AINS 21 (page 2 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 4: Marketing

Question Answer
ProducerAny of several kinds of insurance personnel who place insurance business with insurers and who represent either insurers or insureds, or both.
AgentIn the agency relationship, the party that is authorized by the principal to act on the principal's behalf.
AgencyA legal, consensual relationship that exists when one party, the agent, acts on behalf of another party, the principal.
PrincipalThe party in an agency relationship that authorizes the agent to act on that party's behalf.
Implied authorityThe authority implicitly conferred on an agent by custom, usage, or a principal's conduct indicating intention to confer such authority.
Express authorityThe authority that the principal specifically grants to the agent.


Question Answer
Actual authorityAuthority (express or implied) conferred by the principal on an agent under an agency contract.
Binding authorityAn insurance agent's authority to effect coverage on behalf of the insurer.
Apparent authorityA third party's reasonable belief that an agent has authority to act on the principal's behalf.
Independent agencyA business, operated for the benefit of its owner (or owners) that sells insurance, usually as a representative of several unrelated insurers.
BrokerAn independent producer who represents insurance customers.
Agency expiration listThe record of an insurance agency's present policyholders and the date their policies expire.


Question Answer
Independent agency networkA group of agencies that contractually link to share services, resources, and insurers to gain advantages normally available only to large regional and national brokers.
Managing general agent (MGA)An authorized agent of the primary insurer that manages all or part of the primary insurer's insurance activities, usually in a specific geographic area.
Exclusive agency marketing systemAn insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers).
Direct writer marketing systemAn insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer.
Mixed marketing systemAn insurer's use of more than one marketing system or distribution channel.
Cold canvassContacting a prospect without an appointment.


Question Answer
Loss runA report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date.
Agency billA payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commission.
Direct billA payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending any commission payable on the premium collected to the producer.
CommissionA percentage of the premium that the insurer pays to the agency or producer for new policies sold or existing policies renewed.
Contingent commission agreementA contract provision in which an insurer agrees to make supplemental payments to producers based on profitability alone or on a combination of profitability, volume, and growth in the agency's book of business placed with that insurer.

Assignment 5: Underwriting and Ratemaking

Question Answer
Book of businessA group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.
Adverse selectionIn general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
CapacityThe amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.
Underwriting authorityThe scope of decisions than an underwriter can make without receiving approval from someone at a higher level.
Underwriting guidelines (underwriting guide)A written manual that communicates an insurer's underwriting policy that specifies the attributes of an account that an insurer is willing to insure.
Line underwriterUnderwriter who is primarily responsible for implementing the steps of the underwriting process.


Question Answer
Staff underwriterUnderwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy.
Underwriting policy (underwriting philosophy)A guide to individual and aggregate policy selection that supports an insurer's mission statement.
Advisory organizationAn independent organization that works with and on behalf of insurers that purchase or subscribe to its services.
Prospective loss costsLoss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.
TrendingA statistical technique for analyzing environmental changes and projecting such changes into the future.
Loss developmentThe increase or decrease of incurred losses over time.


Question Answer
Treaty reinsuranceA reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.
Facultative reinsuranceReinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Underwriting auditA review of underwriting files to ensure that individual underwriters are adhering to underwriting guidelines.
Expert systems, or knowledge-based systemsComputer software programs that supplement the underwriting decision-making process. These systems ask for the information necessary to make an underwriting decision, ensuring that no information is overlooked.
Physical hazardA tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss.
HazardA condition that increases the frequency or severity of a loss.


Question Answer
Morale hazard (attitudinal hazard)A condition of carelessness or indifference that increases the frequency or severity of loss.
Moral hazardA condition that increases the likelihood that a person will intentionally cause or exaggerate a loss.
Legal hazardA condition of the legal environment that increases loss frequency or severity.
Information efficiencyThe balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.
Predictive analyticsStatistical and analytical techniques used to develop models that predict future events or behaviors.
Catastrophe modelA type of computer program that estimates losses from future potential catastrophic events.


Question Answer
Predictive modelingA process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.
CounterofferA proposal an offeree makes to an offeror that varies in some material way from the original offer, resulting in rejection of the original offer, and constituting a new offer.
Experience ratingA rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Schedule ratingA rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Retrospective ratingA ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
Mix of businessThe distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications.
BinderA temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.


Question Answer
Certificate of insuranceA brief description of insurance coverage prepared by an insurer or its agent and commonly used by policyholders to provide evidence of insurance.
RateThe price per exposure unit for insurance coverage.
Rate manualA resource for classifying accounts and developing premiums for given types of insurance; includes necessary rules, factors, and guidelines to apply those rates.
Exposure unit (unit of exposure)The unit of measure (for example, area, gross receipts, payroll) used to determine an insurance policy premium.
RatemakingThe process insurers used to calculate insurance rates, which are a premium component.
ActuaryA person who uses mathematical methods to analyze loss data and develop insurance rates.
Loss costsThe portion of the rate that covers projected claim payments and loss adjusting expenses.


Question Answer
Insurance advisory organizationAn independent corporation that works with and on behalf of insurers that purchase or subscribe to their services, which include developing prospective loss costs and standard policy forms.
Law of large numbersA mathematical principle stating that as the number of similar but independent exposure units increases, the relative accuracy of predictions about future outcomes (losses) also increases.
ContingenciesA provision in an insurance rate for losses that could not be anticipated in the loss data.
Class ratingA rating approach that uses rates reflecting the average probability of loss for businesses within large groups of similar risks; the predominant method used for rating commercial properties.
Individual rate, or specific rateA type of insurance rate that reflects the unique characteristics of an insured or the insured's property.
Judgment ratingRating used by underwriters to rate one-of-a-kind risks.
Final rateThe price per exposure unit determined by adjusting the prospective loss costs for expenses, profits, and contingencies.

Assignment 6: Claims

Question Answer
First-party claimA demand by an insured person or organization seeking to recover from its insurer for a loss that its insurance policy may cover.
Third-party claimA demand against an insured by a person or organization other than the insured or the insurer, seeking to recover damages that may be payable by the insured's liability insurance.
ClaimantA party that makes a claim and that can be either a first-party claimant or a third-party claimant.
Claims representativeA person responsible for investigating, evaluating, and settling claims.
Third-party administrator (TPA)An organization that provides administrative services associated with risk financing and insurance.
Independent adjusterAn independent claim representative who handles claims for insurers for a fee.
Public adjusterAn outside organization or person hired by an insured to represent the insured in a claim in exchange for a fee.


Question Answer
Nonwaiver agreementA signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.
Reservation of rights letterAn insurer's letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.
SubrogationThe process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.
MediationAn alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a mutually agreeable settlement.
ArbitrationAn alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a settlement, which can be final and binding.
AppraisalA method of resolving disputes between insurers and insureds over the amount owed on a covered loss.
Mini-trialAn alternative dispute resolution method by which a case undergoes an abbreviated version of a trial before a panel or an adviser who poses questions and offers opinions on the outcome of a trial, based on the evidence presented.


Question Answer
Summary jury trialAn alternative dispute resolution method by which disputing parties participate in an abbreviated trial, presenting the evidence of a few witnesses to a panel of mock jurors who decide the case.
Insurable interestAn interest in the subject of an insurance policy that is not unduly remote and that would cause the interested party to suffer financial loss if an insured event occurred.
Actual cash value (ACV)Cost to replace property with new property of like kind and quality less depreciation.
DepreciationThe reduction in value caused by the physical wear and tear or technological or economic obsolescence of property.
Replacement costThe cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.
Agreed value methodA method of valuing property in which the insurer and the insured agree, at the time the policy is written, on the maximum amount that will be paid in the event of a total loss.
Salvage rightsThe insurer's rights to recover and sell or otherwise dispose of insured property on which the insurer has paid a total loss or a constructive total loss.


Question Answer
Constructive total lossA loss that occurs when the cost to repair damaged property plus its remaining salvage value equals or exceeds the property's pre-loss value.
DamagesMoney claimed by, or a monetary award to, a party who has suffered bodily injury or property damage for which another party is legally responsible.
Compensatory damagesA payment awarded by a court to reimburse a victim for actual harm.
Special damagesA form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.
General damagesA monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses.
Punitive damages (exemplary damages)A payment awarded by a court to punish a defendant for a reckless, malicious, or deceitful act to deter similar conduct; the award need not bear any relation to a party's actual damages.