Insurance Section 1

Strict or absolute Liability

Arises from inherently dangerous activities or defective products that are likely to result in harm to another, regardless of protection taken. Example: owning a pet rattlesnake (Negligence is not required to be proven)

Moral Hazard

Associated with mental attitudes, behaviors, ethics, and habits. Examples: lying on an application, fraudulent claims, exaggerating a loss to get more money

Sprinkler Insurance

Includes insurance against loss through damage by water to goods or premises arising from the breakage or leakage of sprinklers, pumps, or other apparatus placed for extinguished fires, loss arising from the breakage or leakage of water pipes, or through accidental injury to such sprinklers, pumps, or other apparatus.

Burglary Insurance

Includes insurance against loss by burglary, theft, or both. (moneys, securities, books, documents) Burglary insurance excludes coverage of the property listed above while in the custody of, possession of, or being transported by any carrier for hire or in the mail.

Insurable Events

Is any contingent (may or may not happen) or unknown event, whether past or future, which may damnify (cause injury to) a person having an insurable interest or create a liability again him; may be insured against, except gambling and lotteries.

Contingent Event

Is one that may or may not occur in a given time period. Example: Whether or not a person will die this year, or if a particular house will burn down this year.

Peril

Is the actual "cause of a loss." Examples: fire, wind, hail, theft, collision, or negligence

Deductible

Is the portion of the loss that is insured must pay before the insurer (company) pays any part of a claim. A higher deductible usually lowers the amount of the premium.

Underwriting

Is the process of selecting and classifying risk by reviewing applications for insurance, checking the accuracy of the information, and gathering additional information to see if the proposed insured meets the insurer's underwriting guidelines.

Boiler and Machinery Insurance

Includes insurance against loss of property and liability for damage to persons or property from explosion of, or accidents from, boilers, tanks, pipes, pressure vessels, engines, wheels, electrical machinery, or apparatus connected to or operating nearby.

Liability Insurance

Includes insurance against loss resulting from liability for injury, fatal or nonfatal, suffered by any natural person or resulting from liability for damage to property or the property interests of others. It does not include workers' compensation, common carrier liability, boiler and machinery, or team and vehicle insurance.

Common Carrier Liability Insurance

Includes insurance against loss resulting from liability of the goods of a common carrier for property in their care, but not owned by them.

Risk

Is the uncertainty about loss that exists when there is a possibility of more than one outcome. Example: Uncertainty about whether or not you will have a car crash or die before the year is up, or have to be hospitalized. Risk = chance, possibility, or uncertainty of loss occurring

Adverse Underwriting Decision

Is when an underwriter rejects, places restrictions or limitations, or chargers a higher premium.

What is the central concern of tort law?

The central concern is determining responsibility for injury or damage (harm). If found legally responsible, the responsible person is usually obligated to compensate (pay monetary damages).

Legal Hazard

The chance of a certain risk ending up in court. Examples: a fitness center might run the risk of lawsuits from clients injured on faulty exercise equipment

Consideration

• The binding force of a contract refers to what each party considers valuable. • Insured's part means paying the premium & the representation made in the application. • Insurer's part is the promise to pay in the event of a loss. • Small certain loss, based on money.

What methods do underwriters use to protect the insurer against adverse selection?

• The company might accept the application at a higher rate • Restrictions may be added to the coverage • The insurer can refuse to accept the risk

Three dimensions of loss exposure:

1. The type of value exposed to loss 2. The peril that causes loss 3. The extent of the potential financial consequences

(CIC) Definition of Insurance

A contract whereby one undertakes to indemnify another against loss, damage, or liability arising from a contingent or unknown event.

What is an advantage and disadvantage of self-insurance?

Advantage: money can be saved if the losses are less than what the premium would have been. Disadvantage: actual losses could be more than predicted, expenses higher than expected, and the cost of hiring someone to administer the program.

Self-funding

Alternative funding method that requires a large amount of assets, loss must be known and predictable.

Life Insurance

Annuities are included in the class of Life.

Hazard

Anything that increases the chance/likelihood that loss will occur, or increases the severity of a loss that does not occur. It does not actually cause the damage; can be controlled and managed.

Physical Hazard

Anything that poses a risk and can be seen, heard, touched, tasted, or smelled. Examples: weak tree limbs, worn-out brakes, absence of fencing around a pool

Criminal Law

Applies to wrongful acts against society and the government takes responsibility for punishing and prosecuting.

Torts

Are any wrongful acts (except a crime or breach of contract) committed by one party against another.

Facultative Agreements

Are discussed on a case by case basis prior to transferring the liability.

Loss

Any reduction in the quality, quantity, or value of something.

Surety

Bonds.

Competent Parties (legal capacity)

Both parties must be capable and willing to enter the contract for it to be legally binding. Requires both parties to be of legal age, mentally competent, and not under the influence of drugs or alcohol.

Insolvency Insurance

Includes insurance against loss arising from the failure of an insolvent insurer to discharge its obligations under its insurance policies.

Title Insurance

Coverage for losses if title is not free and clear of defects that were unknown when the title insurance was written.

Legal Insurance

Coverage is prepaid service that entitles a group member to a schedule of benefits for certain legal services-- such as those for adoptions, probates, and divorces-- at a stipulated premium. After schedules benefits have been exhausted, subsequent legal fees are usually on the attorney's customary rate. Example: a prepaid legal insurance plan may provide only three legal consultations a year.

Civil Law

Deals with the rights and responsibility that we, as citizens, have with respect to one another and applies to legal matters that are not under the government's jurisdiction.

Open Peril/All Risk Policy

Does not list the perils but states that it covers all or any peril, except those specifically excluded. Places the burden of proof to the insurer; the name of the policy form that indicates open peril/all risk is called "special."

Insurable Interest

In Property and Casualty: • Must establish they actually own it or has interest in it. • Means insured might suffer financial loss • Ownership must be proven twice: at application and again at claim. In Life and Health: • Based on relationships • Proven once at application

Offer and Acceptance (Agreement or Mutual consent)

In insurance, an applicant makes an offer by completing an application and submitting it along with the premium. If the applicant does not include the premium, this would be considered an invitation to an offer. The insurer shows acceptance by issuing a binder or policy.The insurer can also make a counteroffer to the applicant with new terms.

Marine Insurance

Includes both inland marine and ocean marine risks.

Mortgage Insurance

Includes guaranteeing the payment of the principal, interest, and other sums agreed to be paid under the conditions of any note or bond protected by mortgage. Mortgage insurance is generally required with a home loan if the down payment on the home is less than a specified percentage of the purchase price (about 20%).

Mortgage Guarantee Insurance

Includes insurance against financial loss by reason of the nonpayment of principal, interest, and other sums agreed to be paid under the terms of any note or bond or other evidence of indebtedness secured by a mortgage, deed of trust, or other instrument constituting a lien or charge on real estate.

Plate Glass Insurance

Includes insurance against glass that breaks its ornamentation, frames, glazing, etc. These are typically excluded on building forms and require a separate coverage.

Team and Vehicle Insurance

Includes insurance against loss through damage or legal liability for damage to property caused by the use of teams or vehicles other than ships, boats, railroad rolling stock. "Team" refers to groups or caravans of vehicles owned by the same insured and operating in the same way at the same time.

Disability Insurance

Includes insurance concerning injury, disability, or death of the insured resulting from accidents, and disability of the insured resulting from sickness.

Automobile Insurance

Includes insurance of automobiles owners, users, dealers, or others having insurable interests against hazards incidental to ownership, maintenance, operation, and use of automobiles.

Workers' Compensation Insurance

Insurance includes insurance against loss from liability imposed by law upon employers to compensate employees and their dependents for injury sustained by the employees arising out of and in the course of the employment, irrespective of negligence or fault of either party.

Satisfying Legal Requirements

Insurance is a method to satisfy the state's requirement that all owners and drivers of vehicles be able to prove financial responsibility in the event of an accident.

Conceptual Definition of Insurance

Insurance is a social device that transfers risk from an individual to a group (insurer), thus pooling a large number of individuals (pure risk).

Layman's Definition of Insurance

Insurance is a substitution/exchange of a small certain loss (premium) for a large uncertain loss (claim).

Providing a Source of Investment Income

Insurance provides funds for investment. Insurers use part of the premiums to purchase stocks and bonds. These invested funds promote economic growth and job creation.

Securing Credit

Insurance provides lenders with the assurance that the property they are financing will be either repaired, replaced, or repaid if the property be destroyed by an insured peril.

Operating Costs

Insurers have operating costs that must be paid to run the company. One of these costs s the agent's commission. A reasonable amount of profit must be calculated in the cost of the premium the insured pays.

Premiums

Insurers must charge premiums to have the funds necessary to make loss payments.

Promoting Loss Control

Insurers often promote loss control by offering discounts for burglar and smoke alarms, fire sprinklers, etc. These measures help prevent or reduce the financial consequences when loss does occur.

Credit Insurance

Insurers persons engaged in business against loss resulting from extending credit, as well as insurance against loss from the failure of persons to met existing obligations to the insured.

Aircraft Insurance

Insures aircraft owners, users, and dealers against loss through hazards incidental to ownership, maintenance, operation, and use of aircraft. It does not include losses resulting from accidents or physical injury, fatal or nonfatal, to any natural person.

Pure Risk

Involves only two possible outcomes: loss or no loss No possible gain or profit is involved with a pure risk, and this is the only type of risk insurance companies are willing to accept. Examples: house burns down or not; either you wreck your car or you do not

Speculative Risk

Involves the possible opportunity for loss or gain. Speculative Risks are NOT insurable Example: Playing the lotto, real estate investments, gambling

Loss Ratio

Is a basic guideline as to the quality of the insurer's underwriting. This information may be used to make decisions about whether to renew accounts or whether to tighten underwriting standards on a particular class/line of insurance. Test formula: Loss Ratio = losses ÷ Premium

Contract Law

Is a branch of civil law that deals with the formation, enforcement, and disputes involving legal agreements (contracts).

Reinsurance

Is a contract by which an insurer procures a third party to insure it against loss or liability caused by the original insurance. It's between two insurers and will be classified as either an automatic or facultative agreement.

Contract

Is an agreement between two or more parties, enforceable by law.

Adverse Selection

Occurs when people seek insurance at the last minute, when they really need it. Example: when someone waits until they get sick to apply for insurance

Intentional Tort

Occurs when someone deliberately acts in a way that causes harm to another person, regardless of whether he/she intended to injure that person. Example: invasion of property, wrongful conviction, slander, assault, or battery. (Breach of contract is not considered an intentional tort)

Unintentional Tort

Occurs when someone does not provide proper care for another person. Referred to as negligence. Example: someone running a red light and crashing into your car

Loss Exposure

Possibility of loss.

Personal Loss Exposure

Presents the possibility of a financial loss to an individual or a family because of death, disability, unemployment, illness, or injury.

Personnel Loss Exposure

Presents the possibility of financial loss to a business because of death, disability, retirement, or resignation of a key employee.

Fire Insurance

Property insurance such as dwelling policies, homeowners, and commercial property would be in this class.

Ideally Insurable Risk

Refers to risk that is financially within reason and is, therefore, reasonable to insure.

Named Peril Policy

Requires the peril causing the loss to be named in the policy for the insurer to pay the claim. Places the burden on the insured; Referred to as "Basic, Broad, or Standard."

STARR Five Methods of Handling Risk

Sharing: "Pro rata liability clause" insure percentage of risk or "pool" losses to share cost of loss. Transfer: "transfer of risk" buying insurance where a party assumes liability/relieves other party of responsibility. Avoid/avoidance: avoid participating in certain activities or remove the hazard or object. Reduce/reduction: steps taken to prevent or minimize the chances of loss. Retain/retention: occurs when a person has the money to cover a loss; self-insuring.

Morale Hazard

Similar to moral hazard but morale hazards deal specifically with a person's state of mind. Arise out of human carelessness or irresponsibility.

Moral and Morale Hazards

Some insureds will be careful due to the fact they have insurance, which may result in losses that might not have occurred without insurance. Insureds may exaggerate claims or even file false or fraudulent claims. These have to be factored into the cost of the premium paid by the insured.

Law of Large Numbers

The greater number of exposure units (cars or homes) the more predictable the loss. Used to establish appropriate rates, benefits the insured.

Exposure Unit

The measure used to establish rate.

What do underwriters do?

They do risk selection and rating, determine coverage limitations or restrictions, and accept or decline the risk.

What do underwriters look for?

They look for "ideally insurable risks" that will be acceptable for both the company and the insured.

What is one of the functions of the underwriting department?

To protect the insurer from this type of adverse selection.

Automatic (treaty) Agreements

Transfer the agreed portion of the policy liability automatically on every policy.

Profitable Distribution of Exposures

Underwriters balancing higher risk with preferred risks, and insurers diversifying by insuring in different locations allows the insurers to achieve profitable distribution.

Spread of Risk

Underwriters must be careful not to accept too many poorer-than-average risks. Example: balancing the number of preferred risk with poorer risk hen losses will fall within the normal range

Using Resources Efficiently

Without insurance, individuals and businesses would have to set aside large sums of money to pay for future losses. Money that would otherwise be set aside for losses can be used to improve one's quality of life and contribute to the growth of the business.

Reduce Social Burdens

Without insurance, victims of job-related injuries or auto accidents may need state welfare or the assistance of another social program.

Conditional Contract

• Conditions must be met to make the contract legally enforceable. • This type of contract is conditional because the company only pays on condition of a loss. • The company does not return premiums to the insured if the insured doesn't have a loss.

What are the special characteristics of an Insurance Contract?

• Contract of Adhesion • Aleatory • Unilateral • Unilateral • Conditional Contract • Personal • Utmost Good Faith • Indemnity

Property Loss Exposure

• Damage to insured's property • Includes real property such as lands, buildings, & any other property attached to it • Includes personal property: - Tangible property: inventory, contents, autos - Intangible property: patents & copyrights • Damage to property can cause an indirect loss, such as net income

Liability Loss Exposure

• Harm caused to others • The degree of loss a person/organization faces in regard to lawsuits brought by a third party

Miscellaneous Insurance

• Insurance against loss from damage done directly or indirectly by lightening, windstorm, tornado, earthquake; • Insurance under an open policy indemnifying the producer of any motion picture, television, etc. against loss caused by the interruption, postponement, or cancellation of such production or event; • Any insurance not included in any of the foregoing classes which is a proper subject of insurance.

Aleatory Contract

• Means that performance depends on an uncertain future event (claim). • The insured pays a relatively small premium & receives no money back if no loss occurs. • If a loss does occur, the insurer may pay a claim that exceeds the premium dollars received. • One party will receive much more in value than he or she gives in value. (An unequal exchange of money)

Indemnity

• Means the insurer restores the insured to the condition the insured was in before the loss occurred. • Insured shouldn't gain profit or be in a better position than they were prior to the loss. • Indemnification can take the form of repair, replacement, or payment for the damaged or destroyed property. • Insurable interest & subrogation supports this principle.

What are the four elements needed for a contract to be enforceable by law?

• Offer and Acceptance • Competent Parties • Legal Purpose • Consideration

Contract of Adhesion

• Refers to the company offering a contract on a take-it-or-leave-it basis. • Once a company is signed, the company is "stuck" with how the court interpret it. • Courts usually rule in the insured's favor in cases of misinterpretation.

What is the primary function of underwriting? What is the primary goal of underwriting?

• Selection of risk • To achieve profitable distribution of exposures

Unilateral Contract

• The exchange of a premium for a promise (Insurer makes promise to pay claim). • Once the insured pays the premium, the insurer is contractually bound to honor the terms of that contract to the end of the policy period. • If the insurer wants to change the terms, they must wait until it expires to do so. • The insured may stop paying premiums and cancel the contract at any time.

Requirements for an ideally insurable risk

• The loss must be an accident; meaning unintentional from the insured's point of view. • It must be possible to calculate the chance of loss. • The loss must create economic hardship. • Must have a large enough number of similar risks and a large base of previous loss experience to be able to predict future losses. • The cost for the insurance must be reasonable in relationship to the possible loss. • The loss must be definite and measurable. • The loss cannot be catastrophic.

What are the two characteristics that must be present for a risk to successfully self-insure?

• The loss must be predictable and known. This means it requires a large number of homogeneous exposure units so that the law of large numbers can be used to predict the losses, and • Sufficient liquid assets must be available to pay claims and other costs of retaining the risk.

Legal Purpose

• The purpose of the contract must be legal and not against public policy. • Activity cannot be illegal; usually applies once the action is considered a felony.

What is the purpose of deductibles?

• To eliminate small nuisance claims • To help keep premiums affordable • To make the insured more careful about loss control

What is the purpose of reinsurance?

• Used to spread the risk in the event of a catastrophic loss • Allows insurers to insure large risks safely • Any type of policy can be reinsured • It solves problems with unearned premiums • Most reinsurance is treaty (automatic), not specific/facultative • Helps insurers avoid capacity problems