Principles and Practice – Study 1

What is risk?     Risk is uncertainty.

Insurance is based on risk.

Risk as it relates to insurance, is the possibility or chance of loss. There are different levels of risk. The more likely a loss is to occur the higher the frequency of that event. Severity of loss relates to the value at risk.

Example: A cottage in the country, miles from the nearest water source, presents an increased possibility of a serious fire - it’s riskier than a brick house that’s across the street from a fire hydrant.

Definitions

A peril is an event that will give rise to a loss. Examples include: fire, theft, storm, explosion.

A hazard is a factor which may influence the outcome of a loss. Examples include: slippery sidewalks, poorly maintained property.

Classifications of Risk

Speculative risk has a chance for profit or loss. Examples include: gambling, starting your own business. These risks are not insurable.

Pure risk has a chance for loss only. Examples include: leaving your car unlocked, storing flammable liquid in your basement close to the furnace. Pure risk can be insured.

C11 Principles and Practice – Study 2

Insurance has developed through many centuries to meet the changing needs of society. Some of the earliest types of insurance were; robbery insurance, life insurance, cargo insurance, marine insurance and fire insurance.

Initially Canada only had large British insurance companies, with a few exceptions. Some of the earliest insurance companies in Canada were Halifax Fire Assurance Company, Quebec Fire Insurance, British America Assurance company and The Gore District Mutual.

Insurance has been divided into three major categories

• Social insurance – provided by the government e.g. OHIP, unemployment benefits and workers compensation.
• Life and health insurance – provided by the major life insurers and offer life, accident, sickness and disability insurance plus other financial services.
• General Insurance/ Property and Casualty Insurance – which covers all other aspects of insurance some of the major general insurance classes include:

Principles and Practice – Study 3

Ratemaking is the process of establishing rates. This function is carried out by actuaries.

Rate is the price of a unit of insurance for a period of one year.

Premium is the total cost of an insurance policy.

E.G. A piece of jewellery has a rate of 50 cents per $100 of coverage. $10,000 of coverage is required.

Rate (.50 / $100) X Amount of coverage ($10,000) = Premium $50

Premium Determination

The law of large numbers – the larger the sample the more reliable the outcome

The theory of probability – the likelihood of an event expressed as:

The number of actual occurrences / The number of possible occurrences

= the probability or the chance of an event happening

Other factors include; the size of the sample, the period in time over which a sample is taken and conditions in the past relative to future conditions.

Principles and Practices – Study 4

Types of Insurers

Government insurers examples; Workers’ Compensation board, Provincial medical plans, Unemployment insurance plan, Automobile insurance plans in some provinces and certain types of coverages relating to trade and export.

Private industry has many different types of insurers:

• Captive insurance companies – insurance companies set up by the insured. Fronting is an arrangement where one insurer gets paid a fee for allowing another insurer to use its name.

• Co-operative organizations – owned by its members, true co-op’s are rare today. More common is mutual companies  which are owned by the policyholders. There are four types of mutual companies; assessment mutuals, stock mutuals, co-operative stock mutuals and factory mutuals.

• Reciprocal insurance exchanges – are owned by a group of insured’s, similar to a captive insurance company. The exchange is based solely on the reciprocal agreement between members.

• Stock companies – are owned by the shareholders and run by a board of directors. Insured pay a fixed premium to cover losses and expenses if funds are not sufficient the money is taken from investment income.  Sources of revenue are; underwriting gains and investment income.

• Insurance Pools – owned by a group of insurers to insure risks no insurer will take on individually. Examples are: Nuclear Insurance Association of Canada (NIAC) and the Pollution Liability Association.

Insurance Distribution and Intermediaries – Study 5

Any business’s success will depend largely on its sales force. In the insurance industry the sales forces is referred to as insurance intermediaries. They are the link between the company and the consumer and most often have a close relationship with the client.

Broker – an independent business person who may place business with a number of insurers. This person has an obligation to meet all of the clients and companies needs.

Agent – represents one company only.

A general agent – has the authority to manage all of a companies business with in an assigned territory.

There are several types insurance distribution systems in the property/casualty industry.

• Independent brokerage system –sells insurance for many companies and gets paid a commission.
• Exclusive Agency system – agency sells for only one company but agents are paid a commission and must pay their own expenses.
• Direct Writing – employees work for the company and are paid by salary usually with some commission incentives.

A legal relationship exists between an insurer and broker. This is referred to a principal and agent relationship. An agent is a person authorized by another to act on his or her behalf.  Under common law agents act on behalf of their employer in contractual matters. In Quebec the relationship is simialr but called Mandator (principal) and Mandatee (agent).

Intermediaries are subject to some government regulation. But mostly intermediaries are self regulated. In Ontario the regulatory body is RIBO their responsibilities include: qualification, licensing, operating requirements, renewal of license.

Law and the Judicial System – Study 6

Law in general terms can be described as the expressed will of a society governing relationships among members of that society.

The two most basic categories of law are: substantive and procedural.

Substantive law: consists of the rights and duties of individuals e.g. to vote and obey laws.

Procedural law deals with the methods used to protect and enforce these rights and duties.

Substantive rules are divided into public and private law.

• Public law is concerned with the conduct of the government with private individuals and corporations.

Sub-categories of this field would be: constitutional, criminal and administrative.  

• Private law is concerned with the relations between private persons and/or legal entities.

Systems of Law

Common law is found in all provinces or territories except Quebec. It is unwritten law based on the rule of precedent. Precedent requires that all decisions be reached based on previous similar court cases (case law).  Judge made law is when a judge must make a decision for which there is no precedent.

The Civil Code of Quebec is codified law. The code was enacted by the Quebec legislature. Cases are decided based upon the interpretation of the appropriate article in the Civil Code. Courts will consider how the article has been interpreted in the past. But are not bound by it.

The difference between the two systems is how the law is applied but the end results will usually be the same or very similar.

Study 7 – The Law of Contract – Common Law

Five elements of a valid contract

1. Offer and acceptance (agreement)
2. Capacity of parties to contract

1. Consideration
2. Genuine Intention
3. Legality of Object

Contract definition: a contract is an agreement (1) between legally capable parties (2) for a consideration (3) demonstrating intent (4) to do something which is legal. (5)

Offer and Acceptance

Offers must be definite and communicated. A price tag or an advertisement, are not considered offers but rather invitations to do business.  An offer can be lapsed for the following reasons:

• The offer is not accepted within the time specified in the offer.
• The offer is not accepted after the passing of a reasonable amount of time if none specified.
• The offer is not accepted before either party dies or becomes incapacitated.
• An offer can be revoked by the offeror at any time prior to acceptance but must be communicated.

Acceptance must be absolute. Any new term added is considered a counter offer, which may be accepted or declined by the originating party and invalidates the original offer. Acceptance must be communicated either in writing, orally or by performance. Lack of action can not be deemed consent.