CPCU 520 Flashcards
In general, the tendency for people with the greatest probability of loss to be the ones to most likely purchase insurance
Adverse Selection
A written manual that communicates an insurer’s underwriting policy and that specifies the attributes of an account that an insurer is willing to insure
Underwriting guidelines (underwriting guide)
A group of policies with a common characteristic, such as territories or type of coverage, or all policies written by a particular insurer or agency
Book of business
The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.
Underwriting
The largest loss that an insured is likely to sustain
Probable Maximum loss
The channel used by the producer of a product or service to transfer that product or service to the ultimate customer
Distribution channel
An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers)
Exclusive agency marketing system
An insurance marketing system that uses sales agents (or sales reps) who are direct employees of the insurer
Direct writing marketing system
An insurance marketing system under which producers (agents or brokers), who are independent contractors, sell insurance, usually as representatives of several unrelated insurers.
Independent agency and brokerage marketing system
A person or firm that places business with insurers not licensed (nonadmitted) in the state in which the transaction occurs but that is permitted to write insurance because coverage is not available through standard market insurers.
Surplus lines broker
The term referring collectively to insurers and other organizations that make insurance available through a shared risk mechanism to those who cannot obtain coverage in the admitted market.
Residual market
An insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties, especially those susceptible to loss by riot or civil commotion
Fair Access to Insurance Requirements (FAIR) plans
An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by attorney-in-fact. Members agree to mutually insure each other, and they share profit and losses in the same proportion as the amount of insurance purchased from the exchange by that member
Reciprocal insurance exchange (interinsurance exchange)
An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them
Mutual insurer
Insurer formed for the purpose of earning a profit for its owners.
Proprietary insurer
An association of insurance commissioners from the U.S. fifty states, the district of Columbia, and the five US territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.
National Association of Insurance Commissioners (NAIC)
A document drafted by the NAIC, in a style similar to a state statue, that reflects the NAIC’s proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry. Any state may choose to adopt the model bill or adopt it with modifications.
Model law
A draft regulation that may be implemented by a state insurance department if the model law is passed.
Model regulation
An insurer doing business in the jurisdiction in which it is incorporated
Domestic insurer
An insurer licensed to operate in a state but incorporated in another state.
Foreign insurer
An insurer domiciled in a country other than the United States
Alien insurer
A balance sheet value that represents the amount of funds that a corporation’s stockholders have contributed through the purchase of stock
Capital stock
The amount stockholders paid in excess of the par value of the stock
Paid-in surplus
An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.
Reciprocal insurer
A situation in which an entity’s current liabilities (as opposed to its total liabilities) exceed its current assets
Insolvency
A state-established fund that provides a system for the payment of some of the unpaid claims of solvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state.
Guaranty fund
The manner of handling claims that requires an insurer to give consideration to the insured’s interests that is at least equal to the consideration it gives its own interests
Good-faith claims handling
A breach of the duty of good faith and fair dealing
Bad faith (outrage)
The person or organization that borrows money from a mortgagee to finance the purchase of real property
Mortgagor
An independent organization that works with and on behalf of insurers that purchase or subscribe to its services
Advisory organization
Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.
Prospective loss costs
Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both
Producer
A subsidiary formed to insure the loss exposures of its parent company and the parent’s affiliates
Captive insurer, or captive
A group captive formed under the requirements of the liability risk retention act of 1986 to insure the parent organization
Risk retention group
Information gathered and analyzed regarding a company’s markets to improve competitive decision-making
Market intelligence
A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repeats itself.
Underwriting cycle
A small group of customers or potential customers brought together to provide opinions about a specific product, service, need, or other issue
Focus group
Statistical and analytical techniques used to develop models that predict future events or behaviors.
Predictive analytics
The process of identifying and dividing the groups within a market that share needs and characteristics and that will respond similarly to marketing actions
Market segmentation
Focusing marketing efforts on a specific group of customers
Target marketing
A type of marketing that focuses on specific types of buyers who are a subset of a larger market
Niche marketing
The necessary people and physical facilities to support the sale of insurance products and services
Distribution system
The record of an insurance agency’s present policyholders and the dates their policies expire
Agency expiration list
Laws that require all policies covering subjects of insurance within state to be signed by a resident producer licensed in that state
Countersignature laws
An authorized agent of the primary insurer that manages all or part of of the primary insurer’s insurance activities, usually in a specific geographic area
Managing general agent (MGA)
An insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone, or the internet
Direct response distribution channel
A type of group marketing that targets various groups based on profession, association, interests, hobbies, and attitudes.
Affinity marketing
Contacting a prospect without an appointment
Cold canvass
A report detailing an insured’s history of claims that have occurred over a specific period, valued as a of a specific date
Loss run
A payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commissions.
Agency bill
A payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending any commission payable on the premium collected to the producer
Direct bill
Under statutory accounting principals (SAP), an insurer’s total admitted assets minus its total liabilities
Policyholder’s surplus
The amount of business an insurer is able to write, usually based on a comparison of the insurer’s written premiums to its policyholder’s surplus
Capacity
The scope of decision that an underwriter can make without receiving approval from someone at a higher level
Underwriting authority
Underwriter who is primarily responsible for implementing the steps in the underwriting process
Line underwriter
Underwriter who is usually located in the home office and who assist underwriting management in making and implementing underwriting policy
Staff underwriter
An insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer
Manuscript policy
A guide ti individual and aggregate policy selection that supports an insurer’s mission statement
Underwriting policy (underwriting philosophy)
The increase or decrease in incurred losses over time
Loss development
A statistical technique for analyzing environmental changes and projecting such changes into the future
Trending
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer’s individual loss exposures that fall within the treaty are automatically re insured
Treaty reinsurance
A review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines
Underwriting audit
A capacity ratio that indicates an insurer’s financial strength by relating net written premiums to policyholders surplus
Premium-to-surplus ratio, or capacity ratio
The accounting principles and practices that are prescribed or permitted by an insurer’s domiciliary state and that insurers must follow
Statutory accounting principles (SAP)
A profitability ratio expressed as a percentage by dividing a company’s net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders’ equity, owners’ equity, or policyholders’ surplus
Return on equity (ROE)
An analysis of an insurer’s practices in four operational areas; sales and advertising, underwriting, ratemaking, and claim handling
Market conduct examination
A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes
Predictive modeling
A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes
Application
An insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and condition
Underwriting
Underwriting information for an initial application, or a substantive policy midterm or renewal change
Underwriting submission
Any condition or situation that presents a possibility of loss, whether or not an actual loss occurs
Loss exposure
A condition that increases the frequency or severity of a loss
Hazard
The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it
Information efficiency
Methodical examination of a policyholders’ operations, records, and books of account to determine the actual exposure units and premium for insurance coverage already provided
Premium audit
Income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses
Underwriting profit
A proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer and constituting a new offer
Counteroffer
A set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance
Rating plan
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods
Experience rating
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include
Schedule rating
A ratemaking technique that adjusts the insured’s premium for the current policy period based on the insured’s loss experience during the current period; paid losses or incurred losses may be used to determine loss experience
Retrospective rating
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted
Facultative reinsurance
A method of underwriting in which all of the business from a particular applicant is evaluated as a whole
Account underwriting
The distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications
Mix of business
The portion of the rate that covers projected claim payments and loss adjustment expenses
Loss costs
A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued
Binder
A brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance
Certificate of insurance
A profitability ratio that indicates whether an insurer has made an underwriting loss or gain
Combined ratio
Computer software programs that supplement the underwriting decision making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked
Expert systems, or knowledge-based systems
Performing underwriting functions is an insurer’s office as well as traveling to visit and maintain rapport with agents and sometimes clients
Production underwriting
The ratio of insurance policies written to those that have been quoted to applicants for insurance
Hit ratio
A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
Moral Hazard
A condition of carefulness or indifference that increases the frequency or severity of loss
Morale Hazard (attitudinal hazard)
The unit of measure (for example, area, gross receipts, payroll) used to determine an insurance policy premium
Exposure unit (unit of exposure)
An audit conducted by an insurance advisory organization or bureau to check the accuracy of insurer’s premium audits
Test audit
A payroll system that increases the regular hourly wage rate for the night shift or other special conditions
Premium pay (shift differential)
The amount the primary insurer pays the reinsurer pending the determination of the actual reinsurance premium owed
Deposit premium
A rate multiplier derived from the experience rating computation
Experience modification
An organization that provides administrative services associated with risk financing and insurance
Third-party Administrator (TPA)
An independent claims representative who handles claims for insurers for a fee
Independent adjuster
An outside organization or person hired by an insured to represent the insured in a claim in exchange for a fee
Public adjuster
A system to remind claims personnel to perform a particular task on a claim
Diary, or suspense
A record of all the activities and analyses that occur while handling a claim
Activity log
A security setting that controls an individuals computer user’s ability to review, enter, and change information in a claims information system
Authority level
A review of claim files to examine the technical details of claim settlements; ensure that claims procedures are followed; and verify that appropriate, thorough documentation is included
Claims audit
A review of claim files conducted by an insurer’s staff to examine the technical details of claim settlements; ensure that claims procedures are followed; and verify that appropriate; thorough documentation is included
Internal claims audit
A review of claim files conducted by organizations other than the insurer that involves reviewing overall claims handling practices; reviewing reserves and other technical details of claim settlements; investigating consumer complaints; ensuring that claims procedures were followed; and verifying that appropriate, thorough documentation was included
External claims audit
