Chapter 3 P&C Insurance Basics Flashcards
Principles and Concepts:
A) Insurable Interest - the interest an insured may have in property that is the subject of insurance. Damage or destruction of the property or a casualty occurrence would cause financial loss. It can be caused by ownership, custody or control of the property or by agreement. It must be shown when a policy is applied for and must exist at the time of a loss.
B) Loss ratio – a formula to show a quick analysis of the insurance company’s financial performance for a certain period.
*** incurred losses + loss adjusting’s expense / earned premium
Incurred losses = 200 homes insured with one fire and cost was $100K
Premiums taken in = 200 homes at 1K per home
Expenses for the year was 20K
Loss ratio is 120,000 / 200,000 or 60%
If the loss ratio is over 100% then the company lost money during that period; if it is less then the company made money
C) A peril is a specific cause of loss. Policies may be Named Peril or Special (Open) Peril Policies.
1C) A Named Peril policy covers only those perils listed or named in the policy.
2C) Open Peril covers any risk not specifically excluded
Types of Losses:
A) Direct Loss – direct physical damage to building and/or personal property or includes other damage where the insured peril was the proximate cause of loss;( i.e. water damage from a fire.)
B) Indirect Loss – Losses that are not direct damage, but are a result of the direct loss. (ex: would be living expenses for temporary quarters because a fire made the covered home uninhabitable.)
C) Judgment rating – is used when valid statistics are not available or when the individual risks are so unique, that it is impossible to have a large group with the same level of risk. It is the oldest method and commonly used in Ocean Marine insurance. It is the judgment of the underwriter to determine the risk and required rate. Most ocean ships are unique.
D) Class Rating - is computing a rate for insurance that applies to all applicants in a certain risk class or risk level) Ex: 2 cents per 100$ of coverage for building insurance. The benefit is that it allows the insurer to apply a single rate to a large group of policyholders.
E) Schedule ratings - are created by applying a list of charges and/or credits to a class rate to determine the proper rate for a particular risk. An example would be a discount for no claims.
F) Experience or Merit rating – the rate is affected by the insured’s own past loss experience. Insured’s with fewer claims pay a lower premium.
G) Retrospective rating - the actual losses during the policy period determines the final premium.
H) Blanket insurance - a single property insurance policy that covers several types of property or multiple people at one location or multiple location.
I)
Types of construction:
A) Frame (Class 1) - the exterior support walls, roof, and floors are wood, or other similar combustible materials. They may be covered by any type of siding or veneer of wood, vinyl, brick, or stucco, etc.
B) Joisted Masonry (Class 2) - the exterior support walls are of masonry material such as brick, adobe, concrete, stone or a similar material, but the roof and floors are combustible materials (wood, etc.)
C)Noncombustible (Class 3) - a structure with noncombustible floors, roof, and walls (usually a metal structure).
D) Masonry Noncombustible (Class 4) – supporting walls are masonry and the roof and floors are non-combustible (metal, concrete).
E) Modified Fire Resistive (Class 5) - the exterior walls and floors that are masonry or resistive to fire with a fire resistance rating of 2 hours or less.
F) Fire Resistive (Class 6) – Masonry or other fire resistant material with a rating of 2 hours or more.
Loss Valuation Methods:
A) Actual C/V – current replacement cost - depreciation.
B) Replacement cost – current price to replace with like, kind and quality.
C) Functional replacement cost – replace with same size and function, but least expensive current construction methods or materials.
D) Market value – amount a typical buyer would pay.
E) Agreed value – value of a total loss agreed to when the policy is written.
F) Stated amount – the amount scheduled in a policy to be paid for a particular or total loss, regardless of value.
Types of Damages
A) Compensatory –to repay an injured person for their damages. There are 2 types of compensatory damages:
B) Special damages pay for actual monetary expenses, such as medical expenses
C)General damages pay for non-economic losses, such as pain and suffering.
D)Punitive damages– money awarded in a civil court to punish the wrongdoer because of actions considered worse than simple negligence. (Knew it may harm someone and did it anyway, for example). It is usually an amount necessary to “punish” the wrongdoer. It may not be related to the actual amount of other damages.
Categories of liability:
A) General – use & maintenance of premises or operations in business
B) Absolute – imposed on defendants engaged in hazardous activities such as harboring wild animals, using explosives.
C) Personal – non business activities of individuals and families
D) Professional – from business dealings serving others (law, real estate, insurance, etc.)
E) Advertising – from acts of libel, slander, defamation.
Vicarious – responsibility of acts of another (children, employees, etc).
F) Strict – similar to absolute, but is specifically from defective products, (dangerous toys, medicines, etc)
Policies have the following major components:
A) Declarations - Contains basic underwriting information; insured’s name, address, amount of coverage and premiums and a description of the insured locations.
B) Definitions - Contains definitions and clarification of the terms used in the policy.
C) Insuring Agreement (Clause) - Contains the insurer’s promise to pay and a description of coverage provided and perils covered.
D) Additional/Supplementary coverage - Provides an additional amount of coverage for specific loss expense, at no additional premium; i.e. expenses to protect damaged property like boarding up a building
E) Conditions - Rules that insured and insurer agree to follow under the terms of the policy. For example:
- Inspections may be made by the insurer at any time.
- Changes to the policy must be in writing and must be signed by the insurer.
- Return of premium dictates method used to return premium if policy is cancelled.
F) Exclusions - States what perils are not insured against and what persons are not insured
G) Endorsements - Addendums to a contract that are used to change the policy’s original terms, conditions or to add or delete coverage. They can be added anytime, but must be in writing, attached to the policy, and signed by insurer.
