Study 7 Key Terms

Question 1

Define application

Answer 1

A request by an insured for insurance. Applications may be done verbally, in writing, or online. The insured provides information relating to the subject for insurance. The insurer then assesses this information and decides whether to accept the risk for insurance and on the terms of such acceptance.

Question 2

Define applicant

Answer 2

The person or firm requesting insurance. That individual answers verbal questions or completes and signs written forms that contain personal statements about himself.

Question 3

Define broker of record

Answer 3

The broker currently receiving a commission to handle a policy.

Question 4

Define disclosure

Answer 4

(1) General—The process of revealing all relevant facts.
(2) Law—The requirement that parties to a litigation disclose relevant information, or the material documents that a party intends to rely on to support his or her case, to the opposing side.

Question 5

Define representation

Answer 5

A statement or conduct made to influence an insurer to decide on a risk. The decision includes declining or accepting the risk and deciding the rate and premium to be charged. In insurance, these statements are said to be “material to the risk” and are enough to void a policy ab initio (Latin term meaning “from the beginning”).

Question 6

Define named insured

Answer 6

The person or party designated in the policy as the insured, as opposed to someone who may be covered by the policy but is not specifically named.

Question 7

Define effective date

Answer 7

The date of inception of an insurance policy, or the date additional coverages become effective.

Question 8

Define expiry

Answer 8

End of the policy period.

Question 9

Define loss payee

Answer 9

A person or an entity other than the named insured to whom the proceeds of insurance will be paid

Question 10

Define mortgagee

Answer 10

A special class of loss payee that has a registered interest on real property offered as security for the money that the mortgagee has loaned the property owner.

Question 11

Define mortgage clause

Answer 11

A clause in an insurance policy that stipulates the rights and obligations of the insurer and the mortgagee. The main characteristics of this clause are that the mortgagee is granted protection in the event a loss is denied due to the actions of the insured (provided that the mortgagee was not aware of the insured’s wrongful action) and, in return, the mortgagee accepts responsibility to advise the insurer of any misrepresentation or change in risk of which the mortgagee is aware.

Question 12

Define ratemaking

Answer 12

The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries.

Question 13

Define rate

Answer 13

Amount charged to an insured that reflects the expectation of loss for a covered risk, insurance company expenses, and profit. In other words, it is the basis of premium calculation for the insurance provided for the exposure.

Question 14

Define premium

Answer 14

The price of insurance protection for a specified risk for a specified period of time.

Question 15

Define law or large numbers

Answer 15

The mathematical premise that states that the degree of uncertainty is reduced as the number of events increases.

Question 16

Define loss probability

Answer 16

The likelihood of a risk resulting in a loss, taking into account all its various hazards and protections

Question 17

Define pure premium

Answer 17

Portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses.

Question 18

Define loading

Answer 18

An additional charge included in an insurance rate to reflect a hazard not contemplated in the basic rate for the class.

Question 19

Define expense loading

Answer 19

The part of a premium rate that represents the cost to the insurer of producing and maintaining the policy.

Question 20

Define acquisition cost

Answer 20

The cost of putting business on the books and acquiring the premium. The items involved are not standard with all insurers, but generally may include such items as agents’/ brokers’ commissions, field representatives’ costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation.

Question 21

Define exposure

Answer 21

The hazard threatening a risk because of external or internal physical conditions.

Question 22

Define special hazards

Answer 22

Foreseen hazards/risks common to certain types of businesses that are not covered in an ordinary policy. For example, woodworking plants and paint shops.

Question 23

Define underwriting notes

Answer 23

The rules used by insurance companies to assess the risk they are taking on by insuring a particular customer. These rules are set individually by insurance companies.

Question 24

Define retention

Answer 24

The amount of liability the ceding company (primary insurer) retains for its own account. It may be a percentage or a dollar amount of each risk.

Question 25

Define manual rating

Answer 25

A pricing method in which an insurer uses rates that are based on its own experience rather than on that of a specific group for which it is calculating a premium.