Additional insured
a person or party who is added to the named insured's policy by an endorsement
Aggregate deductible
all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount
All-risks" policy
An insurance policy that covers any risk of physical loss unless the policy specifically excludes it.
Calendar-year deductible
a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts
Coinsurance clause
A provision that states that the insurer and the insured will share the losses covered by the policy in a proportion agreed upon in advance.
Coinsurance percentage clause (health insurance)
a provision that requires the insured to pay a specified percentage of covered medical expenses in excess of the deductible
Conditions
provisions in the policy that qualify or place limitations on the insurer's promise to perform
Contribution by equal shares
each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid
Coordination-of-benefits provision
in group health insurance is designed to prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan
Declarations
The section of an insurance policy containing the basic underwriting information, such as the insured's name, address, amount of coverage and premiums, and a description of insured locations, as well as any supplemental representations by the insured.
Deductible
Amount you must pay before you begin receiving any benefits from your insurance company
Elimination (waiting) period
a stated period of time at the beginning of a loss during which no insurance benefits are paid
Endorsements and riders
A written provision that adds to, deletes from, or modifies the provisions of the original contract or policy
Equity in rating
The fundamental purpose of coinsurance is to achieve
Exclusions
Causes of loss, exposures, conditions, etc. listed in the policy for which the benefits will not be paid.
First named insured
The individual whose name appears first on the policy's declaration
Insuring agreement
A statement in an insurance policy that the insurer will, under described circumstances, make a loss payment or provide a service.
Large-loss principle
main purpose of insurance is to cover large catastrophic loss
Named insured
the person or persons named in the declarations section of the policy
Named-perils policy
Coverage by an insurance contract that promises to pay only for those losses caused by perils specifically listed in the policy.
Open-perils policy
Coverage by an insurance contract that promises to cover all losses except those losses specifically excluded in the policy.
Other-insurance provisions
prevent profiting from insurance and violation of the principle of indemnity
Other insureds
persons or parties who are insured under the named insured's policy even though they are not specifically named in the policy
Primary and excess insurance
the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
Pro rata liability
A generic term for a provision that applies when two or more policies of the same type cover the same insurable interest in the property. Each insurer pays based on the proportion that its insurance bears to the total amount of insurance on the property.
Special coverage policy
If the loss is not excluded, then it is covered
Straight deductible
the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
Declarations
are statements that provide information about the particular property or activity to be insured
Insurance contracts typically contain a page or section of
definitions
The insuring agreement summarizes
the major promises of the insurer
the two basic forms of an insuring agreement in property insurance are
named perils or open perils
Named perils coverage
where only those perils specifically named in the policy are covered
Open-perils, or special coverage
where all losses are covered except those losses specifically excluded
Insurance contracts contain three major types of exclusions
perils, losses, and property
Some perils are not
commercially insurable
Why are Exclusions Necessary
-Some perils are not commercially insurable
e.g., catastrophic losses due to war
-Extraordinary hazards are present
e.g., using the automobile for a taxi
-Coverage is provided by other contracts
e.g., use of auto excluded on homeowners policy
-Moral hazar
Conditions
are provisions in the policy that qualify or place limitations on the insurer's promise to perform
If policy conditions are not met
the insurer can refuse to pay the claim. e.g., not reporting a claim
Insurance policies contain a variety of
miscellaneous provisions
e.g., cancellation, subrogation, grace period, misstatement of age
An insurance contract must identify
the persons or parties who are insured under the policy
The named insured is
the person or persons named in the declarations section of the policy
The first named insured
has certain additional rights and responsibilities that do not apply to other named insureds
A policy may cover
her parties even though they are not specifically named (person driving your car with your permission)
Additional insureds may be
added using an endorsement
In property and liability insurance, an endorsement is
a written provision that adds to, deletes from, or modifies the provisions in the original contract
A deductible is
a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable
The purpose of a deductible is to
-Eliminate small claims that are expensive to handle and process
-Reduce premiums paid by the insured
-Reduce moral hazard and attitudinal (morale) hazard
With a straight deductible
the insured must pay a certain number of dollars of loss before the insurer is required to make a payment
An aggregate deductible means
that all losses that occur during a specified time period, usually a year, are accumulated to satisfy the deductible amount (health insurance)
A calendar-year deductible
a type of aggregate deductible that is found in basic medical expense and major medical insurance contracts
An elimination (waiting) period
is a stated period of time at the beginning of a loss during which no insurance benefits are paid
Coinsurance
Penalty
A coinsurance clause in a property insurance contract encourages
the insured to insure the property to a stated percentage of its insurable value
The fundamental purpose of coinsurance is to achieve
equity in rating
Health insurance policies frequently contain
coinsurance clause
The purposes of coinsurance in health insurance are
reduce premiums and prevent overutilization of policy benefits
The purpose of other-insurance provisions is
to prevent profiting from insurance and violating the principle of indemnity
Under a pro rata liability provision
each insurer's share of the loss is based on the proportion that its insurance bears to the total amount of insurance on the property
Under contribution by equal shares
each insurer shares equally in the loss until the share paid by each insurer equals the lowest limit of liability under any policy, or until the full amount of the loss is paid
Under a primary and excess insurance provision
the primary insurer pays first, and the excess insurer pays only after the policy limits under the primary policy are exhausted
The coordination of benefits provision in group health insurance is designed
to prevent overinsurance and the duplication of benefits if one person is covered under more than one group health insurance plan
many states have adopted part or all of the
coordination of benefits provisions developed by the NAIC, which include a number of rules including:
-Coverage as an employee is usually primary to coverage as a dependent
-For dependents in families where the parents are married or are not separated, th
Annual pro rata method
it is assumed that the policies are written uniformly throughout the year
Asset valuation reserve
a statutory account designed to absorb asset value fluctuations not caused by changing interest rates
Balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date.
Case reserves
amounts that represent the estimated loss value of each individual claim
Class rating
The practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics.
Combined ratio
loss ratio + expense ratio
Earned premiums
The portion of written premiums that corresponds to coverage that has already been provided.
Expense ratio
An insurer's incurred underwriting expenses for a given period divided by its written premiums for the same period.
Experience rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Exposure unit
the unit of measurement used in insurance pricing
Gross premium
paid by the insured consists of the gross rate multiplied by the number of exposure units
Gross rate
A method of collecting interest by adding total interest to the principal of the loan at the outset of the term.
Income and expense statement
Lists and summarizes income and expense transactions that have taken place over a specific period of time, usually a month or year
Incurred-but-not-reported (IBNR) reserve
a reserve that must be established for claims that have already occurred but that have not yet been reported
Investment income ratio
Net investment income divided by earned premiums for a given period.
Judgment rating
an approach used when credible statistics are lacking or when the exposure units are so varied that it is impossible to construct a class
Loading
the amount that must be added to the pure premium for other expenses, profit, and a margin for contingencies
Loss-adjustment expenses
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.
Loss ratio
A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.
Loss ratio method
A loss reserving method that establishes aggregate reserves for all claims for a type of insurance
Loss ratio method
A method for determining insurance rates based on a comparison of actual and expected loss ratios
Loss reserve
An estimate of the amount of money the insurer expects to pay in the future for losses that have already occurred and been reported, but are not yet settled.
Merit rating
a rating plan by which class rates are adjusted upward or downward based on individual loss experience
Net gain from operations
equals total revenues less total expenses, policyowner dividends, and federal income taxes
Overall operating ratio
Combined Ratio - Investment Income Ratio
Policyholders' surplus
the difference between an insurance company's assets and liabilities
Pure premium
the portion of the rate needed to pay losses and loss adjustment expenses
Pure premium method
the pure premium can be determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units
Rate
amount at which insurance is charged
Reserve for amounts held on deposit
a liability that represents funds that are owed to policyholders and to beneficiaries
Retrospective rating
A ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
Schedule rating
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Unearned premium reserve
An insurer liability representing the amount of premiums received from policyholders that are not yet earned.
A balance sheet
is a summary of what a company owns (assets) and what it owes (liabilities), and the difference between total assets and total liabilities (owners' equity)
Total Assets
Total Liabilities + Owners' Equity
The primary assets for an insurance company
are financial assets
Insurers' liabilities
include required reserves
A loss reserve is an estimated amount for
-Claims reported and adjusted, but not yet paid
-Claims reported and filed, but not yet adjusted
-Claims incurred but not yet reported to the company
Case reserves are loss reserves that are established for
each individual claim
Methods for determining case reserves include
-judgement method
-average value method
-tabular method
judgment method
a claim reserve is established for each individual claim
average value method
an average value is assigned to each claim
tabular method
loss reserves are determined for certain claims for which the amounts paid depend on data derived from mortality, morbidity, and remarriage tables
The loss ratio method establishes
aggregate loss reserves for a specific coverage line
A formula based on the expected loss ratio is used to
estimate the loss reserve
The incurred-but-not-reported (IBNR) reserve
is a reserve that must be established for claims that have already occurred but that have not yet been reported
The unearned premium reserve is a liability item that represents
the unearned portion of gross premiums on all outstanding policies at the time of valuation
unearned premium reserve
Its purpose is to pay for losses that occur during the policy period
unearned premium reserve
It is also needed so that refunds can be paid to policyholders that cancel their coverage
unearned premium reserve
It also serves as the basis for determining the amount that must be paid to a reinsurer for carrying reinsured polices
unearned premium reserve
The annual pro rata method is one method of calculating the reserve
Policyholders' surplus
is the difference between an insurance company's assets and liabilities
The stronger a company's surplus position
the greater is the security for its policyholders
The level of surplus is an important determinant of
the amount of new business that an insurance company can write
The income and expense statement summarizes
revenues and expenses paid over a specified period of time
The two principal sources of revenue for an insurance company are
premiums and investment income
Earned premiums
are those premiums for which the service for which the premiums were paid (insurance protection) has been rendered
Expenses include
the cost of adjusting claims, paying the insured losses that occurred, commissions to agents, premium taxes, and general insurance expenses
Life insurance actuaries use
a mortality table or individual company experience to determine the probability of death at each attained age
Expected future payments are
discounted back to the start of the coverage period and summed to determine the net single premium or level installment premiums
The annual expected value of death claims equals
the probability of death times the amount the insurer must pay if death occurs
Merit rating
is a rating plan by which class rates are adjusted upward or downward based on individual loss experience
Under a schedule rating plan
each exposure is individually rated
Under experience rating
the class or manual rate is adjusted upward or downward based on past loss experience
Under a retrospective rating plan
the insured's loss experience during the current policy period determines the actual premium paid for that period
Class rates are determined using two basic methods
pure premium method and loss ratio method
Under the pure premium method
the pure premium can be determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units
Under the loss ratio method
the actual loss ratio is compared with the expected loss ratio, and the rate is adjusted accordingly
There are three basic rate making methods in property and casualty insurance
judgement rating, class, or manual
Judgment rating means
that each exposure is individually evaluated, and the rate is determined largely by the judgment of the underwriter
Class, or manual rating
means that exposures with similar characteristics are placed in the same underwriting class, and each is charged the same rate
A rate
is the price per unit of insurance
An exposure unit
is the unit of measurement used in insurance pricing
The pure premium
is the portion of the rate needed to pay losses and loss adjustment expenses
Loading is
the amount that must be added to the pure premium for other expenses, profit, and a margin for contingencies
The gross rate
consists of the pure premium and a loading element
The gross premium
paid by the insured consists of the gross rate multiplied by the number of exposure units
Business Rate-Making Objectives include
-Rates should be easy to understand
-Rates should be stable over short periods of time
-Rates should be responsive over time to changing loss exposures and changing economic conditions
-The rating system should encourage loss control activities
A number of measures can be used to gauge the performance of life insurers
Pre-tax or after-tax net income vs. total assets
Rate of return on policyowners' surplus
Policyholders' surplus is
less volatile in the life insurance industry than in the property and casualty insurance industry
Benefit payments, including death benefits paid to beneficiaries and annuity benefits paid to annuitants
are the life insurer's major expense
A life insurer's net gain from operations equals
total revenues less total expenses, policyowner dividends, and federal income taxes
The asset valuation reserve
is a statutory account designed to absorb asset value fluctuations not caused by changing interest rates
The reserve for amounts held on deposit
is a liability that represents funds that are owed to policyholders and to beneficiaries
State laws
specify the minimum basis for calculating policy reserves
Policy reserves are
a liability item on the balance sheet that must be offset by assets equal to that amount
The assets of a life insurer have a
longer duration, on average, than those of property and casualty insurers
many life insurance policies
have a savings element
life insurers keep an interest-bearing asset
called "contract loans" or "policy loans
A life insurance company may have separate accounts
for assets backing interest-sensitive products, such as variable annuities
The investment income ratio compares
net investment income to earned premiums
The overall operating ratio is equal to
the combined ratio minus the investment income ratio
The loss ratio is equal to
(Incurred Losses + Loss Adjustment Expenses)/Premiums Earned
The Expense Ratio is equal to
underwriting expenses / premiums written
Combined Ratio
the sum of the loss and expense ratios
Actuary
An officer, as of an insurance company, who calculates and states the risks and premiums.
Catastrophe bonds
corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
Ceding commission
An amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses.
Ceding company
the primary insurer that initially writes the insurance
Certified Financial Planner (CFP)
Professional who has attained a high degree of technical competency in financial planning and has passed a series of professional examinations.
Certified Insurance Counselor (CIC)
Professional in property and casualty insurance who has passed a series of examinations sponsored by the Society of Certified Insurance Counselors
Cession
the portions of the obligations in an insurance company's policy portfolio that are transferred to a reinsurer.
Chartered Financial Consultant (ChFC)
a designation for professionals who are working in the financial services industry
Chartered Life Underwriter (CLU)
A life insurance agent who has passed a series of college-level examinations on insurance and related subjects.
Chartered Property Casualty Underwriter (CPCU)
professional program in property and casualty insurance here individual must pass certain professional examinations to receive the designation
Claims adjustor
an insurance specialist who works for the insurance company, as an independent adjustor, or for an adjustment bureau to investigate claims
Excess-of-loss reinsurance
A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount
Facultative reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Independent adjustor
Claims adjustor who offers his or her services to insurance companies and is compensated by a fee.
Information systems
use IT to collect, organize, and distribute data for use in decision making
Insurance agent
represents the insurance company and sells insurance policies to individuals and businesses
Loss control
any activity that lessens the severity of loss once it occurs
Medical Information Bureau report
a trade association report made available to members that lists health impairments of a potential insured
Producers
are licensed to sell and negotiate life, health, property, or other types of insurance offered by an insurance company.
Production
the sale of life insurance
Public adjustor
represents the insured and is paid a fee based on the amount of the claim settlement
Quota-share treaty
the ceding company and reinsurer agree to share premiums and losses based on some proportion
Rate making
the pricing of insurance and the calculation of insurance premiums
Reinsurance
an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance
Reinsurance pool
an organization of insurers that underwrites insurance on a joint basis
Reinsurer
the insurer that accepts the insurance from the ceding company
Retention limit (net retention)
the amount of insurance retained by the ceding company for its own account
Retrocession
A reinsurance agreement whereby one reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire).
Retrocessionaire
The reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer.
Securitization of risk
insurable risk is transferred to the capital markets through creation of a financial instrument
Staff claims representative
usually a salaried employee who will investigate a claim, determine the amount of loss, and arrange for payment
Surplus-share treaty
the reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit, up to some maximum amount
Treaty reinsurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.
Underwriting
an arrangement under which an investment banker agrees to purchase all shares of a public offering at an agreed-upon price
Unearned premium reserve
An insurer liability representing the amount of premiums received from policyholders that are not yet earned.
Ratemaking
refers to the pricing of insurance and the calculation of insurance premiums
A rate is
the price per unit of insurance
An exposure unit
is the unit of measurement used in insurance pricing
Total premiums charged must be adequate for
paying all claims and expenses during the policy period
Rates and premiums are determined by an
actuary
Rates and premiums are determined by an actuary
using the company's past loss experience and industry statistics
Actuaries also
determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and state regulatory officials.
Underwriting
refers to the process of selecting, classifying, and pricing applicants for insurance
An underwriting policy
establishes policies that are consistent with the company's objectives
The underwriting policy is stated
in an underwriting guide
underwriting guide specifies
-Acceptable, borderline, and prohibited classes of business
-Amounts of insurance that can be written
-Territories to be developed
-Forms and rating plans to be used
-Business that requires approval by a senior underwriter
The basic principles of underwriting include
-Make an underwriting profit
-Select prospective insureds according to the company's underwriting standards (often called underwriting appetite)
-Provide equity among the policyholders
Other factors considered in underwriting include
-Rate adequacy
-Availability of reinsurance
-Whether a policy can or should be cancelled or renewed
Cancelled
almost always for non-payment of premium
Non-renewed
Changes in risk or co. appetite
Production
refers to the sales and marketing activities of insurers
Agents and brokers are often referred to as
producers
Life insurers have
an agency or sales department
Property and liability
insurers have marketing departments
The marketing of insurance
has been characterized by a trend toward professionalism
The agent or broker should be a
competent professional with a high degree of technical knowledge in a particular area of insurance and who also places the needs of his or her clients first
The objectives of claims settlement include
-verification of a covered loss
-fair and prompt payment of claims
-personal assistance to the insured
Some laws prohibit
unfair claims practices
Some laws prohibit unfair claims practices, such as
-Refusing to pay claims without conducting a reasonable investigation
-Not attempting to provide prompt, fair, and equitable settlements
-Offering lower settlements to compel insureds to institute lawsuits to recover amounts due
Main types of claims adjustors include
-insurance agent
-staff claims representative
-independent adjustor
-public adjustor
An insurance agent often has authority to
settle small first-party claims up to some limit
A staff claims representative is usually a
salaried employee who will investigate a claim, determine the amount of loss, and arrange for payment.
An independent adjustor is an
organization or individual that adjusts claims for a fee
A public adjustor represents
the insured and is paid a fee based on the amount of the claim settlement
Steps in Claim Settlement
-notice to insurance company
-investigation
-proof of loss
The claim process begins with a
notice of loss
the claim is investigated
An adjustor must determine that a covered loss has occurred and determine the amount of the loss
The adjustor may require
a proof of loss before the claim is paid
The adjustor decides
if the claim should be paid or denied
Policy provisions address
how disputes may be resolved
Reinsurance is
an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance
The primary insurer is
the ceding company
The insurer that accepts the insurance from the ceding company
is the reinsurer
The retention limit is
the amount of insurance retained by the ceding company
Reinsurance is used to
Increase underwriting capacity
Stabilize profits
Reduce the unearned premium reserve
Provide protection against a catastrophic loss
Retire from business or from a line of insurance or territory
Obtain underwriting advice on a line for which the insurer ha
two principal forms of reinsurance
Facultative Reinsurance and Treaty Reinsurance
Facultative reinsurance is
an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit
Treaty reinsurance means
the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business
Facultative reinsurance
Often used when the primary insurer has an application for a large amount of insurance
with Treaty reinsurance
All business that falls within the scope of the agreement is automatically reinsured according to the terms of the treaty
There are two basic methods for sharing losses
-Pro rata -Excess
Under the Pro rata method
the ceding company and reinsurer agree to share losses and premiums based on some proportion
Under the Excess method
the reinsurer pays only when covered losses exceed a certain level
Under a quota-share treaty
the ceding insurer and the reinsurer agree to share premiums and losses based on some proportion
There are two scenarios in which reinsurance is applied
treaty and facultative
Treaty contracts are
negotiated annually between primary insurers (ceding insurer) and reinsurers based on entire books of business
Facultative contracts
This is an agreement between a primary insurers and reinsurers on specific accounts that need unusual limits or types coverages.
Under a surplus-share treaty
the reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit, up to some maximum amount
An excess-of-loss treaty is designed for
protection against a catastrophic loss
A treaty can be written
to cover a single exposure, a single occurrence, or excess losses
Because premiums are paid in advance
they can be invested until needed to pay claims and expenses
Investment income is extremely important in
reducing the cost of insurance to policy owners and offsetting unfavorable underwriting experience
Life insurance contracts are long-term
thus, safety of principal is a primary consideration
In contrast to life insurance, property insurance contracts are
short term
property insurance contracts are short-term in nature
and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc
Information systems
are extremely important in the daily operations of insurers.
Computers are widely used in many areas, including
policy processing, simulation studies, market analysis, and policyholder services
The accounting department prepares
financial statements and develops budgets
In the legal department
attorneys are used in advanced underwriting and estate planning
Property and liability insurers also provide
many loss control services