Cpcu 520

Front 1

Insurance

Back 1

Insurance is a risk management technique that transfers some or all of the potential financial consequences (liability) for certain loss exposures from the insured to the insurer

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Law of large numbers

Back 2

A mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases

Front 3

Proprietary insurers

Back 3

Insurers formed to earn a profit for their owners

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Cooperative insurers

Back 4

Insurers owned by their policyholders and usually formed to provide insurance protection to their policyholders at minimum cost. Mutual insurance companies, reciprocal exchanges, and fraternal organizations are examples of cooperative insurers.

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Pool

Back 5

An association of persons or organizations that combines its resources to economically finance recovery from accidental losses

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Fair Access to Insurance Requirements (FAIR) plans

Back 6

An insurance pool through which private insurers collectively address an unmet need for property insurance on urban properties, especially those susceptible to loss by riot or civil commotion

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Licensed insurer, or admitted insurer

Back 7

An insurer authorized by the state insurance department to transact business within a particular state

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Unlicensed insurer, or nonadmitted insurer

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An insurer not authorized by the state insurance department to transact business in the insured's state

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Expense ratio

Back 9

An insurer's incurred underwriting expenses for a specific period divided by its written premiums for the same period

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Loss ratio

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An insurer's incurred losses (including loss adjustment expenses) for a specific period divided by its earned premiums for the same period

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Combined ratio

Back 11

The sum of an insurer's loss ratio and its expense ratio

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Financial basis combined ratio

Back 12

A profitability ratio calculated by dividing incurred losses by earned premiums

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Trade basis combined ratio

Back 13

A profitability ratio calculated by dividing incurred losses and loss adjustment expenses by earned premiums and then adding the result of dividing incurred underwriting expenses by net written premiums

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Operating profit or loss

Back 14

The sum of underwriting profit or loss and investment profit or loss

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National Association of Insurance Commissioners (NAIC)

Back 15

An association consisting of the insurance commissioners of each U.S. state, the District of Columbia, and the U.S. territories and possessions that coordinates regulatory activities among the various insurance departments.

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Model law

Back 16

A draft bill -- the suggested wording of a new law -- for consideration by state legislatures. Any state may choose to adopt the model bill or adopt it with modifications.

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Model regulation

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A draft regulation that may be implemented by a state insurance department if the model law is passed

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Domestic insurer

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An insurer doing business in its home state

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Foreign insurer

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A U.S. insurer doing business in a state that is not its home state

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Alien insurer

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An insurer domiciled outside the U.S.

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Surplus lines laws

Back 21

State laws that permit producers with a surplus lines license to write business for an "acceptable" nonadmitted insurer when protection from admitted insurers is not available

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Guaranty funds

Back 22

State-established funds that provide for the payment of unpaid claims of insolvent insurers licensed in that state. Although guaranty funds do not prevent insurer insolvency, they mitigate its effects.

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Underwriting cycle

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A cyclical pattern of insurance pricing in which a soft market (low rates, relaxed underwriting, and underwriting losses) is eventually followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern again repeats itself.

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Mandatory rate law

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State law under which insurance rates are set by a state agency or rating bureau and all licensed insurers are required to use those rates.

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Prior approval law

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State law under which insurance rates must be approved by the state insurance department before they can be used

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File-and-use law

Back 26

State law under which insurance rates must be filed with the state insurance department but can then be used immediately

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Use-and-file law

Back 27

State law under which insurance rates can be put into effect with filing information subsequently submitted and subject to regulatory review

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Flex rating law

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State law under which prior approval is required only if the new rates exceed a certain percentage above (and sometimes below) the rates previously filed

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Open competition system

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A system under which rates do not have to be filed with the state insurance department

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Unfair trade practices acts

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State laws that prohibit an insurer from using unfair methods of competition and engaging in unfair acts or practices as defined in the acts

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Rebating

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The practices of giving a portion of the producer's commission or some other financial advantage to an individual as an inducement to purchase the policy

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Advisory organizations

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Independent corporations that work with and on behalf of insurers that purchase or subscribe to their services. Services include prospective loss costs and standard contract forms

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Marketing system

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The system that directs and facilitates the design, development, sale, and support of a product or service

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Distribution channel

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The channel used by the producer of a product or service to transfer that product or service to the ultimate customer

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Actual authority

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Authority (express or implied) conferred by the principal or an agent under and agency contract

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Apparent authority

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Authority that arises from a third party's reasonable belief based on appearances created by a principal that an agent has authority to act on behalf of that principal

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Independent agency and brokerage marketing system

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An insurance marketing system under which producers (agents or brokers), who are independent contractors, sell insurance, usually as representatives of several unrelated insurers

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Managing general agents (MGAs)

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Independent business organizations that function almost as branch offices for one or more insurers and that point and supervise independent agents and brokers for insurers using the independent agency and brokerage system.

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Excess and surplus lines (E&S) brokers

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Persons or firms that place business with insurers not licensed (nonadmitted) in the state in which the transaction occurs but that are permitted ("eligible") to write insurance because coverage is not available through standard-market insurers

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Exclusive agency marketing system

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An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers).

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Direct writer marketing system

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An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer

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Cold canvass

Back 42

Also known as "cold calling,' cold canvass is an insurance sales technique involving the solicitation of insurance prospects either by phone or in person, without a prior appointment

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Agency bill

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A payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commission.

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Direct bill

Back 44

A payment procedure in which an insurer sends premium bills to the insured, collects the premium, and sends any commission payable on the premium collected to the producer

Front 45

Alternative distribution channels

Back 45

Distribution channels used by insurers that elect not to use an agency force to obtain and service customers; frequently the channels are technology driven (Internet, interactive voice response) and are combined with traditional distribution channels

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Direct response distribution channel

Back 46

An insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone, or the Internet

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Affinity marketing

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A type of group marketing that targets various groups based on profession, association, interests, hobbies, and attitudes

Front 48

Underwriting

Back 48

The process of determining what loss exposures will be insured, for what amount of insurance, at what price, and under what conditions

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Book of business

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A group of policies, also called a portfolio, with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer, producer, or agency

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Adverse selection

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A situation that occurs because people with the greatest probability of loss are the ones most likely to purchase insurance

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Physical hazard

Back 51

A tangible condition of property, persons, or operations that increases the frequency or severity of loss

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Moral hazard

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A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

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Attitudinal or morale hazard

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A condition of carelessness or indifference that increases the frequency or severity of loss.

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Legal hazard

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A condition of the legal environment that increases loss frequency or severity

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Experience rating

Back 55

A ratemaking technique that adjusts the insured's premium for the upcoming policy period based on the insured's experience for the current period

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Schedule rating

Back 56

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

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Retrospective rating

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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

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Line underwriter

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Underwriter who is primarily responsible for implementing the steps in the underwriting process

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Staff underwriter

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Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy

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Underwriting audit

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A process in which members of an insurer's home office underwriting department examine files to see whether underwriters in branch or regional offices are following underwriting guidelines

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Retention ratio

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The percentage of insurance policies renewed

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Success ratio

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The ratio of insurance policies written to those that have been quoted to applicants for insurance

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Fire-resistive construction

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Construction that incorporates load-bearing members and that has a fire-resistance rating of at least two hours

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Modified fire-resistive construction

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Construction that has load-bearing walls and columns of masonry or reinforced concrete construction and that has a fire-resistive rating of one to two hours

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Masonry noncombustible construction

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Masonry construction or construction that includes exterior walls of fire-resistive construction with a fire-resistance rating of not less than one hour.

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Joisted masonry construction

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Construction that has load-bearing exterior walls made of brick, adobe, concrete, gypsum, stone, tile, or similar materials; that has floors and roofs of combustible materials; and that has a fire-resistance rating of at least one hour.

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Frame construction

Back 67

Construction that has load-bearing components made of wood or other combustible materials

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Fuel load, or fire load

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The expected maximum amount of combustible material in a given area of a building, including both structural elements and contents

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Fire division

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A section of a structure so well protected that fire cannot spread from that section to another, or vice versa

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Fire wall

Back 70

A wall that resists the spread of fire by serving as a fire-resistive barrier

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Parapet

Back 71

A vertical extension of a fire wall that extends above a roofline.

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Fender wall

Back 72

An extension of a fire wall through an outer wall

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Building codes

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Local ordinances or state statutes that regulate the construction of buildings within a municipality, county, or state

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Common hazards

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Hazards existing in almost every class of business occupancy, usually referring specifically to (1) housekeeping, (2) heating equipment, (3) electrical equipment, and (4) smoking

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Special hazards of the class

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Hazards that are typical for the class of loss exposures

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Special hazards of the risk

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Hazards that are created by the activities of a particular business and that are not typical of other businesses with which it would be classed.

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Public fire protection

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Fire protection equipment and services made available through governmental authority to all properties within a defined area

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Local fire alarm system

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A detection system, triggered by smoke or heat, that sounds a gong, siren, or another audible alert inside or outside the building

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Central station system

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A private detection service that monitors the systems of multiple businesses and/or residences and that calls appropriate authorities or dispatches its own personnel when an alarm is activated

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Automatic sprinkler systems

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Fire sprinkler systems with a series of interconnected valves and pipes with sprinkler heads. Each sprinkler head usually contains a heat-sensing element that responds individually to the heat generated by a fire.

Front 81

Wet pipe sprinkler systems

Back 81

Automatic fire sprinkler systems with pipes that always contain water under pressure, which is released immediately when a sprinkler head opens

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Dry pipe sprinkler systems

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Automatic fire sprinkler systems with pipes that contain compressed air or another inert gas that holds a valve in the water line shut until an open sprinkler head releases the gas and allows water to flow through the previously dry pipe to the sprinkler head

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Pre-action sprinkler systems

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Automatic fire sprinkler systems with automatic valves controlled by smoke or heat detectors

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Deluge sprinkler systems

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Automatic fire sprinkler systems with valves that remain open and that are controlled by an automatic fire detection device, such as a smoke or heat detector

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External loss exposures

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Loss exposures outside the area owned or controlled by the insured

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Amount subject

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The total value exposed to loss at any one location from any one event

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Probable maximum loss (PML)

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An estimate of the largest likely loss

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Nationwide Marine Definition

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Definition of the kinds of loss exposures and coverages that can be classified under state insurance laws as marine and inland marine insurance

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Navigation warranty

Back 89

Part of a yacht insurance policy that restricts coverage to the navigational areas for which the hull, the equipment, and the operator's experience are appropriate

Front 90

Filed classes

Back 90

Inland marine classes for which advisory organizations are required to file loss costs, rules, and forms

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Nonfiled classes

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Inland marine classes rated according to the individual insurer's underwriting practices

Front 92

Loss control

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A risk management technique to reduce loss frequency or loss severity

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Loss prevention

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A loss control technique to lower the frequency of losses

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Loss reduction

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A loss control technique to lower the severity of losses that occur

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Liability insurance

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Insurance that covers losses resulting from bodily injury to others or damage to the property of others for which the insured is legally liable and to which coverage applies

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Tort

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Wrongful act (other than a breach of contract) committed by one person against another for which a civil lawsuit in a court can provide a remedy

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Negligence

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Failure to act in a manner that is reasonably prudent or failure to exercise an appropriate degree of care under given circumstances

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Invitee

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Person who enters a premises for the financial benefit of the owner or occupant

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Licensee

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Person who enters a premises with the owner's or occupant's permission

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Trespasser

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Person who enters a premises without the owner's or occupant's permission

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Intentional torts

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Category of torts that involves a wrongful act or omission of a type intended to cause harm

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Strict liability

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Liability imposed without regard to fault

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Vicarious liability

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Liability arising when one party is held liable for the actions of another party

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Premises liability loss exposures

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Liability loss exposures that arise from the ownership or possession of real property (the premises)

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Operations liability loss exposures

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Liability loss exposures that arise from a policyholder's business activities conducted away from its own premises and from uncompleted work.

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Completed operations loss exposures

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Liability loss exposures that arise from an organization's finished work

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Hold-harmless agreement

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Contractual provision that obligates the indemnitor to assume the indemnitee's legal liability

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Indemnitor

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Party in a hold-harmless agreement who assumes the other party's liability

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Indemnitee

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Party in a hold-harmless agreement whose legal liability is assumed by the indemnitor

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Breach of warranty

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Source of liability based on laws that protect consumers who purchase products that do not perform as expected

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Attractive nuisance

Back 111

Potentially harmful object or structure so inviting or interesting to children that would lure them onto someone's premises

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Premium audit

Back 112

Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided

Front 113

Ratemaking

Back 113

the process insurers use to calculate insurance rates, which are a premium component

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Actuary

Back 114

A person who uses complex mathematical methods and technology to analyze loss and other data used in determining insurance rates

Front 115

Pure premium

Back 115

The amount included in the rate per exposure unit required to pay losses

Front 116

Expense provision

Back 116

The amount that is included in an insurance rate to cover the insurer's expenses and that might include loss adjustment expenses but that excludes investment expenses.

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Loss adjustment expenses

Back 117

the expenses associated with adjusting claims

Front 118

Earned exposure unit

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Exposure unit for which an insurer has provided a full year of coverage

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Profit and contingencies

Back 119

An amount included in the insurance rate to protect insurers against the possibility that actual claims or expenses will exceed projections

Front 120

Experience period

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The period for which all pertinent statistics are collected and analyzed in the ratemaking process

Front 121

Pure premium method

Back 121

A method for calculating insurance rates using estimates of future losses and expenses, including a profit and contingencies factor

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Loss ratio method

Back 122

A method for determining insurance rates based on a comparison of actual and expected loss ratios

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Judgment ratemaking method

Back 123

A method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data

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Policy-year method

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A method of collecting ratemaking data that analyzes all policies issued in a given twelve-month period and that links all losses, premiums, and exposure units to the policy to which they are related

Front 125

Calendar-year method

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A method of collecting ratemaking data that estimates both earned premiums and incurred losses by formulas from accounting records

Front 126

Accident-year method

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A method of collecting ratemaking statistics that uses incurred losses for an accident year, which consist of all losses related to claims arising from accidents that occur during the year, and that estimates earned premiums by formulas from accounting records

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Linear trending

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A method of loss trending that assumes a fixed amount of increase or decrease for each time period and whose amount is in either dollars or number of claims

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Exponential trending

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A method of loss trending that assumes a fixed percentage increase or decrease for each time period

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Claim adjusting

Back 129

The insurer function that handles demands for claim payments

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Adjuster, or claim representative

Back 130

A person responsible for investigating, evaluating, and settling insurance claims

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Independent adjusters

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Adjusters who handle claims on a case-by-case basis for a fee and who are not employees of insurers

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Public adjusters

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Adjusters who represent policyholders to negotiate a settlement with the insurer in exchange for a fee or a percentage of the settlement

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Reservation of rights letter

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A letter providing notice to the insured that the insurer is investigating a claim that is issued to inform the insured that a coverage problem might exist, and that protects the insurer so it can deny coverage if necessary

Front 134

Nonwaiver agreement

Back 134

An agreement that is signed by the policyholder and that indicates that the insurer may investigate a claim while reserving the right to deny coverage if necessary

Front 135

Declaratory judgment

Back 135

A ruling by a court to determine whether an insurance policy provides coverage

Front 136

Legal liability

Back 136

The legal responsibility of a person or an organization for bodily injury or property damage suffered by another person or organization

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Special damages

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Compensatory damages awarded for specific out-of-pocket expenses, such as doctor and hospital bills

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General damages

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Compensatory damages awarded for losses, such as pain and suffering, whose monetary value cannot be documented easily

Front 139

Extra-contractual damages

Back 139

Monetary awards that are against an insurer for its negligence to its insured and that are considered extra-contractual because they are beyond the insurance contract between insurer and insured

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Defense and containment expenses

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Costs of adjusting a claim that can be assigned to a specific claim

Front 141

Adjusting and other expenses incurred

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Costs of adjusting a claim that relate to the overall operation of an insurer's claim function

Front 142

Judgment method

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A case reserving method in which the amount that will eventually be paid to settle the claim is estimated by a claim adjuster or another claim specialist.

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Average value method

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A case reserving method that establishes a predetermined dollar amount of reserve for each claim as it is reported

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Tabular method

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A case reserving method that establishes an "average" amount of all claims that have similar characteristics in terms of the claimant's age, health, and marital status

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Stair-stepping

Back 145

incremental increases in claim reserves the claim representative without any significant change in the facts of the claim

Front 146

Alternative dispute resolution (ADR)

Back 146

methods used to settle claims that avoid litigation