Unit 2 Principles and Concepts

Depreciation

Reduction in value, particularly due to wear and tear

Earned premium

The portion of premium paid in advance that now belongs to the insurer for providing coverage for a specified period of time

Exposure units

Used as a measure of the rating units or the premium base of a risk

Premium

Exposure units multiped by the rates results in the

Implied warranty

A legal term meaning that a product is suitable for it’s intended purpose and that it fits an ordinary buyer’s expectations

Inception

The date which the insurance policy goes into effect

Negligence

The failure to use the care that a reasonable, prudent person would under the same or similar circumstances

Obsolescence

Depreciation in the value of a property due to becoming outdated

Statute

A written law passed by legislative body

Insurable Interest

The insured must have an _______ in the person or property covered by an insurance policy

Financial, blood, and business

Three elements of insurable interest

At the time of the loss

In property and casualty insurance, insurable interest must exist

Underwriting

The process of rewriting applications for insurance and the information on the application. In other words, it is a risk selection process

Underwriters function

The operations of an insurance company where an employee is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions, and rates for that policy

Insurance rate

The amount charged for a particular amount of coverage

Insurance rate

The actuarially concluded unit of cost that is applied against the basis from which a policy premium is developed, or the charge per unit of exposure

Property values, revenue receipts, or payroll

Rates may be developed by

Class and individual

Two types of rates

Class rating (manual rating)

The practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics

All drivers of a given gender and age driving in the same geographic area

Example of class rating

Permits the insurer to apply a single rate to a large number of insureds, simplifying the process of determining their premiums

What is the advantage of the class rating system

Class rating

The most common approach used by the insurance industry and is used in life and most property and casualty fields

Individual rates

Not enough similar exposures to justify a class rate

Specific risk factors: lowering or raising rates based on the type of risk

When applying individual rates, underwriters start with a class rate, but then modify it according to the

Judgement, scheduling, experience, retrospective, and merit

5 Basic individual rate making approaches

Judgement rating

Used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class

Ocean marine insurance

When would judgement rating be used

A rated

A risk that has been judgement rated

Schedule rating

Developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure

Iso class rating program

Why is schedule rating used less frequently

Commercial building

What used to be scheduled rated but no longer is because of ISO class rating program

Largest and most complex risks

What is the main use of schedule rating now

Experience rating

The insured’s own past loss experience enters into the determination of the final premium

Retrospective rating

Self rating plan under which that actual losses during the policy period determine the final premium, subject to a minimum or maximum premium

A deposit premium at the inception of the policy

What is required when using retrospective rating

Merit rating

The insured’s premium is based not on the actual loss record, but on the factors that indicate the probability that loss will occur

Auto insurance

When is merit rating most commonly used

Bad driving record that does not involve any at fault accidents

Example of merit rating

Loss costs

Rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expense) or profit and are based on historical aggregate loss and loss adjustment expenses rejected through development to their ultimate value and through trending to a future point in time

Components

Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits

Peril

Cause of loss

Fire, wind, hail, and explosions

Perils insured against in standard property policies include

Named peril

Describes the breadth of coverage provided under an insurance policy form that lists specific covered perils

Open peril

Describes the breadth of coverage under an insurance policy form that insures against any risk of loss that is not specifically excluded

Direct and indirect

What are the types of property losses that an individual or a business may be exposed to

Direct

Property insurance only covers what type of loss

Direct loss

Direct physical damage to building and/or personal property

Indirect loss

Related to direct loss, but insurance coverage to protect against these losses often is added to property insurance policies

Proximate cause of loss

Direct loss also includes other damage where the insured peril was the

Indirect/Consequential losses

Considered a result of direct loss. Result from the time it takes to repair or replace damaged property

Tort

A wrongful act or the violation of someone’s rights that leads to legal liability

Tortfeasor

A person who commits a tort

Intentional or unintentional

How are torts classified

True

Unintentional tort is referred to as negligence

Intentional tort

Any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party

Unintentional tort

The result of acting without proper care

Legal duty, standard of care, unbroken chain of events (proximate cause), and actual loss or damage

What are the elements considered in establishing negligence

Proximate cause

An act or events considered a natural and reasonable foreseeable cause of the damage or event that occurs and damages property or injures a plaintiff

Negligence

What must have been the proximate cause of damage if the injured party is to collect for the damage

Direct liability

Negligence must have been the cause without which the accident would not have happened

Actual injury or damage

What has to exist for legal liability in terms of an individuals negligent behaviors

True

An individual’s negligent behavior does not necessarily mean that a person will be held legally liable

Assumption risk

When a person recognizes and understands that there is danger involved in an activity and voluntarily chooses to encounter it

Comparative negligence

The other parties negligence or fault will not necessarily defeat the claim, but will be used to mitigate the damages payable to the other party

Pure comparative negligence

allows the plaintiff to recover the damages, as long as the plaintiff is not 100% negligent

Plaintiff

The party who brings the lawsuit

Modified comparative negligence

Equal to or greater than rule, the injured party may only recover damages if their fault is less than that of the defendant

Contributory negligence

The injured party must be completely free of fault in order to collect

True

Any negligence on the part of the injured party that contributed to the injury, however slight, normally will defeat the claim

The last clear rule chance

A variation of contributory negligence that may be used as a defense by a negligent party who can show the injured party has the last clear chance to avoid the loss, but did not

Intervening cause

Any event in an accident that happened after the insured’s negligent act and contributed to or enhanced an injury of another person or property damage

Statute of limitation

Some states have set a time limit in which an injured party may bring legal action against party for certain types of injures

Bodily injury and property damage

A tort may result in what form Pro

Property damage

The extend of the loss is usually simple to determine; it is measure by the actual monetary loss the injured party suffered

The value of the property damaged or destroyed and the loss of use of that asset

How is monetary loss measure

Bodily injury

More difficult to determine the loss monetarily. Not only could it lead to claims for medical expenses and lost wages, but also for disfigurement, pain and suffering, mental anguish, and loss of consortium

Special and general

Classes of compensatory damages

Special damages

Specific out of pocket expenses for medical, miscellaneous expenses, and loss of wages

General damages

compensate the injured person for pain and suffering, mental anguish, disfigurement, and other similar types of losses

Punitive damage

A form of punishment for extreme outrageous behavior, gross negligence, or willful intent

Absolute liability

Imposed upon a person or company engaged in hazardous or potentially dangerous business who, by negligence or by an omission, causes harm or injury to another person or property

Swimming pool or selling explosives

Example of absolute liability

Strict liability

Commonly applied in product liability cases. A person or business that manufactures or sells a product makes an implied warranty that the product is safe. Business is then liable if product is defective regardless of fault or negligence

Vicarious liabiility

Transfers the liability from one person to another person who would probably have greater ability to pay. “A master is liable for the acts of their servants”

Blanket insurance

A sine property insurance policy that provides coverage for multiple classes of property at one location, or for one or more classes of property at multiple locations. All inured properties are written for one total amount of insurance

Specific insurance

A property insurance policy that covers a specific kind or unit of property for a certain amount of insurance

Fire resistive, modified fire resistive, masonry noncombustible, noncombustible, joisted masonry, and frame

Basic classes of construction used for underwriting

Fire resistive

Buildings constructed with masonry and/or other materials with a fire resistance rating of 2 or more

Fire resistive

Which of the basic classes of construction used for underwriting usually receives the most favorable rating?

Modified fire resistive

Buildings constructed with masonry and/or other materials with a fire resistance rating between 1 hour and 2 hours

Masonry noncombustibe

Buildings constructed with masonry or fire resistive walls and noncombustible or slow burning floors and roof

Noncombistible

Buildings constructed of noncombustible materials (materials that will not ignite and burn when subjected to fire)

Joisted masonry

Buildings constructed with masonry or fire resistive walls and combustible floors and roof

Frame

Buildings constructed of combustible materials, or with noncombustible or slow burning walls and combustible floors and roof

Frame

Which of the basic classes of construction used for underwriting usually receives the least favorable rating?

Loss valuation

Factor determining the premium charged and the amount of insurance requires

Actual cash value (ACV)

Reinforces the principle of indemnity because it recognizes the reduction of value of property as it ages and becomes subject to wear and tear and obsolescence

Current Replacement Cost - Depreciation = Actual Cash Value

How is actual cash calculated

Repalcement cost

Thee cost to replace damaged property with like kind and quality at today’s price, without any deduction for depreciation

Following a loss it may provide the insured with a settlement in excess of the property’ actual value

How is replacement cost different from indemnity