p&c basics

eArbitrator - individual responsible for resolving a claim settlement dispute between an insured and insurer

credibility - an actuarial term describing the degree of accuracy in forecasting future events based on statistical reporting of past events

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 (exposure units multiplied by the rate results in the premium)

homogeneity - the degree to which items are similar

inception - the date at which the insurance policy goes into effect

void - cancelled or declared invalid

ISO (Insurance Services Office - part of the obligation of state government to the public is making sure policies are quality, understandable products and rates are reasonable. regulatory authority that reviews the forms for compliance with minimum standards and approves or declines the form and makes recommendations.

American Association of Insurance Services (AAIS) - national advisory and statistical organization that develops standardized policy forms and rating information used by persona commercial and inland marine insurers

other rate filing and form services organizations include, but are not limited to:

• surety and fidelity association of america (SFAA)

• National COuncil on Compensation Insurance (NCCI)

• Other state rate-making entities

Independent Rating Services

the financial strengrth of an insurance company is based on prior claims experience, investment earnings, levels of reserves (amount of money kept in a sperate account to cover debts to policyholders) and management.

guides to insurance companies financial integrity are published regularly by the folloqing various independent rating services:

• AM Best

• Fitch

• Standard and Poor’s

• Moody’s

• Weiss

California Workers' Comp Inspection Rating Bureau (WCIRB) unincorporated nonprofit association

main functions:

• provide statistics and rating information regarding workers compensation and employer’s liability insurance

• collect and tabulate information and statistics for the purpose of developing pure premium rates to be submitting to the commissioner for issuance or approval

• Inspect risks for classification or rate purposes and furnish this information to the insurer (and employer upon request)

Association for Cooperative Operations Research and Development (ACORD)

ACORD - association for cooperative operations research and development is gloabal nonprofit organization formed by insurance carriers and agents focused on building efficiencie in the p&c insurance marketplace

Property vs Casualty Insurance

Property insurance pays for losses to belonging possessions or assets, in which the insured has financial interest. a property insurance contract is between the insurance company and the insured, known as a two-party contract

Liability or casualty insurance exists to pay damages to third party for reasons such as bodily injury, property damage, personal injury, or advertising injury.

1. Accident vs. Occurrence

   an accident is a sudden, unplanned and unexpected event, not under the control ofthe insured resulting in injury or damage that is neither expected nor intended.

   an occurrence is broader definition of loss than accident because it includes those losses caused by continuous or repeated exposure to conditions resulting in injury to persons or damage to property that is neither intended nor expected

2. Loss

Loss is defined as the reduction, decrease or disappearance of vlaue ofthe person or property insured in a policy

3. direct vs. indirect property loss

two types of property losses are direct and indirect

property insurance only covers direct losses.

indirect losses are related to the direct loss and insurance coverage to protect against these indirect losses often is added to property insruance policies

diredct loss also includes other damage where the insured peril was the proximate cause of loss

consequential losses (indirect losses) most common are loss of rental value and/or the additional living expenses

All-risk - old term. damage or loss must be caused by a peril that is named or listed in the contract

Open Peril and Named Peril

named peril - is a term used in property insurance to describe the breadth iof coverage provided under an insurance policy form that lists specific covered perils . no coverage is provided for unlisted perils

open peril is a term used in a property insurance to describe the breadth of coverage provided under an insurance policy form that insurers

concurrent causation - the action of more than one cause produces a particular harm or loss to an insured. if a loss is caused by both an insured peril and an uninsured peril, coverage is deemed to apple.

expense and expense ratio

expense - an insurer’s costs of operations including overhead, marketing, and commissions.

expense ratio - measures how much of the company’s funds are used for administraive and operational expenses

cancellation, nonrenewal and lapse

cancellation - act of revoking or terminating one’s insurance policy

lapsed policy - policy that is terminated becuase of NSF

renewal - continuance of an insurance policy beyond its original term

nonrenewal - discontinuance of an insurance policy beyond its original term (policy isn’t renewed once the term of the policy expires)

at lest 45 days before the policy expiration, an insurer must deliver to the named insured or mail to the named insured at the address shown in the policy,

• offer of renewal of the policy contingent upon paymennt of premium,

• notice of nonrenewal

Short Rate, Flat Rate, Pro-Rata Cancellation

flat cancellation- policy is cancelled upon its effective date, no premium penalty

pro rata - refund that is given to insured if policy is cancelled BY insurance company mid-term. (calculated by determining how many days coverage were paid minus how many days the policy was in force

short rate - insured cancels the policy prior to renewal date. penalty is imposed generally 10% on the refund of unearned premium

earned and unearned premium

rate - cost for a unit of insurance

premium - payment required by the insured to keep the policy force

• formula for premium = rate x number of units

types of ratings

two different types of rates = class and individual

class rating (or manual rating) - refers to practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics

5 basic individual rate-making approaches:

1. judgment rating

2. schedule rating

3. experience rating

4. retrospective rating

5. merit rating

judgement rating - used when credible statistics are lacking or when the exposure units are so varied that it’s impossible to construct a class

schedule rating - rates are made by applying a schedule or charges and credits to some base rate to some base rate to determine the appropriate rate

experience rating - insureds own past loss experience enters into the determination of the final premium

retrospeective rating - self-rating plan under which the actual losses during the policy determine the final premium

merit rating - most commonly used. premium is based not on the actual loss record but on factors that indicate the probability that loss will occur

combined ratio - percentage of each premium dollar a property/casualty insurer spends on claims and expenses. decrease = financial profitability is improving. increase = profitability is decreasing

claims terms

first party risk protection - insurance coverage that applies to the insured’s own property or person

third party coverage protection - defined as insurnace coverage that applies to the property or

person of one other than the insured

first party vs third party

first party - someone who is makng a claim against their own insurance policy

third party - person or persons who are not a party to the contract pursuing their claim directly against the at-fault person insurance company

Subrogation - insurer’s legal right to seek damges from third parties after it has reimbursed the insured for the loss. Based on indemnity

ARBITRATION - METHOD OF CASUALTY CLIAM SETTLEMENT USED WHEN THE INSURED AND INSURER CANNOT AGREE ON HOW TO SETTLE A CLIAM

Loss Reserve - estimate of what wil ultimately be paid out on the claim to the insured by the insurer

Statutory Reserves - funds that the insurance companies operating in their state are required to maintain at any given time

Lost Cost Rating - insurance company must collect sufficient premiums to pay for the insrued losses that occur to cover costs of operation and to allow for a reasonable profit.

to determine the premiums to charge the insurer predicts the expenses that they will incur

insurers use rate classification systems that rate insured’s based on loss potential

Insurable Interest

An Interest in property insured must exist when the insurance takes EFFECT, and when the loss occurs. but need not exist in the meantime.

Requirement for Insurable Interest to exist: if the insured has no insurable interest, the contract is void

contingent or expectant interests: a simple conditional or expectant interest in anything not based on any actual right or claim to that thing, nor upon any valid contract for the ownership or possession of it, is not considered to be an insurable interest in that thing

expense is defined as an insurer’s costs of operations including overhead, marketing, and commissions

a mere contingent or expectant interest in anything, not based on any actual right or claim to that thing, nor upon any valid contract for the ownership or possession of it, is not considered to be an insurable interest in that thingmaking