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INSURANCE

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The method of spreading the risk of a financial loss among a large number of people. When spreading the risk reduces the financial impact of an individual loss.

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INSURANCE COMPANY

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entity that agrees to indemnify (make financially whole again) Insureds against covered losses

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PROPERTY

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Various types of insurance designed to insure property from financial loss. D.H.C.I.O.C 1.Dwelling 2.Homeowners 3.Commerical Property 4.Inland marine 5.Ocean marine 6.Crime

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Actuaries

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1.insurance statistician: a statistician who calculates insurance premiums, risks, dividends, and annuity rates

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CASULTY INSURANCE

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Protects you against liabilty for BODILY INJURY (BI) and PROPERTY DAMAGE (PD)

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LIABILITY OR CASUALTY COVERAGE

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Will pay for accidental damage you cause to another person or their property. There are three parties to Liability insurance contract. 1.you 2.your insurance company 3.the injured party

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PERSONAL LINES INSURANCE

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Property and casualty insurance for an individual. Policies include Property and Casualty coverages.

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COMMERCIAL LINES INSURANCE

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Refers to property and casualty insurance to cover a BUSINESS as opposed to personal lines

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PURCHASING INSURANCE

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The money you pay in exchange for insurance coverage is known as the CONSIDERATION. It is also the PREMIUM, and the statements you make in the application along with the payment of the initial premium are part of the consideration.

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DEDUCTIBLE

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Portion of covered loss that is not paid by the insurance company.The company will pay for the remaining portion up to the policy limits. The higher the deductible, the lower premium.

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BINDER

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An ORAL or WRITTEN agreement that provides TEMPORARY evidence of insurance until a policy can be issued. It does not guarantee that a policy will be issued, but it is temporary until a contract can be underwritten from home or office.

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Insured on a policy

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Person or entity that is listed first on the declarations page is referred to as the first named insured. The first named insured is the primary and holds the highest rank and has broader rights and obligations under the contract.

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RISK

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Possibility or Uncertainty of loss. It is not actual loss. It is the possibility (risk) that an accident may occur.

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SPECULATIVE RISK VS PURE RISK

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SPECULATIVE RISK offers the chance of loss as well as the oppurtunity for gain. PURE RISK offers only the chance of loss no gain. Only PURE RISKS are insurable.

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CHARACTERISTICS (ELEMENTS) OF INSURABLE RISKS

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To be Insurable, the risk must: 1.Be PREDICTABLE-an insurer must be capable of statistically predicting the possibility of loss. 2.Be a CHANCE OCCURRENCE- the risk must be outside the insureds control. It must be unexpected, accidental, or uncertain. 3.Not be CATASTROPHIC-Insurers typically will not insure risks that will expose them to losses that may occur to large number of insureds at the same time. 4.Be MEASURABLE and DEFINITIVE- an insurable risk is a loss that has a definite monetary value. The insurer must be able to measure or value a potential loss. 5.Be AFFORDABLE- Loss must cause a financial or economic hardship to the insured or to the insureds family.

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INDIRECT LOSS

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(or consequential) loss occurs as the result of a direct loss. For example your home burns down and you have to stay in a temporary place until it is fixed.

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LAW OF LARGE NUMBERS

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To accurately predict what will happen to a large group of similiar risks. The larger the group becomes, the more accurate the predictions become.

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PERIL

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a PERIL is the cause of a LOSS some examples Fire Accidents Explosions Flood Disease Death

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HAZARDS

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is a condition or the source that increases the chance and/or severity of a peril. It will be present before a peril occurs, but it is the PERIL that acutually causes the loss.

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MORAL HAZARD

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results from a decision to do something wrong or to be less conscious of your actions since you know your insurance will pay for the loss.

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MORALE HAZARD

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is created when your careless and/or reckless actions or attitudes cause a loss to occur. i.e. texting while driving/failing to wear seatbelt

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PHYSICAL HAZARD

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The physical sources that cause or increase the chances of a loss.

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ACCIDENT

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A sudden and unexpected event

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OCCURRENCE

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continous or repeated exposure which results in bodily injury or property damage which is not expected or intended by the insured.

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VACANCY AND UNOCCUPANCY

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VACANCY-both the ABSENCE of people and personal property from the insured premises UNOCCUPANCY- is ONLY the absence of people. most insurance policies will exclude or limit coverage for losses when property is vacant or unoccupied.

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BLANKET VS SPECIFIC

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BLANKET COVERAGE-provides coverage for different classes of property under one policy. SPECIFIC INSURANCE-is when you insure a specific item or specific kind of property.

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BURGLARY

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The taking of property from a premise that is closed and locked tight. There must be evidence of forced entry or exit. It also includes forcing a security guard/employee to open a locked store.

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ROBBERY

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The taking of property from a person by VIOLENCE or threat of VIOLENCE

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THEFT

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The UNLAWFUL TAKING OF PROPERTY...typically, the peril of theft covers loss by burglary, robbery, and larceny

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MYSTERIOUS DISAPPERANCE

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Unexplained loss of property

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CERTIFICATE OF INSURANCE

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Document that serves to provide evidence that you have purchased certain types of insurance coverages and limits.

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EXCLUSIONS

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This is the part of the policy that states what perils are not covered.

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CONDITIONS

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The CONDITIONS are provisions in the policy that qualify or place limitations on the insurers promise to pay or perform.

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ENDORSEMENTS

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Written modification that either adds or deletes one or more provisions of the standard policy to serve particualar needs.

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RISK MANAGEMENT METHODS

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METHODS to deal with uncertainty of loss (S.T.A.R.R.) S.haring-- distributes risk among a particualar number of individuals T.ransfer---insurance A.void-- R.educe--control of a risk R.etain--financially responsible for all or part of a risk.

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REINSURANCE

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A risk management tool that lessen their risk exposure. Companies (insurers) purchase insurance from another insurance company (reinsurer) to transfer some risk from the insurer to the reinsurer. A REINSURER IS AN INSURANCE COMPANY'S INSURANCE COMPANY

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PRINCIPLE OF INDEMNITY

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\"restore\" The principal of indemnity states that the insurance company will RESTORE you to the same financial position you were in before the loss occurred.

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INDEMNITY

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means to secure against

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INSURABLE INTEREST

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Insurance companies sell you a policy on property in which you have or soon will have an insurable. The extent of your financial interest at the time of loss is your insurable interest.

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COINSURANCE/INSURANCE TO VALUE

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Splitting or spreading of risk among the insurance company and the insured. It rewards you when you buy adequate amounts of coverage, but if you dont.

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COINSURANCE PENALTY

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is a penalty imposed on the insured by the insurance carrier for under reporting/declaring/insuring the value of tangible property or business income.

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COINSURANCE CLAUSE

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A clause in most insurance policies that penalizes you for not having adequate coverage on your personal or private property.

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LOSS VALUATION

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This is simply a method insurance companies use to decide how much to pay you for a loss.

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ACTUAL CASH VALUE (ACV)

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ACV is computed by subtracting depreciation from the replacement cost. ACV=DPR-RPC ACV = R × (E - C) / E Where: ACV = actual cash value R = replacement cost or purchase price of the item E = expected life of the item C = current life of the item

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DEPRECIATION

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amount of decrease: the amount or percentage by which something decreases in value over time, usually one year ACV = RCV - (DPR * RCV * Age) ACV = Actual Cash Value (Depreciated Value) RCV = Replacement Cash Value (Cost to Purchase Now) DPR = Depreciation Rate (% per year)

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REPLACEMENT COST VALUE (RCV)

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Is the actual cost to replace an item or structure at it's pre-loss condition. This may not be the market value of the item and is typically distinguished from the ACV METHOD which includes a deduction for depreciation. (replaces property with similar to the one lost)

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MARKET VALUE

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Market value is what the property could be sold for. Market value is the amount that a buyer would pay to purchase your home and its land in its current condition

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STATED VALUE

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Stated value pays the cost to repair an insured item or the stated value of the insured item, whichever is less. If a loss occurs you will have to show proof that you lost that much.

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SALVAGE CONDITION

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Allows the insurance company to settle with you by taking possession of the damage property, then paying the full loss amount. After the insurance company sells the salvaged property the proceeds can reduce the cost of the claim to the insurance.

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ADVERSE SELECTION

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used to protect the insurer from people who are poor risks who are more likely to purchase insurance than average risks. \"People who may conceal their condition to get insurance.\"

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STOCK COMPANY

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OWNED by a group of STOCK HOLDERS who are not necessairly policy holders. since stock companies do not normally return any direct surplus monies(dividends) to policy holders they are considered a nonparticipating insurance company which issues (nonpar) policies

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MUTUAL COMPANIES

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Have NO STOCKHOLDERS, but the owners of a mutual insurance company are policy holders. They sell participating policies that pay policy dividends to the policyowner.

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DIVIDENDS

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surplus company profits at year end that the insurer divides up among the policyholders.

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FRATERNAL BENEFIT SOCIETIES

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Have memberships based on religious, national, or ethnic affiliations. These companies primarily sell Life Insurance, and you must become a member of the fraternal organization. The membership appliction is normally completed along with application for insurance. They closely resemble mutal companies in their organization and operation.

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RECIPROCALS

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Unincorporated group of individuals or organizations(called subscribers)that agree to pool their risks together for the purpose of paying losses and purchasing reinsurance. They are managed by an attorney-in-fact, someone who is authorized to act for the group. Subscribers have a responsibility for paying the losses of the reciprocal.

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RISK RETENTION GROUPS

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will allow members who engage in similar or related business or activities to write liability insurance for all or any portion of the exposurers of group members.

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LLOYD'S ASSOCIATIONS

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Lloyd's is a society of members, both corporate an individual, who underwrite in syndicates on whose behalf professional underwriters accept risk.

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PRIVATE VS GOVERNMENT INSURERS

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FEDERAL and STATE GOVERNMENTS provide social insurance programs in those areas where private insurers either cannot or will not write insurance. 1.participation in government insurance programs is mandatory and automatic for all citizens 2.the government does not provide benefits under a insurance contract or policy. These benefits are in place as a result of the passage of certain laws. The only way any benefits is to change the laws that affect them. 3.Social insurance programs are designed to be adequate enough to meet public needs rather than equitable. As the government redistrubtes income through the system, individuals who contribute the least amount into the system recieve greater benefits. 4.The government has a clear and strong monopoly as an insurance provider.

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AUTHORIZED AND NONAUTHORIZED COMPANIES(ADMITTED AND NONADMITTED)

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AUTHORIZED(admitted)company-have a certificate of authority, meet the capital and surplus requirements required by state are considered Authorized or admitted. NONAUTHORIZED(NONADMITTED)-insurers who have not been approved to do business in the state.

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DOMICILE

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DOMESTIC COMPANY-state where insurers home office is located FOREIGN COMPANY-state other than the insurers home state where the insurer is admitted to do business. ALIEN COMPANY-home office is located in a different country.

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INSURANCE DISTRIBUTION SYSTEMS

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Insurance is sold by many different types of companies through an assortment of different distribution systems. An insurance producer may be either an agent who represents a specific company or a broker who represents many different insurance companies.

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CAPTIVE(EXCLUSIVE)AGENCY SYSTEM

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represent on particular insurer in a specfic geographical area. Captive agencies recruit insurance producers who are trained and supervised by a company employee or a general agent. PRODUCER CATEGORY a captive or exclusive producer represents one insurance company and sells only that company's insurance products. Represents the company, not the insured.

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INDEPENDANT AGENCY SYSTEM

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Not affiliated with any particular insurer, and are independant producers and represent various insurers PRODUCER CATEGORY usually work for themselves or under a general agent or MGA and are paid commissions. They own the policy expirations that allow the producer to place an insureds business with another insurer at renewal time.

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MANAGING GENERAL AGENT SYSTEM (MGA)

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A personal producing general agency system recruits, hires, trains, and supervises other producers through a contractual agreement with an insurer. Any producers hired by an MGA are employees or independant contracts of the MGA and not the insurance company. 1.Sell insurance 2.build and supervise a sales force PRODUCER CATEGORY will only sell products through contractual arrangements

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BROKERS

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Independant Producers sell insurance through many different insurance companies. A producer acting as a broker represents the insured in selecting the best coverage available from the various companies they represent. Brokers do not have binding authority.

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DIRECT RESPONSE

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certain insurance marketing is conducted through direct selling methods in the mass media.

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DIRECT WRITING COMPANIES

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sell their policies through company employees who are compensated by salary or a combination of salary plus commission. The representatives do not own the policy expirations, so they do not have the choice of moving a policy to another company when the policy renews. PRODUCER CATEGORY Generally, producers are salaried employees of the direct writing company.

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INTERNET INSURANCE SALES SYSTEMS

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insurance can be purchased online directly from the insurance company or agent. PRODUCER CATEGORY many P&C and life and health insurers have websites available either for direct purchase or to locate an agent.

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FRANCHISE MARKETING SYSTEMS

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provides insurance coverage to groups of employees that are too small to meet the requirements of a group policy. Individual policies are issued with the premiums payable by payroll deduction. Each policy will vary as to the amount of coverage issued and premium amounts. Individual underwriting is required therefore no group underwriting or premium rate reduction is given

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NON-INSURANCE MARKETING

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markets insurance products through financial institutions that issue credit cards. The purchase of the insurance can be deducted from the cedit cards or banking accounts held by he financial institutions marketing the insurance product.

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POLICY AND RATE FILING

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Insurers are required to file any policy forms and rates offered with the DEPARTMENT OF INSURANCE (DOI) The principal rating laws that allow an insurer to change their rates varies with each jurisdiction, but generally fall into one of the following 1.PRIOR APPROVAL-you are required to have to recieve approval from the DOI for a rate change, but must justify and show good cause for changing the rate. If the commissioner does not disapprove within 30 to 60 days then it is approved. 2.FILE AND USE-Insurers must file rate changes with the DOI, but do not need to wait for approval to put into effect 3.USE AND FILE-This law allows the insurance company to change rates immediately, but must file the new rate with the DOI within a specfic time---15 to 60 days. 4.OPEN-COMPETITION LAWS- These laws eliminate all filing requirements, however, insurers may be required to furnish rate schedules to DOI, if requested. Rates under this law are naturally regulated by competition.

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PREMIUM DETERMINATION AND RATING

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The pricing goal for insurers is to charge a premium that is propotional to their loss exposure. The premium charged for each insured should be adequate enough so that total premiums paid by a large group of similar insureds will pay the losses and expenses of that group. Insurers know how much to charge by classifiying the applicant by category of loss exposure. The premium is determined by applying an appropriate rate to your exposure units.

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EXPOSURE UNITS

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is a measure of loss potential used in rating insurance, and depends on the type of insurance. Property insurance: each $100 Auto liabilty Insurance: each insured month (one car insured for one year would be 12 exposure points)

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PREMIUM AMOUNT

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To determine the premium amount you multiply the rate by the number of exposure units. premium=(property insurance limit/exposure unit) (rate x number of exposure units)

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RATE TYPES

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When the underwriter is ready to issue the policy, a rate is determined for the application. rates may vary according to several factors. There are 3 common types of ratings.

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JUDGEMENT RATING

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Rates determined based on knowledge and experience of the underwriter, rather than using an actual premium manual

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MANUAL OR CLASS RATING

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rates for all states are contained in a manual provided by the insurer. manual rates may be modified by using merit ratings or experience. EXPERIENCE RATING-modified based on the insured's loss history for claims filed during a specfic period. The better your past loss compared to the average the less you will pay than the manual. RETROSPECTIVE RATING-the insureds premium is based on losses that are incurred during the policy period, and the final premium is based on the insureds actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by formula. MERIT RATING-charges more to those who are more likely to have losses, and charges less to those less likely to have losses.

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LOSS COSTS

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This is a factor which insurers use in calculating insurance rates. It represents the amount an insurer should collect to cover expected losses.

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LOSS RATIO

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loss ratios help an insurer to determine if the business they are writing is profitable. Insurers need to determine if the company can pay for current losses out of current premium income. Basic loss ratios can be determined by the following formula: LOSSES / EARNED PREMIUM=LOSS RATIO losses that are under 100% means that the insurer is making an underwriting profit, and conversely loss ratios that exceed 100% means that the insurer is losing money

CHAPTER 1. Property and Casualty Exam Texas

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