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143 Cards in this Set

  • Front
  • Back

Name all Private Firms and Persons

1. Insurers

2. Insurance Agencies

3. Insurance Agents/Producers

4. Insured


Insurance companies or carriers that manufacture and sell insurance coverage by way of insurance policies or contracts

Insurance Agencies

Independant organizations that recruit, contract with, and support sales agents and producers

Insurance Agents/Producers

Licensed individuals representing an insurance company when transacting insurance


The person or entity that buys insurance for protection from loss of life, health, property or liability

Name all Trade and Regulatory Associations

1. The National Association of Insurance Commissioners (NAIC)

2. Federal Insurance Office (FIO)

3. Insurance producer and company trade associations

The National Association of Insurance Commissioners (NAIC)

1. Consists of all State and territorial insurance commissioners or regulators

2. Provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators

3. Promotes uniformity amount states; Members may accept or reject recommendations

4. Has no legal authority to enact or enforce insurance laws

Federal Insurance Office (FIO)

1. Established by the Dodd-Frank Wall Street Reform and Consumer Protection Act

2. Monitors the insurance industry and identifies issues and gaps in the state regulation of insurers

3. monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low-and-moderate-income persons.

4. Not a regulator or supervisor; Insurance is primarily regulated by the individual State

Insurance Producer and Company Trade Associations

Provide education, support, networking and lobbying for insurance companies and producers

The insurance industry is regulated primarily at what level?

State level

What does the legislative branch do?

Writes and passes state insurance laws, or statutes, to protect the insuring public

What does the judicial branch do?

Interprets and determines the constitutionality of the statutes

What is the role of the state's executive branch?

Enforce the existing statutes that have been put in place

What does the Commissioner of Insurance do?

Has the power to issue rules and regulations to help enforce statutes

Who usually appoints the Commissioner, Director, or Superintendent of Insurance

the Governor

What did the McCarran-Ferguson Act of 1945 determine?

Determined that the federal government can not regulate insurance in areas over which states have the authority to do so

Why did Congress create federal agencies?

To provide regulatory oversight impacting insurance practices

When do government insurers step in?

When private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk; Are a last resort

Most insurance is written through who?

Private insurers

When private insurers are unable to provide protection, who steps in?

Governmental insurers

* usually relates to the catastrophic nature of the risk

* capacity to handle the risk

* lack of desire to engage in a line of insurance where experience to evaluate necessary premium intake to offset potential loss is lacking

Names Types of Insurance - Insurance Companies and Carriers

1. Stock Insurance Company

2. Mutual Insurance Company

3. Reciprocal Insurance Company

4. Lloyds of London

5. Fraternal Benefit Societies

6. Risk Retention Group (RRG)

7. Self Insurer

Stock Insurance Company

* Owned by stockholders or shareholders

* Director and officers direct the company operations and are elected by stockholders

* Stockholders receive taxable corporate dividends as a return of profit when declared by the Directors

* Dividends are not guaranteed

* Traditionally stock insurers issue Non-Participating policies

Mutual Insurance Company

* Owned by policyholders (referred to as members)

* A Board of Trustees or Directors directs the company operations and is elected by policyholders

* Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors

* Dividends are not guaranteed

* Mutual insurers issue Participating policies

Reciprocal Insurance Company

* A group-owned insurer whose main activity is risk sharing

* A recipriocal insurer is unicorporated, and is formed by individuals, firms and business corporations that exchange insurance on one another

* Each member is known as a subscriber. Each subscriber assumes a part of the risk of all other subscribers.

* If premiums collected are insufficient to pay losses, an assessment of additional premium can be made

* The exchange of insurance is affected through an Attorney-In-Fact

Lloyds of London

* Not an insurance company. Consists of groups of underwriters called Syndicates

* Each syndicate specializes in insuring a particular type of risk

* Lloyds provides a meeting place and clerical services for syndicate members who actually transact the business of insurance

* Members are individually liable for each risk they assume

* Coverage provided is underwritten by a syndicate manager such as an attorney-in-fact or individual proprietor

Fraternal Benefit Societies

* Social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members

* Membership consists of members of a given faith, lodge, order, or society

* Organized on a non-profit basis

Risk Retention Group (RRG)

* A group-owned insurer that primarily assumes and spreads the liability related risks of its members

* Licensed in at least one state and may insure members of the group in other states

* Owned by its policyholders

* Group must be made up of a large number of homogeneous or similar units

* Membership is limited to risks with similar liablity exposures such as theme parks, go cart tracks, or water slides

* Must have sufficent liquid assets to meet loss obligations

* Each memeber assumes a portion of the risk insured

Self Insurer

* To assume the financial risk one's self

* An option only for large companies who may even reinsure for risks above certain maxium limits

Residual Markets

* A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers

* A Joint Underwriting Association or Joint Reinsurance Pool requires insurers writing specific coverage lines in a given state to assume the profits/losses accruing their share of the total voluntary market premiums written in that state

* Risk Sharing Plan - Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels

* Coverage is typically written as workers' compensation, personal auto liabilty or property insurance on real property

Reinsurance Companies

* An insurance company that assumes all or a portion of a risk from a primary or ceding insurance company

* Reinsruance transfers risk among insurance companies

* The insurer requesting reinsurance is the primary or ceding company

* The Insurer sharing in the risk is the reinsurance company

* Consumer inquiries must origniate with the ceding company, which then obtains reinsurance

Types of reinsurance

1. Treaty Agreements - Reinsurance agreement that covers all risk contained in the subject line(s) of business automatically

2. Facultative Agreements - Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks

Financial Rating Services

* Independent financial rating services evaluate and rate the financial stability of insurance companies

* These companies assign rating codes to show finanical strength or weakness of each company rated

* The rating are available to the public

* Producers are responsible for placing business with insurers that are financially sound

* Examples of rating services include: A.M. Best Company, Standard & Poor's, Moody's Investment Services, Weiss Insurance Rating, and Fitch Ratings

What does domicile refer to?

Refers to the jurisdiction (i.e. state or county) where an insurer is formed or incorporated

Domestic Insurer

An insurer organized under the laws of this state, whether or not it is admitted to do business in this state

Foreign Insurer

An insurer not organized under the laws of this state, but in one of the other states or jursidictions within the United States, whether or not it is admitted to do business in the state or jurisdiction

Alien Insurer

An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state

Admitted vs. Non-admitted

R efers to whether or not an insurer is approved or authorized to write business in this State

* This domicile does not impact whether an insurer may be admitted to do business in this State

* A Non-Admitted (Non-Authorized) insurer has either applied for authorization to do business in this state and was declined or they have not applied. They are not authorized to transact insurance in this state

* An Admitted (Authorized) insurer is authorized by this State's Commisioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State

* Surplus and Excess lines insurance can be placed through non-admitted carriers

Surplus Lines Insurance

Finds coverage when insurance cannot be obtained from admitted insurers

* May not be utilized solely to receive lower cost coverage than would be available form an admitted carrier

* Each State regulates the procurement of Surplus Lines insurance in its State

* Non-admitted business must be transacted through a Surplus Lines Brokers or Producers

Insurer Management

1. Executives - Oversee the operation of the business

2. Actuarial Department - Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates

3. Underwriting Department - Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium

4. Marketing/Sales Department - Responsible for advertising and selling

5. Claims Department - Assists the policyholder in the event of a loss

Name all Distribution Models

1. Exclusive or Captive Agency System

2. Direct Writing System

3. Independent Agency

4. Career Agency System

5. Personal Producing General Agent

6. Direct Mail or Direct Response Company

7. Mass Marketing

Exclusive or Captive Agency System

Deals with the insured through an exclusive or captive agent

* Agent represents solely one company or group of companies having common ownership

* Insurer retains ownership rights to the business written by the agent

* The agent is an employee or a commissioned independent contractor

* Insurer may or may not provide office and agency support services

Direct Writing System

* Producer or Agent is an employee of the insurer

* Insurer owns the accounts

* The agent may be paid a salary, salary plus bonus, or commission

Independent Agency

* An agent or agency that enters into agency agreement with more than one insurer. It may represent an unlimited number of insurers

* Agency retains ownership of the business written

* An independent contractor that is paid a commission and covers the cost of agency operations

Career Agency System

Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company

Personal Producing General Agent

* Does not recruit career agent

* Sells insurance for carriers it is contracted with and maintains its own office and staff

Direct Mail or Direct Response Company

* Sells insurance policies directly to the public with licensed employees or contractors

* A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines

Mass Marketing

* Used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP)

* Insurer reduces marketing and underwriting expenses

Name all Insurance Agents and Producers

1. Law of Agency

2. Insurer (principal)

3. Producer (agent)

4. Broker

Law of Agency

* A relationship between two or more parties where one party (the agent or producer) acts on behalf of the other party, known as the principal or insurer

* The agent or producer binds the actions and words of the principal

Insurer (principal)

* Insurer is the source of authority form which the producer must abide

* Insurer is responsible for all acts of a producer, when producer is acting within the scope of its authority

* Producer may be personally liable when his/her actions exceed the authority of the agency's contract

Producer (agent)

* A person or agency appointed by an insurance company to represent it and to present policies on its behalf

* A producer possesses three types of authority

1. Express - Authority that is written into the producer's agency contract. An example would be the producers binding authority if written in the contract

2. Implied - Authority the public assumes the producer has. An example would be the business activities of providing quotes, completing applications and accepting premiums on behalf of the insurer

3. Apparent - Authority created when producer exceeds the authority expressed in the agency contract. This occurs when the insurer does nothing to counter the public impression that such authority exists. An example would be the producer's acceptance of premiums on a lapsed policy

Producer's Responsibilities to the Insurer are:

1) Fiduciary duty to the insurer in all respects, especially when handling premium funds

2) Must keep premium funds in a trust account separate from other funds and forward to insurer promplty

3) Must report any material facts that may affect underwriting

4) Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer

5) Duty to only recommend the purchase of suitable policies

Producer's responsibilities to Insurance Applicants or Insured are:

1) Forward premiums to insurer on a timely basis

2) Seek and gain knowledge of the applicant's insurance needs

3) Review and evaluate the applicant's current insurance coverage, limits and risks

4) Serve the best interests of the applicant or insured, although producers represent the insurer

5) Recommend coverage that best protects the insured from possible loss and NOT the most profitabel coverage from the perspective of the producer


* A licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant

* Represents the applicant or insured's interests, not the insurer, and thus does not have legal authority to bind the insurer

* A broker's license is not applicable in all states

Federal Regulations

1. Fair Credit Reporting Act (15 USC 1681-1681d)

2. Financial Anti-Terroism Act (USA Patriot Act)

3. Fraud and False Statements (Fraudulent Insurance Act)

4. Merchant Marine Act of 1920 (the Jones Act)

5. Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

5. Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)

6. Terrorism Risk Insurance Act and its Extensions of 2005 and 2007

7. Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

Fair Credit Reporting Act (15 USC 1681-1681d)

1. Protects consumer privacy

a. Ensure data collected is confidential, accurate, relevant and used for a proper and specific purpose

b. Protects the public from overly intrusive information collection practices

2. When an applicant is taken, it must inform the applicant a credit report (from consumer reporting agency) will be obtained. This is done to determine the financial and moral status of an applicant (for variety of purposes such as employement screening, insurance underwriting or loan approvals)

3. Applicant has the right to reveiw the report

a. Applicant challenge - Credit reporting agency must reinvestigate within 6 months, if applicant challenges accuracy

b. Inaccuracies - Agency must forward to applicant inaccurate information given out within previous 2 years

c. Disallowed information - Report must not include lawsuits over 7 years old or bankruptcies over 14 years old

4. Insurer obligations

a. Insurer is not responsible for correcting inaccuracies on any reports

b. If an applicant is denied coverage because of inaccurate information they are entitled to certain rights

Financial Anti-Terrorism Act (USA Patriot Act)

Imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act)

Fraud and False Statements (Fraudulent Insurance Act)

1. Fraud always involves a false statement and deceit; it can be either a cirninal civil crime. Federal laws prohibit the commission of fraud

2. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Each of the states enacted its own Fraudulent Insurance Act

3. A fraudulent act involves a misstatement of material fact by a person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement

4. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers

5. Insurance applications and claim forms msut contain a disclosure about how false statements and fraud will be treated by the insurer. A sample warning is, "Any person who knowingly presents false or fraudulent information on an insurance application or claim for the payment of a loss is guilty of a crime and may be subject to fines and confinement in state prison

Merchant Marine Act of 1920 (the Jones Act)

Because workers' compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injurises suffered during the course of employement.

It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen

Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)

Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier's right to set its own rates.

Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer

Gramm-Leach-Bliley Act (GLBA, aka the Financial Services Modernization Act of 1999)

1) Repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguard Rule for the protection of consumers' privacy

2) The Financial Privacy rule requires "financial institutions," which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter

3. The privacy notice must explain:

a. The information collected about the consumer

b. Where that information is shared

c. How the information is used

d. How that information is protected

4. The notice must also identify the consumer's right to opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act

5. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance

6. Each time the privacy notice is re-established, the consumer has the right to opt out again

Terrorism Risk Insurance Act and its Extensions of 2005 and 2007

1. Terroism Risk Insurance Act of 2002 (TRIA) - Enacted in direct response to the terrorist attacks New York and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks

2. TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism

3. TRIA was a temporary program that allowed the federal governments to share in terrorism losses with private insurers in the event a certified act of terrorism took place

4. TRIA expired on December 31, 2005 and was extended for two years, with changes, under the Terrorism Risk Insurance Extension Act of 2005 (TRIEA). It was extended with changes a second time, in 2007, under teh Terrorism Risk Insurance Program Reauthorization Act of 2007 (TRIPRA) and is scheduled to expire on December 31, 2014

5. Protects consumers by addressing market disruption and ensuring the continued widespread availability and affordability of property and casualty insurance for terrorism risk

6. The Act provides for a Terrorism Insurance Program established in the Department of the Treasury. The Secretary of the Treasury administers the Program, "Act of Terrorism" is defined as any act certified by the Secretary of Treasury, in cooperation with the Secretary of State and Attorney General

7. Only commercial property and casualty insurance is covered by the Program; personal lines insurance and life and health insurance are not covered

8. No payment may be made by the Secretary under the Program with respect to an insured loss covered by an insurer, unless:

a. The person that suffers the insured loss, or a person acting on behalf of that person, files a claim with the insurer

b. The insurer provides clear and conspicuous disclosure to the policyholder of the premium charged for insured loss covered by the Program and the Federal share of compensation for insured losses under the Program

c. The insurer processes the claim for the insured loss in accordance with appropriate business practices, and any reasonable procedures that the Secretary may prescribe

d. The insurer submits to the Secretary, in accordance with such reasonable procedures as the Secretary may establish

9. An insurer must make coverage for insured losses that do not differ materially from the terms, amounts, and other coverage limitations applicable to losses arising from events other than acts of terrorism

10. The Secretary shall not make any payment for any portion of the amount of such losses that exceeds $100 billion (cap on annual liability) and no insurer that has met its insurer deductible shall be liable for the payment of any portion of that amount that exceeds $100 billion

11. The insurer deductible is 20% of all covered losses

12. The insurance marketplace aggregate retention amount (the maximum losses the insurance industry must sustain before federal co-payments are available) is the lesser of $27.5 billion and the aggregate amount, for all insurers, of insured losses during such period

13. The insurance companies share of losses in excess of the deductible (amounts paid or losses exceeding insurer's deductible) is 15% while the federal government is responsible for 85%

Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)

The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime and fraud

1. The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust

a. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance

b. Dishonesty - Deceit, misrepresentation, untruthfulness, falsification

c. Breach of Trust - Based on fiduciary relationship of parties and the wrongful acts of violating the relationship

2. Penalties - Fines and possible prison time

3. Insurance license applications and producers:

a. Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance - prior to applying for an insurance license

b. Producers must apply for consent in their resident state

c. Officers and employees must apply for consent in the state where their home office is located

d. Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business

e. Reciprocity - If consent is granted by any state, other states must allow the applicant to work in their states as well

f. Consent Withdrawal - If conditions of consent are not continually met, the consent may be withdrawn

What is included in risk management?

1. Risk

2. Management

3. Types of Risk

4. Loss

5. Peril

6. Hazard

7. Loss Exposure

8. Adverse Selection

9. Managing Risk

10. Insurable Risks


* A condition where the chance, likelihood, probability or potential for a loss exists

* Uncertainty concerning a loss


* The determination of what types of protection are required to meet an insured's needs

* A survey of the insured's operations, health assets and exposures that could give rise to losses

* Assessment of potential loss frequency and severity

* Physical inspections, applications or medical exams used for underwriting help to manage a risk

Types of Risk

1. Speculative Risk - Situations where there is a chance for loss, gain, or neither loss nor gain to occur

* An example of speculative risk is gambling

* Speculative risk cannot be insured

2. Pure Risk - situations where there is no chance for gain; the only outcome is for nothing to occur or for a loss to occur

* can be insured

* Examples: 1) the possibility of damage to property caused by a fire or other natural disaster 2) the possibility of financial loss as a result of death


* Reduction, decrease, or diappearence of value.

* The basis of a claim for damage under the terms of an insurance policy


The cause of loss


A specific condition that increases the probability, likelihood, or severity of a loss from a peril

What are the 3 types of Hazard

1. physical hazard

2. moral hazard

3. morale hazard

Physical Hazard

* A physical condition that increases the probability of loss

* Use, condition, or occupancy of property

Examples: flammable material stored near a furnace

Moral Hazard

* Dishonest tendencies that increase the probability of a loss

* Certain characteristics and behaviors of people

Example: An insured burns down his/her own house to collect the insurance payout

Morale Hazard

* Attitude that increases the probability of a loss

Example: Indifference or carelessness of leaving one's house or vehicle unlocked

Loss Exposure

* The condition of being at risk for a loss

* Purely by existing, property and people are at risk for loss

Adverse Selection

* An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace

Example: only those living in earthquake-prone areas seek to buy earthquake insurance

* High-risk exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do

Managing Risk

* Analyzing exposures that create risk and designing programs to minimize the possibility of a loss

* Ways of managing risk: STARR

S - Sharing: Investments of a large number of people may be pooled by use of a corporation or partnership

T - Transfer: * Transferring the risk from one party to another, such as from a consumer to an insurance company

* Transfer the uncertainty of loss via a contract

A - Avoidance: *Elimination of the risk

* Avoid the activity that gives rise to the chance of loss

* After potential areas of hazards have been identified, it may be found that some exposure to risk can be eliminated, but it is impossible to avoid all risk

R - Reduction: *Minimizing the chance of loss, but not preventing the risk

* Pooling or spreading the risk among a large number of persons or entities

Example: sprinkler systems, burglar alarms, pollution controls and safety guards on machinery

R - Retention: * Assume the responsibility for loss

* Self-insure the entire loss or portion of the loss; Choosing deductibles is a method of risk retention

* It might be economically practical for an insured to not insure each exposure to loss and instead insure only those risks that threaten financial stability security

What must insurable risk include?

1. Large number of homogeneous units or groups with the same perils

* Law of Large Numbers - as the number of units in a group increases, the more likely it is to predict a particular outcome

* Auto insurance losses are the easiest type of insurance loss to predict precisely because the number of units insured is a so great

2. The chance of loss must be calculable. A statistical expectation of loss is used by insurers to calculate premiums

3. The loss must be measurable (definite and verifiable in terms of amount, cause, place and time)

4. The premium must be affordable

5. From the perspective of the insured, the loss must be accidental in nature

6. Catastrophic perils are not covered

Example: war, nuclear hazard and illegal operations

Insurance Concepts

1. The Insurance Contract

2. Principal of Indemnity

3. Insurability

4. Underwriting

5. Insurable Events

6. Insurable Interest

The Insurance Contract

* A legal contract purchased to indemnify the insured against a loss, damage or liability arising from an unexpected event

* The exchange of a relatively small and definite expense for the risk of loss that, if it occurs, may be large or small

* A contract designed to transfer risk from the insured to the insurer

Principal of Indemnity

* Insured is restored to the same financial or economic condition that existed prior to the loss

* Insured should not profit from an insurance transaction


The of an applicant to meet an insurer's underwriting requirements


The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage

Insurable Events

Any event, past or present, that may cause loss or, damage or create legal liability on the part of an insured

Insurable Interest

1. All Policies

* Insurable interest must exist in every enforceable insurance contract. Depending upon the contract, it must exist at the time of application or at the time of loss

* Requires the potential for an insured to suffer financial or economic hardship in the event of a loss

2. Life & Health policies

* Insurable interest must exist at the time of application, but not at time of loss

* Coverage is determined based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured

* The amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply

3. Property

* Insurable interest must exist at the time of the loss

* Property ownership (or mortgage or lien) is evidence of insurable interest

4. Casualty

* Insurable interest must exist at the time of the loss

* Insurable interest usually results from property or contract rights and potential legal liability

General Terms of Contracts

1. Contract Law

2. Tort Law

3. Contract of Utmost Good Faith

4. Estoppel

5. Hold Harmless Agreement

6. Parole Evidence Rule

7. Waiver

Contract Law

Pertains to the formation and enforcement of contracts

Tort Law

* Torts are civil wrongs

* They're not crimes or breaches of contract

* They result in injuries or harm that constitute the basis of a claim by a third party

Contract of Utmost Good Faith

* Both parties bargain in good faith when forming and entering into the contract

* The two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made


Prevents the denial of a fact, if the fact was admitted to be true previously

Hold Harmless Agreement

* A contractual agreement that transfers the liability of one party to another party

* It is used by landlords, contractors, and other as a way to avoid or reduce risk

Parole Evidence Rule

A written contract may not be altered without the written consent of both parties


Voluntary surrender of a known right, claim or privilege

Four Elements of a Legal Contract

1. Competent Parties

2. Legal Purpose

3. Agreement

4. Consideration

Competent Parties

* All parties to a contract; Insurer and Insured must have legal capacity to enter into a contract

* Those without legal capacity include:

1. Minors - the insurer may be held responsible for its obligations, however, in most cases a minor cannot enter into a contract. Exceptions do exist, such as for the purchase of auto insurance

2. The mentally incompetent or incapacitated

3. Persons under influence of drugs or alcohol

Legal Purpose
*All parties to a contract must enter it for a legal purpose; public policy cannot be violated by a legal contract

* All parties to a contract must enter it in good faith


One party must make and communicate an offer to the other party and the second party must accept that offer

* offer - the offer for entering an insurance contract is the application submitted by the applicant

* acceptance - the acceptance of an insurance contract takes place when the insurance company agrees to issue insurance. A counteroffer by the insurance company is not acceptance until the applicant accepts the counteroffer


* Something of value is exchanged; the exchange of an act for a promise

* The consideration made by the applicant is the premium payment

* The consideration made by the insurer is its promise to pay for covered losses

Insurance Contracts: Characteristics, Definitions and Interpretations

Contract of Adhesion

* one person writes the contract, without input from the other party

* one party (insurer) prepares the contract and presents it to the other party (applicant) on a "take-it-or-leave-it" basis without negotiation

* any doubt or ambiguity found in the document is construed in favor of the party that did not write it (insured)

Aleatory Contract

t* The exchange of value is unequal

* Insured's premium payment is less than the potential benefit to be received in the event of a loss

* The insurer's payment in the event of a loss may be much greater, or much less (e.g. $0 in the event of a loss doesn't occur), than the insured's premium payment

Valued Contract

* A contract that pays a stated amount in the event of a loss

* most insurance policies are NOT valued contracts unless they are endorsed

Indemnity Contract

An agreement to pay on behalf of another party under specified circumstances, such as when a loss occurs


The party submitting an application for insurance


A policy form that alters or adds to the provisions of a property and casualty insurance contract

Personal Contract

Owner cannot transfer or assign ownership of an insurance policy (property and casualty) to another person

Non-Personal Contract

Owner may transfer or assign ownership of a life or health insurance policy to another person


Policy owners may not assign or transfer their rights under an insurance contract without the written consent of the insurer

Issue Age

Insured's original age on the policy issue date

Attained Age

Insured's age at any point in time at issuance, renewal or conversion

Effective Date

The date when insurance coverage begins

Lapse Date

* The date when insurance coverage ends

* If not cancelled prior, policy will terminate by end of grace period if premium is not paid

Unilateral Contract

* Only one party is legally bound to the contractual obligations after the premium is paid to the insurer

* Only the insurer makes a promise of future performance, and only the insurer can be charged with breach of contract

Conditional Contract

* Both parties must perform certain duties and follow rules of conduct to make the contract enforceable

* The insurer must pay claims if the insured has complied with all the policy's terms and conditions

Reasonable Expectations Doctrine

* What a reasonable and prudent policy owner would expect

* The reasonable expectations of policy owner's are honoured by the Courts although the strict terms of the policy may not support these expectations


Statements made by the applicant on the application that are believed to be true to the best of the knowledge and belief of the applicant; may be withdrawn prior to policy issuance


* A false statement contained int he application

* Usually does not void coverage or the policy

* In some cases, a material misrepresentation may void the policy


* The willful hiding or obscuring of material facts pertinent to the issuance of insurance (or a claim)

* Concealment results in denial of coverage and may void the policy


* Statements in the application or stipulations in the policy that are guaranteed true in all respects

* If warranties are later discovered untrue or breached (past, present or future) coverage (and sometimes the contract) is voided


* Intentional deception of the truth in order to induce another to part with something of value or to surrender a legal right

* Contains 5 elements:

1. False statement, made intentionally and that pertains to a material fact

2. Disregard for the victim

3. Victim believes the false statement

4. Victim makes a decision and/or acts based on the belief in, or reliance upon, the false statement

5. The victim's decision and/or action results in harm

Void Contract

An agreement without legal effect because it was made illegally or it was declared void by the courts because it doesn't contain all the elements of a legal contract

Voidable Contract

A valid contract that for reasons satisfactory to a court, may be set aside by one of the parties

Example: an insurer may void or revoke coverage for misrepresentation or fraud

Insurer Underwriting


* Primary responsibility is the selection of risks to be insured

* Also determines the classification, and premium rate if a risk is accepted by the insurer

* Underwriting protects the insurer against adverse selection and risks that are more likely than average to suffer losses

* Goal is to select risks that fall into the normal range of expected losses

* Field underwriter is the producer

* Line and staff underwriters are employed by the insurer

Underwriting Factors

1. Nature of risk

2. Hazards that are present

3. Claims history

4. Other factors that depend upon the type of risk being insured

Premium Assumptions

1. Must charge an adequate premium for the risk based on the same factors used in evaluating the risk

2. Premium rates are considered inadequate when they do not cover projected losses and expenses

3. Rates must not be excessive or unfairly discriminatory

4. rate - the dollar amount charged for a particular unit of insurance, such as $5 per $1,000 of insurance

5. premium - the total cost for the amount of insurance purchased

Example: $50,000 of coverage = $5 rate x 50 (per $1,000 of insurance) for a $250 premium

Rating Types/Methods

Class Rating

A rate charged to a group of policyholders who have similar exposures and experience

Experience Rating

A rate based on the policyholder's actual loss history when compared to the loss history of similar risks

individual Rating

* A rate used for a policyholder because a large enough pool of similar risks is not available to any other type of rate

* Primarily used for commercial speciality risk because of the number of unique variables involved

"A" Rating or Judgement Rating

An individual rate that doesn't use loss history as a component and that is derived largely from the underwriter's evaluation and best judgement the risk poses to the insurer

Loss Cost Rating

A rating organization provides insurers with the portion of a rate that does not include provisions for expenses or profit

* the expense and profit components to develop the final rate must be added by individual insurers based upon their projections

* Loss cost rating is used on risks for which the insurer may not have enough data to develop the rate, other than for expenses and profit

Manual Rating

The use of rates contained in a manual published by the insurer or those of the rating organization of which it is a member

Merit Rating

The use of rates that rewards a policyholder that takes measures to decrease the probability fo loss by the implementation of safety programs, loss control programs, etc.

Retrospective Rating

* The use of rates that adjust the policy premium to reflect the current loss experience of the policyholder

* Premium adjustments are subject to minimums and maximums

Schedule Rating

A method of rating property and liability risks by using charges and credits to modify a class rate based on the nature of the particular risk being rated

Rate Approval

File and Use

Rates must be filed with the state insurance regulatory authority (Department of Insurance) and may be used as soon as they are filed

Prior Approval

Insurers cannot use rates until approved by the Department of Insurance, or until a specific time period has expired after the filing

Mandatory Rates

Some states require that mandatory rates be used for certain lines of insurance

Open Competition

A state relies on competition between insurers to produce fair and adequate rates

Loss Reserves

* The net premiums plus interest reflects possible future contract obligations

* An accounting measurement of an insurer's future obligation to its policyholders

Case Reserve Method - A loss reserve established for each claim, when reported

Average Value Method - A loss reserve established based on average settlements of particular claim types

Loss Ratio Method - A loss reserve formula based upon the expected losses for a particular class or line

Tabular Method - A loss reserve based upon the estimated length of an insured's or claimant's life or expected disability

Financial Ratios

Loss Ratio - Determined by dividing Paid Losses + Loss Reserves by Total Earned Premiums

Expense Ratio - Determined by dividing an insurer's Total Operating Expenses by Written Premiums

Combined Ratio - Sum of the loss ratio and expense ratio