Lesson 1 Property and Casualty Insurance Basics

Lloyd's Associations

A society of members, both corporate and individual, who underwrite in syndicates on whose behalf professional underwriters who accept risk.

Foreign Company

A state, other than the insurer's home state, where the insurer is admitted to conduct business. The insurer is considered to be a foreign company in those states.

exposure units

A unit of measure of loss potential used in rating insurance.

Commercial lines insurance

Property and casualty insurance to cover a business (vs. individuals) Ex. commercial general liability, workers' compensation, and commercial property insurance.

Casualty (liability) insurance

Protects you against bodily injury (BI) and/or property damage (PD) you cause to other people. Accidental damage to another person or property.

transferring risks

Purchasing insurance is what method of risk management

Judgment Rating

Rates are determined based on the knowledge and experience of the underwriter, rather than using an actual premium manual.

physical

Slippery floors, icy roads, or faulty structural defects of a building are examples of _____ hazards.

Non-insurance Marketing Systems

System that markets insurance products through financial institutions that issue credit cards.

morale

Texting and driving or not wearing a seatbelt is a ____ hazard.

Replacement Cost Value (RCV)

The actual cost to replace an item or structure at its pre-loss condition.

Adverse Selection

The concept that suggests that the people who are poor risks are more likely to purchase insurance than average risks.

The insured and insurance company

2 parties involved with property insurance

The statements on the application and the initial premium

2 parts of the consideration in a contract

The insured, insurer (insurance) company and the injured party.

3 parties involved with liability insurance contract

moral, morale, and physical

3 types of common hazards

Sharing, transfer, avoid, reduce, retain

5 basic methods of risk managements

Independent producer

A _______ represents the insured rather than the insurer.

Captive or exclusive producer

A ___________ represents one insurance company and sells only that company's insurance product.

False

A binder guarantee that a policy will be issued. (T/F)

exposure

A condition or situation that presents the possibility of loss.

moral hazard

A decision to do wrong or to be less conscious of your actions. Creating a loss in order to profit from an insurance claim.

Loss costs

A factor which use in calculating insurance rates

Insurance

A method for spreading the risk of a financial loss among a large number of people.

Loss valuation

A method insurance companies use to decide how much to pay you for a loss.

Reinsurance

A risk management method used by most insurance companies to lessen their risk exposure.

Risk Retention Groups

Allows members to engage in similar or related business or activities to write liability insurance for all or any portion of the exposures of group members.

Binder

An oral or written agreement that provides temporary evidence of insurance until a policy can be issued.

Reciprocals

An unincorporated group of individuals or organizations (called subscribers) that agree to pool their risks together for the purpose of paying losses and purchasing insurance.

Coinsurance penalty

Being punished for not buying an adequate amount of coverage.

Each insured month

Exposure units for auto liability insurance

Each $100 of insurance

Exposure units for property insurance

moral

Faking an accident to profit from insurance is a ____ hazard.

Actual Cash Value (ACV)

Calculated by subtracting depreciation from the replacement cost.

morale hazard

Careless and/or reckless actions that create a loss.

predictable, a chance occurrence, not catastrophic, measureable, affordable

Characteristics of insurable risks

Retain risk

Choosing to be financially responsible for all or part of a risk.

Stated Value

Coverage that pays the cost to repair an insured item or the stated value of the insured item, whichever is less.

Coinsurance

Describes a splitting or spreading of risk among the insurance company and the insured.

ice; collision with pole

Driving on icy roads may cause you to slide off the road and hit a telephone pole. In this situation hazard is the ____ and ____ is the peril.

Must be out of control by insurer

Explain chance occurrence element.

Insured property must have definite monetary value.

Explain measurable and definitive element.

It is not predictable (war, hazards, flood)

Explain not catastrophic element.

Insurers must be able to statistically predict the possibility of loss

Explain predictable loss element.

Giving up activities such as hobbies that risk loss

Explain reducing risk

Distributes risk among a particular number of individuals

Explain sharing risk

Loss must cause economic hardship. Losses too small are not insurable.

Explain the affordable element.

Fraternal Benefit Societies

Have memberships based on religious, national or ethnic affiliations. They are well-known for their social, charitable, and benevolent activities. These companies primarily sell life insurance.

direct; indirect

If your home is damaged by fire and is deemed unsafe to occupy, then you may need money to pay for a temporary place to live while repairs are being made. In this situation, the damage as a result of the fire is the ___ loss while the temporary housing is an ____ loss.

premium

Insurance jargon for the initial money you pay in exchange for insurance coverage.

Alien Company

Insurer whose home office is located in a different country.

pure

Insurers will only insure ____ risks.

Property Insurance

Insures property from financial loss. Such as house, auto, furniture, jewelry, business, or anything physical.

Law of Large Numbers

It is possible to accurately predict what will happen to a large group of similar risks. The larger the group becomes, the more accurate the predictions become. These statistics allow insurance companies to more accurately predict future losses.

consideration

Legal jargon for the initial money you pay in exchange for insurance coverage.

Loss ratios

Losses/Earned premium= ___ ____

avoiding risk

Not performing an activity between that could carry risk

retrospective rating

On this rating, the insurered premium is based on losses that are incurred during the policy period.

experience rating

On this rating, the manual rate is modified based on the insured's loss history for claims filed during a specific period

Stock company

Owned by a group of shareholders who are not necessarily policy holders.

Mutual company

Owned by policyholders

Personal lines insurance

Property and casualty insurance for an individual (vs. a business). Ex. homeowners, renters, auto, and personal umbrella.

Insurance company

The entity that agrees to indemnify (make financially whole again) insured against covered losses. Writes policy language and includes the rights of the company within guidelines of the insurance statutes. Also establishes rates to charge policy holders before making policies available for distribution.

Insurable Interest

The extent of your financial interest at the time of loss.

Principle of Indemnity

The insurance company will restore you to the same financial position you were in before the loss occurred-- no profit, no loss.

deductible

The portion of a covered loss that is not paid by the insurance company. The insured in responsible for any of these at the time of loss. The insurance company will pay the remaining portion of any covered loss up to the policy limits.

underwriting

The process of classification, rating and selection of risks.

Domestic Company

The state where insurer's home office is located. The insurer is considered to be a domestic company in their home state.

Salvage Condition

This condition allows the insurance company to settle with you by taking possession of the damaged property, then paying the full loss amount.

Direct-Response Marketing

This method uses advertisements in newspapers, magazines, television, and other mass media sources to market policies directly to consumers.

Insurable interest

This usually results from property rights, contract rights, and potential legal liability. You would no directly benefit from any insurance unless you would lose money or value if the insured property suffers a loss.

1. Helps minimize frequent claims. 2. Helps eliminate small claims.

What does an insurance company accomplish by requiring a deductible?

spreading risk to make losses more manageable

What is the purpose of insurance?

Right to cancel, initiate changes, and the receipts of any returned premiums.

What rights does the 1st named insured have?

Market Value

What the property could be sold for.

certificate of insurance

a document that serves to provide evidence that you have purchased certain types of insurance coverages and limits.

vacant

both the absence of people and personal property from the insured premises.

occurrence

can be a single incident or continuous or repeated exposure which results in bodily injury or property damage that is unexpected by the insured.

peril

cause of loss

speculative risk

chance of loss as well as opportunity to gain

hazards

condition or the source that increases the chance and/or severity of peril

Indirect loss

consequential loss. The result of a direct loss.

Brokers

independent producers who sell insurance through many different insurance companies.

pure risk

only offers opportunity of loss

occupancy

only the absence of people.

Direct loss

physical loss

physical hazard

physical sources that increase chances of loss.

risk

possibility or chance of loss

Franchise marketing

provides insurance coverage to groups of employees that are too small to meet the requirements of a group policy.

conditions

provisions in the policy that qualify or place limitations on the insurer's promise to pay or perform. If not met, insurer can refuse to pay the claim.

robbery

taking of property by violence or threat of violence.

burglary

taking of property from a premise that is closed and locked tight. There must be forced entry or exit. Also incudes robbery of watchperson.

loss

the amount of financial damage to your property caused by perils for which you are insured for. Can be total or partial and are stated as a dollar amount.

Risk management methods

the methods you can use to deal with the uncertainty of loss (risk).

exclusions

the part of the policy that states what perils are not covered. It eliminates coverage for certain acts, property, types of damage or locations.

mysterious disappearance

unexplained loss of property. There is no evidence that it was actually stolen.

theft

unlawful taking of property-- money, securities or other property.

endorsements

written modification that either adds or deletes one or more provisions of the standard policy to serve particular needs.