AINS 21 - Chapter 1

What are the 7 examples of an insurance companies operating costs?

1. salaries 2. producers' commissions 3. advertising 4. building expenses 5. equipment 6. taxes 7. licensing fees

Businessowners Policy (BOP)

A package policy that is complete on it's on but combines most of the property and liability coverages needed by small and medium sized businesses

Personal Liability Coverage

Covers damage related to a claim or suit brought against the insured that resulted from BI or PD caused by an occurrence covered under the policy.

Benefit of insurance: Source of investment funds

The timing of the insurance companies cash flow, premiums are collected up front and claims paid at a later date enable insurance companies to invest funds in a variety of different ways

Annuity

a type of life insurance that makes periodic payments to the recipient for a fixed period or for life in exchange for a specified premium.

Why do the additional losses result from insureds' carelessness increase the cost of insurance for everyone?

because insurance companies often pay for injuries and damage that insureds could have prevented.

Why must an ideally insurable loss exposure be one of a large number of similar exposure units?

because it allows an insurance company to spread the risk of loss over its entire pool of similar insureds and thereby maintain manageable premium levels

Why do loss exposures involving only small losses and loss exposures involving a high probability of loss are generally considered uninsurable?

because they are not economically feasible to insured - the expense of providing coverage exceeds the amount of potential losses

How do fraudulent claims increase costs for insureds?

because they pay increased premiums to help cover the costs of those who defraud insurance companies

Property-Casuality Insurance

Homeowners, Auto & Commerical general liability - covers damage to own property or legal liability to others

Benefit of insurance: Comply with legal requirements

Insurance can be used to meet the statutory and contractual requirements of insurance coverage and to provide evidence of financial resources. Ie- purchasing workers comp insurance and contractors having to show proof of insurance before a contract is granted

Benefit of insurance: Reduce social burden

Insurance helps to reduce the burden to society of uncompensated accident victims

Benefit of insurance: Efficient use of insured's resources

Insurance makes it unnecessary to set aside a large amount of money to pay for the financial consequences of loss exposures that can be insured, allows money to be used more efficiently. Insureds pay a small premium allowing people and organizations to free up additional funds. Ie - only having to pay an annual premium of $5k for 1 million in coverage. Alot of protection for a small amount of money

Benefit of insurance: Providing support for insured's credit

Insurance provides loans to individuals and organizations by guaranteeing that the lender will be paid if the collateral for the loan is destroyed or damaged by an insured event, reducing the lenders uncertainty. Ie- legal interest enables the lender to repossess a car or foreclose a home if the loan is not repaid

Liability Insurance

Insurance that covers losses resulting from the insured's liability to others - payment on behalf of the insured for injury or damage to others property that the insured is legally responsibly for

Inland Marine Insurance

Insurance that covers mobile equipment and property used away from the premises - Ie - coverage for construction equipment, solar panels and wind turbines, cameras and movie equipment, musical instruments

Ocean Marine Insurance

Insurance that covers ships and their cargo

Benefit of insurance: Manage cash flow uncertainty

Provides financial compensation when covered losses occur. Provides some degree of financial security and stability - can be confident they will only have to pay the deductible for a covered loss. Peace of mind

Sharing the Cost of losses

Sharing/spreading premiums that all policy holders have already paid when a loss occurs. Not everyone will suffer a loss at one time

Comprehensive Coverage

covers the vehicle for fire, theft, wind, contact with an animal and other causes of loss except collision

List 3 risk-sharing mechanisms an insurer may use to promote risk control

deductibles, premium credit incentives and contractual requirements

For an insurance company to be fiscally sound, its total revenue must....

equal or exceed the amount needed to pay for loss and business expenses

Risk Management

implementing decisions that will minimize the adverse effects of accidental losses on an organization, to mitigate the financial consequences of loss exposures

Insurer

insurance company

Commerical Auto Insurance

insurance that covers a business or a not-for-profit organization against loss exposures asisiting out of the ownership, maintenance, or use of automobiles.

Commerical Property Insurance

insurance that covers commerical building and contents

Professional Liability Insurance

insurance that covers professionals such as accountants and attorneys for harm resulting from their professional practice errors

Property Insurance

insurance that indemnifid an insured who suffers a financial loss because property has been lost, stolen, damages or destroyed.

Long-term care insurance

insurance that pays for coverage when someone in a nursing home or home health care

Workers Comp Insurance

insurance that pays the cost of medical care, lost wages, and other state mandated benefits when an employee is injured on the job or a job related illness

Intentional exaggeration

intentional exaggeration of a loss Ie- lighting your car on fire car and saying there was $5k in the car

Personal Watercraft Policy

legal liability that may arise from accidents involving the boat or damage to the boat itself

Term life insurance

life insurance that provides coverage for a specified period such as 10 or 20 years, with no cash value - commonly used for protection of a parent's premature death

Utmost Good Faith

on obligation to be truthful, ethical and to disclose all revelant facts to each other

Insured

one covered by the insurance company

Insurance can be viewed as a transfer system because...

one party (the insured) transfers the chance of financial loss to another party (the insurance company)

salaries, producers commissions, advertising, building expenses, equipment, taxes, licensing fees are _________ __________ of insurerers

operating costs

Describe the coverage provided by workers comp insurance

pays the cost of medical care, lost wages, and other state mandated benefits when employees are injured on the job or acquire a job related illness

Commerical Package Policy (CPP)

policy used that covers two or more lines of business providing *large* business owners with necessary property, crime, and liability coverage in one policy. Usually built one piece at a time until you have a full policy.

A firm of computer systems consultants would most likely purchase this type of coverage to protect them in the even that they provide incorrect advice that causes financial injury to a customer?

professional liability insurance - covers professionals for errors or omissions arising out of their professional practices

Homeowners Policy

property and liability coverage for individuals and families - protects insureds for damage to the home and its contents caused by fire, wind, lightning and other causes of loss. Some HO policies also include coverage for theft or destruction of a home's personal contents.

Identify the purpose of environmental liability insurance

protect business owners against environmental damage that may occur as a result of business operations

Commerical General Liability Insurance

protection against claims alleging that the insured is legally liable for BI or dmg to the property of others. Ie- a retail store could be responsible if a customer falls on the store's wet floor and is injured or a line painter sprays a car in passing

Auto Physical Damage Coverage

protection for the loss of use of damage to a vehicle listed on the policy

Commerical Crime Insurance

protects the insured against theft of contents such as cash registers and computers, money stolen in a robbery, theft of an employee's property committed by employees

Describe the property coverage provided by a homeowners policy

protects the insured for damage to the home and its contents caused by fire, wind, lightening, and other causes of loss

Identify the purpose of commercial package policies and business owners policies

provides business owners with the necessary property, crime, and liability coverages in one policy

What is the difference between pure risk and speculative risk?

pure risk entails the chance of a loss or no loss - but no gain. speculative risk presents the possibility of loss, no loss or gain

Loss Prevention

reduces the frequency of a loss Ie: wearing safety googles and helmets to reduce the frequency of injuries

Loss Reduction

reduces the severity of a loss Ie: placing fire extinguishers in the home

Distinguish between the two main categories of life insurance

term life: provides coverage for a specific period with no cash value - good for young families who cannot afford high premiums but need coverage for a parents premature death Permanent life: provides coverage until death and premiums remain consistent

Contract of Indemnity

the amount the insurance company agrees to pay related to a loss, without the insured profiting

Affordable

the insurance company is able to charge a feasible premium - one that the insured can afford to pay. Insurance companies seek to cover only loss exposures that are economicaly feasible to insure

What are the identifying characteristics of a fortuitous loss

the insured cannot have control over whether or when the loss will occur

What is claim buildup?

the intentional exaggeration of a loss in an other-wise legitimate claim

Large number of similar exposure units

the loss exposure is one of a large number of similar exposure units - each exposure unit has a value that can be at risk when exposed to loss.

Independent and not Catastrophic

the loss suffered by one insured does not affect any other insured Ie- an insurance company would not want to insure 1,000 homes in a subdivision surrounded by a wooded area because if there is a forest fire it would put all homes at risk and be catatrophic

Exposure Unit

the predicted number of losses that an insurance company expects

Definite

three compnents are required for a loss exposure to be deinite: time, cause and location

Identify three components required for an insurer to consider a loss exposure to be definite in the context of ideally insurable loss exposure

time, cause and location. Must be able to determine the event(s) that led to the loss, when the loss occurred and where the loss occurred.

What is the primary role of insurance?

to indemnify individuals and organizations for covered losses

Identify the fundamental purpose of an annuity

to provide a periodic income that an individual cannot outlive

Describe two typical personal liability loss exposures and how a personal umbrella liability policy would provide needed protections

when 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 limited of insurance

Explain how an organization can achieve risk financing goals through the use of insurance

- indemnifies for covered losses - manages cash flow uncertainty - meets legal requirements

What are the ways in which insurance benefits individuals, organizations and society?

- indemnifies individuals and organizations for covered losses - enables individuals and organizations to manage cash flow uncertainty - enables individuals and organizations to meet legal requirements - promotes risk control - frees up the insured's financial resources for other expenditures or investments - supports insured's credit - provides an investment for insureds and insurance companies - helps reduce social burden

Jim is reviewing a listing of homeowners book of business, he notes 75 of his clients are located in a flood zone and these homeowners are concerned their policies do not cover flood. Jim determined that only 3 of the 6 ideally insurance loss exposures are present. They are pure risk, fortuitous losses and definite measure

- pure loss because a loss occurs as a result of a flood does not result in financial gain for the insured. - fortuitous because the insured does not have control over whether and when a flood will occur - definite in time, cause and location - flood data are available that can be measured. - there is NOT a large number of similar exposure units - the loss is not independent because all of the homes in the flood plain will be exposure - only those who believe they are at risk for a flood loss would purchase the floor endorsement, the insured will not be able to offer an economically feasible premium

Life - Health Insurance

Life, health and disability insurance - covers financial consequences of death, injury or sickness

Benefit of insurance: Promote Risk Control Activity

Policies may provide insureds with incentives to undertake risk control activities. Incentives such as deductible forgiveness and premium credit incentives

Self-contained policy

a single document that contains all agreements between the insured and the insurer and that forms a complete insurance policy

Transferring the cost of losses

The insured purchases a policy - pays a premium rather than paying for the entire loss after a fire

Pure Risk

a chance of loss or no loss, but no chance of gain

Contract Adhesion

a contract between both parties, written by one party and the other party either accepts or rejects it. You take or leave the policy, cannot make any changes

Measurable

a loss exposure needs to be measurable to be ideally insurable, they have to meaure the frequency or severity of the potential loss Ie - underwriters analyze data from past fire losses of single dwelling and wood homes within a certain geographic area to determine premiums needed

Fortuitous loss

a loss occuring by chance, something the insured does not have control over Ie- wind storms, hail, lightning

What are the distinguishing characteristics of an independent loss exposure?

a loss suffered by one insured does not affect any other insureds

Umbrella Policy

a policy that provides an additional level of protection for large liability losses - excess and additional coverage above the normal policy

Personal Auto Policy (PAP)

an insurance policy that covers an individual or a family against loss exposures arising out of the ownership, maintenance, or use of automobiles.

Arson

an intentionally staged event and constitutes insurance fraud Ie - lighting your car on fire

loss exposure

any condition or situation that presents a possibility of loss

How do the resources used in the operations of insurance represent opportunity costs?

capital and labor are being used in the insurance industry could be used elsewhere and could create other productive contributions to society

Identify four common causes of loss covered by auto physical damage coverage (comp & collision)

collision, fire, theft and collision with an animal

Premiums paid by insureds, operating costs of insurance companies, opportunity costs and increased losses are...

costs of insurance

Modular Policy

coverage forms and other documents that tailor a policy to the insured's needs, none of which form a complete policy by itself. Ie: Commerical package policies

Liability Coverage

coverage that protects the insured from damages owed because of legal liability to another party

Permanent life insurance

coverage until death