Basic Insurance Concepts

Insurer Solvency

Financial strength of an insurer. The insurer's ability to meet its financial obligations as they become due.

Insurance Regulatory Information System

Regulators administer this system, which helps them identify insurers with potential financial problems.

Independent Agency

This type of agency includes agents that often represent many insurance companies with which they do business and are not employees of those insurance companies. An example of this type of agency is American International Group (AIG), Chubb, etc.

Surplus Lines Broker

a "wholesaler" that assists in approachng insurers. Most often used for specialty coverages (professional liability, umbrella liability, aircraft insurance, and marine insurance, for example) or for insureds who are in very high-risk businesses.

Tort

a civil wrong, other than a breach of contract or a criminal act, giving rise to legal liabilty.

Proximate Cause

a substantial factor in setting events in motion that cause a loss

"soft market"

buyers market. relatively low occurrence of catastrophic events (e.g, hurricanes) along with substantial industry competition cause this.

Peril

cause of loss

Moral Hazard

concerns intentional acts committed by the insured that either create or exaggerate a loss

Hazard

condition or conditions that increase the possibility of a loss

Risk

considered the uncertainty arising from the possible occurrence of given events.

Morale Hazard

does not imply a propensity to cause a loss, but implies an indifference to loss simply because of the existence of insurance.

File and Use State

in this state the insurer can start to use the rate after it has been filed; however, if the state insurance department later rejects it, the insurer has to stop using that rate and must refile it.

Prior Approval State

in this state the insurer must file the rate and wait until it is approved before it can use the rate.

Risk Classification

system used by insurers that allow them to group loss exposures into well-defined homogeneous classes

Stare Decisis

this principle of law refers to courts adhering to precedents and not changing established rulings. Often used by courts in cases regarding regulation of the insurance industry.

Personal Contract

this term means that the contract is solely between the named insured and the insurer.

Loss Reserves

this term refers to an estimate of the value of a claim or group of claims not yet paid.

Doctrine of Good Faith

type of contract in which one party is in particular possession of facts unknown to the other party at the time the contract is negotiated. As a result, a higher standard of honesty is imposed on parties to an insurance transaction than is imposed on regular commercial contracts.

Physical Hazard

physical condition or situation that increases the possibility of a loss

Contract of Adhesion

this characteristic stipulates that the insured must accept or adhere to the entire contract, with all of its terms and conditions.

Insurance Broker

legally an agent of the insured and not of the insurance company.

Underwriter

The person works for the insurer reviewing data and determines whether the insurer wants to write the policy. This person also decides how the premium will be determined.

Conditional Contract

one in which the performance of some or all of the terms of the agreement are dependent upon a condition.

Unearned Premium Reserves

the portion of the policy premium the insurer has not yet "earned" because the policy still has some time to run before expiration.

Nonadmitted Assets

these type of assets are viewed as relatively illiquid assets. examples are: insurer's office supplies, furniture, and uncollectible agency debt.

Fundamental Characteristics of Insurance

(a) loss pooling, (b) payment of accidental losses, (c) transfer of risk, (d) indemnification

Claims Costs

generally consumes between 50 and 90 percent of the premium dollar.

Elements of Negligence

(1) a duty owed to a plantiff (2) an unintentional breach of that duty by the defendant (3) an injury or damage suffered by the plantiff (4) a sufficient causal connection between the defendant's unintentional negligence and the plantiff's injury or damage.

Elements of a Valid Contract

(a) offer and acceptance (b) consideration (c) legal capacity and (d) legal purpose

Intentional Acts

if an act is committed with the purpose of injuring someone or damaging another's property, the result is an intentional injury. Many of these types of acts are excluded under commercial lines insurance policies.

Principle of Indemnity

in an insurance contract, this principle stipulates that an insured will be reimbursed for his or her loss, subject to the policy's limits and terms. The goal is to put the insured back in the same financial condition he or she was in prior to the loss.

Direct Writer & Exclusive Agencies

insurance companies market insurance through salaried salespeople or commissioned agents who sell only the insurance products of a particular company. An example of this is State Farm. Typically have higher quality claims & risk control as well as lower expense ratios which results in lower premiums.

Admitted Assets

those assets whose value is included in the annual statement of an insurer to the state insurance department. These assets are ones that can readily be used to pay claims, including cash, stocks, bonds, real estate, and money market funds.

Guaranty Fund

A state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state.

Strict Liability

a doctrine that concerns liability for damages regardless of fault and often deals with inherently dangerous property or situations.

Consideration

a legal term referring to the value that each party gives to the other when making the contract. Each party must give something of value in order for the transaction to be enforceable.

Negligence

failure to use a reasonable degree of care under a given set of circumstances. Is virtually always covered by commercial lines insurance coverage, subject to certain exclusions.

Pure Risk

risk involved in situations that present the opportunity for loss but no opportunity for gain. (insurable) example would be loss to property by flood or lightning.

"hard market"

sellers market. the stock markets downward spiral along with rising loss costs cause this.

Policy Form Regulation

the main goal of this is to protect insureds from overly complex, confusing, or unfair provisions.

Legal Capacity

the right to make binding agreements for oneself (excluding minors, intoxicated individuals, and insane persons)

Legal Purpose

A written agreement regarding child pornography or drug dealing is not considered a contract by a court of law because it doesn't contain this..

Solvency Surveillance

The process, conducted by state insurance regulators, of verifying the solvency of insurers and determining whether their financial condition enables them to meet their financial obligations and to remain in business.

Adjuster Licensing Requirements

The purpose of this is to ensure that consumers are dealing with knowledgeable claim representatives, increasing the likelihood that the insured business will receive a fair settlement.

Reinsurance

a transaction in which one party, the reinsurer, in consideration of a premium paid to it, agrees to indemnify another party (the insurer) for part or all of the liability assumed by the insured under a policy it has issued. Is the insurane for insurers.

McCarran Ferguson Act (1945)

an act passed by congress returning insurance regulation to the states, with narrow or limited applicability of specified federal laws to insurance.

National Association of Insurance Commissioners (NAIC)

an association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.

Open Competition Law

an insurer can use whatever rate it selects after filing the rate and the supporting datum with the insurance department. Also, under this law insurers have greater flexibility to compete on prices.

Insurable Interest

is the insured's financial interest in the value of the subject of insurance, such as an owned building used as a warehouse or a tractor trailer rig. In other words, an insured must clearly prove a personal stake in the item being insured or else be unable to collect compensation due when an insured peril causes a loss.

Insurance Commissioner

leads individual state insurance departments. This person can either be elected or appointed and has the authority to (a) conduct hearings, (b) stop insurers, agents, and brokers from engaging in a particularly unfair or unethical activity, (c) or suspend an insurer's, agent's, or broker's license to transact business.

Insurance Agent

legally an agent of the insurance company and not of the insurance buyer.

Speculative Risk

often create risks in which there were none previously; thus they are generally uninsurable. an example would be investing in the stock market or new business venture

Subrogation

the assignment to an insurer, after the insurer's payment of a loss to the named insured, of the rights of the insured to recover the amount of the loss from one legally liable for it.

Aleatory Contract

this distinctive characteristic refers to an agreement concerned with an uncertain event that provides for unequal transfer of value between the parties. Insurance policies are considered this type of contract because an insured can pay premiums for many years without sustaining a covered loss.

Risk-Based Capital

this is a method developed to determine the minimum amount of capital required of an insurer to support its operations and write coverage.

Claims Adjusters

this person as well as examiners and investigators work primarily for property and casualty insurers, for whom they handle a variety of property and liability claims. Their main role is to determine whether the insured's policy covers the loss and the amount to be paid.

Unilateral Contract

this type of contract is one in which only one party (the insurer) makes an enforceable promise (to pay a covered loss). By contrast, the insured makes few, if any, enforceable promises to the insurer.