AINS 21 (page 1 of 4)

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Property and Liability Insurance Principles (5th ed.): one of several courses in the Associate in General Insurance (AINSĀ®) designation program

Assignment 1: Understanding Insurance

Question Answer
Loss exposureAny condition or situation that presents a possibility of loss, whether or not an actual loss occurs.
Risk managementThe process of making and implementing decisions that will minimize the adverse effects of accidental losses on an organization.
Loss preventionA risk control technique that reduces the frequency of a particular loss.
Loss reductionA risk control technique that reduces the severity of a particular loss.
Exposure unitA fundamental measure of the loss exposure assumed by an insurer.
Property-casualty insuranceOne of the two main sectors of the insurance industry, encompassing numerous types of insurance, most of which cover the financial consequences of damage to one's own property or legal liability to others.
Life-health insuranceOne of the two main sectors of the insurance industry, encompassing numerous types of insurance that cover the financial consequences of death, injury, or sickness.


Question Answer
Utmost good faithAn obligation to act in complete honesty and to disclose all relevant facts.
Contract of adhesionAny contract in which one party must either accept the agreement as written by the other party or reject it.
Contract of indemnityA contract in which the insurer agrees, in the event of a covered loss, to pay an amount directly related to the amount of the loss.
Self-contained policyA single document that contains all the agreements between the insured and the insurer and that forms a complete insurance policy.
Modular policyAn insurance policy that consists of several different documents, none of which by itself forms a complete policy.
Property insuranceAny type of insurance that indemnifies an insured who suffers a financial loss because property has been lost, stolen, damaged, or destroyed.
Liability insuranceInsurance that covers losses resulting from the insured's liability to others.


Question Answer
Homeowners policyPolicy that covers most of the property and liability loss exposures that arise out of residential property ownership and occupancy, as well as property and liability loss exposures that individuals and families may have while they are away from their residences.
Personal liability coverageCoverage for damages, plus costs of any defense, related to a claim or suit brought against the insured that resulted from bodily injury or property damage caused by an occurrence covered under the policy.
Personal auto policy (PAP)An insurance policy that covers an individual or a family against loss exposures arising out of the ownership, maintenance, or use of automobiles.
Comprehensive coverageCoverage for direct and accidental loss or damage to a covered auto by any peril except collision or overturn or a peril specifically excluded.
Personal watercraft policyAn insurance policy that covers an individual's or a family's loss exposures arising out of the ownership, maintenance, or use of watercraft used principally for recreational or personal transportation purposes.
Umbrella liability policyA liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention.
Liability coverageCoverage that protects the insured from damages owed because of legal liability to another party. For auto policies, it protects insureds against liability arising out of the ownership or operation of automobiles.


Question Answer
Term-life insuranceLife insurance that provides coverage for a specified period, such as ten or twenty years, with no cash value.
Permanent life insuranceLife insurance designed to remain in force for an insured's entire life and provide a death benefit at death, characterized by the presence of a cash value.
Long-term care insuranceInsurance that pays for extended medical care or custodial care received in a nursing home, hospital, or home.
AnnuityA type of life insurance policy or contract that makes periodic payments to the recipient for a fixed period or for life in exchange for a specified premium.
Commercial package policy (CPP)Policy that covers two or more lines of business by combining ISO's commercial lines coverage parts.
Commercial auto insuranceInsurance that covers a business or a not-for-profit organization against loss exposures arising out of the ownership, maintenance, or use of automobiles.
Businessowners policy (BOP)A package policy that combines most of the property and liability coverages needed by small and medium-size businesses.


Question Answer
Auto physical damage coverageCoverage for damage to or theft of a covered auto that can include both collision coverage and other than collision (comprehensive) coverage.
Commercial property insuranceInsurance that covers commercial buildings and their contents against various types of property loss.
Ocean marine insuranceInsurance that covers vessels and their cargoes, including various vessel-related liability exposures.
Inland marine insuranceInsurance that covers many different classes of property that typically involve an element of transporation.
Commercial crime insuranceInsurance that covers (1) money and securities against numerous perils (not limited to crime perils) and (2) property other than money and securities against crime perils, such as employee theft, robbery, theft by outsiders, and extortion.
Commercial general liability (CGL) insuranceInsurance that covers many of the common liability loss exposures faced by an organization, including its premises, operations, and products.
Professional liability insuranceInsurance that covers persons engaged in various occupations against liability resulting from their rendering or failing to render professional services.
Environmental liability insuranceInsurance that offers business owners protection against environmental damage that may occur as a result of business operations.
Workers compensation insuranceInsurance that provides coverage for benefits an employer is obligated to pay under workers compensation laws.
Claim buildupThe intentional exaggeration of a loss in an otherwise-legitimate claim.

Assignment 2: Insurers and how they are regulated

Question Answer
Private insurerA nongovernment insurance provider.
Stock insurerAn insurer that is owned by its stockholders and formed as a corporation for the purpose of earning a profit for the stockholders.
Mutual insurerAn insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them.
Reciprocal insurance exchange (interinsurance exchange)An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.
Captive insurer/captiveA subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates.
ReinsuranceThe transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary's insurance policies.


Question Answer
UnderwritingThe process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the decisions made.
UnderwriterAn insurer employee who evaluates applicants for insurance, selects those that are acceptable to the insurer, prices coverage, and determines policy terms and conditions.
ClaimA demand by a person or business seeking to recover from an insurer for a loss that may be covered by an insurance policy.
Risk controlA conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.
Premium auditMethodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.
SolvencyThe ability of an insurer to meet its financial obligations as they become due, even those resulting from insured losses that may be claimed several years in the future.
Foreign insurerAn insurer licensed to operate in a state but incorporated in another state.


Question Answer
Domestic insurerAn insurer doing business in the jurisdiction in which it is incorporated.
Alien insurerAn insurer domiciled in a country other than the United States.
Admitted insurerAn insurer to which a state insurance department has granted a license to do business within that state.
Nonadmitted insurerAn insurer not authorized by the state insurance department to do business within that state.
Surplus lines lawA state law that permits any producer with a surplus lines license issued by that state to procure insurance from an eligible surplus lines insurer if the applicant cannot obtain the desired type of insurance in the admitted market.
Mandatory rate lawState law under which insurance rates are set by a state agency or rating bureau and all licensed insurers are required to use those rates.
Prior-approval lawAn insurance rating law in which the rates and supporting rules must be filed with and approved by the state insurance department before they can be used.


Question Answer
File-and-use lawAn insurance rating law in which the insurer must file rates and supporting rules with the state insurance department prior to their use, but the rates can then be used immediately without specifric approval.
Use-and-file lawAn insurance rating law in which the rates must be filed with the state insurance department within a specified period after they are put into use.
Flex rating lawAn insurance rating law under which prior approval is required only if the new rates exceed a certain percentage above (and sometimes below) the rates previously filed.
Open competition (no-file law)An insurance rating law that allows insurers to develop and use rates without having to file with or get approval from the state insurance department.
Market conduct regulationRegulation of the practices of insurers in regard to four areas of operation: sales practices, underwriting practices, claims practices, and bad-faith actions.
Unfair trade practices lawState law that specifies certain prohibited business practices.
Solvency surveillanceThe process, conducted by state insurance regulators, of verifying the solvency of insurers and determining whether their financial condition enables them to meet their financial obligations and to remain in business.


Question Answer
National Association of Insurance Commissioners (NAIC)An association of insurance commissioners from the fifty U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.
NAIC Annual StatementThe primary financial statement prepared by insurers and required by every state insurance department.
ReserveThe amount the insurer estimates and sets aside to pay on an existing claim that has not been settled.
Insurance Regulatory Information System (IRIS)An information and early-warning system established and operated by the NAIC to monitor the financial soundness of insurers.
Guaranty fundA state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state.
Standard marketCollectively, insurers who voluntarily offer insurance coverages at rates designed for customers with average or better-than-average loss exposures.
Surplus lines insuranceInsurance obtained from nonadmitted insurers when protection is not available from admitted insurers.
Surplus lines insurerA nonadmitted insurer that is eligible to insure risks that have been exported by a surplus lines licensee in accordance with a surplus lines law.

Assignment 3: Insurer Financial Performance

Question Answer
Loss adjustment expense (LAE)The expense that an insurer incurs to investigate, defend, and settle claims acording to the terms specified in the insurance policy.
Paid lossesLosses that have been paid to, or on behalf of, insureds during a given period.
Incurred lossesThe losses that have occurred during a specific period, no matter when claims resulting from the losses are paid.
Incurred but not reported (IBNR) lossesLosses that have occurred but have not yet been reported to the insurer.
DividendsThe portion of an organization's profits that is paid to shareholders.
AssetsTypes of property, both tangible and intangible, owned by an entity.
Admitted assetsAssets meeting minimum standards of liquidity that an insurer is allowed to report on its balance sheet in accordance with statutory accounting principles.
Nonadmitted assetsTypes of property, such as office furniture and equipment, that regulators do not allow insurers to show as assets on financial statements because these assets cannot readily be converted to cash at or near their market value.


Question Answer
LiabilitiesFinancial obligations, or debts, owned by a company to another entity, usually the policyholder in the case of an insurer.
Loss reserveAn estimate of the amount of money the insurer expects to pay in the future for losses that have already occurred and been reported, but are not yet settled.
Unearned premium reserveAn insurer liability representing the amount of premiums received from policyholders that are not yet earned.
Policyholders' surplusUnder statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.
Loss ratioA ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.
Expense ratioAn insurer's incurred underwriting expenses for a given period divided by its written premiums for the same period.
Combined ratioA profitability ratio that indicates whether an insurer has made an underwriting loss or gain.
Investment income ratioNet investment income divided by current premiums for a given period.