Chapter 1- General Insurance

Loss Ratio

(Paid Losses + Loss Reserves) / Total Earned Premium

Four elements of a legal contract

1. Competent parties 2. Legal Purpose 3. Agreement 4. Consideration

Factors that underwriters take into consideration

1. Nature of the risk 2. hazards that are present 3. claims history 4. other factors that depend upon the type of risk being insured

Valued Contract

A contract that pays a stated amount in the event of a loss (disability insurance/life insurance).

application

A document submitted by an applicant to an insurer that provides information needed for the insurer to underwrite a risk; becomes part of the insurance contract. Most applications require statements on the application to be true to the best knowledge and belief of the applicant.

Misrepresentations

A false statement contained in the application; usually does not void coverage or the policy. If material to the issuance of coverage, meaning the insurer would not have issued coverage had the misrepresentation not been made, coverage does not apply. In some cases, a material misrepresentation may void the policy.

Tabular Method

A loss reserve based upon the estimated length of a claimant's life or expected disability.

Average Value Method

A loss reserve established based on average settlements of particular claim types.

Case Reserve Method

A loss reserve established for each claim, when reported.

Loss Ratio Method

A loss reserve formula based upon the expected losses for a particular class or line.

Schedule Rating-

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of a particular risk being rated.

Class Rating

A rate charged to a group of policyholders who have similar exposures and experience.

Individual Rating

A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate. Primarily used for commercial any speciailty risks because of the number of unique variables involved.

loss cost rating

A rating organization provides insurers with the portion of a rate that does not include provisions for insurer expenses and profits (which insurer adds to arrive at final rate) -The expense and profit components to develop the final rate must be added by the individual insurers based upon their projections. -Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit.

Open Competition

A state relies on competition between insurers to produce fair and adequate rates.

Voidable Contract

A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties. An example is an insurer may void or revoke coverage for misrepresentation or fraud.

Legal Purpose

All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract. All parties to a contract must enter it in good faith.

Competent Parites

All parties to a contract; insurer and Insured must have legal capacity to enter into a contract. Those without legal capacity include: 1. Minors 2. Mentally incompetent or incapacitated. 3. Persons under influence of drugs or alcohol.

Premium Assumptions

An adequate premium must be charged for the risk based on the same factors used in evaluating the risk. Premium rates are considered inadequate when they do not cover projected losses and expenses. Rates must not be excessive or unfairly discriminatory. Rate- The dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance. Premium- The total cost for the amount of insurance purchased - $50,000 of coverage= $5 rate X $50 (per $1,000 of insurance) for a $250 premium

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs.

Void Contract

An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn't contain all the elements of a legal contract.

"A" Rating or Judgment Rating

An individual rate that doesn't use loss history as a component and that is derived largely from the underwriter's evaluation and best judgment the risk poses to the insurer.

conditional

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable.

Conditional Contract

Both parties must perform certain duties and follow rules of conduct to make the contract enforceable. The insurer must pay claims if the insured has complied with all the policy's terms and conditions.

When an insured fails to disclose known facts in an application for insurance, he/she may be guilty of: A. Concealment B. Twisting C. Waiver D. Breach of Warranty

Concealment The failure to disclose known facts.

Insurance Contracts

Contract of Adhesion Aleatory Valued Contract Indemnity Contract Applicant Application Unilateral Contract Conditional Contract

Which of the following is not true of the Fair Credit Reporting Act? A. A consumer is protected from unwelcome personal information collection practices B. A consumer can obtain the information in the reporting agency file C. A consumer must be informed whenever insurance was denied due to an adverse report D. Errors in the report can only be changed by court action.

D. Errors in the report can only be changed by court action. If a consumer says that certain information is incorrect, the reporting agency must reinvestigates the facts and makes changes as necessary.

Where can an insured find insurance coverage after being rejected by Insurer A due to claims history? A. Lloyds of London B. Reinsurance Market C. Risk Retention Insurer D. Residual Market

D. Residual Market- Is a coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.

The Terrorism Risk Insurance Program is administered by which of the following Federal entities? A. Executive Office B. Department of the Treasury C. Department of State D. Department of Defense

Department of the Treasury The Terrorism Act, which protects consumers by addressing market disruptions and ensuring the continued widespread availability and affordability of property and casualty insurance for a terrorism risk, is administered by the Dept. of Treasury.

Expense Ratio

Determined by dividing an insurer's Total Operating Expenses by Written Premiums.

All of the following are risk management techniques, except: A. Retention B. Enhancement C. Avoidance D. Transfer

Enhancement

Each of the following is an element of a legal contract, except: A. Consideration B. Indemnity C. Legal Purpose D. Agreement

Indemnity The fourth element of a legal contract is a competent party or someone that has the legal capacity to enter into a legal contract.

Prior Approval

Insurers cannot use rates until approved by the Department of Insurance or until a specific time period has expired after the filing.

Fraud

Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right. Contains 5 elements: 1. False statement, made intentionally and that pertains to a material fact 2. disregard for the victim 3. victim believes the false statement 4. victim makes a decision and/ or acts based on the belief in, or reliance upon, the false statement 5. the victim's decision and/or action result in harm

All of the following are true of insurance, except: A. It protects against uncertainty B. It transfers risk C. It is a means of sharing Loss D. It eliminates risk

It eliminates risk Insurance transfers, but does not eliminate risk.

Financial Ratios

Loss Ratio Expense Ratio combined Ratio

Each of the following is a factor used by an underwriter, except: A. Outside factors B. Hazards C. Claims history D. Marital status

Marital Status

When writing the application for homeowners insurance, B's agent asked him if he had any theft losses in the past 3 years. B answered 'no', despite the fact that he was a theft victim 3 times in the past 3 years. B is guilty of which of the following? A. Unilateral Statement B. Waiver C. Misrepresentation D. Representation

Misrepresentation is a false statement in the application.

Contract of Adhesion

One party (insurer) prepares the contact and it is not negotiable.

Agreement

One party must make and communicate an offer to the other part and the second party must accept that offer. Offer- The offer for entering an insurance contract is the application submitted by the applicant. Acceptance- The acceptance of an insurance contract takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer.

Contract of Adhesion

One party writes the contract, without input from the other party. One party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis, without negotiation. Any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured).

Unilateral

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer.

Unilateral Contract

Only one party is legally bound to the contractual obligations after the premium is paid to the insurer. Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract.

A potential cause of loss, such as fire, explosion, flood, or theft is considered to be a(n): 1. Hazard 2. Occurence 3. Peril 4. Accident

Peril- cause of potential loss to property such as fire, windstorm, hail or flood.

File and Use

Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed.

Self-Insurance is an example of which of the following type of risk management: 1. Avoiding the Risk 2. Pooling the risk 3. Eliminating the risk 4. Retaining the Risk

Self- Insurance is an example of retaining the risk.

Mandatory Rates

Some states require that mandatory rates be used for certain lines of insurance.

Consideration

Something of value is exchanged, the exchange of an act for a promise. The ______ made by the applicant is the premium payment. The ________ made by the insurer is its promise to pay for covered losses.

Warranties

Statements in the application or stipulations in the policy that are guaranteed true in all respects. If _____________ are later discovered untrue or breached (past, present or future), coverage (and sometimes the contract) is voided.

Representations

Statements made by the applicant on the application that are believed to be true to the best of the knowledge and belief of the applicant; may be withdrawn prior to policy issuance.

All of the following are characteristics of a Mutual Insurance Company, except: 1. They provide insurance to members 2. Profits are returned as dividends 3. Stockholders have ownership 4. Policyholders elect the Board of Directors

Stockholders have ownership. A mutual insurance company is owned by its policyholders, and does not have shareholders.

Combined Ratio

Sum of the loss ratio and expense ratio.

Acceptance

The ________ acceptance of an insurance contract takes place when the insurance agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer.

Offer

The __________ for entering an insurance contract is the application submitted by the applicant.

Aleatory Contract

The exchange of value is unequal. Insured's premium payment is less than the potential benefit to be received in the event of a loss. The insurer's payment in the event of a loss may be much greater, or much less (e.g., $0 in the event a loss doesn't occur), than the insured's premium payment.

Minors

The insurer may be held responsible for its obligations, however, in most cases a __________ cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance.

Loss Reserved

The net premiums plus interest reflects possible future contract obligations. An accounting measurement of an insurer's future obligation to its policyholders.

Applicant

The party submitting an application for insurance.

All of the following are producer responsibilities owed to the insured or applicant during an insurance transaction, except: 1. The producer represents the insured's interests 2. Review and evaluate the applicant's current coverage, limits and risks. 3. Recommend the best coverage. 4. Forward premiums to the insurer on a timely basis.

The producer represents the insured's interests.

Manual Rating

The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member.

retrospective rating

The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder. Premium adjustments are subject to minimums and maximums. - Deposit premium: The required initial premium paid into the policy that is subject to adjustment. A premium audit will be used to determine the actual premium based on the risk exposures.

Merit Rating

The use of rates that rewards a policyholder that takes measures to decrease the probability of loss by the implementation of safety programs, loss control programs,

Concealment

The willful holding back or secretion of material facts pertinent to the issuance of insurance (or a claim), even if the applicant or insured was not about the subject. _________ results in denial of coverage and may void the policy.

Determining acceptable risks is the primary responsibility of the: 1. Auditor 2. Producer 3. Adjuster 4. Underwriter

Underwriter

The voluntary surrender of a right is known as which of the following? A. Tort Law B. Liability C. Waiver D. Estoppel

Waiver

Which of the following is not an example of a pure risk? A. A tornado destroying a mobile home park B. A fire causing a home to be uninhabitable C. A slip and fall injury at a large department store D. Wall Street's decline in the stock market

Wall Street's decline in the stock market. That is a speculative risk.

Reasonable Expectations Doctrine

What a reasonable and prudent policy owner would expect; the reasonable expectations of policyowners are honored by the Courts although the strict terms of the policy may not support these expectations.

misrepresentation

a false statement on the application that renders the contract void if material to acceptance of the risk.

Experience Rating

a rate based on the policy holders actual loss history when compared to the loss history of similar risks.

representation

a statement made on the application that is believed to be true to one's knowledge

warranty

a statement that is guaranteed to be true and coverage may hinge on the truthfulness of that statement.

Concealment

failure to provide or willful hiding of material facts pertinent to the issuance of a policy.

The goal of an underwriter

is to select risks that fall into the normal range of expected losses. The producer is the field underwriter; the line and staff underwriters are employed by the insurer.

Principal of Indemnity

the insured is to be restored to the original financial position they held prior to the loss.

fraud

the intentional misrepresentation deceit, or concealment of known material facts by a person with the intention of causing injury to another

underwriter

underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses. The underwriter's primary responsibility is the selection of risk to be insured. The underwriter also determines the classification, and premium rate if a risk if accepted by the insurer.