencies

Price of insurance is a function of costs

Page 5 of 5