Primary Insurance Key Info Flashcards
Types of Loss Exposures
(1) Property Loss Exposure
(2) Liability Loss Exposure
(3) Human Resources Loss Exposure
Peril v Hazard
Peril – cause of a loss
Hazard – conditions that create or increase the chance of loss
Types of Hazards
(1) Physical - property, persons, or operations
(2) Moral - dishonesty or immoral behavior
(3) Morale - carelessness, indifference, or don’t care attitude
Adverse Selection
Tendency of those more exposed to risk to buy more insurance coverage
Risk Management Steps (6)
(1) Identifying Loss Exposures
(2) Analyzing Loss Exposures (Frequency, Severity, Tail)
(3) Examining feasibility of risk management techniques
(4) selecting appropriate risk management techniques
(5) implementing selected risk management techniques
(6) monitoring results and revising the risk management program
Risk Management Techniques
Risk Control (6)
(1) Avoidance
(2) Loss Prevention – reduce frequency
(3) Loss Reduction – reduce severity
(4) Separation – isolate loss exposures to minimize severity of a single loss
(5) Duplication – use backup or spare parts or copies
(6) Diversification – spread loss over various components
Risk Financing (2)
(1) Retention – absorb the loss
(2) Transfer – pass on the risk
Characteristics of Ideally Insurable Risks (6)
(1) Pure Risk – cannot benefit or gain; only loss or no loss
(2) Large # of similar loss exposures – for law of large numbers
(3) Determinable, definite, measurable loss – can quantify the loss
(4) accidental loss – must not be intentional
(5) Losses that are not catastrophic
(6) Premium and losses are economically feasible to insure – not too small or too large
Benefits for insurance (7)
(1) payment in event of loss
(2) reduction in uncertainty
(3) loss control
(4) more efficient use of resources
(5) support for credit
(6) satisfaction of legal requirements
(7) reduction of social burdens
Unique Characteristics of Insurance Contracts (6)
(1) Contract of Indemnity (requires insurable interest and allows for subrogation)
(2) Not usually transferable
(3) Conditional (on policy conditions)
(4) Exchange of Unequal Amts
(5) Adhesion (Insured must adhere to contract drawn up by insurer)
(6) Utmost good faith (disclose all relevant facts)
Types of Torts
(1) Intentional
(2) Negligence (requires duty, breach of duty, causation, and damages)
Other notes impacting proof:
(3) Strict or Absolute liability – business sponsoring a dangerous situation
(4) Negligence per se – criminal law broken, burden of proof on defendant
(5) Res Ipsa Ioquitor – thing speaks for itself, burdon of proof removed
Types of Damages
Compensatory or Actual
(1) General – pain, suffering, etc.
(2) Special / Consequential – out of pocket expenses, lost time from work, hospital bills
Punitive or Exemplary
Types of Insurance Orgs (6)
(1) Stock
(2) Mutual
(3) Reciprocal (like mutual but policy holders insure each other individually and not jointly and they have an attorney-in-fact)
(4) Lloyd’s – marketplace for insurance, not an insurer
(5) Pools – insurers pooling resources to cover loss exposures otherwise uninsurable
(6) Government insurers – fed or state
Insurance Operations (3)
(1) underwriting – process of selecting and classifying loss exposures, avoid adverse selection
(2) Loss adjustment – claims settlement, includes LAE
(3) Ratemaking – predicting future losses and allocating to classes of policyholders
Underwriting – Field vs Line vs Staff underwriters
Field underwriting performed by agents
Staff underwriters set underwriting policy
Line underwriting performs actual evaluation
Rates must be (3) by state regulations
(1) not unfairly discriminatory
(2) not too high
(3) must be adequate to support the exposures
Rate
price per unit of coverage
Rating Systems
Class or Individual
Purpose of insurance regulation
Consumer protection
Preservation of insurer solvency
Rate regulation
How regulators monitor insurers (5)
(1) licensing insurers
(2) licensing insurance company representatives
(3) policy form approval
(4) market conduct examinations
(5) consumer complaint investigation
Loss Ratio
Incurred losses (including loss expense) / earned premium
Expense ratio
incurred underwriting expenses / written premium
UW expenses includes commissions, general expenses, and taxes
Combined ratio
Loss ratio + Expense ratio
measures underwriting performance
Investment Income Ratio
Net investment income / earned premium
Overall operating ratio
combined ratio - net investment income
7 Questions to determine coverage
- Is the peril covered?
- Is the property covered?
- Is the type of loss covered?
- Is the person covered?
- Is the location covered?
- Is the time period covered?
- Are the hazards involved covered?
Proximate Cause
If a loss occurs, find the covered peril that may be the proximate cause
Basic Form Perils (11)
(1) Fire
(2) Lightning
(3) Windstorm or Hail
(4) Explosion
(5) Smoke
(6) Vandalism
(7) Aircraft or Vehicle Collision
(8) Riot or Civil Commotion
(9) Sinkhole Collapse
(10) Volcanic Activity
(11) Sprinkler leakage
Broad Form Perils (5)
11 Basic plus:
(1) Burglary/Break-in damage
(2) Falling Objects (like tree limbs)
(3) Weight of Ice and Snow
(4) Freezing of Plumbing
(5) Accidental Water Damage
Typical exclusions for special form (9)
(1) war and nuclear reaction
(2) governmental action
(3) earthquake
(4) flood
(5) wear and tear
(6) marring and scratching
(7) rust
(8) gradual seepage of water
(9) damage by insects, birds, animals
Real v Personal Property
Real – tangible property including land, structures, and vegetation attached to the land
Personal Property – tangible or intangible property that isn’t defined as real property
COPE is used for underwriting fire, stands for:
Construction
Occupancy
Protection
External Exposures
Types of Liability (9)
- Visitors Liability (invited or not)
- Public or Private Nuisance
- Product Liability
- Fiduciary Liability
- Vicarious Liability (masters responsibility for their subordinate, aka respondeat superior)
- Professional Liability
- Employers Liability (bodily injury arising from employment not covered by WC)
- Employment Practices Liability (wrongful termination, etc.)
- Motor Vehicle Liability
Types of Injuries (4)
- Bodily Injury (to someone else)
- Property Damage (to third party)
- Personal Injury (to myself)
- Advertising Injury
Covered Costs
- Damages
- Defense costs and expenses
- Litigation expenses
- Supplementary payments
- Prejudgment and post-judgment interest
- Medical payments
Types of triggers
(1) occurrence basis – loss occurred during policy period
(2) claims made basis – claims made during policy period or extended reporting period
Retroactive date
Date on or after which the covered event must take place
Extended Reporting Period
Extended period after termination of claims-made policy for reporting a claim
Occurrence Policy advantages / disadvantages
Advantages:
(1) can always go back to report the claim
(2) don’t have to worry about canceling the policy since coverage is locked in
(3) can stack coverage when courts find occurrences in successive policies for continuing harm
Disadvantages:
(1) insolvent insurers
(2) limits may not be sufficient due to inflation
Claims Made Policy Advantages and Disadvantages
Advantages:
(1) Limits are more accurate so less likely to be underinsured
(2) Cannot impose accumulating limits
Disadvantages:
(1) occurrence must be within retroactive and reporting dates
(2) coverage terms may be updated to be more restrictive
(3) must keep extending reporting period
Switching from Occurrence to Claims Made
Need to set retroactive date for first and all future claims made policies as the date of expiration for the occurrence policy
Basic Tail vs Full (Supplemental) Tail
Basic Tail allows for 5 years extended reporting from the policy expiration date
Full tail begins after basic tail expires and provides coverage
DICEE (insurance policy sections)
Declarations
Insuring Agreement
Conditions
Exclusions
Endorsements (Riders)
Personal and Commercial Lines Policies
Personal:
Personal Auto Policy (PAP)
Homeowners Policy
Personal Umbrella Policy
Commercial:
Commercial Package Policy
Commercial Umbrella Policy
Dwelling Fire Policy is for
Landlord’s
PAP Coverage Parts
A - Liability (BI and Property Damage to 3rd party)
B - Medical payments for insured and others in auto (or insured / family when pedestrian)
C - Uninsured / Underinsured motorist
D - Auto Physical Damage (Comp / Coll)
E - Duties after a loss
F - General provisions
Other coverages include PIP for no-fault
HO Policy Forms
HO-1: Basic Form
HO-2: Broad Form
HO-3: Special Form
HO-4: Contents Broad Form (renters)
HO-5: Comprehensive Form (includes dwelling, structures, personal prop)
HO-6: Unit-Owners Form (Condo owner)
HO-8: Modified coverage form
HO Section Coverages
A: Dwelling
B: Other Structures
C: Personal Property
D: Loss of use
E: Personal Liability
F: Medical payments to others
Popular HO endorsements
HO-61 - scheduled personal property
Inflation guard
Home Business coverage
Water back up and sump pump
When is personal umbrella insurance kick in? What is commonly excluded?
(1) only after underlying policies are exhausted
(2) common exclusions are professional liability and intentional tort
Types of Commercial Lines Policies (7)
- Commercial Property (losses to buildings, personal property, business personal property, business income, additional expenses)
- Commercial Crime
- Equipment Breakdown Protection
- Commercial Inland Marine (goods in transit or moveable)
- Commercial General Liability (for business not employees)
- Commercial Auto
- Commercial Umbrella
Monoline vs Package
Monoline is single line of coverage vs package provides more (CPP, BOP, MOP)
Creation of a contract (4)
- offer and acceptance
- consideration
- competent parties
- legal purpose
Coinsurance
% of ACV or replacement value required by the contract to ensure adequate coverage
Property Valuation Methods
- ACV = replacement cost - depreciation
- Replacement Cost = current cost for replacing property
- Market Value = value based on current marketplace
