insurance terms

  1. insurable interest and limit of liabilty
    insurer will not be responsible for the amount which is greater than the limit of liabilty stated on the declaration page
  2. restoration/ nonreduction of limits
    the sum and circumstances the insurer charges the insured to restore a policy to its initial face value after the claim
  3. Submitting proof of loss to the insurer
    • 1. the time and cause of loss
    • 2. any other insurance policy that may cover the loss
    • 3. any appropriate evidence of the loss
  4. Claim settlement
    the valuation method used to pay losses
  5. Appraisal
    if the insured and insurer do not agree on the amount of the loss, they demand an appraisal. the appraisal either agrees or submits the difference to the umpire.
  6. loss payment
    the time frame the insurer must pay a loss to the insured after receiving the proof of loss and agree with it. For personal lines forms the time frame is 60days; commercial 30days
  7. Abandonment of property
    the insured may not abandon the ownership of the property to the insurer for repair
  8. No benefit to bailee
    insurer will not grant any coverage to the bailee
  9. endorsement
    writtent documents attached to the policy to broaden or restrict coverage
  10. First named insured (Primary insured)
    name appears in the first polisiton of the Declaration page of a policy; has certain rights and duties that does not apply to the other names listed on the declaration page
  11. additional insured
    any person or organization added to the policy by endorsement; has the same coverage as the named insured
  12. deductible
    a specified dollar amount that an insured must bear; the higher the deductible, the lower the premium
  13. coninsurance
    used to encourage the insured to purchase and maintain the insurance to value and to establish the basis of payment if the insured fais to maintain a specifed percentage of value

    • Formula
    • amount of insurance carried X amount of loss
    • amount of insurance required
  14. California standard form of fire policy
    the basis from which all fire policies are written; insures against losses caused by fire, lightning and by removal from premises endanger by the perils insured against
  15. Hazard
    Physical hazard - physical condition that increases the probability of loss

    Moral hazard - dishonesty

    Morale hazard - indifference to loss

    Legal hazard - an increase in probabilty that the loss will occur because of court actions
  16. insurance
    the substitution of a small certain expense for a large uncertain loss
  17. insured
    the first party; protected by an insurance policy
  18. insurer
    the second party; indemnifies for losses
  19. risk
    uncertainity concerning a loss
  20. Pure risk
    a possibility of loss or no loss; insurance is designed to protect pure risk
  21. peril
    a cause of potential loss
  22. risk management
    determination of what types of protections are required to meet insured's meets
  23. Reduction (Loss prevention)
    using techniques that prevent potential loss like burglar alarms and sprinkler systems
  24. elimination (avodiance)
    after the exposure is identified, some risk can be eliminated entirely
  25. retention (self-insurance)
    insure only to the risk that can cause financial instability
  26. transfer
    transfer the uncertainity of loss to an insurance company from an insured
  27. sharing
    investments of a large number of people
  28. Elements of insurable risks
    • Risks must be
    • 1. homogenous units to make losses resonably predictable
    • 2. accidental
    • 3. definite in terms of time, place, amout and cause
    • 4. cause financial hardship
    • 5. exclude catastrophic perils
  29. Law of large numbers
    the larger the number of exposure considered, the more closely the lossess reported will equal the underlying probability of loss
  30. Adverse selection
    insuring the risks which are more prone to losses than average risks
  31. Reinsurance (Risk sharing)
    device used by insurers to transfer or share in a risk; insurer originating the risk (the ceding company); the insurer who share in a risk (reinsurance insurers)
  32. Automatic agreements
    the ceding company transfer the amount of insurance in excess of the retention level immediately and automatically upon receipt of the premium
  33. Facultative agreements
    allow the opportunity to exchange advice about the underwriting of each case; may result in higher premium
  34. Insurable interest
    potential for financial hardship in the event of loss; property ownership is the evidence of insurable interest and must exist in every enforcable contract
  35. Principle of indemnity
    the insured is restored to the same financial condition as prior to the loss
  36. Underwritting
    • Primary function - selection of risk
    • protect the insurer against adverse selection
    • charge an adequate premium for the risk
    • producers engage in field underwriting

    • In evaluating a risk must examines;
    • the nature of the risk
    • hazards are present
    • outside factors that affect the risk
    • past losses that had occured
  37. Reserves
    accounting measurements of insurer's future obligation to its policyholders
  38. Loss reserves
    estimate of the amount than an insurer will pay for a claim
  39. Loss ratio
    dividing the paid losses plus loss reserves by total earned premium
  40. Expense ratio
    divinding an insurer's total operating expenses by total earned premium
  41. rating methods
    • 1. class ratings
    • 2. experience ratings
    • 3. individual rating
    • 4. judgement rating
    • 5. loss cost rating
    • 6. manual rating
    • 7. merit rating
    • 8. retrospective rating.
    • 9. schedule rating
  42. class rating
    a group of insureds who have similar exposurers and experience
  43. experience rating
    based on the actual loss during a specified period of the past
  44. individual rating
    used when there are not enough similar insureds to support a class rate
  45. judgement rating
    based on underwriter's judgement and experience
  46. loss cost rating
    used on risks on which insurer may not have enough data to develop the rate, other than expenses and profit
  47. manual rating
    rates containe in a manual published by the insurer
  48. merit rating
    rewards an insured who takes measure to decrease the potential loss
  49. retrospective rating
    insured's premiums are adjusted at the end of policy period based on formula of debits or credits for losses that have occured during the period
  50. schedule rating
    using charges and credits to modify the class rate based on the nature of particular risk being rated
  51. occurence
    include continuous or repeated exposure to harmful conditions
  52. cancellation
    terminatio of a policy before its expiration date
  53. pro rata cancellation
    when an insurer cancels the policy, the unearned premium is refunded to the insured on pro rata basis
  54. short rate cancellation
    when insured request canellation, the insurer retains a portion of the unearned premium and the unearned premium is refunded to the insured on a short rate basis
  55. Flat cancellation
    cancellation of a policy on the date the policy becomes effective
  56. nonrenewal
    termination of an insurance policy after its expiration date
  57. proximate cause
    the cause that sets other causes in motion; multiple causes combine to produce loss or damage
  58. hostile fire
    a fire that leaves the area in which it was intended to be kept
  59. inherent vice
    a condition or defect that exists within the policy itself; insurance policy exclude inherent vice
  60. binder
    a temporary document that provides the insurance coverage until a policy is issued, contains perils covered, amount of coverage, effective date and name of insurer; DOES NOT STAEE THE PREMIUM AMOUNT
  61. Arbitration
    a disputed claim is decided by a neutral third party
  62. right of salvage
    the right of insurer to take possession of damaged property after the loss has been paid
  63. endorsement
    a written document attached to the policy by the insurer to broaden or restrict coverage
  64. concurrent causation
    2 causes resulting in a loss; one cause is covered, the other is excluded, the insurance is covered unlesss the policy specifies
  65. concurrency
    a situation in which at least 2 policies provide identical coverage for the same risk, each policy pays the proportion of a loss to its limit
  66. nonconcurrency
    2 policies covered for a property but since the limit of coverage, the insured may not be fully covered in the event of a loss
  67. Bailee
    an individual or organization who control the property of another for servicing
  68. Bailor
    an individual who owns the property that has been taken care of the bailee
  69. excess insurance
    property coverage above the primary insurance; does not pay until the primary insurance has been exhausted
  70. Unoccupancy
    a property that contains personal propety but has no occupants
  71. Vacant
    a property that contains neither personal properties nor occupants
  72. Types of property lossess
    • Direct loss - damage to a property in which proximate cause is an insured peril
    • Indirect loss - a second or financial loss occuring as a result of financial loss
  73. Scope of coverage
    1. named peril - coverage applies only to losses stated in the policy

    2. Open peril - coverage applies to all losses caused by all perils
  74. Acutal cash value (ACV)
    the policy pays current replacement cost less depriciation (25%)
  75. Replacement cost
    the policy repays the full cost to repair the damaged property without depreciation

    the coverage amt at the time of loss be at least equal to 80% of cost of replacement; replace with like kind and quality
  76. Functional replacement cost
    replacement with less costly property with functionally equivalent
  77. Market value
    reimburstment to the insured according to the price a willing buyer would pay for the property purchased from a willing seller
  78. Agreed value
    insuring various classes of property whose actual value or replacement cost is difficult to determine; insured and insurer agree at the time of insuring
  79. Stated amount
    insuring an unusual or valuable piece of property that establishes at the time of insuring a maximun amount of isnurance to be paid in the event of loss
  80. Valued policy
    an insurer to pay full amout of insurance on an insured structure in the event of loss
  81. Difference between open policy and valued policy
    • Open policy - value is not agreed upon
    • Valued policy - value is agreed upon at the time of insuring
  82. Conditions
    the rights, rules, and obligations of the insurer and insured to follow throughout the policy period
  83. Liberalization clause
    if the insurer broadens the coverage with no increase in premium, boradened coverage automatically applies to the policy without the need for an endorsement
  84. Assignment/ Transfer of the insured's interest
    insured may not transfer the right of ownership to another party without the insurer's written consent
  85. subrogation
    the legal process the insurer seeks recovery of the amount paid to the insured from a third party resoponsible for having caused the loss; prevents insured from collecting twice for the same loss
Card Set
insurance terms
Chapter 1