P & C Exam Prep: Ch 3 Basics of Property and Liability Insurance Key Study Points

Underwriting

Private insurers are in business to make a profit.  They are not like Social Security or Medicare where everyone is insured.  It is up to the Underwriting Department to help ensure the company is profitable.The Underwriting Department serves several important functions:1) They screen applicants and issue policies only to applicants who present an acceptable level of risk for that insurer's program.2) Underwriters determine the proper rate to charge the applicant.3) Underwriter's monitor the risk to change the rating or terminate the policy if the risk changes.

Underwriting's Purpose

The purpose for all of these activities is to avoid adverse selection.ADVERSE SELECTION occurs when the rate for the risk is too low

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What tools does the underwriting dept. use to evaluate a potential new risk or monitor existing risk? There are 4 Primary Methods for gathering underwriting information.

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Caption: : The agent acts as a frontline or field underwriter

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Caption: : The application is the customer's representation of the risk. An Agent can refuse an unacceptable risk.

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Caption: : Consumer Reports may be ordered, depending on the type of risk and the insurer. They can include a driving record, a credit report, and even a physical inspection of property.

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Caption: : Many times an insurer will need to visually inspect the risk prior to issuing a policy. Property inspections are used to determine value or to uncover additional hazards that might increase the chance of loss.

Policy Structure

Agents of the insurer are usually given limited binding authority.  Binding authority allows the agent to place the coverage in force immediately upon completion of the application and taking payment pending insurance company approval.

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Declarations Page

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Caption: : All policies have a cover page that contains all of the factors in a policy that are variables from one client to another.

The Declaration Page shows the following:Name of the Insurance Co. & AgentName and Address of the named insuredLocation of the covered propertyPolicy #Effective and Expiration DatesPolicy PremiumPolicy LimitsDescription of property insured or Location of the Risk

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Caption: : Insuring Agreement

Insuring Agreement

Describes the insurance company's promise to pay.  May include: additional coverage (supplementary coverage or Extension of Coverage.Another Standard Feature of an Insurance Policy is the DEFINITIONS SECTION.  Usually precedes the rest of Insuring Agreement in the contract.If an insurer is going to use a word that may be ambiguous or confusing, the insurer puts the word in "quotation marks" so the insured can look up it's meaning in the policy.

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Caption: : Conditions: Rules

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Caption: : The CONDITIONS SECTION explains the rules that both the insured and insurer must follow.

Conditions

Exclusions

This section of the policy lists perils and situations that WILL NOT be covered.(Helps keep premiums more affordable)

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Caption: : UNINSURABLE RISK

Endorsements

Endorsements are changes to an insurance policy.

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Caption: : Any change to an insurance policy must be made by the insurer and be issued in writing.

Common Policy Provisions

Deductible (a form of Retention)Other InsurancePro Rata (a Proportionate Share)Primary/Excess (usually applied to Auto Expense - Policies written on a primary/excess basis require the primary insurer to pay until its policy limits are exhaustedContribution by Equal Shares - each insurer pays the same amountNon-Concurrency: refers to a situation where there are multiple policies on the same loss but the policies are written on diff terms or conditions.