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FIN 331 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

• ISO

A

Insurance Services Office

  • Not a non-profit organization
  • It is a leading provider of products and services that help measure, manage, and reduce risk
  • Creates standardization of policies (mainly used in P&C)
  • Creates a lot of the policy language. Allows the language to be the same across companies
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2
Q

Package policies

A

Combinations of two or more policies or coverages into a single policy with one overall premium

Ex. Modern homeowners policies because it combines coverages for property . and liability in one policy

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3
Q

Sections of insurance policies

A 
Declarations page
Definitions section
The insuring agreement
Exclusions
Conditions
A basis of recovery section
Clauses controlling and limiting amounts payable
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4
Q

Declarations page

A
  • Usually the first page of any policy
  • It is the summary of a policy’s key features.
  • Describes what, or who is insured, the name of the insurance company, the policy number, the insured’s address, period of coverage, coverages that apply, amount of the premium, etc.
  • If the policy is for a vehicle, it will have a description of the covered vehicle
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5
Q

Definitions section

A
  • Defines several key words used throughout the policy
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6
Q

The insuring agreement

A
  • Where insurers summarize what they agree to do and describe the situations under which they will pay claims
  • Includes detailed descriptions of coverages
  • In P and C, it takes on one of two forms: named perils and open perils
  • One way contract
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7
Q

Named perils

A

Policies only provide coverage for those perils specifically named, and losses from all other perils are excluded

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8
Q

Open perils

A

Policies cover every imaginable peril (and even some unimaginable) except for those specifically named as exclusions

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9
Q

Exclusions section

A

 What will not be covered in the policy
 Some perils just can’t be covered (FedEx packages because the weather cannot be prevented)
 Excluded perils can be covered, but at an increased cost by adding an endorsement
 Coverages that increase the chance of a moral hazard are excluded
 Coverages not needed by normal insurance are excluded (ice insurance in Cuba)

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10
Q

Conditions section

A
  • States the policy provisions placing restrictions or requirements on policyholders’ conduct and if the conditions aren’t met, may negate insurers promises stated in their policies
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11
Q

Common policy conditions

A
  • Fraud
  • Must provide notice of loss
  • Must provide proof of loss
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12
Q

Basis of recovery section

A

Addresses how insurance companies decide how much to pay when covered property is damaged or destroyed

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13
Q

Clauses section

A

Limits the amounts that will be paid when losses occur.

Limits include: dollar limits, deductibles, co-pays, co-insurance, and time limits

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14
Q

Endorsements

A

Written provisions that add or remove coverage to an existing property or liability policy

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15
Q

Rider

A

A written provision that adds or removes coverage to an existing life, health, or disability insurance contract

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16
Q

Riders and endorsements accomplish

A 
Adding coverages
Deleting exclusions
Changing definitions
Adding locations
Adding insureds
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17
Q

Commonly excluded perils

A

Suicide, warfare, floods, earthquakes, gradual wearing out of property, and international losses

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18
Q

Hard markets

A

Occur when premiums are increasing rapidly

Often kicked off by sudden disruptive events such as 9/11, stunningly large court award for a homeowner’s lawsuit over mold damages, or a bad hurricane season causing a lot of damage

They happen because when these events happen, they cause extremely large underwriting losses as large claims are paid, thus insurers jack up their premiums to offset their losses and build up savings for future hard markets

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19
Q

Soft markets

A

When insurance premiums decrease or stay constant

Caused by intense competition among commercial insurers

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20
Q

How many separate P&C insurers are there in the US

A

As of 2009, there were 2,737

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21
Q

Components of the combined ratio

A

Loss ratio
LAE (Legal Adjustment Expense)
Expense ratio
Dividend ratio

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22
Q

Loss ratio

A

Claims expenses as a percent of earned premiums

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23
Q

LAE (Legal Adjustment Expense)

A

Consists of legal defense costs incurred while settling claims. Expressed as a percent of earned premiums

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24
Q

Expense ratio

A

The ratio of underwriting expenses (ex. commissions, taxes, advertising, and admin expenses as a percent of earned premiums)

25
Q

Dividend ratio

A

The portion of earned premiums paid to policyholders as policy dividends

26
Q

What makes up insurance companies net income

A

Premiums and the revenue from the float

27
Q

Mutual insurance companies

A
  • Owned by their policyholders
  • Types of mutual insurance companies: Pure assessment, advance premium, assessment mutuals, perpetual mutuals, factory mutuals, and fraternal insurers
28
Q

Pure assessment mutuals

A
  • No initial premiums
  • A group of people or businesses agree to share their risks where as losses occur, each member’s share is determined and each policyholder pays an end of ear fee for that amount
  • Ex. Suppose 100 students agree to share their personal property risk exposures. Assume each owns the same dollar amount of property and each faces the same dollar amount of risk. Suppose, now, that a student living in an apartment building loses $10,00 worth of property in a fire, since each student’s share of the loss is $100 ($10,000/100), they will each be billed $100
  • Not feasible as not every student would pay the $100
29
Q

Advance premium mutuals

A
  • All mutual insurance companies are advance premium mutuals

- Policyholders pay premiums in advance

30
Q

Assessment mutuals

A
  • Cross between pure assessment mutuals and advance premium mutuals
  • Charge insureds an advance premium with the expectation that it will be large enough to cover losses
  • If losses are higher than expected, then additional charges will ensue
  • Most are fire and windstorm coverages
31
Q

Perpetual mutuals

A
  • Charge a single advance premium which, along with investment income, is large enough to cover claims while the policy is in effect
  • Offered with title insurance where the buyer is protected against title defects for as long as the buyer lives in that house
32
Q

Factory mutuals

A
  • A type of mutual insuring only superior properties (properties meeting stringent building standards with heavy emphasis on lost control using state of the art material and construction features)
33
Q

Fraternal insurers

A
  • Non-profit organizations providing life or health insurance to members of religious orders or social groups
  • Ex. The Knights of Columbus, Masons, etc.
34
Q

Reciprocals

A
  • Also owned by their policyholders
  • Groups of people who want the same type of insurance and agree to insure each other by exchanging risks
  • Both members are both an insurer and an insured because each person owns a portion of liabilities and a portion of assets
  • Managed by an attorney-in-fact which is usually a corporation hired to sell policies, collect premiums, invest reserves, pay claims, and conduct other business
  • Used in auto policies
  • A group of 20 stock-car racers, for example, could agree to cross-indemnify each other for damage to each of the 20 cars owned by the individual racing members: at the end of each race, the racers would have agreed to pass the hat to fund the repairs of the car(s) damaged in that race
35
Q

Lloyd’s associations

A
  • Insurers that take advantage of the law of large numbers in a unique and clever way by writing a single unique policy where more than 1,000 risk bearers or members share the underwriting risk (pooling of money to cover a risk)
  • Insures weird things that no other org will cover
36
Q

American Lloyd’s

A
  • Started in the 1860’s

- Focus changed from marine to auto and homeowners (insur 90% of homes in Texas)

37
Q

What act allowed banks to affiliate with each other and got rid of the glass steagall act

A

The Financial Services Modernization Act of 1999

38
Q

Who regulates the insurance industry

A
  • Primarily the states
39
Q

How is the insurance industry unique

A
  • Because most other financial institutions are federally regulated
  • You may or may not get a payment back
  • Payments are made when a claim is made
  • Insurance companies make their money on float
40
Q

Rebating

A

 You sign up your policy with someone, they say that you will receive some of the commissions back
 If you find the insurer the client, you will receive 25% of what the insurer gets
 Rebating is illegal because of licensing. The insured is most likely not licensed to sell insurance

41
Q

Twisting

A

 Take the policyholder and convince them to make a change because you enhance the benefits of what is being offered (twisting the facts to make something look better/worse)
• If you have money in your 401k, a lot of times, the money is transferred into an annuity

42
Q

 Paul v. Virginia

A

Insurance was not commerce and therefore, the federal government should not have control over it (decision stayed for 75 years)

43
Q

The Appleton Rule

A
  • Insurance companies in New York must follow New York regulations even if they are doing business outside of the state.
  • Helped standardize insurance in industry practices and regulation across the US and is still in place today
44
Q

The Armstrong Investigation

A
  • State of New York started an investigation towards corruption and nepotism. They were not allowing new insurance companies to start
45
Q

Regulation XXX (30)

A

insurance companies were not setting aside enough resources for future losses, so they got penalized for it

46
Q

b. Businesses total package

A

referred to as its commercial lines coverage.

47
Q

c. Common commercial lines policies

A

i. Commercial property package
ii. Equipment breakdown protection
iii. Crime and fidelity insurance
iv. Commercial inland marine insurance
v. Commercial automobile insurance
vi. Commercial liability insurance
vii. Employer’s liability insurance
viii. Professional liability insurance
ix. Worker’s compensation insurance.

48
Q

i. Manuscripted policies

A

Key coverage’s were written as if someone was writing a manuscript. Only used in very large companies.

Entire insurance contract for that business is written specifically for that business

49
Q

Commercial Package Policy (CPP)

A

Large companies purchase the basic coverage’s that they need. Packages together insurance modules for many of the most common perils that businesses face

  1. When different insurance policies are packaged together
  2. Business Owners Package Policies (BOP): Used in medium and small companies.
50
Q

Seven specific CPP coverages

A
  1. Commercial property
  2. Commercial general liability
  3. Crime
  4. Equipment breakdown protection
  5. Inland marine (anything that is moving)
  6. Auto liability
  7. Farm liability
51
Q

c. Under CPP. Insured’s must choose among three cause of loss options:

A

i. Basic form-Named perils (only a few perils)
ii. Broad form-Named perils (all coverages of basic plus water damage, damages from falling objects, weight of snow or ice, collapse of a building.
iii. Open perils-all perils are covered except those specifically excluded.
iv. Earthquake form-additional coverage for earthquakes.

52
Q

i. Fidelity bonds

A

Covering the dishonest act of employees (if an employee steals, you can recover from the bonding agency)
1. Penalty is the maximum amount of protection the bond offers.

53
Q

c. Privity of contract

A

only an injured buyer of a defective product could sue, and the only business that could be sued is the one selling to the injured person.

54
Q
  1. Commercial General Liability Insurance
A

a. Dominant form in use today by most insured’s.
b. CGL policy dominates because it includes liability exposures faced by most organizations.
i. Section 1-Coverages: The insuring agreement
1. Coverage A: Covers bodily injury and property damage losses (other than damages to the property of the insured)
2. Coverage B: Covers personal and advertising injury liability.
3. Coverage C: Applies on a no-fault basis to medical payments for bodily injuries arising on the insured’s premise.
ii. Section 2-Who is an insured?
1. Defines who has liability protection under the CGL.
2. Coverages generally apply to employees, officers, directors, partners, etc.
3. Does not protect a company against claims from its own employees, nor does it protects employees from claims filed by fellow employees.
iii. Section 3-Limits of insurance
1. Six limits include general aggregate liability, product/completed operations aggregate, each occurrence, personal and advertising liability, fire damage legal liability, medical expense limit.
iv. Section 4-CGL conditions
1. Description of the rights, procedures for making changes to policy coverages, etc.
v. Section 5-Definitions
1. Liability coverages
2. Physical damage to covered vehicles
a. Collision, loss other than collision, specified causes of loss.

55
Q

Builders risk insurance

A

Losses that may occur before the building is finished.

56
Q

Order of common commercial liability policies

A
  • Dec page
  • Definition of the insured
  • Insuring agreement
  • Supplementary payments
  • Exclusions
  • Limits of liability
57
Q

Exclusions to commercial liability insurance policies

A

i. Potentially catastrophic losses
ii. Losses that are intentional or the result of inherently dangerous activities.
iii. Perils typically covered using different insurance policies or covered using endorsements (requiring an extra premium).

58
Q

iii. Tail coverage

A

Provide protection for claims after the policy is terminated.

FIN 331 (4 decks)

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