Chapter Definitions

Chapter 1
Loss exposure: any condition/ situation > possibility of loss> regardless of actual loss
occurs
Insurance: system of both transferring (through an insurance policy)and sharing cost of
losses.
Roles of insurance: risk management technique, transfer system, contract, business
Risk Management: process> making and implementing decisions> minimize adverse
effects of accidental losses (mitigate financial consequences of loss exposures)
Loss prevention: Risk control technique that reduces the frequency (no. of losses occurred
in a specified period) of a particular loss. Eg. Use of safety goggles by construction workers
Loss reduction: Risk control technique that reduces the severity (typically measured
monetarily) of a particular loss. Eg, placement of fire extinguisher in house/workplace
Law of large numbers: mathematical principle> enable insurers to make predictions about
losses. As no of similar but independent exposure unit (to the extent that they are not
generally subject to same loss-causing event) increases, relative accuracy of predictions
about future outcome (losses) also increases.
Exposure Unit: measure of loss exposure assumed by the insurer.
Property-Casualty Insurance: Covers for financial consequences of damage to ones own
property or legal liability to others. Eg, homeowner, auto, CGL.
Life-Health Insurance: covers for financial consequences of death, injury or sickness.
State Insurance Regulators: review insurance rates, policy form, underwriting & claim
practices, and financial performance; can revoke licenses of insurers who fail to comply with
state regulations.
Insurers Financial soundness: Insurers revenue = or > amount it pays for claims & other
admin exp
Revenue Sources: premiums and investment income
Insurance policy characteristics: Contract of; utmost good faith, indemnity, adhesion,
conditional, non transferable, fortuitous events and exchange of unequal amounts.
Utmost good faith: act with complete honesty and disclose all relevant facts.
Adhesion: one party must either accept or reject the agreement as it.
Indemnity: insurer agrees to pay for covered losses, an amount directly related to the
amount of loss.

Insurance Structure: Modular- several documents (eg CPP) or Self contained- single
document policy (eg. PAP).
Personal Insurance: cover individuals and families against personal loss exposure.
Common types are:

Property Insurance: indemnifies insured (by paying or replacing) suffering loss from
property been stolen, lost, damaged, or destroyed. Net income lost and other related
expenses also count.
Liability Insurance: covers for the insureds liability to others. Cost to defend insured
also counts.
Life Insurance: replaces income- earning potential lost through death. Related
expenses of deceased insured also count. Main categories, term life and permanent life
insurance.
Term Life Insurance: coverage for specified period with no cash value.
(effective risk management strategy)
Permanent Life Insurance: coverage till death; accrues a cash value.
Annuities: written by life insurers, provides periodic income (for a fixed period
or for life) an individual cannot outlive; with an exchange of a specified premium.
Health Insurance: covers for financial losses caused by sickness or accidents, such
as disability insurance (disability insurance is primarily income replacement
insurance).
Long-Term care insurance: coverage for extended medical care or custodial care
received in nursing home, hospital or home.
Homeowners Policy: covers both property & liability insurance; also personal
liability (bodily injury or property damage) coverage (damages and cost of defense
related to claim against insured). PL covers for allegations of negligence.
PAP: liability losses due to bodily injury or property damage of others arising from
use, maintenance and ownership of automobile such as auto accident, collision.
Comprehensive Coverage: coverage for direct and accidental losses to auto by
any peril other than collision or overturn or peril specifically excluded. Eg, fire, theft,
contact with animal.
Personal Watercraft Policy: covers for loss exposure due to ownership,
maintenance, or use of watercraft that is used for recreational or personal
transportation purposes.
Umbrella Liability Policy: provides excess/additional liability coverage for both
available and not available coverage in the underlying policies, subject to self
insured retention. (A dollar amount specified in a liability insurance policy that must
be paid by the insured before the insurance policy will respond to a loss)

Commercial Insurance: Loss exposures arising from business (profit and not for profit)
operations. Common types are:
CPP: Policy that covers two or more lines of business by combining ISOs commercial lines
coverage parts.
Commercial Auto Insurance: covers a business for exposures arising out of ownership,
maintenance or use of automobile. Defense costs also included.

BOP: combines most of the property and liability coverage needed by small and mid size
businesses.
Auto Physical damage coverage: Covers for damage to or theft (loss of use) of covered
auto, includes both collision coverage and other than collision (comprehensive) coverage.
Commercial Property Insurance: covers building and their contents against various
property loss exposures. Coverage is limited to property physically located on or near the
insureds premises.
Ocean (wet) marine insurance: oldest form of insurance; covers ships and their cargoes
against perils of the sea (vessel related liability exposures).
Inland (dry) marine insurance: covers different classes of property; involves element of
transportation (by land). Covers property in transit worldwide, equipments used on job sites,
backhoes & other mobile equipments.
Commercial Crime insurance: covers money and securities, and property other than
money and securities against crime perils and other numerous perils. Eg., extortion, theft or
burglary by outsiders or employees.
CGL insurance: provides protection and peace of mind to the business owner; Protection
against liability loss exposures faced by organization, including premises, operations and
products. Eg. Retail store has a wet floor and customer falls getting injured, side effects of a
product. Excludes pollution related claims.
Professional Liability Insurance: covers professionals for harm resulting from errors or
omissions from their professional practices; liability arising from rendering or failing to render
professional services.
Environmental Liability Insurance: protection to business owners against environmental
damage resulting from business operations. Eg. Leaking fuel tank
Commercial Umbrella Liability coverage: provides additional limits; protects insured in
the event of large liability losses.
Workers Compensation insurance: pays for medical care, lost wages, other state
mandated benefits to employees; its a no-fault coverage, provides coverage for benefit an
employer is obligated to pay under workers comp laws.
Ideally Insurable loss exposures: six characteristics,
1. Pure Risk( chance of loss, no loss but no gain) , not speculative (chances of loss, no
loss or gain)
2. Fortuitous losses(occurring by chance- no control by insured) by insured stand point
Moral Hazard: Incentive to cause a loss.eg arson committed by insured.
3. Definite(time, cause and location)and Measurable(frequency & severity)
4. Large number of similar exposure units
5. Independent and non catastrophic
6. Affordable

8 Benefits of insurance: (achieving risk financing goals when used as a risk financing
technique)
1.
2.
3.
4.
5.
6.
7.

8.

paying for losses primary role indemnify insured

managing cash flow uncertainty financial security and stability to insured
meeting legal requirementsboth statutory and contractual requirements
promoting risk controlmajor benefit; risk sharing mechanism like deductibles,
premium credit incentives and contractual requirements
enabling efficient use of resourceshaving insurance and using the savings for cos
growth
providing support for insureds creditreduces lenders uncertainty; guarantees that
lender will be paid in case the collateral is damaged by an insured event
providing source of investment funds for both insured(no retention funds reqd. to be
set aside for insured losses) and insurer(premiums can be invested until reqd. to pay
claims
Reducing social burdenseg. Social costs of natural disasters, compulsory auto
insurance

Costs of Insurance:
Premiums paid by insured
Operating costs of insurers(salary, producers commission,
advertising, bldg expenses, equipment, taxes, licensing fee, etc)
Opportunity costs
Incurred losses claim buildup: intentional exaggeration of a loss in
an otherwise legitimate claim. Nuksan ka barha charha k batana
Fraudulent claims: (increase costs for both insured- in terms of high premium and
insurers- in terms for paying for claims and investigation costs)
Losses incurred due to carelessness on part of insured such as leaving car keys in the
car.

Chapter#2
Pvt. Insurer: A nongovernment insurance provider.
Types of Pvt. Insurers: (CSLMRR)
Stock Insurers, Lloyds (both r proprietary insurers- profit to their owners)
Mutual Insurers, Reciprocal Insurance Exchange (both r cooperative insurersinsurance at minimum cost)
Captive Insurers, Reinsurance Co.,
Stock Insurers: owned by stockholderscorporation purpose is to earn profit for its
stockholders elect BOD who create & oversee corporate goals & objectives and appoint
CEO to carry out insurers operations.
Mutual Insurers: owned by the policyholders corporationpurpose is to provide
insurance to its policyholders. Demutualization: process through which mutual insurers
convert to stock insurers.
Assessment Mutual insurance co:
insurers charge insured addl. premium or assessment incase insurer has endured series of
losses from catastrophic event such as a hurricane. (theyre less common now)
Similarities b/w stock and mutual insurers:

Purpose to earn the profit

Payment of dividends
Voting rights (appointing BOD)

Reciprocal Insurance Exchanges: (Interinsurance exchanges) each member is an

insured and an insurer unincorporated organizationowned by its
policyholders/subscribersshare profits & losses on proportionate basis.
Subscription
Agreement: Authorizes attorney-in-fact to act on behalf of subscribers to market &
underwrite insurance coverage, collect premiums, invest funds and handle claims.
Attorney-in-fact: An individual or organization to operate the
reciprocal.
Lloyds: resemble stock insurersan insurance & reinsurance mkt place
each individual investor called a NAME

Lloyds function as an alien insurer in US

Captive Insurers: subsidiary formed to insure loss exposures of its parent co. and parents
affiliates owned and controlled by its insureds insure risk of owner
Reason for prevalencelow insurance cost, insurance availability, improved cash flow.
Reinsurance: transfer of insurance risk from one insurer to another. contractual
agreement b/w insurer and reinsurer in return for a reinsurance premium to indemnify for
some or all financial consequences of certain loss exposures covered by primarys insurance
policies.
Insurance Functions: (MUCRP)
Marketing
Elements of successful marketing programs
Market research to determine needs
Advertising to inform about their products & services
Selecting marketing systems training sales force setting sales goals
Motivating and managing sales force

Underwriting
Process of selecting insured, pricing coverage, determining insurance policy
terms and conditions, monitoring underwriting decisions made.
Underwriters follow underwriting process that involves gathering info, making
and implementing of decision.
Claims
Claim handling process has six activities: (to achieve fair & equitable settlement)
Acknowledge claim & assign to claim rep
Identifying the policy
Contacting insured or insureds rep
Investigating & documenting the claim
Determining cause of loss & loss amount
Concluding the claim

Risk control
A conscious act or decision not to actmakes losses more predictable reduces
frequency or severity of losses
Premium audit
Methodical examination of policyholders operations, records and books of account
to determine actual exposure units and premium for insurance coverage already
provided. Conducted year end

Government Insurance Programs:

o Purposes:
Fulfill unmet needs of pvt. insurance mkt (eg. Terrorism Risk Insurance Program)
Facilitate compulsory insurance purchases (eg. Workers Comp, personal auto liab
insurance)
Provide efficiency in mkt and convenience to insureds

( by reducing time or resources indured will need to expend to obtain desired

insurance coverage, save on two large expenses of insurers i.e. marketing &
sales commissions)
Achieve collateral purposes (govt. provide incentive for purchase of insurance, that
benefits the society)

Level of Government Involvement:

-Exclusive Insurer - Partnership with private Insurer - Direct competition with pvt. Insurer
Examples of P & C Insurance by Federal Govt.

NFIP (National Flood Insurance Program)- Fed Gov act as primary insurer
TRIP (Terrorism Risk Insurance Program)- Pvt insurers are primary and Fed Gov is
temp reinsurer
Federal Crop Insurance- Fed Gov subsidizes & reinsures pvt insurers.

Examples of P & C Insurance by State Govt.

FAIR plans(Fair Access to Insurance Requirements)- basic property insurance is made

available to property owners who are unable to get coverage from pvt mkt.
Workers Comp Insurance (Help employers meet their obligations to injured workersstate gov can operate as an exclusive insurer, as a competitor or as a residual
market i.e. serve as a last resort)
Beach & Windstorm Plans- property insurance against windstorm cause of loss is
available incase not coverage is available in the pvt market due to propertys
location.
Residual Auto Plans- Make compulsory auto liability coverage available to high-risk
drivers who cannot obtain coverage in the pvt. Market.

Key areas of Insurer Operations:

Licensing Insurance Rates insurance policies market conduct insurer solvency
3 Reasons why insurers are regulated:

To protect consumers (reviewing insurance policy, protect against fraud & unethical
behavior, ensure insurance is readily available. E.g. PAP restrict the right of insurers
to cancel or refuse to renew policy)
To maintain insurer solvency (ability of insurer to meet its financial obligations as
they become due, even for the future claims)
To prevent destructive competition (adequate insurance rates are maintained)

Insurer Licensing:
-Foreign Insurer: An insurer licensed to operate in a state but incorporated (domiciled) in
another state. License must be renewed annually.
- Domestic Insurer: Insurer operating in the state where domiciled. License generally has no
expiration date.
-Alien Insurer: Insurer domiciled in the country other than U.S. License must be renewed
annually.

-3 Common Forms of Insurer Ownership:

- Stock Insurer

-Mutual Insurer

-Reciprocal Insurance Exchange

Admitted Insurer:
Insurers that are licensed to do business regardless of what they are licensed as (i.e.
domestic, foreign or alien insurer.
Nonadmitted Insurer:
Insurers that are not authorized by the state to do business within that state. They are
frequently referred to as surplus lines insurers.

Surplus lines insurers are permitted to sell only insurance that is not readily available
from admitted insurers due to specialty, risk or several other factors. They can
transact business only through licensed surplus lines producers.
Surplus Lines Law: A state law that permits licensed surplus lines producer to procure
insurance from eligible surplus lines insurer/nonadmitted insurer if applicant cannot
obtain desired type of insurance in the admitted market.
Insurance Rates and Form Regulation:
Rates are regulated to strike balance b/w insurer profits and reasonable prices for
consumers.
Forms are regulated to ensure that they are readable, understandable and fair.
3 Criteria used by a state insurance commissioner to approve or disapprove
insurers request for rate:

Adequate

- Non excessive

-Not fairly discriminatory

Rating Laws:

Mandatory rate law: strictest control of insurers rate > rates set by state agency
or rating bureau > insurers are reqd. to use those rates.
Prior Approval law: Rates and supporting rules must be filed and approved before
they can be used.
File-and-use law: Insurers must file rates and supporting rules with the state
insurance, but can be used while the approval is pending.
Use-and-File law: provides more flexibility to insurers in setting rates > rates must
be filed with state insurance within a specified time period once they are put into
use.
Flex rating law: prior approval reqd. only when new rate exceed a certain %age
above and below the rates previously files > increase amount of flexibility for insure
in their rate determination.
Open Competition: known as no-file law > insurers develop and use rates without
approval or filing rates with state insurance.

2 major objectives to meet regulations regarding insurance policy forms

Policy must be clear and readable to insurance consumer

To detect and address any policy provisions that are unfair or unreasonable

Unfair trade practices laws (specify certain prohibited business practices) involve 3
areas of insurance co. operations:
-Sales

-underwriting

-claims handling

Market Conduct Regulation:

Regulation of practices of insurers in regards to four areas of operation: sales, underwriting
practices, claims handling, and bad-faith actions.
Insurer Solvency:
Ability to meet its financial obligations as they become due, even the insured losses that
may be claimed in the future.
Solvency Surveillance> regulators conduct this process to verify insurers solvency >
determining whether their financial condition enable them to meet financial obligation and to
remain in business.
Causes of Insurer Insolvency: (IMPORTANT)
Mismanagement (root cause) deficient loss reserves, inadequate pricing, and rapid growth
are primary causes

Investment problems, alleged fraud, and catastrophe losses are less frequent causes.

4 Methods used by regulators to verify solvency of insurers:

Establish financial requirements to measure solvency> varies by state> eg. capital &
surplus requirement for admitted insurer to obtain and keep license
Conduct on-site field examinations to ensure regulatory compliance> once every
3to5yrs
Review annual financial statements> NAIC (coordinates with various state insurance
dept) prescribed format of primary annual F/S called NAIC Annual Statement,
Requires detail info on premiums, exp, inv, losses, reserves & other financial info.
Reserve: amount the insurer estimates and sets aside to pay on existing claim that
has not been settled.
Administer IRIS (Insurance regulatory Info System)> its an early warning system,
established and operated by NAIC, enables regulators to rehabilitate insurer or
minimize losses from liquidation.
Guaranty Fund: state-established fund> used to pay unpaid claims of insolvent
insurer> funded by assessments collected from all licensed insurer in a particular
state.

Standard business: insurers who offer insurance coverage at rates designed for customers
with average and better-than-average loss exposures.
Surplus Lines Insurance: insurance obtained from nonadmitted insurers when protection
is not available from admitted insurers.
5 Classes of Surplus Lines Business:

Unusual of unique loss exposure. E.g. non-appearance insurance

Nonstandard business. E.g. restaurant with history of grease fires in its kitchen> poor
loss experience.
Insureds needing high limits of coverage. E.g. Manufacturer of hazardous chemicals
Insureds needing broad coverage. Eg. Contactor specialized in removal of hazardous
substances.
Loss exposures that require new forms

Surplus Lines Insurer: A non admitted insurer that is eligible to accept business from a
state, i.e. eligible to insure risks that have been exported by a surplus lines licensee
(licensed surplus lines broker) in accordance with surplus lines law. (after diligent search for
coverage in the std mkt has been performed.

Chapter #9 Insurance Policies

Elements of a contract : 4 elements; agreement, consideration, capacity, legal

purpose
Insurance Contract: Agreement b/w the insurer and insured (also known as
insurance policy)
Valid Contract: That meets all the regal requirements for the contract to be
enforceable

o Agreement: -> mutual assent(one party makes an offer (to buy

insurance) and other party accepts it- fills the insurance application)should not be result of fraud, duress, coercion, or mistake
Underwriters Creativity: Accept application with modification
o Capacity to Contract: -> All parties must have legal capacity to contract,
some minors can enter into contract for auto insurance, insurers need to
be licensed in the state to do business where the contract is made.
Mentally incompetent, unconscious, or minor is not a capacity.
o Consideration: -> something of value exchanged by parties to a contract.
In insurance contract, consideration is the promise by insurer to pay for
claims resulting due to covered losses and insured promises to pay
premium.
o Legal Purpose: -> Contract should not be against the law or against
public policy, must involve legal subject matter. Eg. Arson (property ko aag
lagana)

6 Distinguishing Characteristics of Insurance Policies:

- Contract of indemnity (amount directly related to the loss is paidinsured shouldnt profit from covered loss)
Factors reinforcing the principle of indemnity
Other insurance provision: proportionate distribution over two
different insurance policy due to same coverage
Subrogation provisions: insurer assumes the insureds rights of
recovery
Insurable interest: of insured in the subject of insurance
Some insurance policies are not contract of indemnity but are valued
policies-insurer pays a stated amount in the event of a specified loss
regardless of the actual value of loss
-

Contract of utmost good faith (act with honesty and in an ethical

way)
An insurer could be released from insurance contract in case of :
Concealment: Intentional failure to disclose a material fact
Misrepresentation: False Statement of a material fact on which a party
relies
Material fact: Fact that affects insurers decision to provide, maintain
insurance or settle a claim
- Contract involving fortuitous events and exchange of unequal
amounts
- Contract of adhesion
Insurance contract is drafted by insurer or insurance advisory
organization on Accept it or leave it basis. If wordings are ambiguous,
interpretation will be in favor of insured by the court.
- Conditional Contract
When one or more parties must perform only under certain conditions
- Nontransferable contract
Transfer of insurance policy, a practice known as assignment is not
allowed. Most policies require insurers written permission before
insured can transfer to another party.
Insurance Policy Structure:
- Preprinted Forms (printed in bulk, insurance form that meets the
need of most policyholders)

Insurance Services Office Inc and American Association of Insurance Services

develop standard forms that many insurers use.
-

Manuscript Forms( drafted according to the terms negotiated b/w

insured & insurer)

Self Contained Policy (single document policy- e.g. PAP, common to

large no. of insureds)

Modular Policy (policy requiring addl. documents- e.g. CPP, not

common to large no. of insured)

Coverage Part: component of CPP or monocline policy, relates to

particular line of business, consists of declaration page, one or more
coverage forms, applicable endorsements, in some cases general
provisions forms.
Each CPP begins with two component documents, i.e. c set of
common policy conditions and common declarations.
Declarations Page: Information page(s) of insurance policy provide
specific details about the insured and the subject of the insurance.
Endorsement and Other Related Documents:

Application (request for coverage containing info about

insured & loss exposures) e.g. PAP application containing
insured vehicle & driving info
Endorsements (documents add to or modify/amend basic
policy form), takes precedence over policy provisions, can be
typed, preprinted or handwritten
Insurers bylaws (mutual insurer giving insured corporate
rights)
Relevant statutory terms (Incorporation of statute e.g.
workers comp or no-fault auto insurance statutes)

Policy Provisions:
- Statement/phrase/clause communicating the insurers and insureds
coverage agreements
- Describes and clarify insurance coverage, exclusions, limits, and
contractual responsibilities

Six Categories under which policy provisions fall (pg. 9.17)

- Declarations (unique info on insured, list of forms included in the
policy, first page, outlines coverage)
Scheduled Coverage: Insurance for property specifically listed
(scheduled) on a policy.
- Definitions (clarifies ambiguity, located near beginning or end of
the policy, word with special meanings, may limit or expand
coverage based on definition)
- Insuring agreements (states insurers promise to the insured to
make loss payment or provide service)

Conditions (clarifies duties, rights and obligations of both insurer

and insured, insured must comply with conditions for a policy to
cover a loss, insurer duty is to pay for losses, defend insured from
law suit, provide other services to insured)
- Exclusions (policy provision that eliminates coverage for specified
exposures)
Eliminate coverage for uninsurable loss exposures (eg war, flood,
earthquake)
Assist in managing moral hazard(exaggerated or intentionally caused
losses for purpose of collecting insurance proceeds)
Assist in managing morale/attitudinal hazard(losses arised due to
carelessness or indifference because an individual is insured)
Reduce likelihood of coverage duplication
Eliminated coverage that typical insured does not need
Eliminate coverage requiring special treatment eg. Workers comp
coverage
Assist in keeping premiums reasonable
- Miscellaneous provisions (may affect coverage but do not have the
force of conditions)

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Property Policy Provisions:

Covered Property:
- Exclusion: eliminates all coverage for excluded property or
excluded causes of loss
- Limitation: specific dollar limit on specific property that is covered

Dwelling: A residential structure in terms of personal insurance and

is covered under HOP, freestanding or detached structures are not
included, does not apply to land.
Building: Permanent structure with walls and a roof in terms of
commercial insurance, may include additions that are completed or
under construction and materials used for that construction, also
permanent structures are included as part of building.

Property insurance policy lists the property that is not covered to clarify what property is
covered; they often provide coverage for the property that is owned by someone other than
the insured, eg HOP provide coverage for the personal property of others such as guests or
employees while personal property is at insureds home. Iski misaal esi hai k jese ek banday
ki diamond ki ring mere ghr pe hai toh mera insurer usko cover karega.
Commercial property policies limited coverage deti hai personal effects k jb tk k wo insured
k under care, custody ya control me ho. PAP policy coverage deti hai borrowed auto ki agar
k usk owner k pass physical damage coverage na ho toh.

Covered Locations:
- Some portions of bldg may be removed like the temporary placing
of storm shutter windows in building.
- HOP covers personal property anywhere in the world, PAP covers
auto within US and its territories.
- Commercial property insurance policy is more restrictive, coverage
for insureds business personal property is provided within the
insured building or within 100ft of the building.
-

Floater: policy designed to cover the property that floats,

or moves from location to location. (may have territorial
limitation or broader limit such as anywhere in the world)

Covered Causes of Loss: eg. Loss including fire, lightning, windstorm,

hail and theft
- Named Peril: Specific cause of loss listed & described in
insurance policy (includes list of both covered and excluded causes
of lost)
- Special Form or open peril policy: policy that cover all causes
of loss except those that are specifically excluded in the policy.
An imp difference b/w named perils and open perils
involves burden of proof. (flood eg)
Named peril: burden of proof on insured; on insurer in open
peril
-

3 different levels of coverage for personal and commercial

property insurance policy

Basic Form (includes 12 named perils)

Fire, lightning, vandalism, hail, theft (by employees only) windstorm,
aircraft, vehicle damage, riot and civil commotion, explosion, smoke,
sprinkler leakage, sinkhole collapse, and volcanic action.
Broad Form (adds several perils to those included in basic form)
Falling objects like weight of snow, sleet, & sudden and accidental
leakage of water from plumbing system

 Special Form (open perils)- Former name: all risk coverage

Covers all causes of loss unless specifically excluded.
- 3 Types of Auto physical damage coverage
Collision Coverage (direct & accidental loss due to collision or by
overturn)
Other than collision/ Comprehensive coverage (damage to covered
auto except collision or cause of loss specifically excluded)
Specified causes of loss coverage (loss caused due to specified
causes, see pg 9.25)

Excluded Causes of Loss:

All property insurance coverage excludes losses arising due to
catastrophic event such as war and nuclear hazard.
Excluded are also the losses that are inherent vice and latent defect
since the loss become certain as well as other maintenance and wear
and tear since loss could be avoided with regular maintenance and
care.
Covered Financial Consequences:
Direct Loss: A direct and immediate reduction in the value of the
property due to property damage. Both HOP and CPP provide this
coverage
Lost Income/ Indirect Loss/ Time Element Loss: Loss arising due
to damage to the property other than direct cause. Reduces Net
Income
Fair Rental Value Coverage: Indemnifies insured for lost income
from the covered property or portion that is rented till it is restored to
livable condition.
Extra Expenses: that a business incurs after facing direct loss.
Additional Living Expense: Covers for direct loss to dwelling that
makes it inhabitable.
Covered Parties:
Owner of the building- name insured on insurance policy covering
building
Own and Occupy building name insured covering both building and
personal property
Tenant- occupies space therefore name insured covering tenants
personal property in the rented portion of the business.
Secured Lender- not name insured but listed by name in dec page as
mortgagee or loss payee(party entitled to share loss payment insured
receives)
Bailee- named insured- in bailee policy cover property of others under
bailees custody
Amounts of Recovery:
Policy limit (dollar amount of coverage, maximum amount of money
that can be received)
Valuation Provisions (used to set value on covered propertyReplacement Cost and ACV, third approach involves agreed value)

 Settlement Options: (Insurer has 3 options to settle a loss)

1. paying value of lost or damage property (as determined by
valuation provision
2. paying cost to repair or replace if thats possible
3. Repairing, replacing or rebuilding other property like of a kind
instead of money
Deductible: (amount of covered loss thats not paid by the insurer
Insurance-to- value provision: encourages insured to purchase
insurance with amount that is equal to or close to the value of covered
property (encouraged by adding co-insurance provision)
Co-insurance- if covered property is underinsured, amount
that insurer will pay for a covered loss is reduced.
Other Insurance Provision: Loss is divided on a proportionate basis so
insured does not profit from the loss occurred.

Liability Policy Provision:

Covered Activities: 2 approaches (specific liability n General Liability
Insurance)
Covered Types of Injury or Damage: (bodily injury, property damage,
personal and advertising injury)
Excluded Loss Exposures:
Avoid covering uninsurable losses
Avoid covering losses due to illegal activities
Eliminate duplicate coverage
Eliminate coverage that most insureds do not need
Eliminate coverage for exposures requiring specialized coverage &
underwriting
Keep premiums reasonable
Covered Costs:
Included two types of costs:
Damages (compensatory & Punitive Damages)
Defense Cost
Others include
Supplementary Payments (expenses incurred by insured at
insurers request)
Prejudgement interest: damage/injury or judgement k
darmyan k time
Postjudgement interest: judgement court me jane k baad
or pese pay krne se pehle

Medical Payments
Coverage that pays necessary medical expenses incurred by claimant
regardless of insureds fault or not.
Covered Time Period:
Occurrence based coverage (injury/damage occurs during the policy
period) Triggered by actual happening of injury or damage. Doesnt
matter if policy is expiring.

 Claims-made coverage (provide coverage for injury/damage that is

claimed during the policy period)
Retroactive date (Date on or after which injury/ damage should occur
in order to be covered)
Covered Parties:
For Homeowers:
o Name insureds spouse if she is resident in the house
o Relatives of named insured or spouse if they reside in the house
o Full time students who were residents before moving out to
attend school if under 21yrs and a relative, or 21 yrs old and in
care of insured
For Commercial Liability Policy:
o Name insureds employee and volunteer workers
o Real Estate managers of name insured
o Organization newly acquired or formed by the name insured for
upto a certain no. of days after it is acquired or formed.
Amounts of Recovery:
Policy Limits
o Each person (max amount Insurer will pay for injury to any one
person)
o Aggregate limit (max amount insurer will pay for all covered
losses in a period)
o Single limit (single limit of liability for a combined total of injury
or damage from any one accident or occurrence)
o Each Occurrence limit (max amount insurer will pay for all
covered losses from a single occurrence)
o Split Limits (separate limits for bodily injury and property
damage liability coverage)
Defense Costs Provisions
Other Insurance Provisions

Chapter # 3 Insurer Financial Performance

Insurers Profitability -> important aspect of insurers financial

performance.
Managing Insurers Income: (Revenue Expenses)

Major sources of income(gain/loss) -> Investment Income( from

investment of funds) or Underwriting Income (sale of insurance)
Only earned premiums are recognized on I/S of insurer.
Written Premiums : Earned premiums (revenue from insurers
underwriting operations) & Unearned premiums
Underwriting Income = Earned Premiums (Paid losses + Loss Adjustment
Expenses)LAE Expenses are expenses incurred by insured to investigate,
defend and settle claims
Investment Income: Investment funds are available for two reasons:
policyholders surplus- to meet its obligations even after catastrophic events
and investment of premiums received.
Managing Insurers Expenses:
Expense related to underwriting activities or investing activities.
Underwriting Activity Expenses:
Paid losses: losses that have been paid by, on behalf of insurer in a
given period
Incurred losses: losses that have occurred during specific period
regardless of when claims are paid (Incurred losses = paid losses +
loss reserves)
Incurred but not reported losses IBNR: losses incurred but not yet
reported to the insurer
Other Underwriting Expenses:
Acquisition Expenses (Expenses associated to acquiring new business,
advertising exp
General Expenses (Incurred during underwriting and issuing insurance
policy)-all administrative and operational expenses.
Premium taxes, licenses and fees.
Investment Activity Expenses:
Net investment Income= investment income-investment
expenses
Insurer Profitability:
Overall gain/loss from operations= Net investment (gain/loss) + Net
underwriting (gain/loss)
NIBT (Net Income before taxes)
(Earned premiums + Investment Income) (Total losses & other
expenses)
Portion of earnings from a qualified municipal bonds is not taxed.
Understanding Insurers Financial Statements:
Insurers, regulators and other financial rating organization monitor
insurers financial performance.
Two imp financial statements are Balance sheet and Income
statement.
Balance Sheet:
Assets: Both tangible and intangible property owned by an entity.
Admitted Assets: Regulators allow insurers to show as assets to f/s.
Easily liquidated to cash or near propertys mkt value

Include stocks, bonds, mortgages, real estate, certain

computer equipment, and premium balances due within
90days.
Non-admitted Assets: Regulators dont allow showing as assets. Eg.
Fixed assets
Not readily convertible to cash or market value
Include premiums that are more than 90days due.
Liabilities: 3 types of liabilities are found on insurers f/s.
Loss reserve & loss expense reserve:
o Loss reserve is an estimate of the amount to be paid by
insurer in the future for losses that have already been
occurred and reported but not yet settled > insurers best
estimate on final settlement amount on claims not settled
> To make reliable estimate insurer use: experience, law of
large no., actuarial and statistical expertise.
o Loss expense reserve is also determined to estimate the
cost of settling claims included in loss reserve.
Unearned Premium Reserve: Total amount of premiums from
insured that has not been earned.
Other Liabilities (typically small, miscellaneous liabilities)
Policyholders Surplus: (Total admitted assets- Total liabilities)
Also used in expansion to new territory or product
development.
Income Statement:
1. Revenues: Earned Premiums
2. Expenses: Incurred losses, LAE, other underwriting exp(acquisition
expense, general expense, other legal fee premium taxes and
licenses)
3. Net Underwriting Gain/Loss: (Revenue- Expenses)- (1-2)
4. Net Investment Income: (Investment Income Investment Expenses)
5. Net Income before Income Taxes: (3+4)
Analyzing Insurer Financial Ratio Calculations:
Investors: to make investment decisions
Regulators: to ensure insurers solvency
Producers: to be in business with that insurer
Ratios to measure insurers profitability:
1. Investment Income and Investment expenses are not part of loss
ratio or expense ratio.
Loss Ratio
Reflects %age of premium consumed by losses
(Incurred losses + LAE )/ Earned Premiums
Expense Ratio
Shows the proportion of insurers written premiums that is used
to pay other underwriting expenses
How efficiently insurer is operating
(Incurred Underwriting Expenses / Written premiums)%
Combined Ratio
Ideally less than 100. Lower the combined ratio, better it is.
Measure of insurers profitability & underwriting performance.
Used in benchmarking and trending
Combined Ratio= Loss Ratio+ Expense Ratio

 Investment Income Ratio

Indicates degree of success achieved in insurers investment
activities
Net Investment Income/ Earned Premiums
Overall Operating Ratio
Most complete measure of insurers financial performance
(Combined Ratio Investment Income Ratio)

Chapter #8 Loss Exposures

Direct & Indirect Losses:

Direct loss is loss that occurs immediately as a result of particular cause of loss, eg reduction
in value of building that is damaged by fire.
Indirect loss is a loss that results from but not directly caused by a particular cause of loss.
Eg. Reduction in revenue since building is closed due to fire damage.

Property Loss Exposures: (Direct Loss) Provide framework for analyzing loss
exposure that may be handled through risk management techniques.
Three important Elements of property loss exposures: lost, damages
or destroyed
Assets exposed to property loss
Basic Property types: Real property and personal property
Other property:
o Buildings- Fixtures: Any personal property affixed to
real property such as it becomes a part of real property.
o Personal Property contained in Buildings: Eg.
Furniture, machinery & equipment, Stock. Term
contents is used to refer contents of personal
property.
o Money and Securities: Highly susceptible to loss by
theft. Money is currency, coins, checks, credit card slips,
money orders held for sale to public. Securities are
written instruments such as stocks and bonds.
o Vehicles and Watercraft:
o Auto a land motor vehicle, trailer or semitrailer
designed for travel on public roads.
o Mobile Equipment Vehicles designed to be used
on off public roads such as bulldozers and cranes.
o Recreational Vehicles Vehicles used for sports
and recreational activities such as dune-buggy, allterrain vehicle, or dirt bike. Both on and off road.
o Property In Transit Damage or loss in transit of
property must be replaced.
Causes of loss (peril): Include fire, lightning, hail, storm and theft.
o Peril: Cause of loss
o Hazard: Anything that increases the frequency or severity of
loss. Eg. Smoking cigarette increases frequency of fire. Keeping
cash in register overnight increases both frequency and severity
of loss.
Financial Consequences: Reduction in the value of the property.
Parties Affected by Property Losses:
o Property owners: most effected by property loss.
o Secured lenders of money to property owner: secured lender is
mortgagee and borrower is called mortgagor.
o Property holder: Bailee temporarily possesses personal property
of others they do not own. They are responsible for safekeeping
property they do not own.

Basis for a Legal Liability:

Legal Liability: Legal enforceable obligation of a person or an
organization to pay sum of money called damages, to another person
or organization.

 Legal right of recovery based on: Torts, Contracts and Statutes.

Legal Foundations of following explain how laws enforce
responsibility:
Source of Law:
o Constitution- source of constitutional law- supreme law in US,
constitution itself and decisions of Supreme Court that involve
the constitution.
o Legislative Bodies- source of statutory law
Statute: written law passed by a legislative body at
federal or state level.
Statutory Law: Laws or statutes enacted by federal, state
or local legislative bodies.
o Court Decisions- source of common law
Laws that develop out of court decisions in particular
cases and establish precedents for future cases.
(Common Law)
Criminal Law and Civil Law:
o Criminal Law: wrongful acts that are deemed harmful for public
welfare, law that imposes penalties for wrongs against society.
o Civil Law: Deals with rights and responsibilities of citizens w.r.t.
one another, and provide remedies to breach of duties owed to
others. Involves legal matters not governed by criminal law.
Damages: Two types of damages; Compensatory and Punitive.
o Compensatory Damages: compensate the victim for harm
actually suffered.
Special Damages and General Damages are included.
Torts:
Civil wrongdoing, wrongful act other than crime or breach of a
contract
Types of Tort: Negligence, Intentional Torts, Strict Liability
o Negligence: Failure to act in prudent manner, party seeking
compensation is plaintiff and party from whom plaintiff is
seeking compensation is defendant.
Proof of four elements are required.
1. Defendant owed duty of care to the plaintiff.
2. Defendant breached the duty of care owed to plaintiff.
3. Breach of that duty was proximate cause of injury or
damage.
Proximate cause # Unbroken chain of events leading to injury, ye na
hota to nuksan b na hota.
4. Plaintiff suffered actual injury or damage.
# the negligent party is called tortfeasor (person or
org who committed a tort)
Vicarious Liability: when one party is held liable for the
actions of its subordinate or an associate because of the
relationship between the two parties.(eg. Employeremployee) Responsibilities do not shift from employee;
instead they may extend to include the employer.
o Intentional Torts: Deliberate/ Foreseeable act causing harm to
another person.
Assault & Battery are common examples

1. Intentional threat of body harm under circumstances

that create a fear of imminent harm or offensive
contact is assault.
2. Intentional harmful physical contact (unlawful and
unprivileged touching) is battery.
Defamation is also an example that includes both libel
and slander.
1. Defamation is false written or oral statement that
harms ones reputation. Statement has to be
false/untrue for a defamation to occur.
2. Libel is defamatory speech written in writing. Also
radios, TV, film or internet are included in libel.
3. Slander is defamatory statement expressed by speech.
False Arrest is the seizure or forcible restraint of person
without authority. Eg. Arresting a suspect for shoplifting
and he is innocent.
Invasion of Privacy: Encroachment on another persons
right to be left alone. Eg. Unauthorized search,
surveillance equipment use, hidden microphones, public
disclosure of private facts.
o Strict Liability (Absolute liab): Liability arising from inherently
dangerous activities or dangerously defected product that result
in loss or harm regardless of how much care was used. Eg.
Owner of wild animal.
Contracts:
o Liability assumed under a contract and breach of warranty are
two basis of legal liability.
o Hold-harmless Agreement: common in construction and service
business. Eg. Contractor takes the responsibility of certain
actions of sub-contractor. A contractual provision that obligates
one party to assume the legal liability of another party.
o Warranty: Written or Oral statement in a contract that certain
facts are true.
o Breach of Warranty: Shampoo wali eg.
Statutes:

o Statutory liability: liability imposed by specific statute or law.

Examples include no-fault auto laws and workers compensation
laws.
Liability Loss Exposure: (Direct Loss)
Assets exposed to liability loss; Most frequently claimed is money.
Causes of Liability Loss
Autos, watercraft and other vehicles.(ownership, use or
maintenance)
Premises (anyone who owns or occupies real property) eg.
Customer slips on wet floor in a grocery store.
Personal Activities (not business related and away from
defendants premises) eg. Dog escapes from owners premises
and bites a neighbor.
Business Operations (eg. Plumbing contractor starting fire in
customers house while soldering a copper pipe, or a roofing
contractor may drop debris from ladder and injure member of
customers family.

Completed Operations(Kam complete karne k baad agr koi

injury paish ati hai jo k cause ho us contractor k completed kam
ki waja se, toh contactor liable hoga. Eg. Natural gas explosion
due to negligently installed furnance.
Products (liability on manufacturers for the products that may
cause bodily injury or property damage)
Advertising (Using another companys trademark or
advertisement)
Pollution (Love Canal Case in NY)
Liquor (business selling or serving alcohol has a significant
liability loss exposure)
Professional Activities (liability arises in case of failure to
exercise due care by professional resulting in injury or damage)
- Errors and Omissions, malpractice.
Financial consequences of liability loss.
Damages difficult to determine, eg. Hotel fire injuring
hundreds of guests
Defense Costs Lawyers fee and expenses associated to
defending claim
Damage to Reputation Defendants loss of reputation.
Personnel Loss Exposure: (Direct Loss)
Possibility of loss due to death, disability, retirement or resignation that deprives an
organization of the skills of that person that organization cannot readily replace.

Assets Exposed to personnel loss.

o Key Employee: Employee whose death or disability before
retirement will have economic effects on the organization.
o Key Personnel: Individual employee; owners, officers,
managers; Group of employees.

Causes of Personnel Loss:

o Death (permanent loss of employees services)
o Disability(inability of a person to meet personal, social or
occupational demand)
o Retirement
o Resignation, layoff and firing
o Kidnapping
Financial Consequences of Personnel Loss:
o Reduction in value employee contributed to organization (atleast
for short term)
o Replacement Costs (recruitment, training and interviewing for
replacement)
o Loss of value caused by negative publicity
o Loss caused by low morale such as reduced productivity &
increased illness.
Net Income Loss Exposures (Indirect Losses)
Assets exposed to NI loss Future stream of NI, i.e. (Rev Exp) and
Income taxes
Causes of NI Loss
o Property Loss
o Liability Loss. Eg. Merger & Acquisition

o Personnel Loss
o Business Risks
Loss of goodwill
Failure to perform
Missed Opportunities
Financial Consequences of NI Loss
- Increase in expenses, reduction in income or a combination of two.

Chapter # 7 Risk Management:

Basic Purpose and Scope of Risk Management:

Pure Risk: Chance of loss, no loss, but chance of gain.
Speculative Risk: Chance of loss, no loss, or gain. (business risk)
Risk Management for Individuals and organizations:
Risk management includes any effort to economically deal with
uncertainty of outcomes(risk).
For individuals and families, risk management is not a formalized
process. In larger corporation risk management is a formalized
program.
Risk Management Program (POLC): system for planning, organizing,
leading and controlling the resources & activities an organization
needs to protect itself from adverse effects of accidental losses.
Risk Management Process (MMI): Process of making, implementing
and monitoring decisions that minimize the adverse effect of risk on
an organization.
Traditional Risk Management and Enterprise wise Risk Management:
TRM mainly focused on pure risk
ERM focuses on overall risks of an organization at an enterprise level
rather than departmental level.
Risk Management Process (6Steps):
1. Identifying Loss Exposures:
- Developing a thorough list of accidental losses.
- Physical inspection of premises.
- Loss exposure surveys and loss history analysis.
- Analysis of Financial statements, flowcharts, interviews etc.
2. Analyzing Loss Exposures:
- It requires estimating how large a possible loss could be and how
often it might occur.
- Loss Frequency: indicate no. of losses that occur within a specified
period.
- Loss Severity: Amount of loss, measured monetarily.
3. Examining Feasibility of Risk Management Techniques:
- Risk control techniques and risk financing techniques
Risk Control Technique:
- Attempts to decrease the frequency and/or severity of loss or make
them more predictable. Common risk control techniques are
Avoidance (eliminates loss exposure, chance of loss = 0)

 Loss Prevention (reducing the frequency of loss- no of losses

e.g. closing doors and windows to prevent burglary, regular
maintenance of vehicle to avoid accident by faulty equipment)
Loss Reduction (lowers the severity of losses- dollar amount of
losses e.g. installing sprinkler system, installing restrictive
money safe)
# Inspection Report: prepared by risk control representatives,
best sources of underwriting info & supplements the
application.
# 2 main objectives of inspection report:
o Provide thorough description of applicants operations to make
underwriter decide whether to accept the application.
o Provides evaluation of current risk control measures and any
recommended improvement in risk control. Underwriter may
require applicants to fulfill those recommendations for
application to get accepted.
- When underwriter receives an application from the commercial
account, his first task is often to order an inspection report.
- Risk control Representative visits the applicants location(s) and
operations and submits an inspection report.
Separation- reduce loss severity (Isolated loss exposures from
one another to minimize adverse effect of a single loss e.g.
having diff vendors, storing inventory in diff warehouse)
Duplication- reduce loss frequency (uses backups, spares or
copies of critical property, information and keep them in
reserve. E.g. Extra copies bana k rkhna key documents ki,
extra inventory rkhna spare parts ki)
Risk Financing Tchniques:
Includes steps to pay for or transfer the cost of losses. Retention and
Transfer are most common risk financing techniques.
Retention:
- Losses are retained by generating funds within the organization to
pay for losses. Eg. Purani vehicles k lye collision coverage lena
work ni krta toh risk manager may ask to retain and pay for any
losses by org. operating funds.
- Retention can be intentional or unintentional(eg. Failure to
purchase Liquor liability coverage by restaurant)
- Retention can be partial ($10,000 deductible on commercial
property insurance) or total(husband wife choosing not to purchase
insurance on lakeside home because they believe its too
expensive).
- A deductible is an example of combination of retention and
insurance.
- Retention is usually used in combination with other risk
management techniques.
Transfer:
- Includes noninsurance risk transfer and insurance
- E.g. Hold-harmless agreement signed by tenant and landlord in
case of any liability arising on the landlord for the loss that resulted
due to activities of the tenant. Jese tenant jo jaga own kar rhay
hain waha koi nuksan hoto woi zimedar hongay malik makan nahi.

Insurance is another risk transfer technique where financial

consequences of a loss exposure are transferred to the insurer by
the insured.
Selecting Appropriate Risk Management Techniques:
Selection based on Financial Criteria (large corporations)
Organizations choose risk management technique that is most
financially beneficial.
Selection based on Informal Guidelines(Individuals and small
businesses)
Four guidelines:
- Do not retain more than you can afford to lose
- Do not retain large exposures to save little premium
- Do not spend a lot of money for little protection
- Do not consider insurance a substitute of risk control
Implementing Selected Risk Management Technique:
Risk manager is required to make following decisions to implementing
risk management technique.
- What should be done (how to implement the selected technique)
- Who should be responsible (authority to implement technique)
- How to communicate risk management information (with
management and other employees so program can be modified or
evaluated for effectiveness)
- How to allocate cost of risk management program (cost of
program and expenses must be spread across all departments and
locations)
Monitoring Risk and Revising Risk Management Program:
- Last step is the return to the first.
Benefits of Risk Management Techniques:
- Help better manage the loss exposure
- Benefits to
Businesses
o Achievement of business goals, obtain broader coverage
from insurers, seek opportunities which otherwise business
would not, cost-effective, increased profits. Eg. Risk
manager chooses to retain loss thus saving insurance cost.
Individuals and families
o Cope efficiently with financial disaster
o Reduce inconveniences
o Greater peace of mind (loss exposures are under control)
o Reduces expenses(handling loss exposure economically)
Society
o Economic growth is stimulated
o Less people dependent on society for support
o Funds are available for other investments/uses
Insurers
o Positive effect on underwriting results, loss ratio and
profitability
o Insurers bsecome more innovative and competitive

Chapter # 6 Claims

Goals of Claim Functions

Keeping insurers promise (provide fair, prompt and equitable
service)
- First party claim (made by the policyholder) e.g. property insurance
- Third party claim (made against policyholder)e.g. liability insurance
o Claimant: A party that makes a claim (could be first party
or third party)
o Claims Representative (promotes peace of mind):
Person responsible for investigating, evaluating and settling
claims (except public adjuster)
Supporting insurers profit goal
- By controlling expenses and paying only legitimate claims.
Claim Department Structure, Personnel and Performance
Claims department Structure
- Senior Claims Officer is head of claims department, reports to CEO,
CFO or Chief underwriting Officer
- Third Party Administrator (TPSs): An organization that
provides administrative services associated with risk financing and
insurance.
Claims Personnel
- Person handling claim could be anyone except public adjuster such
as, staff Claims Representative, independent adjuster, producers
who sell insurance to insured, employee of the TPAs.
Staff Claims Rep

o Inside claims rep and field claims rep (both inside and
outside)
o Handle most claims and are employees of insurer
o Field/outside claims rep- involved in investigating scene of
loss, meeting insured, claimants, lawyers and other
involved in the loss, and inspecting damage.
o Inside Claims rep work from branch or regional office other
than home-office.
Independent Adjusters (self-employed or work for
adjusting firms)
o An independent claims rep who handles claims for insurers
for a fee.
o Some insurers use them for all field work
o Some insurers use them when all claims rep are busy to
handle all claims
o Some insurers use them for assistance in handling large
claims quickly in case of disaster strike
o Some insurers use them when desired service level or
special skills are needed. Eg aircraft accident
investigations.
Third Party Administrators
o Work for businesses who chooses to self-insure
o Administers risk financing and insurance
o Often associated with large independent adjusting firms
or as subsidiary to the insurance company.
Producers
o Anyone who sells insurance
o Granted some authority to pay claims up to certain
amount on behalf of the insurer. called drafts
o Function like inside claims rep in the above situation
Public Adjusters
o Hired by insured for a fee to protect their interest
o Represent insured
o Negotiates settlement with the claims representative or
independent adjuster
Claims Performance Measures
Profitability Measures
o Using Loss Ratio to evaluate insurers financial well being
o Increased loss ratio- claims function is improperly
performed
o To reduce loss adjusting expenditures in the long run,
inflated settlement demands should be resisted,
researched, negotiated and litigated. LAE can also be
reduced by using claims procedures.
o To reduce LAE in the short run, claims rep could offer
insured and claimants the settlement demanded rather
than settlement deserved.
Quality Measures
o Best Practices (identified internal practices- produce
superior performance)

o Claims audit (ensure compliance with best practices and

gather statistical information on statistical info on
claims) see pg 6.10
o Customer Satisfaction
Claims Handling Process
Seven step process.
Acknowledging and Assigning the claim
- Advise insured that the claim has been received
(acknowledgement)
- Assigning claim to the claims representative (he gets in touch with
the insured or claimant and explain the claim process, or have the
investigation.
Identify the policy and setting Reserves
- Policy is identified upon receiving of assignment to determine what
coverage would apply.
- If coverage is not available for the loss, the insured should be
notified by the claims representative through non waiver
agreement or reservation of rights letter.
- Non waiver Agreement: Signed agreement, neither insurer nor
insured waives rights under the policy during the course of
investigation.
- Reservation of Rights: Insurers letter, informing insured that
the insurer might deny the coverage later if the facts warrant it.
- Setting reserves adequately is important for insurers financial
stability.
Contacting Insured or Insureds Representative
- Inform insured about the claim, necessary documentation required
and to be provided
Investigating the Claim
- Subrogation: Insurer, after paying losses can recover from the
party other than insured who caused the loss or is otherwise legally
liable for loss.
Documenting the Claim
- 3 Crucial parts of claims documentation
Diary systems/ suspense system/pending system (work on a
claim one day and diary it or calendar it for review) e.g.
reminder
File Status Notes/Activity Log
o Clear, concise and accurate info
o Timely claim handling
o Fair investigation considering insured and insurer
interests
o Objective comments about parties involved
o Thorough Good-faith investigations
File Reports
o Involves different types of internal and external reports
o Internal Reports: For parties within the insurance
organization
o Preliminary Report: Initial report about claims rep
receiving the assignment, informing insurer, suggest
reserves, note coverage issues and request assistance if
needed.

o Status Reports: Periodically reports progress of claim

and related activities.
o Summarized Reports: Filed within 30 days of
assignment, detailed narratives in structured format
with captioned heading.
o External Report: Contain info collected by claims repinforms interested parties like producers and some state
advisory organization.
Determining Cause of Loss, Liability and the Loss Amount
- E.g. Toaster caused fire in the kitchen, Negligence caused accident
(liability), Loss amount determination by extent of injury,pain and
suffering, effects of injury.
Concluding the Claim
- When all documentations have been received and investigation is
completed, claims representative must decide whether to pay the
claim or deny it.

Alternative Dispute Resolution and Litigation (MMAAS)

- Incase insured or claimant and insurer cannot agree on claims
coverage, can resolve disagreement in court.
- ADR techniques can be used for settling disputes outside
traditional court system including:
o Mediation (neutral outside party used to settle the issue
that is mutually agreeable)
o Arbitration (neutral outside party used to settle the issue
that can be final and binding)
o Appraisals (resolving disputes b/w insured and insurer
over the amount owed on a covered loss)
o Mini-trials(case presented to a panel or advisor who offer
opinions and ask questions based on evidence presented)
o Summary jury trials (case presented to mock jurorsevidence of wittness)
Closing Reports
- Completed when a case is resolved. Helpful source to evaluate
claim representative performance, submitted to reinsurers for
reimbursement.
Aspects of Property Insurance Claims
- Verifying Coverage
Initial Verification steps:
1. Valid policy was in effect
2. Date of loss falls within the policy period
3. Damaged property is insured under the policy
Questions to verify that claim is covered:
1. Insured has insurable interest?
2. Damaged property covered in the policy?
3. Cause of loss covered in the policy?
4. Any endorsement, additional coverage or limitations apply?
- Determining Amount of Loss
Property valuation method used under policy?
1. ACV= Cost to replace Allowance for depreciation
2. RC= Cost to replace
3. Agreed Value- based on appraisal, eg fine arts, antiques

Value of damaged property?

Replacement Cost of real property:
1. Square ft. of the property
2. Type and quality of construction
3. Construction cost per sq.ft
- Concluding the claim and exercising subrogation and salvage rights
- Salvage Rights: Insurers rights to sell or otherwise dispose of
insured property on which insurer has paid total loss or
constructive total loss.
- Constructive loss: Loss that occurs when cost to repair damaged
property + remaining salvage value equals or exceeds propertys
pre-loss value.
Aspects of Liability Insurance Claims
4 key aspects:
- Verifying Coverage (determine if insured is legally responsible for
loss)
- Cause of loss
- Amount of Damages
# Money claimed by, monetary award to party who suffered bodily
injury or property damage.
o Compensatory Damages General and Special Damages
o Punitive Damages/ Exemplary- malicious or outrageous
conduct
- Concluding the Claim
o Out of court settlement by negotiation
o Settlement in court
Special Considerations for Property Catastrophe Claims
Contingency plan communicated to insurer staff:
1. Identifying weakness, bottlenecks and difficulties
2. Clearly understanding their roles and responsibilities
3. Keeping organization free to focus on claims handling
without reallocating essential resources.
Changes in Work Operations In case of Catastrophic Event
1. Develop & Use Abbreviated Claims Handling Processspeed process
2. Temporarily transferring claim settlement authority to
producers
3. Temporarily transferring claim settlement authority to
pre selected independent adjusting firms
4. Bringing catastrophe team of claim rep from other
regions
5. Making advance payments to policy holders eg cost of
living
6. Settling property value questions in favor of policyholder
7. Suspending all but most essential record keeping
8. Reallocating available employees in critical work areas
Good Faith Claims Handling
Elements :
- Thorough, unbiased and timely investigation
- Complete and accurate documentation(helpful for interested
parties)

Fair Evaluation (Facts not opinions)- crucial element(promptness)

Good Faith Negotiation
Regular and prompt communication
Competent legal advice
Effective Claim Management (consistent supervision, thorough
training, manageable caseloads)
Unfair Claims Practices Laws
- Specify claims practices that are illegal. Example
- Knowingly misrepresenting facts about coverage to
insured/claimant
- Failing to promptly acknowledge communication
- Failing to promptly investigate & settle claims
- Failing to settle claims in good faith
- Offering insured/claimant less amount than they deserve to get
- Failing to affirm or deny coverage within a reasonable time
- Delaying claims
- Materially altered application without insured consent

Chapter 4 Marketing

Factors Influencing Agency Relationship (principal Insurer) (AgentProducer)

- Legal Roles
- Legal Responsibilities of an Agent
Loyal
Reasonable Degree of care
Account promptly- duty of accounting
Obey principals lawful instructions
Keep principal informed- duty of relaying information
- Legal Responsibilities of Principal
Pay compensation for services provided
Duty to indemnify, reimburse for damage or liability agent
suffered without any fault
Error and Omission- agents negligence due to which the
customer suffers damage
- Scope of Authority
Actual Authority (authority conferred by principal to an agent)
o Express Authority (Authority principal specifically
granted to the agent)
o Implied Authority (implicitly conferred authority by
custom, usage or principals conduct indication
intention to confer such authority)
o Binding Authority (Form of express authorityaccomplished by issuing binders- agreement to provide

temp insurance coverage until formal written policy is

issued- can be written or oral)
Apparent Authority
o Third partys reasonable belief that agent has authority
to act on principals behalf
Producer:
Represent insurers insured or both
Insurance Personnel
Place Insurance business with insurers
Agent:
Party authorized by the principal to act on principals behalf
Principal:
Party that authorizes agent to act on that partys behalf
Agency:
A consensual legal relationship that exists when one party, the
agent acts on behalf of the other party, the principal.
Authority and control are two essential elements of agency
relationship
Summarizing Types of Insurance Distribution Systems
Independent Agency and brokerage Marketing System
- Independent agents and brokers
Operated for benefit of its owner(s), who sells insurance,
usually as a rep for several unrelated insurers
not employees of insurer
Can be sole proprietorship, partnership or corporation
They dont have binding authority
Ownership of expiration list- agencys most valuable asset,
independent agency has the right to sell its expiration list to
another independent agent.
Offer loss adjustment and risk management services
Compensation in two forms: Flat Percent Commission or Profit
sharing commission
- National and Regional Brokers
Represent Commercial Insurance accounts
Operate regionally, nationally, internationally
Can tailor insurance program for customers or group of
customers
Receive negotiated fees for the services they provide
- Independent Agency Networks
Also known as agent groups, agent clusters or agent alliances
Operate nationally, regionally, or locally
Group of agencies contractually link to share services,
resources and insurers gain advantages normally available
only to large regional and national brokers.
- MGAs (Managing General Agents)
Authorized agent of primary insurer
Manages all or part of the primary insurers insurance
activities
Usually in a specific geographical area
Advantages: Low fixed cost, Assumption of insurers activities,
Specialty Expertise

Surplus Lines Brokers

Coverage with non admitted insurers
Compensated based on commission
Are independent like national and regional brokers
Can represent multiple insurers
Exclusive Agency Marketing System
An insurance marketing system in which agent contracts to sell
insurance exclusively for one insurer (or an associated group of
insurers)
Uses independent contractors called captive insurers/ exclusive
agents
Not employees of insurers
Restricted to represent single insurer- hence more control by
insurer management
Compensated by commissions
Typically dont own expiration list but in some cases , are granted
limited ownership
Focus is on new business production
Offer loss adjustment services
Handle administrative functions (policy issue, premium collection,
claim processing)

Direct Writer Marketing System

- Insurance marketing system that uses sales agents (sales rep) to
sell insurance and are employees of the insurer.
- Compensated by salary, commission or both
- Are also involved in brokerage business (incase insurance the
customer needs is not provided by them is outsourced to another
insurer on a shared commission basis)
- No ownership of expirations
Distribution Channels
Internet (portals- increase mkt. share and brand awareness)
Call Centers
Direct Response(no agent involve, via mail, phone or internet
sale)
Group Marketing
Affinity Marketing (target groups on basis of profession,
hobbies, interest or attitudes)
Mass Marketing or Mass Merchandising (large no of targeted
individuals or groups)
Worksite Marketing or Payroll Deduction (Voluntary insurance
coverage as a benefit to employees by employers)
Sponsorship Marketing (Trade group sponsors an insurer)
Trade Associations
- Serve their members through activities such as political lobbying,
advertising, education and research.
- Advertising is to make customer familiar with the company logos
and other association symbol.
- E.g. producers Trade Association IIABA or Big I and PIA
- E.g. CIAB handles commercial insurance
- MGAs are members of AAMGA

Financial Institutions
- Strong Customer base
- Strength at processing transaction
- predisposition to product-cost selling
- Efficient use of technology
Mixed Marketing System
- Insurers use of more than one marketing system or distribution
channel
- Several issues to consider:
Consistent Customer communication
Consistent Customer Experience
Matching insurance type with distribution channel
Functions of Insurance Producers:
Initial contact to insurance customers
Functions Performed:
Prospecting (to search for)
o Cold Canvass: Contacting a prospect without
appointment
Risk Management Review (based on prospects insurance
needs)
o Individuals or families
o Businesses
Loss Run: Detailed report indicating insureds
claim history that have occurred over a specific
period
Sales (contacting prospect, determining needs, proposal,
closing sale)
Policy Issuance
Premium Collection
o Agency Bill: Producer sends premium bills to insured
collect premiums and sends to insurer after deducting
applicable commission.
Methods to transmit premium to insurer:
1. Item basis (premium-comission is sent to the
insurer)
2. Statement basis(insurer sends statement to
producer)
3. Account Current Basis (periodic statement
sent to insurer after deducting comission)
o Direct Bill: Insurer sends premium bills to insured,
collect premiums. Producer is not involved.
Customer Service
o Facilitate contact between policyholders and insurer
Claims Handling
Consulting
Selecting Distribution Systems (support insurance product & services) and
Channels (promote and service product- communication) for Insurance
Marketing
Customer needs and characteristics
o Products & Services
o Pricing

o Response Time
Insurers profile
o Insurers Strategies and Goals
o Insurers Strengths
Financial Resources
Core Capabilities
Expertise and Reputation of Producers
o Existing & Target Market
o Geographical Location
o Degree of Control Required
Direct Writing System (greatest control over
producers results and methods- producers are
employee)
Independent Agency and brokerage system and
Exclusive Agency system (control over producers
results only- producers are independent)
Direct Response System (No producer involvedcomplete control)
How States Regulate Insurance Marketing Activities:
Licensing
- Producer must be licensed in the state in which he/she wants to
sell the insurance
- Insurance agents- Represent Insurers
- Brokers- Represent Insurance purchaser
- Solicitors- less authority than agents, cannot bind coverage but can
solicit prospects, often known as customer service agents or rep
- State can suspend or revoke license in case of engaging in unfair
trade practices.
Insurers
- Meet minimum standards of financial strength, competence and
integrity.
o Insurer Licensing Standard
Domestic Insurers no expiration date, apply for
charter
Foreign Insurers - satisfy capital, surplus and other req.
Alien Insurers Non Admitted Insurers
Risk Retention Groups (Can write only commercial
liability insurance)
Insurance Personnel
o Producer
o Claim Representative
o Public Adjuster
o Insurance Consultants
Compensation
o Sales commissions
o Contingent Commissions (supplemental payment to
producer by insurer on basis of profitability alone or
combination of profitability , volume and growth of
agencys books of business placed with the insurer)
o Salaries

Unfair Trade Practices

- Misrepresentation and false advertising
- Tie-in Sales
- Rebating
- Other Deceptive Practices