February 2003

Demystifying the insurance industry

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How to make sense of what is happening

by Kathy Woodliff
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In 2000, many of us watched the movie, "The Perfect Storm." The blockbuster showed us how a number of meteorological factors converged to form the perfect storm. Within the insurance industry, there has been a confluence of key factors that led to a "perfect storm" that began in 2001 and still continues. We've seen an unprecedented catastrophe on Sept. 11, 2001; investment results that have declined in stocks and bonds for a three-year period, which hasn't happened since 1939-41; years of price decreases while inflation significantly has risen; and reserve deficiencies that partially are attributable to the increase in jury awards.

To understand the insurance industry, you must understand that businesses have mutually beneficial relationships with their commercial insurance carriers. Insurance allows customers to transfer certain business risks for a premium charge in exchange for achieving financial protection. For large organizations, insurance becomes more of a financial transaction where the insurer only responds when losses exceed an agreed-upon level, or self-insured retention.

One difficulty with understanding insurance often involves how carriers extend coverage and determine premiums. As a roofing contractor, you probably find it difficult to understand why you pay so much for insurance premiums, often for many years before experiencing a significant claim. And you may assume a commercial general liability (CGL) policy will provide coverage for most, if not all, liabilities you may face. However, it is the policy language that determines what is covered when a claim is made.

An insurance policy is a contract between you and an insurer that specifies terms and conditions to which each party must adhere. I will attempt to demystify the insurance purchasing process by discussing the dynamics of the industry,...

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