Financial Markets and Institutions (2-downloads)

Insurance Agent: 

The Customer’s Ally

An underwriter working for Prudential Insurance was

responsible for a number of agents selling property

insurance in Southern California in 1985. One agent

sold a large number of fire insurance policies and

was always careful to document clearly when a fire

hydrant was on the property by including it in a pho-

tograph attached to the policy application. The agent

made a mistake on one policy, however, when he

included his car in a picture of a different view of the

property. The picture showed a plastic fire hydrant

lying in the open trunk of his car. He had been

putting this fire hydrant on property for years when

he needed to give a low quote to get business.

The agent was neither fired nor sued. He was sim-

ply advised to halt the practice, and his policies con-

tinued to be accepted by the company.

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Part 6 The Financial Institutions Industry

Types of Insurance

Insurance is classified by which type of undesirable event is insured. The most com-

mon types are life insurance and property and casualty insurance. In its simplest form,

life insurance provides income for the heirs of the deceased. Many insurance com-

panies offer policies that provide retirement benefits as well as life insurance. In

this case, the premium combines the cost of the life insurance with a savings pro-

gram. The cost of life insurance depends on such factors as the age of the insured,

average life expectancies, the health and lifestyle of the insured (whether the insured

smokes, engages in a dangerous hobby such as skydiving, and so on), and the insur-

ance company’s operating costs.

Property and casualty insurance protects property (houses, cars, boats, and so

on) against losses due to accidents, fire, disasters, and other calamities. Marine insur-

ance, for example, which insures against the loss of a ship and its cargo, is the old-

est form of insurance, predating even life insurance. Property and casualty policies

tend to be short-term contracts subject to frequent renewal. Another significant

distinction between life insurance policies and property and casualty policies is that

the latter do not have a savings component. Property and casualty premiums are

based simply on the probability of sustaining the loss. That is why car insurance

premiums are higher if a driver has had speeding tickets, has caused accidents, or

lives in a high-crime area. Each of these events increases the likelihood that the insur-

ance company will have to pay a claim.

Life Insurance

Life is assumed to unfold in a predictable sequence: You work for a number of years

while saving for retirement; then you retire, live off the fruits of your earlier labor, and

die at a ripe old age. The problem is that you could die too young and not have time

Number of

Life Insurance

Companies

2500

2000

1500

1000

500

0

1950

1955

1960

1965

1970

1975

1980

1985

1990

2000

1995

2005