Property and Casualty Insurance Principles and Concepts

Property Insurance: Transfers financial risk of property loss to the insurer. Covers "Real Property" (buildings) and "Personal Property" (Contents)

Liability Insurance: Protects the insured against claims from third parties. Applies to: Bodily injury, property damage, and personal injury

Insurable Interest: A financial stake in the subject of insurance.

Underwriting Purpose: Evaluate risk and determine premium to maintain profitability for claim payments and expenses coverage

Risk Appetite: The amount of risk an insurer is currently willing to accept

Causes for change in risk appetite::

Risks currently insured

Risks insurer wants to insure

Expected claim payments

Competition

Underwriter: Applies company underwriting guidelines

Underwriting Process (Step 1): Gather information

Underwriting Process ( Step 2): Evaluate Risk

Underwriting Process (Step 3): Accept/Decline

Underwriting Process (Step 4): Determine Premium

Underwriting Information Sources:

Policy application

Underwriting Maps

Third

Credit information

Inspections

Standard Rate: Normal/average risk

Substandard Rate:

Higher than normal risk

Higher Premium

Loss Ratio Formula: Losses Incurred/Earned Premiums.

Expense Ratio Formula: Expenses/Written Premiums.

Combined Ratio Formula: Losses + Expenses/Premiums.

Loss Reserves: Estimated amount needed for outstanding and future claims.

Statutory Reserves: Minimum funds required by state law to operate.

Producer: Insurance agent that gathers underwriting information to potentially make underwriting decisions

Field Underwriting: Preliminary underwriting performed by a producer.

Field underwriting purpose: To eliminate obviously unacceptable risks and streamline underwriting process

Credit Score: Information used to develop insurance score; helps predict future claims

FCRA Purpose: Regulates the use of consumer credit information.

Inspections: Used to determine if property meets eligibility guidelines

Insurance Rate: Price charged per unit of exposure

Rate Standards

Fair: not unfairly discriminatory

Rate Standards

Adequate: cover expected loss + profit

Rate Standards

Current: Revised as needed

Rate Standards

Loss Prevention: Encourage safety/loss prevention

Manual/Class Rating: Groups similar risks and applies the same rate.

Merit Rating: Uses individual characteristics with surcharges or discounts.

Judgment Rating: Rate assigned directly by an underwriter's professional judgment.

Rate Components

Loss Cost: Pure premium/cost; includes claim payments, claims administration, and claims investigation

Rate components

Loading: Administrative/Operating Expenses; salaries, overhead

Rate components

Profit: Insurer's desired profit

Loss Cost Multiplier: Factor accounting for insurer expenses and profit.

Premium: Loss Cost x Loss Cost Multiplier

Earned Premium: Premium for coverage already provided.

Unearned Premium: Premium for coverage not yet provided.

First

Party Claimant: Claims made against your own insurer.

Third

Party Claimant: Claims made against someone else's insurer.

Hazard: Condition that increases the probability or severity of loss

Physical Hazard: Tangible condition increasing risk, like poor maintenance.

Moral Hazard: Intentional behavior increasing risk for personal gain.

Morale Hazard: Unintentional carelessness or indifference due to having insurance.

Legal Hazard: Increased loss due to legal or court actions.

Peril: Specific event/circumstances that causes loss

Named Peril Policy: Covers only perils specifically listed in the policy.

Open Peril Policy: Covers all perils except specifically excluded ones.

Loss: Unintended/unforeseen reduction or destruction of economic value

Accident: Sudden, unforeseen, unexpected, and unintended event.

Occurrence: Broader event including repeated or continuous exposure.

Direct Loss: Damage directly caused by a peril.

Indirect Loss: Loss resulting as a consequence of a peril.

Time Element Coverage: Coverage for the loss of business income over a period of time that results from direct physical loss

Contingent Loss: Loss resulting from interruption of a customer's or supplier's business

Concurrent Causation: Multiple perils that cause a loss

Proximate Cause Doctrine: Peril that sets other causes in motion

"But For" Test: Courts may ask whether loss would have occured "but for" the particular cause

Standard Replacement Cost: The cost to repair/replace with like kind and quality with no deduction or depreciation

Functional Replacement Cost: Restores the original intended function without the use of like

kind materials

Guaranteed Replacement Cost: Pays entire replacement cost and can exceed policy limits.

ACV Formula: Replacement Cost

Depreciation.

Market Value: The price a property would sell for in marketplace

Agreed Value: The agreed upon value written beforehand for a specific amount; may use appraisal/photos/documentation. Covered total loss

insurer pays agreed amount

Stated Amount/Value: The stated property value by the insured; requires documentation

Valued Policy: Pays a predetermined amount after a loss.

Actual Loss Sustained: Primarily commercial. Measures the actual financial loss from business interruption that generally compares expected earnings vs. actual earnings after loss

Pair & Set Clause: Applies when property is more valuable as a pair/set. Insurer may repair/replace the missing/damaged part or pay difference between value before and after loss if the property is damaged

Broad Evidence Rule: ALL relevant evidence can be considered when determining property value

Specific Insurance: Covers property at one specific location.

Blanket Insurance: One policy covering multiple locations.

Cost Containment: Incentives for reducing loss frequency/severity

ISO 1 Construction: Frame construction, least fire resistant.

ISO 2 Construction: Jointed masonry

masonry exterior walls, combustible roofs/floors

ISO 3 Construction: Noncombustible

Metal walls, roofs, or floors

ISO 4 Construction: Masonry Noncombustible

Masonry walls, noncombustible roofs/floors

ISO 5 Construction: Modified Fire Resistive: 1

2 hour fire resistance

ISO 6 Construction: Fire

resistive construction, most fire resistant.

Liability Insurance: Protects insured against claims from third parties. Usually involves: bodily injury, property damage, negligence, and legal liability

Absolute Liability: Liability without the need to prove fault or negligence.

Strict Liability: Liability without fault, but certain defenses are allowed.

4 Liability Defenses:

Plaintiff's Fault

Act of God

Act of a third party

Consent of plaintiff

Negligence: Failure to use reasonable care/due diligence

Four Elements of Negligence: Duty, breach, proximate cause, and damages.

Element of negligence

Duty: Legal duty of care existed

Element of negligence

Breach: duty was violated

Element of negligence

Proximate clause: breach caused the damages