Unit 3: Basics of Property and Casualty Insurance

Question 1

Property Insurance

Answer 1

• Protect the insured from loss caused by damage from a covered peril to insured property
• Covers first party losses -> “my stuff” (buildings (real property) and personal belongings

Question 2

Casualty Insurance

Answer 2

• Often called liability insurance, protect an individual or business when it is found legally liable for negligent acts or omissions that cause injury or property damage to others
• Pays the “other guy”

Question 3

Policy Sections DICEE

Answer 3

• Declarations
• Insuring agreements
• Conditions
• Endorsement
• Exclusions

Question 4

Additional/Supplementary Coverage

Answer 4

• Payment for additional expenses not normally covered
• May have separate limit of insurance

Question 5

Insureds

Answer 5

• Named insured – listed on the declarations
• First-named insured – first on the declarations (commercial policies when multiple partners)
• Insureds – by definition (others such as named insured’s resident relatives)
• Additional insured – added by endorsement

Question 6

Policy Period and Policy Territory

Answer 6

• Policy period: when the policy begins and ends
• Policy territory: where a loss must occur

Question 7

Cancellation

Answer 7

Occurs before the policy’s expiration date

• Insurer cancellation requires advance notice
• Full refund of unearned premium – pro rata
• Insured cancellation – no advance notice
• Partial refund of unearned premium – short rate

Question 8

Nonrenewal

Answer 8

Occurs at the expiration date

• Company must give advance notice
• No advance notice required by the insured

Question 9

Deductible

Answer 9

• Amount of the loss paid by the insured
• The higher the deductible, the lower th epremium

Question 10

Multiple policies insuring the same loss

Answer 10

• Primary/excess: primary policy pays first; excess pays what’s left (if any)
• Equal shares: each policy pays the same up to the smallest policy’s limit
• Pro rata: each policy pays its share according to the total insurance

Question 11

Named Insured Duties after Loss (PPC-MSC)

Answer 11

• Prompt notice to insurer
• Protect property from further damage
• Complete proof of loss (if asked)
• Make property available for inspection
• Submit to examination under oath if required
• Cooperate with insurer

Question 12

Assignment

Answer 12

Policy cannot be transferred without written consent from the insurer

Question 13

Abandonment

Answer 13

Insured cannot abandon property that can be repaired and expect to be paid as if the loss was total

Question 14

Salvage

Answer 14

Insurer has the right of salvage, not the insured

Salvaged property can lower claim cost for the insurance company

Question 15

Liberalization

Answer 15

• Extended coverage to insured
• No additional premium charged
• No action required by insured

Question 16

Subrogation

Answer 16

Insurer has the right to sue an at-fault party for damages the insurer had to pay the insured

Common when at-fault party does not have insurance

Question 17

Insurable Interest

Answer 17

• Financial risk of loss
• Must be present at time of loss

Question 18

Underwriting

Answer 18

• Process of evaluating a risk
• Field underwriting is performed by the agent or producer
• Application is the primary source of information
• Company underwriters decide if a policy is to be issued

Question 19

Binder

Answer 19

• Temporary insurance given by the agent verbally or in writing
• Can be cancelled by the company
• Does not guarantee a policy will be issued
• Automatically ends if a policy is issued by the underwriter

Question 20

Loss ratio

Answer 20

Compares company’s operations year over year

Loss ratio = (Incurred losses)/(Earned premiums)

Question 21

Expense Ratio

Answer 21

Cost of doing business

Expense ratio = (Underwriting expenses)/(Written premium)

Question 22

Combined ratio

Answer 22

Combined ratio = expense ratio + loss ratio

• 100% is breakeven point
• 100% = underwriting profit
• > 100% = underwriting loss

Question 23

Rating a Risk

Answer 23

• Judgment: no set rates; based upon underwriter’s experience
• Manual (class): set rates for specific risk classes
• Experience rating (merit): based on insured’s claim history; increases or decreases premium

Question 24

Loss costs

Answer 24

Pure claims data

• No operating expenses included
• No profits included

Question 25

Rate Components

Answer 25

• Loss costs (estimate of claim costs)
• Claims handling costs
• Operating expenses
• Profit

Question 26

Fair Credit Reporting Act (FCRA)

Answer 26

• All insurers and producers must comply
• Notice to the applicant within three days after report was requested
• Maximum penalty - $5,000, 1 year in prison, or both

Question 27

Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA)

Answer 27

• Result of 9/11 Attacks on US
• Congress originally enacted in 2002
• Limits exposure of insurers in case of another catastrophic event
• Triggering event - $200 million

Question 28

Gramm-Leach-Bliley Act (GLBA) (15 USC Section 206)

Answer 28

• Consumer: anyone about whom information is collected
• Customer: someone who has an ongoing relationship with a financial institution
• The opportunity to opt out must be offered by financial institution when an account is established and annually thereafter

Question 29

Fraud and False Statements

Answer 29

It is illegal to make false statements

If guilty:

• Fine, up to 10 years in prison, or both
• Up to 15 years in prison if false statements jeopardize insurer