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Intro to Insurance
Definitions
| Term | Definition |
|---|---|
| Insurance definition | Transfer of risk from a person or business to an insurance company |
| Risk definition | Uncertainty/possibility of loss |
| (2) Types of Risks | (1) Speculative Risk (2) Pure Risk |
| Speculative Risk definition | Chance of loss OR gain; no insurable |
| Pure Risk definition | Chance of loss ONLY; is insurable |
| Exposure definition | Risks for which the insurance company would be liable |
| Peril definition (and example) | A CAUSE of loss If a house burned down, the peril is the FIRE that occured |
| Direct Loss definition (and example) | Physical loss to property with no intervening cause Ex. A lightning struck a house or an automobile hitting a tree |
| Indirect Loss definition (and example) | Consequential loss as the result of a direct loss Ex. If you had a fire, the loss of your home would be the indirect loss |
| Hazard definition | Something that increases the chance of a loss |
| Physical Hazard definition | A hazard that can be seen Ex. A wet floor sign alerting guests - the wet floor is the hazard |
| Moral Hazard definition | Dishonesty - increased risk that the insured will lie on an applicant or fakes a loss |
| Morale Hazard definition | Carelessness Ex. you ran into the store with the keys in the running car |
| STARR Accronym | Sharing Transfer Avoidance Retention Reduction |
| Sharing in STARR definition (and example) | 2+ individuals or businesses agreeing to pay a portion of any loss incurred by a member of the group Ex. Stockholders |
| Transfer in STARR definition | The insurance company agrees to pay a claim in a customer has a loss Customer must pay the premium |
| Avoidance in STARR definition (and example) | Eliminating a particular risk by not engaging in a certain activity Ex. Someone who does not drive to avoid the risk of injuring someone else in an accident and being reliable for the damage |
| Retention in STARR definition (and example) | The individual or business will pay for the loss if it occurs Ex. If you don't have car insurance to pay for the damages you caused to a person, you have retained that risk |
| Reduction in STARR definition (and example) | Lessening the chance or extent that a loss will occur Ex. A business installs a sprinkler system to reduce the amount of damage a fire may cause |
| Contract definition | An agreement between the insured and the insurer |
| Who is the 1st party in a contract? | The customer - insured |
| Who is the 2nd party in a contract? | The insurance company - insurer |
| Law of Large Numbers definition | The principal that makes insurance possible A calculation of accurate losses that may happen in a specific group. The larger the group, the more statistics a loss can be predicted |
| CANHAM Accronym | Calculable Affordable Non-Catastrophic Homogeneous Accidental Measurable |
| Calculable in CANHAM definition | A premium must be calculable based on prior loss statistics for a particular risk to predict future losses |
| Affordable in CANHAM definition | The premium should be affordable for an average consumer |
| Non-Catastrophic in CANHAM definition | The risk must be non-catastrophic. Catastrophic risks could be detrimental to the insurance company |
| Homogenous in CANHAM definition | The risk must be similar so the same factors affect the chance of loss A wood frame catching on fire is different than a brick house catching on fire |
| Accidental in CANHAM definition | The loss must have been accidental. Intentional losses from the insured are not covered by insurance |
| Measurable in CANHAM definition | Proof of loss must be proven by numbers and dollar amounts |
| Adverse Selection definition | Risks that have a high-than-normal chance off loss This is why insurance companies do underwriting processes |
| Are Adverse Selections covered by insurance? | No |
| Reinsurance definition | An insurance company paying for another insurance company to take some risk off the insurer This spread the insurers risk across the board |
| Facultative definition | The reinsurer evaluates each risk before allowing the transfer (agreement from the insurance company) |
| Treaty definition | An agreement |
| Stock Insurer definition | A business formed as a corporation and owned by its stockholders or shareholders issues non-participating policies |
| Dividends related to a Stock Insurer is... (3 things) | (1) Not guaranteed (2) Paid to the stockholder (3) Taxable to stockholder |
| Mutual Insurer definition | A business owned by its policyholders (aka customers) Issues to Participating policies |
| Mutual companies are referred to as... | Participating companies because they sell par policies |
| Dividends related to a Mutual Insurer is... (3 things) | (1) Not guaranteed (2) Paid to policyholders (customers) (3) Not taxable |
| Fraternal Insurer definition | Provides/Offers insurance only to members Can provide social events and typically engages in charitable causes |
| Reciprocal Insurer definition | Unincorporate groups that agree to insurer each other's losses under a contract |
| Who is a reciprocal Insurer handled by? (and definition) | An Attorney-in-fact (controlled and overseen by an advisory committee of subscribers |
| Lloyds Association definition | Insurance provided by individual underwritters (aka not companies) |
| What are the Lloyds Association unusual risks? (3 examples) | (1) Hole-in-one Contest (2) Athlete's Arm (3) Celebrities Hair |
| Risk Retention Group definition (and example) | Insurance companies owned by their members creating a liability insurance for customers from the same industry (a car dealers risk retention group would be only the car dealers can be policy holders |
| Risk Purchasing Group definition | Purchasing liability insurance for its policyholders (members) Ex. A group of businesses from the dealership join together to buy liability insurance from an insurance company |
| Self-Insurance definition (and example) | A business that pays its own claims (someone reserves specific funds to pay for any losses) Also retains more risk than transfers |
| Federal Government provides what types of insurance? (6 things) | (1) War Risk (2) Nuclear Energy (3) Flood (4) Federal Crop (5) Unemployment (6) Workers Compensation |
| Domestic Insurance Location definition | An insurance company incorporated in the state is resides in (typically where headquarters are located) |
| Foreign Insurance Location definition | An insurance company incorporated in one state but does business in another state |
| Alien Insurance Location definition | An insurance company incorporated outside the USA and its territories |
| Certificate of Authority definition | A state license for an insurance company |
| Admitted (also known as Authorized) definition | When a company is licensed and has a certificate of authority to sell insurance |
| Nonadmitted (also known as unauthorized) definition | Allow insurers to sell insurance to certain types of risk without a license an no certificate of authority |
| Surplus Lines definition | Insurance sold by nonadmitted insurance companies unless on the states approved list of insurers |
| Who can/cannot Surplus Lines be sold to? | (Can) be sold to certain high-risk customers (Cannot) by sold only to get a insured a cheaper rate than admitted insurers |
| Financial Strength Rating definition | A report card of the company |
| What are the (4) Methods of Marketing | (1) Independent Marketing (2) Exclusive or Captive Marketing (3) Managing General Agents (4) Direct Writing Companies |
| Independent Marketing Agents definition | Individuals that sell several companies insurance and are not direct employees of the insurance company These agents own the policies they sell |
| Exclusive or Captive Marketing Agents definition | Individuals that represent ONE insurance company The insurance company owns the policy they sell |
| Managing General Agents (MGAs or GAs) definition | Individuals that hire, train, and supervise other agents within a specific geographical area |
| Direct Writing Companies definition | A company whose products are sold by employees who are salaried, compensated, or both. There is NO Agent or producer involved The insurance company owns the policy Ex. Magazines, television, internet, radio |
| Agency definition | The relationship a person is authorized to represent The person authorized to represent the Agency is an Agent |
| What are the (3) types of Agent Authorities? | (1) Express Authority (2) Implied Authority (3) Apparent Authority |
| Express Authority definition | What the agents written contract with the company says |
| Implies Authority definition | Not written; Activities an agent normally does to sell insurance (business cards, advertising) |
| Apparent Authority definition | Authorities a normal person would *believe* the agent has based on the agents actions and statements |
| Fiduciary Trust definition | A person in a position of financial trust |
| Commingling definition | The illegal act of mixing personal funds with the insured or insurance insurers funds |
| Suitability Considerations definition | To make purchase recommendations that are appropriate in light of a clients needs |
| CLOAC Acronym | Consideration Legal Purpose Offer Acceptance Competent Parties |
| Consideration (in CLOAC) definition | Money and statements made on an application |
| Insured Consideration definition | Statements made on the application and premium |
| Insurer Consideration definition | Promises to pay claim based on the policy |
| Legal Purpose (in CLOAC) definition | The risk transfer (insurance) doesn't violate the law |
| Offer (in CLOAC) definition | A proposal made by one of the potential parties in the contract |
| Counteroffer (in CLOAC) definition | When an insurance company issues a policy with a higher premium than the insured applied for |
| Acceptance (in CLOAC) definition | *Agrees* to pay the premium |
| Competent Parties (in CLOAC) definition | Must be 18 or older, mentally sane, and sober to make an insurance contract |
| Adhesion definition | Policies written in place by the insurer with absolutely no wiggle room. It's *glued* |
| Aleatory Contracts definition | The value received from the contract by each party is *unequal* Ex. Pay a small premium and have a large claim OR pay premiums for many years with zero claims |
| Utmost Good Faith definition | Must be honest and have good intentions |
| Unilateral Contracts definition | *One-sided) contracts due to only one party being legally bound to preform under the contract Insured may cancel at *any* time Insurer must pay covered losses |
| Personal Contracts definition | Contracts between the insurance company and applicant; usually nontransferable to another party |
| Conditional Contracts definition | Insured must pay the premium for coverage and file a claim if a loss occurs |
| Indemnity definition | The contract is intended to restore the insured to the financial state he or she was in prior to the loss - no more, no loss |
| Representation definition | A statement the applicant believes is true |
| Misrepresentation definition | A false statement that does not void contracts but may alter the premium |
| Material misrepresentation definition | A false statement that would void the premium offer |
| Warranty definition | A statement guaranteed to be true - a promise |
| Breach definition | Void |
| Concealment definition | A failure to disclose named facts - hiding information |
| Fraud definition | An intentional act to deceive another party to part with something of value - cheating, could be criminal |
| Waiver definition | Voluntarily giving up a right |
| Estoppel definition | Once a right has been waived, it cannot be changed |
| Real Property definition (and example) | Insured property Ex. A house, TV, *my stuff* |
| DICEE Acronym | Declarations Insuring Agreements Conditions Endorsements & Additional Coverage Exclusions |
| Declaration (in DICEE) definition | The first page of the policy which goes over who, what, when, where, and how much |
| Insuring Agreements (in DICEE) definition | Describes covered perils or risks assumed by the insurer and makes reference to a contractual agreement between the insurance company |
| Conditions (in DICEE) definition | States the rules for the policy |
| Endorsements (in DICEE) definition | Changes to the original policy |
| Exclusions (in DICEE) definition | Item(s) that are not covered by the insurance company |
| Named Insured definition | A person, business, or other entity named in the declaration page to who the policy is insured |
| First-Named Insured definition | The first listed person on the declaration page when there is more than one person insred (not commercially) |
| Additional Insured definition | In certain circumstances, another person or business is added by endorsement |
| Policy Period definition | The duration of a policy - when it starts and when it ends |
| Policy Territory defintion | When a loss will not be covered unless it occurs within the geographical territory (USA, Canada, Puerto Rico) |
| Unearned Premium definition | When the insured paid for premiums in advance and must be return if the insured cancels the policy |
| Cancellation definition | Occurs *before* the expiration date |
| Nonrenewal definition | Occurs at the time of the expiration |
| Prorated Basis definition | When the insured will receive a portion of the premium back dependent on when the policy is cancelled Full refund of the unearned premium |
| Short-rated Basis definition | When an insured cancel a policy before the expiration date, they are entitled to retain a larger percentage of the unearned premium |
| Flat Cancellation definition | When a policy is cancelled on the effective date (can be done be insurer or insured) |
| Deductible definition | An amount paid out of pocket by the insured before an insurer pays any expenses |
| Other Insurance definition | When more than one policy covers the same loss or claim |
| Nonconcurrency definition | When more than one policy covers the same loss or claim but providing different coverage |
| Contribution of Equal Shares definition | All insurers pay equal amounts, up to the limits policy with the smallest limit |
| Pro Rata definition | When each insurance company is liable for a portion of the loss |
| Duties After Loss (PPC-MSC) Acronym | Prompt Protect Complete Make Submit Cooperate |
| Named Insured Duties After Loss definition | Lists the named insured's (who's on the dec page) responsibilities after a property insurance loss |
| What does the first P in Named Insured Duties After Loss (PPC-MSC) mean? | Promptly notify the insurance company of the claim |
| What does the second P in Named Insured Duties After Loss (PPC-MSC) mean? | Protect the property from further damage |
| What does the first C in Named Insured Duties After Loss (PPC-MSC) mean? | Complete detailed proof of loss (an official list of inventory) |
| What does the M in Named Insured Duties After Loss (PPC-MSC) mean? | Make the property available for inspection |
| What does the S in Named Insured Duties After Loss (PPC-MSC) mean? | Submit examination under oath if required |
| What does the second C in Named Insured Duties After Loss (PPC-MSC) mean? | Cooperate with the insurance company during the claim investigation proceedure |
| Assignment Condition definition | A policy may not be transferred to anyone else without *written consent* from the insurance company |
| Transfer of Right definition | When the named insured dies and the rights & duties under the policy are transferred to the insured legal representative who kept the policy until the expiration date |
| Abandonment Condition definition | A condition that states the insured may not abandon property to the insurance company for profit or reimbursement |
| Salvage Condition definition | A condition that states that the insurance company can take possession of damaged property after insurance company pays a total loss |
| Liberalization Condition definition | A condition that states that if the insurer broadens coverage under an endorsement without an added premium, all the other coverages will be broadened as well |
| Subrogation definition | Insurance company has a right to sue an at-fault party for damages they had to pay to the insured |
| Insurance Interest definition | A legitimate risk of financial loss |
| Underwriting definition | The process (preformed by an agent or producer) of evaluating a risk and if the company should issue a policy |
| Application definition | Contains information that will help the underwriter decide to accept the risk and/or what the premium rate will be |
| Binder definition | A *temporary* statement made by the agent that gives the insured immediate coverage for 30, 60, or 90 days (when no cancellation notice is sent) The middle man of Agent and underwriter - does not guarantee a policy |
| Loss Ratio Formula | Calculated by dividing (incurred losses) by the (earned premiums) |
| Loss Ratio definiton | To compare the companys operation from year to year |
| Earned Premium definiton | An amoutn the company actually earned by providing insurance to a customer during a time period |
| Expense Ratio definition | The cost of doing business |
| Expense Ratio Formula | Calculated by dividing (underwriting expenses) by (written premium) |
| Underwriting Expenses definition (and example) | The cost to acquire/promote business and keep current customers Ex. Advertising, commission or salaries to employees, taxes/fees |
| Written Premium defintion | The gross amount (before tax) of premium income received from insureds |
| Combined Ratio definition | The sum of loss ratio and expense ratio You want this to be at 100% (same number) or par <100 = underwriting profit >100 = underwriting loss |
| Combined Ratio Formula | (loss ratio) + (expense ratio) |
| Judgement Rating definition | Deciding an premium based on the individual risk Made by careful consideration by underwriter - no books are used |
| Manual (or class) Rating definition | Rates calculated by a formular in a manual rate per unit of insurance X the number of units of insurance being purchased |
| Experience rating Experience Rating definition | Based on insured (3 year) claim history |
| Retrospective Rating definition | Insured premium on losses incurred during a policy period |
| Schedule Rating definition | A system of debits or credit to reflect characteristics of a particular customer |
| Loss Costs | Based on pure claims data No profits are included No operating expesnse are included |
| Rate Components definition | Factors that determine premium rates; Loss costs costs of handling claims operating expenses profits |
| Fair Credit Reporting Act definition | Requires agentcies to adopt procedures for pulling credit info - credit, personnel, insurance other subjects |
| Consumer Rights definition | Consumers who feel that information in their files in inaccurate They may dispute the information If disputed, insurers are required to investigate |
| Commissioner of Insurance definition | The head of the Department of Insurance in Wisconsin |
| Promissory Warranty definition | A warranty that certain things will be done or not done AFTER the policy has taken effect. |
| Affirmatory Warranty definition | A warranty that certain things will be done or not done AT or BEFORE the policy has taken effect. |
| Compulsive Forfeiture definition | A court-ordered fine for failing to comply with the Commissioner |
| Agreed Value Policy definition | A policy in which the insured and insurer agree on a property value and list it in the policy |
| WIP stands for... | Wisconsin Insurance Plan |
| Insurance Security Fund definition | protects insured against loses from unpaid claims if an insurer is *liquidated* |
| Short-rate cancellation definition | A method used when a policy is canceled by the policyholder before expiration date - the insured receives a less pro rata return of premium |
| The Gramm-Leach Bliley Act definition | To protect the privacy of customers financial information |
| Coinsurance definition | A requirement stating the insured must carry a minimum about of insurance typically 80% coverage Does not cover total losses - that would be policy limit |
| Blanket Policy Defintion | Allowing an insured to move inventory from one location to another without notifying insurance company |
| Specific Policy definition | When a business does not move inventory from one location to another |
| Remit definition | Cancels |
| Standard Mortgage Clause defintion | A policy specifying the rights and duties of the mortgagee under the policy- A mortgaee may have to pay the premium if the insured fails to do so |
| Bailee definition | Someone who has temporary custody of someones property for s special occasion |
| Actual Cash Value definition | Replacement cost minus depreciation |
| Aggregate Limit definition | the maximum amount the policy will pay per policy period regardless of the amount of claims |
| Vicarious Liability definition | when a person may be responsible for the negligent acts of another person who has direct liability |
| Supplemental Payments definition | Payments paid in addition to a policy's regular limits of liability Include defense costs, claim investigation, lawyers, other related court costs) |
| Absolute/Strict Liability definition | When someone is doing something so dangerous that it doesn't matter what you did to prevent the claim, you will be responsible (you ABSOLUTELY did it) |
| Negligent definition | |
| Appurtenant definition | Other |
| Slander definition | A false statement that damages a reputation |
| Libel definition | A false statement that damages a reputation |
| Liable definition | legally responsible for |
| Remit definition | Cancels |
| Personal Property Replacement Cost Endorsement definition | An endorsement that modifies basis of loss settlement from actual cost value to replacement cost |
| Scheduled Personal Property Endorsement definition | Provides coverage for specific items of property Ex. Watches |
| Business Pursuit Endorsement definition | Provides Homeowners liability coverage for personal damage or injury while conducting business |
| Permitted Incidental Endorsement definition | Deletes Exclusions in the policy relating to doing business on the residents premises Ex. 20 students coming over for weekly piano lessons |
Created by:
marerickson
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