Chapter 1 Notes
Private insurers
• Stock insurers, which are corporations owned by stockholders • Mutual insurers, which are corporations owned by their policyholders • Reciprocal
Contract of Indemnity
A contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amounts
Insurer operations
Marketing Underwriting Claim handling Rate-making
Loss Prevention
Rish Control technique that reduces the frequency of a particular loss
Explain how an organization can achieve risk financing goals through the use of insurance
- Indemnifies for covered losses - Insurance indemnifies the insured, subject to applicable deductibles and policy limits, for losses to covered loss exposures resulting from covered causes of loss - Manages cash flow uncertainty- Insurance helps reduce the financial effect on the insured's cash flow to any deductible payments and any loss amounts that exceeds the policy limits. -Meets legal requirements- Insurance is often uses or required to satisfy statutory requirements and contractual requirements that arise from the business relationships
Buisnessowners Policy (BOP)
A pkg policy that combines most of the property and liability coverages needed by small and medium-sized businesses
Annuity
A type of life insurance policy or contract that makes periodic payments to the recipient for a fixed period or for life in exchange for the a specified premium
Explain why an ideally insurable loss exposure must be one of a large number of similar exposure units
An ideally insurable loss exposure must be one of a large number of similar exposure units b/c a loss exposure that is one of a large number of similar exposure units allows an insurer to spread the risk of losses over its entire pool of similar insured and thereby maintain manageable premium levels
Modular Policy
An insurance policy that consists of several different documents, none of which by itself forms a complete policy
Utmost Good Faith
An obligation to act in complete honesty and disclose all relevant facts
Contract of adhesion
Any contract in which one party must either accept the agreement as written by the other party or reject it
Property insurance
Any type of insurance that indemnifies an insured who suffers a financial loss b/c property has been lost, stolen, damaged, or destroyed.
Liability insurance
Auto liability insurance Commercial general liability insurance- insurance that covers liability loss exposures arising Personal liability insurance Professional liability insurance
What is claim build up
Claim build up is when a claim is filled in which there is an exaggeration of a loss in an otherwise-legitimate claim.
Identify four common causes of loss covered by auto physical damage coverage
Collision, Fire, Theft, Collision w/ animal
Auto physical damage coverage
Coverage for damage to or theft of a covered auto that can include both collision coverage and other than collision (comprehensive) coverage
Personal Liability coverage
Coverage for damages, plus costs of any defense, related to a claim or suit brought against the insured that resulted from bodily injury or property damaged casue
Liability Coverage
Coverage that protects the insured from damages owed b/c of legal liability to another party. For auto policies, it protects insured against liability arising out of the ownership or operation of automobiles.
Property insurance
Fire and allied lines insurance Business income insurance Crime insurance Ocean marine insurance Inland marine insurance Auto physical damage insurance
Identify the distinguishing characteristics of a fortuitous loss
For a loss to be fortuitous, the insured cannot have control over whether or when a loss will occur
Commercial Crime insurance
Insurance that covers (1) money and securities against numerous perils (not limited to crime perils) and (2) property other than money and securities against crime perils, such as employee theft, robbery, theft by outsiders, and extortion.
Commercial Auto Insurance
Insurance that covers a business or a not for profit organization against loss exposures arising out of the ownership, maintenance, or use of automobiles
Commercial Property insurance
Insurance that covers commercial buildings and their contents against various types of property loss
Inland marine Insurance
Insurance that covers many different classes of property that typically involve an element of transportation
Long-term care insurance
Insurance that pays for extended medical care or custodial care received in a nursing home, hospital, or home
Workers compensation insurance
Insurance that provides coverage for benefits an employer is obligated to pay under workers compensation laws
Term Life Insurance
Life insurance that provides coverage for a specified period, such as ten or twenty years, with no cash value.
Identify the three components required for an insurer to consider a loss exposure to be definite in the context of ideally insurable loss exposures.
Must be definite. Time, Cause, and Location. The insurer must be able to determine the event (or series of events) that led to the loss, when the loss occurred, and where the loss occurred.
Property-casualty insurance
One of the two main sectors of the insurance industry. Encompassing numerous types of insurance, most of which cover financial consequences of damages to ones over property or legal liabilities to others.
Commercial Package Policy (CPP)
Policy that covers two or more lines of business by combining ISO's commercial lines coverage parts
What are the primary sources of income for insurers
Premiums and investment incomes
Type of insurers
Private insurers Federal government insurance programs State government insurance programs
Types of insurance:
Property insurance Liability insurance Life insurance Health insurance
Types of loss exposures
Property loss exposures Liability loss exposures Personal and personnel loss exposures
Identify the fundamental purpose of an annuity
Provide periodic income that an individual cannot outlive.
Distinguish btw pure risk and speculative risk
Pure risk -->Chance of loss or no loss, but no chance of gain Speculative --> possibility of no loss, loss, or gain.
Loss Reduction
Risk control technique that reduces the severity of a particular loss
Self contained policy
Single document that contains all the agreements between the insured & insurerer and that forms a complete insurance policy
Explain why the additional losses that result from insureds' carelessness increase the cost of insurance for everyone
The additional losses that result from insureds' carelessness increase the cost of insurance for everyone b/c insurers often pay for injuries and damage that insureds could have prevented.
Identify the purpose of commercial package policies (CPP) and businessowners policies (BOP)
The purpose of commercial package policies and businessowners policies is to provide business owners with the necessary property, crime, and liability coverage in one.
Distinguish between the two main categories of life insurance
The two main categories are Term and Permanent Life Insurance. Term life - provides coverage for a specified period, such as ten or twenty years, with no cash value and may be an effective risk management strategy for young families who cannot afford high premiums but need protection for a parents premature death. Permanent life - provides coverage until death, and, in contrast with term life insurance, its premiums consistent throughout the life of the policy
Liability loss exposures
any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party • Claims may result from bodily injury, property damage, libel, slander, humiliation or invasion of privacy • Liability loss- a claim for monetary damages because of injury to another party or damage to another party's property
Property loss exposures
any condition or situation that presents the possibility that a property loss will happen • Real property- land, buildings and other structures attached to the land or embedded in it • Personal property- all tangible or intangible property that is not real property • Net income- revenue minus expenses and taxes during a given time period • Net income loss- an indirect loss caused by a reduction in revenue, an increase in expenses or both during a given time period
Explain how the resources used in the operations of the insurance industry represent opportunity costs
because capital and labor being used in the insurance industry could be used elsewhere and could create other productive contributions to society.
A contract
between the insured and the insurer that states what potential costs of loss the insured is transferring to the insurer and expresses the insurer's promise to pay for those costs of loss in exchange for a stated payment by the insured
Comprehensive coverage
coverage for direct & accidental loss or damage to a covered auto by any peril except collision or overturn or a peril specifically excluded
Marketing
determining customer's needs and then promoting and selling products or services to meet those needs. Insurance marketing enables insurers to reach potential customers and retain current ones
Risk management technique
enables a person or an organization to deal with loss exposure and their financial consequences ( Loss exposure- any condition or situation that presents the possibility of a loss)
Claim handling
enables insurers to determine whether a covered loss has occurred and, if so, the amount to be paid for the loss
Insurance as a transfer system
insurance is a system that enables a person, a family or an organization to transfer the costs of losses to an insurer. The insurer in turn pays for covered losses and in effect distributes the costs of losses among all insured's
Crime insurance
insurance that covers money, securities, merchandise and other property from carious causes of loss such as burglary, robbery, theft, and employee dishonesty
Identify the distinguishing characteristics of an independent loss exposure
is that a loss suffered by one insured does not affect any other insured or group of insured
Insurance is essentially:
o A risk management technique o A transfer system o A business o A contract
Describe the coverage provided by workers compensation insurance
pays the cost of medical care, lost wages, and other state mandated benefits when employees are injured on a job or acquire job related illness
Risk Management
process of making and implementing decisions that will minimize that adverse effects of an accidental loss on an organization
Provide seven examples of an insurer's operating costs
salaries, producers' commissions, advertising, building expenses, equipment, taxes, and licensing fees
Sharing the costs of losses
the insurer pools premiums paid by insured's and insured's who incur covered losses are paid from the insurers pooled funds. The total cost of losses is thereby shared among all insured's o Law of large numbers- a mathematical principle stating that as the number of similar but independent exposure units increases, they relative accuracy of predictions about future outcomes (losses) based on these exposure units also increase o Exposure unit- a measure of the loss exposure assumed by the insurer, used in pricing insurance
Underwriting
the process by which insurers decide which potential customers to insure and what coverage to offer them • Responsible for selecting insured's, pricing coverage, and determining policy terms and conditions
Ratemaking
the process by which insurers determine the rates for each category, or classification of similar but independent insured's. Insurers need appropriate rates to have enough money to pay for losses, cover operating expenses and earn a reasonable profit
Federal government insurance programs
these exist because of the huge amount of financial resources needed to provide certain types of coverage to citizens and because the government has the authority to require mandatory coverage • Social security, national flood insurance program, the federal crop insurance program
A business
which includes various operations that must be conducted in a way that generates sufficient revenue to pay claims and provide a reasonable profit for its owners
State government insurance programs
• All states require that employers meet the financial obligations to injured workers, based on workers compensation laws • Fair access to insurance requirements (FAIR)- provide basic property insurance for property owners who cannot otherwise obtain needed coverage on the open market
Costs of insurance
• Premiums paid by insured's • Operating costs of insurers • Opportunity costs • Increased losses • Increased lawsuits
Exposure Unit
A fundamental measure of the loss exposure assumed by an insurer.
Permanent Life Insurance
Coverage until death
List the ways insurance benefits individuals, organizations and society
-Indemnifies individuals and organization for covered loss -Enables individuals and organizations to manage cash flow uncertainty - Enables individuals and organizations to meet legal requirements - Promotes risk control - Frees up insured's financial resources for other expenditures or investments - supports insured's credit - Provides source of investment funds for insurers and insureds - Help reduce social burden
Umbrella Liability Policy
A liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to self-insured retention.
Personal Watercraft Policy
An insurance policy that covers an individual's or a family's loss exposure arising out of the ownership, maintenance, or use of watercraft used principally for recreational or personal transportation purposes
Loss Exposure
Any Condition or situation that presents a possibility of a loss, whether or NOT an actual loss occurs
Explain how the law of large #s enables insures to make predictions about losses
As the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases. Because insurers have large numbers of independent exposure units (the cars and houses of all their insureds, for example) they can predict the number losses that all similar exposure units combined are likely to experience.
Personal auto policy
Covers an individual or family against loss exposures arising out of the ownership, maintenance, or use of automobiles
Liability Insurance
Covers losses resulting from the insured's liability to others
List risk-sharing mechanisms an insurer may use to promote risk control
Deductible, Premium Credit Incentives, Contractual Requirements
Identify 3 prevalent examples of property-casualty insurance
Homeowners Policy, Personal Automobile policy, and Commercial General Liability.
Explain how fraudulent claims increase costs of insured
In order to pay for the costs of fraudulent claims, the insurer chargers the pool of insured an increased premiume
Explain how insurance functions as a system of both transferring and sharing the costs of losses
Insurance is a system of both transferring and sharing the costs of losses b/c the potential financial consequences of certain loss exposures are transferee to an insurer, which in turn, pays for covered losses and, in effect, distributes the costs of losses among all insured
Commercial General Liability (CGL) Insurance
Insurance that covers many of the common liability loss exposures faced by an organization, including its premises, operations, and products
Professional Liability Insurance
Insurance that covers persons engaged in various occupations against liability resulting from their rendering or failing to render professional services
Identify the general categories of risk management techniques
Loss avoidance, Loss prevention, lost reduction, or risk transfer
Explain why loss exposures involving only small losses and loss exposures involves a high probability of loss are generally considered uninsurable
Loss exposures involving only small loses and loss exposures involving a high probability of loss are generally considered uninsurable b/c they are not economically feasible to insure. The expense of providing the insurance probably exseeds the amount of potential losses.
Life-health insurance
One of the two sectors of the insurance industry, encompassing numerous types of insurance that cover the financial consequences of death, injury, or sickness
Homeowners policy
Policy that covers most of the property & liability loss exposure that arise out residential property ownership & occupancy, as well as property & liability loss exposures that individuals and families may have while they are covered
Identify the mechanism through which individuals or business exchange the possibility of a large loss for the certainty of a much smaller, periodic payment
The mechanism through which individuals or business exchange the possibility of a large loss for the certainty of a much smaller, periodic payment
Describe two typical personal liability loss exposures and how a personal umbrella liability policy could provide needed protection
Two typical personal liability loss exposures and how a personal umbrella liability policy could provide needed protection are those in which a jury awards a large sum of money in a liability case and when a homeowner has significant assets to protect and therefore requires higher limits of insurance than those available under personal liability or personal auto coverage
Transferring the costs of losses
by transferring the costs of their losses to insurers, insured's exchange the possibility of a large loss for the certainty of a much smaller, periodic payment (premium that the insured pays for insurance coverage) --> This is done through an insurance policy (a contract that states the rights and duties of both the insured and the insurer regarding the transfer of the costs of losses
transfer system
in which one party (the insured) transfers the chance of financial loss to another party (the insurer)
Auto liability insurance
insurance that covers an insured's legal liability arising out of the ownership, maintenance, or use of an automobile
Fire and allied lines insurance
insurance that covers direct damage to or loss of insured property
Commercial general liability insurance
insurance that covers liability loss exposures arising from a business organizations premises and operations, its products or its completed work o Premises o Business operations o Products o Completed operations
Auto physical damage insurance
insurance that covers loss of or damage to specified vehicles from collision, fire, theft or other causes
Inland marine insurance
insurance that covers miscellaneous types of property, such as movable property, goods in domestic transit, and property used in transportation and communication
Ocean marine insurance
insurance that covers ships and their cargo against such causes of loss as fire, lightning, and "perils of the seas
Business income insurance
insurance that covers the loss of net income or additional expenses incurred by a business as the result of a covered loss to its property
Ocean Marine Insurance
insurance that covers vessels and their cargoes, including various vessel-related liability exposures
Personal liability insurance
insurance that provides liability coverage to individuals and families for bodily injury and property damage arising from the insured's personal premises or activities
Professional liability insurance
insurance that provides liability coverage to professionals for errors and omissions arising out of their professional duties
Ideally insurable loss exposures
o Loss exposure involves pure, not speculative risk o Loss exposure is subject to accidental loss from the insured's standpoint o Loss exposure is subject to losses that are definite in time and that are measurable o Loss exposure is one of a large number of similar, but independent, exposures o Loss exposure is not subject to a loss that would simultaneously affect many other similar loss exposure; loss would not be catastrophic o Loss exposure is economically feasible to insure
Describe the property coverage provided by a homeowners policy
protects insureds for damage to the home and its contents caused by fire, wind, lightning, and other causes of losses.
Benefits of insurance
• Indemnifying for the costs of covered losses • Indemnify- to restore a party who has sustained a loss to the same financial position that party held before the loss occurred • Reducing the insured's financial uncertainty • Promoting insurers loss control activities • Using resources efficiently • Providing support for credit • Satisfying legal requirements • Satisfying business requirements • Providing a source of investment funds • Reducing social burdens
Personal and personnel loss exposures
• Personal loss exposure- any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury or unemployment • Personnel loss exposure- any condition or situation that presents the possibility of a financial loss to a business because of the death, disability, retirement, or resignation of key employees
