Property and Casualty: Overview of the Insurance Industry

Actuarial department

This department calculates policy rates, reserves, and dividends.

Alien Insurer

An insurer that is authorized in any state within the U.S., but its principal office is located outside this country.

Admitted Insurer

An authorized insurer who has received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

Broker

These individuals represent themselves and the insured (i.e., the client or customer).

Captive Insurer

An issuer established and owned by a parent firm for the purpose of insuring the parent firm's loss exposure.

Certificate of Authority

A license issued to an insurer by a department of insurance (or equivalent state agency) that authorizes that company to conduct insurance business in that particular state.

Claims Department

This department is responsible for processing, investigating, and paying claims.

Divisible Surplus

The amount of earnings paid to policyowners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.

Domestic Insurer

An insurer with its principal or home office in a state where it is authorized.

Foreign Insurer

An insurer that is authorized in one state, but its charter or principal office is in another State.

Fraternal Benefit Society

Nonprofit benevolent organizations that provide insurance to their members.

Industrial Insurer

A special branch of the industry primarily providing policies with small face amounts with weekly premiums. They are also referred to as home service or debit insurers.

Insured

The customer covered under the insurance policy.

Insurer

The the insurance company.

Lloyds of London

They are NOT an insurer but an association or group of individuals or companies that underwrite unusual insurance.

Multi-line Insurer

An insurance company or independent agent that provides a one-stop shop for businesses or individuals seeking coverage for all their insurance needs. For example, many large insurers offer individual policies for automobile, homeowner, long-term care, life and health insurance needs.

Mutual Insurance Company

Insurance companies characterized by having no capital stock; it is owned by their policy owners and usually issue participating insurance.

Non-admitted Insurer

An insurer who has not received a certificate of authority from a state's department of insurance authorizing them to conduct insurance business in that state.

Non-participating plan

This plan is insurance under which the insured is not entitled to share in the company's divisible surplus.

Participating Plan

An insurance policy under which the policy owner shares in the company's earnings through receipt of dividends.

Private (Commercial) Insurer

Companies owned by private citizens or groups which offer one or more lines of insurance. Commercial insurers are NOT government owned.

Reciprocal Insurer

An unincorporated organization where all members insure one another.

Reinsurance

The acceptance by one or more insurers, called reinsurers, of a portion of the risk underwritten by another insurer who has contracted for the entire coverage.

• Insurance for insurance companies

• Helps insurers handle large or catastrophic losses

• Involves Ceding Company and Reinsurer

• Keeps the insurance industry state and growing

• Example: Springfield Insurance sells 1,000 home policies. If a tornado destroys half of Springfield, Springfield Insurance could go bankrupt paying all claims. To protect itself, it cedes/transfers part of the risk to Capital Reinsurance Co., which helps pay Claims if such a disaster happens.

Reinsurer

A company that provides financial protection to insurance companies. Reinsurers handle risks that are too large for insurance companies to handle on their own and make it possible for insurers to obtain more business than they would otherwise be able to. Takes on the risk for a premium

Risk Retention Group

A group-owned liability insurer that assumes and spreads product liability and other forms of commercial liability risks among its members.

Self-Insurers

They establish a self-funded plan to cover potential losses instead of transferring the risk to an insurance company.

Stock Insurance Company

An insurance company owned and controlled by a group of stockholders (or shareholders) whose investment in the company provides the safety margin necessary for the issuance of guaranteed, fixed premium, non-participating policies.

Surplus Lines Insurance

Non-traditional insurance only available from a surplus lines insurer. They offer coverage for substandard or unusual risks not available through private or commercial carriers.

Underwriting Department

A department within an insurance company responsible for reviewing applications, approving, or declining applications, and assigning risk classifications.

Insurance

• Provides a financial cushion to any entity that is exposed to risks

• Considered to be the most cost-effective means to reduce financial uncertainty as a result of unforeseen events

• Helps people manage financial risk by transferring it to a company (the insurer) through a legal contract

• Benefits:

  • Loss Control

  • Loss Payments

  • Securing credit

• How it works:

  • The insured pays premiums (money) to the insurance company

  • The insurer promises to cover losses if certain bad events happen

  • Insurance helps people use their money more wisely instead of saving huge amounts “just in case”

The transfer of risk through the pooling or accumulation of funds.

Loss Control

Actions and strategies taken to reduce the frequency and severity if a loss

• Insurance Companies incentivize these strategies by providing discounts on premiums to customers

• Employee safety devices included

• Helps lower premiums because taking steps to prevent loss can reduce costs

Indemnity

The purpose is to restore the insured to the same financial position they were in before the loss

The protection from loss or financial burden.

Restore customers to their financial status prior to loss.

Compensation for loss.

Insurance pays for damage or loss that has happened (or may happen).

• Ownership Required

• No Profit Rule

• Pay on Behalf Of

Contract of Indemnity

Insurers make payments to the insured when a loss occurs due to contract terms

Risk Management

Involves identifying and handling potential loss or liability

Finding and handling possible losses before they happen

Steps

• Find possible risks

• Choose how to handle them

• Take Action

• Review and adjust as needed. For example, Marge Checks the house for fire risks, buys insurance, and keeps updating

5 Main Methods of Handling Risk:

• Risk Retention

• Risk Sharing

• Risk Avoidance

• Risk Reduction

• Risk Transfer

Risk Transfer

Individuals can transfer risk to an insurer by purchasing insurance. Move the risk to someone else (like an insurer)

Risk

The chance or uncertainty of a loss occurring (e.g., theft, damage, personal injury)

Pure Risk

Only a chance of loss, insurable (e.g., fire, theft)

Speculative Risk

Chance of loss or gain, not insurable (e.g, investing, gambling).

Elements of Insurable Risk

• Accidental (Due to chance)

• Definite and measurable

• Predictable

• Not Catastrophic

• Large Number of Similar Risks

• Randomly Selected (Due to chance)

Loss Exposure

The possibility of a loss (it might happen)

The chance of financial loss because of risk

Level of exposure changes based on habits, location, or lifestyle.

2 types

• Property Loss Exposure

• Liability Loss Exposure

Losing or damaging your stuff, for example, The Simpsons’ house burns down or Bart breaks the TV.

Liability Loss Exposure

The chance of having to pay for injury or damage you cause to someone else. For example, Homer rear-ends Ned’s car - he must pay for Ned’s bumper and hospital bills.

Property Loss Exposure

• The chance of losing the value or use of something you own. For example, Homer’s car got wrecked, so he pays for repairs and can’t drive for a week.

• Types of Property Damage

  • Physical Damage

  • Destruction

  • Loss of functionality

  • Loss of use

Losing or damaging your stuff, for example, The Simpsons’ house burns down or Bart breaks the TV.

Physical Damage

Bart breaks the TV

Destruction

House catches fire

Loss of functionality

Marge’s oven stops working

Loss of use

Homer can’t use his car while it’s being fixed

Loss

Actual injury or damage covered by insurance. It’s what the claim is for. The actual damage or injury that did happen.

Property Loss

The insured suffers damage to their own things. For example, Homer’s garage burns down.

Liability Loss

The insured causes harm to someone else.

Being responsible for someone else’s loss. For example, Homer Crashes into Ned Flander’s fence- Homer must pay for it.

Peril

An event or situation that causes damage or loss

Agent’s Role

They must know which perils

a policy protects against and which perils

a policy doesn’t protect against

Hazard

Anything that increases the chance or severity of a loss

4 Types

• Physical Hazard

• Moral Hazard

• Morale Hazard

• Legal Hazard

Physical Hazard

Something you can see or touch

Moral Hazard

Dishonest behavior that increases risk

Morale Hazard

Careless attitude because you have insurance

Legal Hazard

Laws or court rulings that raise the chance of claims

Pooling of Risk/ Risk Pooling

Everyone pays a small amount (premium) into a big money pool

• The few people who have losses use money from this pool

• Because not everyone has a loss, insurance coverage stays affordable

No Profit Rule

You can’t get more money than your actual loss.

Pay on Behalf Of

Sometimes the insurance company pays others directly instead of the insured

Risk Retention

Keep the risk and pay for small losses yourself

Risk Sharing

Split the risk with others

Risk Avoidance

Don’t do the risky thing

Risk Reduction

Make the risk smaller

Adverse Selection

• When an applicant hides or misstates their true risk

• Causes insurer to undercharge for high-risk clients

• Underwriting helps detect and rate risks correctly

• Example: Homer says he drives less than he really does → higher risk

Law of Large Numbers

• The bigger the group, the more accurate the loss prediction.

• Balances high-risk and low-risk policyholders.

• Example: Homer (bad driver) + Marge (good driver) = average group risk.

• More policies = fairer, stable rates.

Ceding Company

The original insurer that transfers (cedes) part of the risk to another insurer.

Rate Filing & Forms Services

• Insurers must file rates and policy forms with the state.

• Many use standard forms from advisory groups to save time.

• Ensures clear, legal, and fair policies for consumers.

Insurance Services Office (ISO)

• Creates standard insurance forms & rules.

• Provides data, statistics, rating tools, fraud detection, and risk consulting.

• Used by most insurers in the U.S.

• Exam Tip: ISO forms are industry standard; state laws may modify them.

AAIS (American Association of Insurance Services)

• Collects data, develops policy forms, and files with states.

• Works like ISO; one of the two main rating groups.

SFAA (Surety & Fidelity Association of America)

• Focuses on the bonding industry.

• Tracks default rates, promotes education, and advises on bond risk management.

NCCI (National Council on Compensation Insurance)

• Handles workers’ compensation data & trends.

• Sets rate recommendations and supports a stable workers’ comp system.

Federal Regulation

• Protects public by keeping insurers solvent and ensuring fair practices.

• Market Conduct Laws: regulate sales, underwriting, rates, and claims.

• Agents must know and follow all insurance laws.

McCarran-Ferguson Act (1945)

• Insurance is mainly regulated by states, not federal gov.

• Still subject to federal antitrust laws unless:

  1. It’s the business of insurance.

  2. It’s state-regulated.

  3. No boycott or coercion.

Gramm-Leach-Bliley Act (1999)

• Protects consumer financial info.

• 3 Rules:

  1. Privacy Rule – limits info sharing.

  2. Safeguards Rule – protect data securely.

  3. Pretexting Rule – no false info access.

• Insurers must give privacy notices before or at application.

• Also allows banks + insurers to operate together again.

Fair Credit Reporting Act (FCRA)

• Ensures accuracy, fairness, privacy of credit info.

• Insurers must:

  • Use reports only for legal purposes.

  • Notify if adverse action is taken.

  • Disclose credit agency name.

  • Correct errors within 30 days.

  • Inform consumers about negative info.

• Exam Tip: Know all insurer duties under FCRA!

Telemarketing Sales Rule

• Telemarketers must:

  • Be honest and give clear info.

  • Call only during allowed hours.

  • Stop calling if asked.

CAN-SPAM Act (2003)

• Sets rules for commercial emails.

• Must include:

  • Unsubscribe link.

  • True header info.

  • At least one sentence and no blank messages.

  • Unsubscribe option at the bottom.

Terrorism Risk Insurance Act (TRIA)

• Federal program sharing terrorism-related losses with insurers.

• Created after 9/11 to stabilize markets.

• Applies to certified acts of terrorism.

• Gov + Insurers share losses.

Violent Crime Control & Law Enforcement Act (1994)

• Bans people with crimes of dishonesty or breach of trust from working in insurance.

• Such people = Prohibited Persons.

• May work only with written consent (Form 1033) from the state regulator.

• Insurers must verify employees aren’t prohibited.