Prop & Casualty Insurance Basics

Adjusters must maintain records for ___ year

1

The Fair Credit Reporting Act limits the use of negative data to ___ years and to __ years in the case of bankruptcy.

7 10

The percentages generally range from a common ___% up to ___%

80 100

Exposure

A condition or situation that presents the possibility of loss

Insurance

A contract which allows for the transfer of individual risk to a company which will idemnify losses suffered by the insured to a predetermined limit unless excluded by policy language. The insured tranfers financial risk to the insurer. Insurance reduces risk.

Underwriting Considerations

A. Manual or Class Ratings B. Merit Rates C. Schedule Ratings D. Experience Rating E. Judgment Rating

Under the laws of agency, persons that sell insurance are ___, and the insurer is known as the ____

Agents Principle

The five elements of an insurance contract are:

Agreement Consideration Competent Parties Legal Purpose/Object Insuranble Interest

Material Fact

Can void a contract if material to acceptance of the risk, and is intentionally withheld

Types of Insurer's

Capital Stock Insurance Company Mutual Insurance Company Lloyds

____ investigate and pay claims in accordance with the provisions of the insurance contract

Claims department

Insurance policies are divided into four sections (DICE)

Declaration Insuring Clause Conditions Exclusions

Building Value = $100,000 Coinsurance 80% Ins Required 80,000 Ins Carried 80,000 Assume a loss of 40,000 $80,000 x $40,000 = $40,000-Deductible _________ 80,000

Example of Coinsurance Formula for Property Insurance

What are the three cosst containment mechanisms used to minimize claims and reduce premiums?

Exclusions Deductibles Coinsurance

Under the las of agency, producers have the following authority:

Expressed Authority Implied Authority Apparent Authority

Coinsurance Formula for Property Insurance is:

Ins Carried (Did) x Loss = Amount Covered - Deductible _________________ Ins Required (Should)

Legal Purpose/Object

Insurance must not be for an illegal activity or for immoral purposes; insurance should be of a legal nature

Consideration

Insured pays premium and submits application; consideration includes statements made in application by the proposed insured Insurer promises to pay benefits in the event of a covered loss during the policy period

Warranties

Insured's guaranty that something is true. Few warranty statements exist in insurance today and, if used, warranties usually give the insured a price break as a risk reductiion devise

Capital Stock Insurance Company

Is in business to make a profit for stockholder Obtains capital from investors who own the company and share in its profits Sometimes referre to as a nonparticipation company since stock companies do not retrun surplus monies to the policyholders

The identification of risk is NOT a _______ technique

Management

Lloyds

Members are grouped into syndicates Representing each syndicate is an underwriter who either accepts risk or rejects risk Underwriter remains individually liable for each accepted risk Most imporatant in the area of reinsurnace, i.e., the practice of tranferring all or a portion of one insurer's risk to another insurer. Reinsurance can be faculatative, reinsurring one single risk, or reinsuring an entire class of business via a resinsurance treaty.

Agreement has three parts, they are:

Offer Acceptance Couter Offer

Mutual Insurance Company

Ownership rests with policyholders, who elect the board of directors Earning is considered a surplus and may be distributed to the policyholders in the form of a nontaxable dividend since they are viewed as a return of premium Since policyholders participate in the company profits, mutual companies are called participating companies

Competent Parties

Parties must have legal capacity of enter into contract (age of 18) Restricted persons are minors, mental incompetents, and those who sign conracts while under the influence of drugs/alcohol. An exception to thet status of minors and contracts exisst in life insurance. In Alabama, a person at 15 or over can purchase property and casualty insurance

The cause of a loss may reslt from the following:

Physical Hazards Moral Hazards Morale Hazards Legal Hazards

Risk Management Techniques (Mitigating Risk)

Reduction Avoidance Retention of Risk Transfer

Insuring Clause

Risks which company assumes, such as fire, ligtning, and removal of contents from endagered premises

Executory clause

There is probably things left to be done with the policy

Indemnity

To make whole to a predetermined limit determined by the policy limit, the amount of the loss, and the insurable interest.

Exposure

a condition or situation that presents the possiblity of a loss

Fraud

a false statement made by the insured, a producer, or an insurer, in order to gain financially at the expense of another

Fair Credit Reporting Act

a federal law designed to protect consumers by requiring notification of consumer type reports being initiaited by the company. The law established procedures for the removal of incorrect information from investigator's files. In addition, the law addresses the repsonsibility of those using these reports.

Unilateral Contract

a one sided contract after premium is paid; only the insurer is legally bound to do anything further

Reasonalbe Expectation

a policy should do what it is reasonable expected to do. A homeowner's policy that did not cover theft would not be approved for sale

Insurance____ handle claims and in AL they have to be licensed must like producers

adjusters

Law of Large Numbers

allows the insurer to mitigate risk by pooling large numbers of similar risks

Aleatory

an insurance contract is contingent on uncertain events, a loss occurring. Unequal value is often given by each party. For example, a $10,000 policy issued by company with a single $100 premium paid by insured

Essential Elements Of an Insurance Contract

an insurance contract is defined as an agreement between two or more parties whose purpose is to indemnify, or make whole again, the insured inthe event of financial loss

Loss Ratio

an insurance term that refers to the amount of money paid out in claims diveded by the amount of money taken in for premiums. IN order to be profitable, the insurer must keep their loss ratios relatively low and will keep track of this imporant calculation in order to evaluate how effectively the business is being run.

Manual or Class Ratings

apply to all memebers of a large group of similar risks and are often referred to a manual rates

Merit Rates

are class rates based upon the characteristics or modifications to the exposure. Merit rates can also be based upon loss experience

Exclusions

are losses or situations not covered. These fall into one of the following categories: Catastrophic Predictable Covered elsewhere in another policy

Schedule Ratings

are the modifcation of manual rates either up or down to reflect the individual risk characteristics of the subject of insurance. Example; lowering rates for a building upgraded with a burlar alarm system

Utmost Good Faith

both parties bargain in good faith, a higher standard of accuracy and honesty than with regular contracts. Both parties have a duty to each other

Conditional

both sides must perform certain acts to make contract legally enforceable; the insured must pay premiums, and insurer must pay covered losses. The insurance policy is said to be conditional since if certain events occur, the insurer will pay a loss

Implied Authority

duties not specified in the contract, but are implied. An example would be scheduling an inspection if rating a policy requires and inspection

Avoidance

eliminating the exposure or hazard; Example : avoiding the hazards of auto ownership

Exclusions

events and properties not covered to minimize claims and keep insurance affordable

Catastrophic exclusions

happens to a lot of people at once (War)

Predictable exclusions

happens to a lot of people, but not all at once (wear and tear)

Estopped

if a producer or insurance comapny has "lulled" an insured into the feeling of security, the contract or contract provision may be voided and the insurer estopped from using the provision

Declarations

information about the contract appears on the first page of the policy, including: A. parties to the contract, names and addresses B. Terms of policy C. Amount of insurance, rates, and premiums charged D. List of forms and endorsements attached E. Property to be covered, locations, mortgages F. Agents signature

Deductibles

insured retaining a portion of risk reducing insurer's expenses related to small claims

Adhesion

insurer formulates the contract and insured must accept it as is. This generally means all ambiguities will be in favor of the insured

Counter-Offer

insurer issues policy as substandard; applicant can accept or refuse

Acceptance

insurer issues policy or a binder of insurance

Concealment

intentional withholding of the truth by an applicant affecting an insurance risk or in connection with a claim

Moral Hazard

intentionally caused losses. An example would be arson

Pure Risk

involves only the possiblity of loss, such as the risk of fire to a buidling. Generally are insurable

Speculative Risk

involves the chance of gain or loss. An example would be stocks going up or down in value. (generally uninsurable)

Experience Rating

is a method used by insurers to determine pricing of premiums for different groups or individuals based on the group or individual's history of claims

Loss of Use

is an indirect loss following a covered direct loss. An example would be if an insured's home burns down, the amount of money it would cost to rent a hotel room

Judgment Rating

is an underwriting phrase denoting the best judgment, based on the experience of an underwriter, in classifying an exposure

Subrogation

is the legal right of an insurer to recover a payout made to an insured from a 3rd party resonsible for the loss. An exmaple might be a recovery from a negligent person who has damaged the insured's auto

Expense Ratio

is the percetage of each premium dollar that goes to the insurers' expenses including overhead, marketing, and commissions

Underwriting

is usually involved in the selection, classification and acceptance or rejection of proposed insureds

Insurable Interest

must be present in order to buy insurance. The following conditions must be present: 1. the insured shall not stand to gain financially should a loss occur 2. the insured should not face a risk of loss 3. the insured should have a legal interest in preserving the subject of insurance

Morale Hazard

not being careful with property because it is insured. Example: keys left in an unlocked auto

Should the insured not be in compliance with the requirement at the time of the loss, the insured will be required to share in the loss by some _____

percentage

All modern property contracts generally contain requirements to carry some major ____ of the maximum probable loss stated either as a ___ or ___ requiring full insurance to value.

portion percentage language

An insurer must give ____ to the insured if a report has adversely affected the issuance of the coverage

post-notification

Apparent Authority

powers assumed by the agent not specified by the insurer, and the insurer fails to correct the error even though the insurer knew that the agent had acted outside of state authority

Expressed authority

powers expressed in the agency contract

Many insurers use a ____ on the application that investigative reports may be orded

pre-notification

Conditions

provisions and stipulations of the contract. These are rules of conduct for insured and insurer under their contractual relationship. Also: Definitions may be found in conditions or in other parts of contract Endorsements are used to add to or to delete coverages, conditions, etc

Transfer

purchasing insurance, using Hold Harmless agreements, i.e., getting someone else to assume the risk

Reduction

reducing the possiblity that a loss will occur, or reducing the severity of the loss if it occurs; such as installing a sprinkler system

Coinsurance

rewarding policy owners that buy adquate insurance. Claim penatlies are avoided if the insured buys adequate insurance.

Assignment

rights belong to the insurer, an insured cannot transfer his/her coverage to another without the insurer's permission

Physical Hazard

slick floors, icy walks, improper sotrage of flammables, ie., a skateboard left on a porch

Hazard

something that increases the chance of a loss; generally an inactive element unitl an accident

Misrepresentation

statements given on the applicaiton known to be untrue

Representation

statements that are made by applicant are believed ato be true to the best of their knowledge, but not guaranteed (written or oral). Most statements on applications are considered to be representations. If fraud is evident, represnetations are treated as warranties

Peril

the actual cause of a loss, an active element; a fire causes damage to a building

Offer

the appliant makes an offer to the producer to buy a policy by submitting the application and the first premium to the insurer

Risk

the chance or uncertainty of loss, ie, a fire could occur (risk is not the loss itself)

Principle of Indemnity

the indemnification process provides, should a loss occur, insured is to be restored financially or returned to former financial position before the loss. No gain or loss

Personal Aspect

the insruance comapny insures the insurable interest of the insured. For example, policy provisions do not automatically pass with the sale of a house to the new purchaser

Rule of 4Ls

the insured will receive the lower of the loss or the limit up to the level of insurable interest

Retention of Risk

the practice of accepting the financial loss by not purchasing insurance or purchasing large dedcutibles with property insurance

Legal Hazard

the probability of being sued

Pro-Rata Cancellation

the termination of a policy or bond with a return of premium charge for the exact time the protection was in force equal to the ratio of the toal premium to the toal policy period

Short Rate Cancellation

the termination of a policy or bondd by the insured before the end of the policy period, with the earned premium plus administrative expesnes retained by the insurance company

Waiver (Estoppels)

the voluntary abandonment of a legal right or advantage-- usually occurs through a mistake by an agent or company employee. As a result, the insurer will be estopped from using the provision that has been waived. For example, cahsing an insured's check after a policy has been cancelled

Binders (P&C Policies)

these are used to grant coverage on a temporary basis (written or oral). Binders meet all the requirements of a legal contract. A binder in Alabama may be effective until a policy is issued, but not to exceed 90 days

Insurers employ ___ cost containment mechanisms to minimize claims and reduce premiums

three