Unit 1-3 Property and Casualty Insurance Fundamentals

A comprehensive set of vocabulary flashcards based on Unit 1, 2, and 3 lecture notes, covering core insurance principles, legal contract characteristics, and regulatory requirements.

Risk

The possibility that a loss will occur.

Speculative Risk

Risks that have a possibility of a loss and also the possibility of a gain, such as gambling or investing; these are not insurable.

Pure Risk

Risks that only involve the possibility of experiencing a loss, not a gain; these can be covered by insurance.

Insurance

A contract that transfers the risk of financial loss from an individual or business to an insurance company.

Exposure

The potential for accidents and other losses, used by underwriting departments to determine premium rates.

Peril

The cause of a loss, such as fire, lightning, or hail.

Direct Loss

Physical loss to property with no intervening cause, such as an automobile hitting a tree.

Indirect Loss

A consequential loss resulting from a physical loss, such as loss of rental income due to a house fire.

Hazard

Anything that increases the chance that a loss will occur.

Physical Hazard

Physically identifiable factors that increase the chance of loss, such as slick tires or a wet floor.

Moral Hazard

Hazards arising from an individual's character, such as dishonesty, which may lead to faked losses.

Morale Hazard

A state of mind or careless attitude, such as leaving a car running and unlocked while entering a store.

STARR

An acronym for the five ways of managing risk: Sharing, Transfer, Avoidance, Retention, and Reduction.

Law of Large Numbers

The principle that the larger the group, the more accurately losses can be predicted.

Adverse Selection

The tendency for higher-risk individuals to get and keep insurance as compared to individuals representing an average level of risk.

Reinsurance

Insurance for insurers, where one company (the ceding insurer) transfers risk to another (the reinsurer).

Stock Insurer

A business formed as a corporation and owned by stockholders who may receive taxable dividends; they issue non-participating policies.

Mutual Insurer

An insurer owned by its policyholders who may receive dividends as a non-taxable refund of overpaid premium; they issue participating policies.

Fraternal Benefit Society

An organization that provides insurance for the benefit of its members and operates under a lodge system based on common religion or ethnic group.

Reciprocal Insurer

Unincorporated groups, known as subscribers, that agree to insure each other's losses and are managed by an attorney-in-fact.

Domestic Insurer

An insurer doing business in the state in which it was formed (chartered or incorporated).

Foreign Insurer

An insurer doing business in a state or U.S. territory other than the one in which it was incorporated.

Alien Insurer

An insurer formed under the laws of any country other than the United States and its territories.

Certificate of Authority

The state license required for an insurance company to sell insurance in that state.

Surplus Lines

Insurance for exceptionally large or specialized risks that is obtained from non-admitted insurers when coverage is unavailable from authorized insurers.

Consideration

An exchange of value; for the insured, this is the premium and statements on the application; for the insurer, it is the promise to pay.

Contract of Adhesion

A contract written by only one party (the insurer) which the other party (the insured) must accept or reject without negotiation.

Aleatory Contract

A contract where the value received by each party is unequal because performance depends on an uncertain event.

Unilateral Contract

A one-sided contract where only the insurer is legally bound to perform once the policy is issued.

Indemnity

The principle intended to restore the insured to the financial state they enjoyed prior to a loss, with no gain or profit.

Representation

A statement that the applicant believes to be true.

Warranty

A statement guaranteed to be true, the breach of which may void the contract.

Concealment

The failure to disclose known material facts.

Waiver

The intentional and voluntary giving up of a known right.

Estoppel

A legal doctrine stating that once a right has been waived, it cannot be reinserted and used against the insured.

Property Insurance

Insurance that provides protection on buildings and personal belongings, covering first party losses.

Casualty Insurance

Often known as liability insurance, it protects against negligent acts or omissions that cause injury or property damage to others (third party losses).

Declarations

The section of a policy containing information on who, what, when, where, and the amount of coverage.

Insuring Agreement

The section that describes the covered perils and the insurer's major promises, including the promise to defend the insured if sued.

Endorsements

Additions to a policy that modify, add, or take away coverage.

Exclusions

Policy sections that describe property, perils, or hazards that are specifically not covered.

Policy Territory

Provisions stating where a loss must occur to be covered, typically including the United States, Canada, and Puerto Rico.

Pro Rata

A method of handling other insurance where each company pays a portion of the loss equal to the percentage of total insurance it provides.

Subrogation

The transfer of the insured's right of recovery against a negligent third party to the insurance company.

Insurable Interest

A legitimate risk of financial loss in the person or thing being insured, which must be present at the time of loss.

Binder

A temporary oral or written statement made by an agent that provides immediate coverage for a specified time.

Loss Ratio

Calculated by dividing incurred losses by earned premium; used to compare company operations year to year.

Combined Ratio

The sum of the loss ratio and the expense ratio; a ratio of less than $100\%$ indicates an underwriting profit.

Fair Credit Reporting Act (FCRA)

A federal law requiring consumer reporting agencies to adopt fair and equitable procedures for exchanging credit information.

Gramm-Leach-Bliley Act (GLBA)

A federal law passed in $1999$ that requires financial institutions to explain their information-sharing practices and safeguard sensitive customer data.