Page 505 - Business Principles and Management

Unit 5
Technology tip
A major risk to companies
conducting business on the
Internet is information secu-
rity. The technology used to To insure any kind of property, the policyholder must have an insurable interest
protect transactions as they in it. An insurable interest is generally defined as the possible financial loss that
are transmitted over the
Internet is Secure Sockets
Layer (SSL). SSL “encrypts”
confidential data (converts
it into an unreadable form)
to ensure that it cannot be
viewed or modified as it
moves between the cus-
tomer and the business’s
Web site. The online order
form is secured with a “digi-
tal certificate.” Customers
see a closed lock at the bot- insured party pays for a loss before the insurance company pays anything. A
tom of the Web page when
the transaction is secure.
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a lower rate of robberies. If fire protection is poor in a particular city or the build-
ing codes do not require fire walls or sprinkler systems in buildings, the fire insur-
ance rates will be high in that city.
Calculating insurance rates is a very scientific process performed by people
known as actuaries. Actuaries review records of losses, determine the number of
people or organizations to be insured, then use statistics to calculate the rates in-
surance companies must charge to be able to cover the cost of losses and make a
reasonable profit. Insurance companies compete with each other for business, so
they must set their rates carefully. If rates are set too high, potential customers
will purchase from a company with lower rates. However, if rates are set too
low, the insurance company may sell many policies but be unable to pay for the
losses that occur among its policyholders. Insurance companies are very careful
in setting insurance rates and rely on skilled and experienced people to determine
possible losses, total amounts of premiums to be collected, and returns on invest-
ments. In many cases, states have departments that review rates charged by insur-
ance companies to make sure those rates are fair to the purchasers.
Regardless of the basic rates set by an insurance company, the rate for a spe-
cific policyholder may be lower or higher than the basic rate, depending on cer-
tain circumstances. For example, a new building that has an automatic sprinkler
system and is located where there is good fire protection can be insured at a
lower rate than an older building that does not have a sprinkler system and is
located where there is poor fire protection. In many states, automobile rates
vary from the basic rate depending on the driver’s age and accident record and
the brand, model, and age of the car.
CANCELLATION OF INSURANCE
An insurance policy contains information about how the contract may be termi-
nated. Most property or liability insurance contracts may be canceled by the insurer
or may not be renewed when they expire if the insurer believes the risk has increased.
If the insurer cancels the insurance, it must give enough notice to policyholders to
allow them to find another insurer. Most states have passed laws that do not al-
low companies to arbitrarily cancel insurance without a good reason. Many states
allow companies and individuals whose insurance has been canceled to purchase
insurance from a special state-sponsored fund, although often at a very high rate.
INSURABLE INTEREST IN PROPERTY
the policyholder will suffer if the property is damaged or destroyed. For example,
if a business owns a van, it has an insurable interest in that van. If the van were
stolen or destroyed in an accident, the business would suffer a financial loss.
People who use a building for storage have an insurable interest in the property
they house in the building, even though they do not own the building. A fire
could destroy their property in the building, causing financial loss. The amount
of a policyholder’s insurable interest in the property to be insured is usually
specifically indicated in the policy and forms the basis for the insurance rate.
DEDUCTIBLES
Many insurance contracts include deductibles. A deductible is the amount the
deductible makes the insured responsible for part of the loss in return for a
lower premium. For example, if a vehicle insurance policy has a $500 deductible