ExamFX (Property and Casualty insurance Basics)

Property and Casualty Insurance Basics

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

Implied warranty

A product is suitable for its independent purpose and that it fits an ordinary buyer’s expectations

Inception

The date at which the insurance policy goes into effect is

Negligence

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

Obsolescence

Depreciation in the value of a property due to becoming outdated.

Statute

A written law passed by a legislative body or government.

Insurable interest

A financial stake in the property or life of an individual, which is necessary for insurance coverage to be valid.

Underwritting

The process of evaluating risks and determining the terms and conditions of insurance coverage for applicants.

A riskassessment conducted by an insurer to decide on policy terms.

Loss ratio

A formula used by insurance companies to compare premium income to losses, including claims paid and claim related expenses.

Loss ratio formula

(Incurred losses + Loss adjusting expense) / Earned premiums

Geographical redlining

Practice of refusing to serve a particular area solely because of its location

Insurance risk score or insurance credit score

A numerical representation of an individual's risk based on their credit history and other factors, used by insurers to determine premium pricing.

Insurance rate

The amount charged by an insurance company for coverage, typically calculated based on various risk factors and is expressed as a premium.

Class rating

A system used by insurers to categorize similar risks together, allowing for standardized pricing based on shared characteristics.

5 basic individual rate-making approaches

Judgement rating

Schedule rating

Experience rating

Retrospective rating

Merit rating

Judgement Rating

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

It involves a skilled underwriter assessing the risk based on their expertise and experience, determining the appropriate rate for coverage.

Schedule Rating

The rates are developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for an individual exposure.

This method allows adjustments based on specific risk factors and individual characteristics of the insured.

Experience Rating

A method that adjusts the premium based on an insured's past loss experience compared to the expected loss experience of the group. This approach rewards good experience with lower rates and penalizes poor experience with higher rates.

Retrospective Rating

A premium rating approach where the final premium is determined by the insured's loss experience over the policy period. It allows for adjustments to the premium based on actual losses incurred, often resulting in a refund or additional charge.

Merit rating

Commonly used in personal auto insurance. The insured’s premium is based not on the actual loss record, but on other factors that indicate the probability that a loss will occur.

Loss costs

The portions of the premium that represent the expected costs of claims and loss adjustments, excluding expenses and profits.

Components

Factors that determine rates including loss reserves, expenses, and profit margin.

Elements of a negligent act

Legal duty

Standard of care

Unbroken chain of events (proximate cause)

Actual loss or damage

Comparative negligence

A legal doctrine allowing damages to be reduced based on the degree of fault of each party involved in an accident, thereby assessing liability in proportion to the parties' respective negligence.

The fault is shared between the parties involved.

Contributory negligence

A legal doctrine that prevents a party from recovering damages if they are found to be at all responsible for the accident, meaning their own negligence contributed to the harm they suffered.

“The last clear chance rule” is a legal doctrine that may allow recovery for a party who was negligent if they can prove that the other party had a final opportunity to avoid the accident.

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

Special damages

Compensatory damages awarded for specific losses, such as medical expenses and lost wages, directly resulting from an injury.

General damages

Compensatory damages awarded for non-economic losses, such as pain and suffering, emotional distress, and loss of companionship, that result from an injury.

Punitive damages

Form of punishment for extreme outrageous behavior, gross negligence, or willful intent.

Absolute liability

A legal doctrine that holds an individual or entity liable for their actions or products regardless of fault or negligence, often applied in cases involving inherently dangerous activities.

ex. owning a swimming pool, harboring wild animals, or selling explosives.

Strict liability

Commonly applied in product liability cases. A person of business that manufactures or sells a product can be held liable for any injuries caused by the product, even if they were not negligent.

Vicarious liability

A legal concept where one party is held liable for the actions of another party, typically in employer-employee relationships, even if the employer was not directly at fault.

Peril

specific cause of loss

Named Peril

coverage for specific risks listed in an insurance policy.

Open Peril

coverage for all risks except those specifically excluded in the policy.

Direct loss

a financial loss directly resulting from a covered peril.

Indirect loss

a financial loss that occurs as a consequence of a direct loss, such as loss of rental income or additional living expenses.

Proximate cause of loss

the primary event or action that leads to a loss, establishing a direct link between the cause and the resulting damage.

Blanket insurance

a type of insurance coverage that applies to multiple properties or types of insurance, providing a single limit for all properties within the policy. This insurance simplifies management by covering various assets under one policy, often leading to easier premium calculations and claims.

Specific insurance

Covers a specific kind or unit of property for a specific amount of insurance.

Types of construction

Fire-resistive (2 or more hours)

Modified fire-resistive (1-2 hours)

Masonry noncombustible (non-combustible or slow burning)
Noncombustible (material that will not ignite or burn)

Joisted masonry (masonry and combustible floors and roof)

Frame (combustible material)

Loss valuation

Factor in determining the premium charge and the amount of insurance required based on the value of the property at the time of loss or damage, considering factors such as depreciation.

Actual Cash Value (ACV)

Reinforces the principal 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 minus depreciation.

Replacement cost

The amount needed to replace a damaged property with a new one of similar kind and quality, without deducting for depreciation. It accounts for current market prices of materials and labor.

Guaranteed replacement cost

A coverage option that pays for the full cost of replacing a damaged property with a new one, regardless of the policy limit, ensuring that insured can fully restore their property without depreciation deductions. However, Insurers usually limit the amount they will pay to replace or rebuild the property to up to 20% above the amount of insurance

Functional replacement cost

A valuation method that determines the cost to replace damaged property with a functional equivalent, rather than a new, identical item. This approach is often used for older structures or unique properties where exact replacements may not be feasible.

Market value

The price a property would sell for in a competitive market, considering its condition and location. It reflects factors such as recent sales of similar properties and economic conditions.

Takes into consideration the value of land and location, rather than just the cost of replacement or construction.

Agreed value

A valuation method where the insured and insurer agree on a specific amount of coverage for a property at the time the policy is written. This amount is paid in the event of a total loss, without depreciation being applied.

stated amount

A valuation method where the insured specifies a dollar amount for coverage, typically used for unique items or properties. In the event of a loss, the insurer pays this stated amount with no depreciation applied.

Policy structure (DICE)

Declarations

Definitions

Insuring agreement

Additional coverage

Conditions

Endorsements

Exclusions and policy limits

Declarations

Contains basic underwriting information:

Insured’s name, address, amount of coverage and premiums, and description of insured locations. It also contains any supplemental representations by the insured. This is usually the 1st page of the policy.

Definitions

The sections of an insurance policy that outline the terms, coverages, and responsibilities of the insurer and the insured.

Clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to their meaning in that contract.

Insuring agreement or clause

The part of an insurance policy that outlines the specific coverage provided, the perils covered, and the obligations of the insurer to pay claims for losses that are included under the agreed terms.

Obligations of the insurance company to provide the insurance coverages as stated in the policy.

Parties to the contract, effective and renewal dates, description of coverage provided, and perils.

Additional or supplementary coverage

Provides an additional amount of coverage for a specific loss expense, at no additional cost to the insured.

This type of coverage addresses certain risks not included in the standard policy, offering enhanced protection. It may also cover losses that occur due to unforeseen circumstances or natural disasters, ideal for comprehensive risk management.

Conditions

The obligations and duties of the insured and insurer, detailing the requirements that must be fulfilled for coverage to apply. Conditions often include deadlines for filing claims, maintenance of property, and notifying the insurer of changes.

The right of theinsurer to inspect the property and investigate claims.

Ways in which policy may be changed

How refunds will be processed if policy is cancelled before expiration date.

ex. Inspections, notification requirements, and cooperation during investigation.

Liberalization clause

Ensures that if the insurer introduces improved coverage free of charge, the insured will get the benefit of new coverage immediately and will not have to wait for policy renewal.

Exclusions

Section of an insurance policy details the perils that are not insured against and what persons are not insured.

Endorsements

Provisions that modify the coverage of an insurance policy, adding or excluding benefits and altering terms. Must be in writing, attached to the policy and signed by an exeutive officer

Common policy provisions

Insureds - named, first named and additional

Policy period

Policy territory

Cancellation and nonrenewal

Earned premium calculation

Deductibles

Coinsurance

Self-insured retention

Other insurance

Limits of liability

Ordinance or law

These are standard terms and conditions included in insurance policies that outline the rights and responsibilities of both the insured and the insurer. They cover aspects like duration of coverage, geographical limits, cancellation procedures, and financial arrangements.

Named insured

Individual(s) whose name appears on the policy’s declarations

First named insured

The individual or entity listed first on the policy's declarations, having specific rights and responsibilities, including the authority to make changes to the policy.

Cancellation

The termination of an insurance policy by either the insurer or the insured before its expiration date, following specific procedures outlined in the policy.

Nonrenewal

The termination of an insurance policy at the end of the policy period by the insurer, without offering to renew it.

Earned premium

Portion of a premium that an insurance company earns for providing coverage for a specified period of time

(Amount of policy / term of policy) X Calculation period

short rate cancellation

applied when the insured cancels the policy prior to its renewal date.

Deductible

dollar amount an insured must pay on a claim before the insurance policy provides coverage. A higher deductible amount usually lowers the premium

Coinsurance

A clause in an insurance policy that requires the insured to bear a portion of the loss if the property is underinsured, usually expressed as a percentage. This ensures that the insured maintains a certain level of coverage to avoid penalties in the event of a claim.

Coinsurance formula

(Insurance carried / insurance required) x loss amount = loss payment

Self-Insured Retention (SIR)

(Usually in liability insurance policies) Sets an amount that the insured must pay before the insurance pays.

Other insurance

Provision in an insurance policy that addresses how claims will be handled when other valid insurance policies exist. This clause often establishes which policy is primary and which is excess, ensuring that the insured does not receive more than the total loss amount.

Excess policy

A type of insurance policy that provides coverage above the limits of an underlying policy, acting as additional protection for the insured's liability. This policy kicks in after the underlying policy's limits are exhausted, thereby covering higher financial risks.

Primary policy

Policy that pays first in the event of a covered loss

Pro Rata share

The method of distributing losses among multiple insurance policies based on each policy's coverage limits. This ensures that claims are paid proportionately according to the limits of each policy.

Limits of liability

maximum amount of money the insurance company will pay for a particular loss

Per occurrence

the maximum amount an insurer will pay for a single event or claim.

Per person

the maximum amount an insurer will pay for injuries sustained by one individual in a single incident.

Aggregate limit

the maximum amount an insurer will pay for all claims during a policy period. This limit combines all losses, regardless of the number of claims, ensuring the insurer has a cap on total payouts within that timeframe.

Sublimit

a limit within a larger policy limit that restricts the amount payable for a specific type of claim.

This limitation applies to particular coverages, like theft or water damage, providing a more defined cap within the broader insurance policy.

A sublimit is often set to control the insurer's exposure to certain risks.

Split limit

A type of insurance policy limit that divides coverage into separate amounts for bodily injury and property damage. It specifies distinct maximum payouts for injuries per person, per accident, and for total property damage.

Combined single

limit is a type of insurance policy limit that combines bodily injury and property damage coverage into one total amount. This approach offers more flexibility in claims, as it allows for the total limit to cover any type of covered incident.

ordinance or law

a coverage endorsement in property insurance that provides protection for damages incurred due to changes in building codes or ordinances. It helps cover the costs of upgrading a building to meet these new standards after a loss, ensuring compliance with current regulations.

Vacancy

A condition in property insurance that applies when a property has been unoccupied for a certain period of time, potentially affecting coverage. This status can lead to reduced or denied claims if a loss occurs while the property is vacant. (usually 60 days)

ex. Insured moved

Unoccupancy

A condition in property insurance when a property is not lived in for a specified duration, typically impacting coverage and potentially leading to reduced claim payouts or claim denial if a loss occurs during this period.

ex. no people have been living or working within the required period of time, but some property is stored.

ex. Insured went on vacation

Assignment

the transfer of rights or benefits from one party to another in an insurance policy, allowing the assignee to claim benefits directly without affecting the terms of the policy.

Abandonment

The voluntary relinquishment of all rights and claims to a property, often leading to the loss of coverage under an insurance policy.

Insurer provisions

Regulations and terms established by an insurance company that outline coverage details, policyholder responsibilities, and procedures for claims.

Liberalization

The provision in an insurance policy that allows for enhancements or improvements in coverage without an increase in premium. It ensures that policyholders receive any benefits from newly adopted policy changes automatically.

Subrogation

The process by which an insurance company seeks to recover costs from a third party responsible for a loss after compensating the insured.

This process allows insurers to pursue reimbursement after they have paid a claim, ensuring the responsible party ultimately bears the financial burden.

Salvage

The process of recovering and utilizing damaged property after a loss to mitigate the financial impact of the claim. Insurers may sell salvaged items to recoup some costs.

Loss payment options

The various methods by which an insurance company settles claims with policyholders, including cash payments, repairs, or replacement of property. These options provide flexibility for insured individuals to choose how they receive compensation after a covered loss.

These options may influence the speed and method of payment, tailored to meet the needs of the policyholder.

Duty to defend

The legal obligation of an insurance company to provide a defense for its insured in a lawsuit, regardless of whether the allegations are valid. This duty exists as long as the claims fall within the policy's coverage.

Third party provisions

Clauses in an insurance policy that provide coverage for claims made by parties not involved in the insurance contract. These provisions ensure that third parties can seek compensation for damages caused by the insured.

Standard mortgagee clause

A provision in insurance policies that protects the interests of mortgage lenders by ensuring they receive payment for damage to a property, even if the borrower defaults on the mortgage or the policyholder fails to pay the premium.

A clause that protects mortgage lenders' interests by guaranteeing payment for property damage, regardless of borrower default or premium non-payment.

Loss payable clause

A provision in an insurance policy that specifies how payments for covered losses will be made to third parties, typically mortgage lenders or others with a financial interest in the insured property.

No benefit to the bailee

A clause in insurance that prevents a bailee from claiming benefits from a policy for losses they have incurred while holding someone else's property.

This clause ensures that only the rightful owner of the property can collect on insurance claims, excluding bailee's claims for their own losses.

Certificate of insurance

Any document that verifies that insurance is in effect and issued as evidence of property/casualty insurance coverage.

It may not amend, extent or alter the coverage provided.

Does not grant to any person any rights beyond those expressly provided by the policy of insurance referenced.

Terrorism Risk insurance act

A federal law enacted in 2002 that provides a mechanism for sharing the risk of loss from acts of terrorism between the federal government and private insurers. It aims to ensure the availability of coverage for terrorism risk in the insurance marketplace.

loss payment

Notice of claim

proof of loss