Webinar on Insurance Coverages

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2 Webinar on Insurance Coverages Property and Casualty Insurance Presenter David M. Pooser, Ph.D. Assistant Professor of Risk Management & Insurance St. John s University Moderator Frank Tomasello Program Director The Griffith Insurance Education Foundation 2

3 Property and Casualty (P&C) Insurance In the U.S. In 2014 More than 2,500 insurance companies $502 billion of net premiums written (2014) Auto insurance makes up more than one-third of industry premiums Roughly 600,000 individuals directly employed by the P&C industry Insurance coverages include property, liability, business interruption, workers compensation, and more 3

4 Property Risk Property is typically categorized as real or personal Real property includes land, structures, and permanent attachments Personal property includes contents and other mobile equipment or property Property risks can be direct or indirect 4

5 Liability Risk Liability insurance covers losses stemming from negligent acts Liability insurance covers the value of a judgment or settlement plus legal defense costs (often as an additional benefit) 5

6 Types of Insurance We Will Discuss Auto Insurance Special Section on Driverless Cars Homeowners Insurance Workers Compensation Insurance Reinsurance Excess & Surplus Lines Insurance 6

7 Emerging Risks What is an emerging risk? What are examples of emerging risks? 7

8 Emerging Risk Driverless Cars Autonomous Vehicles (Driverless Cars) are developing: Now: autonomous parking, adaptive cruise control, collision warning Soon: hands-free vehicles for freeway or low-speed driving Later: fully autonomous vehicles capable of navigating from destination to destination without driver input How will these vehicles impact the P&C insurance industry? 8

9 Driverless Cars Benefits: Reduction in accident frequency Improved traffic patterns Costs Economic impact on insurers, garages, car manufacturers Decreased control for the driver Shifting the responsibility of accidents and injuries 9

10 The Personal Auto Policy The most common tool for individuals and families to protect against the risk of property damage and physical injury stemming from car accidents 10

11 Understanding The Personal Auto Policy (PAP) What does auto insurance cover? Part A Liability Part B Medical Payments Part C Uninsured/Underinsured Motorists Part D Physical Damage Personal Injury Protection / No Fault 11

12 Part A Liability Coverage Insurer pays defense costs plus judgments or settlements stemming from: Bodily injury to another person(s) Property damage to others property Insured must be found legally responsible Applies to Insured when driving covered vehicles or others vehicles Other occasional drivers of the covered vehicle 12

13 Driverless Cars & Liability Insurance Driverless cars will likely still be involved in accidents. Failure in physical technology Failure in software technology Major policy question: Who is liable when injury or property damages is caused by a self-driving vehicle? 13

14 Part B Medical Payments Coverage Insurer pays reasonable and necessary medical expenses for injuries from an auto accident. Covered individuals are: Insured in any auto Insured pedestrian injured by auto Occupants of insured auto Medical Payments Are paid regardless of fault Carry per-person limit Typically do not cover lost wages or extra expenses after an accident 14

15 Driverless Cars & Medical Payments Driverless cars are expected to reduce accident and injury frequency and severity Healthcare and health insurance participation is increasing Future is uncertain Major policy question: What will happen to Medical Payments Coverage? 15

16 Part C Uninsured Motorists Coverage Insurer (typically) pays for bodily injury to: The insured in a covered vehicle, other vehicle, or as a pedestrian Passengers in a covered vehicle Covers injury from Uninsured motorists Hit-and-run drivers Insolvent drivers 16

17 Driverless Cars & Uninsured Motorists Coverage Question: What is the purpose of Uninsured Motorists Coverage? Answer: To replace the liability protection of another driver (who does not have it) Major policy questions: Will Uninsured Motorists Coverage be necessary if liability is shifted from the driver to the manufacturer? What about a widely-adopted no-fault system? 17

18 Part D Physical Damage Coverage Insurer pays for physical damage to the insured s covered autos In some cases, the insurer pays for damage to: Non-owned auto not for the insured s regular use Auto or trailer used as temporary substitute vehicle (loaner) The insured must pay a deductible if a loss occurs 18

19 Physical Damage Coverage Collision Insurer pays for physical damage stemming from the covered auto: Colliding with another vehicle Striking an object Overturning 19

20 Physical Damage Coverage Other Than Collision Insurer pays for physical damage to the covered auto which did not result from collision E.g., damage from fire, theft, vandalism, hail, animal contact, flood, and glass breakage 20

21 Driverless Cars & Physical Damage Coverage Accident frequency is expected to be reduced substantially Reduction in physical damage losses overall Question: Will loss costs per accident increase or decrease? Driverless cars rely on computer components throughout a vehicle costly to repair & replace 21

22 No Fault / Personal Injury Protection Insurer pays: Medical expenses Lost wages Extra expenses (e.g., daycare, cooking & cleaning services, other daily living activities) Pays benefits regardless of fault May restrict victims right to sue ( true no-fault laws) Added by endorsement 22

23 Impact Summary: Driverless Cars Potential major reduction in auto insurance premiums Shift in liability from drivers to manufacturers of vehicles and software Increase in No-Fault coverage? A shift to usage based insurance Telematics will be more widespread because the driverless cars will come automatically equipped with a black box 23

24 Questions 24

25 The Homeowners Insurance Policy An individual or family insurance policy which protects against losses to real property, personal property, extra expenses after a loss, and liability claims 25

26 Understanding The Homeowners Policy Section I Property Coverages Coverage A: Dwelling Coverage B: Other Structures Coverage C: Personal Property Coverage D: Loss of Use Section II Liability Coverages Coverage E: Personal Liability Insurance Coverage F: Medical Payments to Others 26

27 Section I Property Coverages, Dwellings and Other Structures Protects: House and structures attached to house Detached structures on premises Perils insured against depend on policy. 27

28 Section I Property Coverages, Personal Property and Loss of Use Personal Property property other than dwelling and other structures Loss of Use financial losses when an insured residence is uninhabitable Reimbursement for living or meal expenses Fair rental value 28

29 Section II Liability Coverages, Personal Liability Bodily injury or property damage for which the insured is legally liable. Insurer is obligated to defend the insured. 29

30 Section II Liability Coverages, Medical Payments to Others For persons injured at insured s premises. Applies whether or not insured is liable. Claim must be made within three years. 30

31 Policy Choices Perils Perils are causes of loss. Named perils Perils listed in the policy. Open perils All perils not excluded by the policy. 31

32 Questions 32

33 Workers Compensation Insurance Workers compensation (WC) laws provide an exclusive remedy for work-related injuries. Employers are required to cover such injuries without regard to fault and employees right to sue in such cases is limited. 33

34 Understanding Workers Compensation (WC) Insurance Employers are obligated to pay for workers onthe-job illnesses and injuries Employees have a limited right to sue their employers for injury and illness This helps reduce litigation costs for both parties as well as court burdens WC guarantees prompt payment of claims which protects individuals and families 34

35 Details of WC Coverage Insurer pays: Medical expenses Disability income benefits Rehabilitation benefits Death benefits 35

36 Who is Covered by WC Insurance? Covered Industrial workers and most workers of private employers Exempt from coverage (varies by state): Small businesses with few employees Farm labor Domestic employees Casual employees Independent contractors 36

37 Financial Stability for WC Claims State laws require employers to demonstrate ability to pay WC claims. Employers can meet this requirement through market insurance or self-insurance. 37

38 WC Insurance Markets Private Insurance Market (Voluntary Coverage) Assigned risk plan (Involuntary and/or Residual Coverage) State fund May be competitive or monopolistic 38

39 Self-Insurance for WC Self-insurance plans Self-insured groups 39

40 Questions 40

41 Excess and Surplus Lines (E&S) Insurance The surplus market includes unique or unusual exposures as well as those exposures that the standard market is unwilling or unable to insure. 41

42 Understanding E&S Coverage E&S Insurers typically provide coverage for: Unusual or unique loss exposures Nonstandard business Insureds needing higher coverage limits Insureds needing unusually broad coverage Loss exposures that require new forms of coverage 42

43 Unusual or Unique Exposures Standard insurance depends on a large number of similar exposure units Loss prediction accuracy improves with more exposure units Some risks are unique or uncommon Event cancellation for a major band or singer Cruise ships Commercial jets 43

44 Nonstandard Business Standard insurers may not cover high-risk or uncontrollable loss exposures. The premium becomes economically unfeasible Examples: A condominium in the Florida Keys for the risk of hurricane damage A restaurant owner with a history of kitchen fires 44

45 High Limits, Broad Coverage, New Exposures In comparison to what the standard market provides, the E&S market provides: Higher-limit coverages Broader coverage Coverage for new exposures 45

46 E&S Lines Regulation Some states maintain lists of approved E&S insurers. Other states maintain lists of unapproved E&S insurers. Most states require all E&S business to be placed through an E&S broker. 46

47 Questions 47

48 Reinsurance Reinsurance is a financial tool used by insurers to protect against catastrophic risk exposure, write greater limits of insurance (insure larger risks), grow their book of business, and more. Reinsurance helped the U.S. insurance industry withstand events such as the 9/11 Terror Attacks and Hurricane Katrina. 48

49 Understanding Reinsurance Insurer transfers liability for certain losses to reinsurer. Insurer pays the reinsurer a premium for this transfer Reinsurer pays the insurer a ceding commission to help offset administrative costs of selling Insurer retains some of the loss; Coverage is subject to limits Reinsurers also use reinsurance (retrocession) 49

50 Benefits of Reinsurance Reinsurers share part of the burden of primary insurers financial loss Reinsurance improves insurers financial stability (good for policyholders) Reinsurance may help an insurer grow its book of business 50

51 Costs of Reinsurance Reinsurance increases premiums to policyholders (additional risk transfer is costly) Policyholders cannot collect directly from reinsurers (Two exceptions): Cut-through endorsement Purchase of reinsurance for captive insurer or pool 51

52 Questions? David Pooser 52

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