AINS cheat sheet

Pure risk involves only the chance of loss or no loss and is insurable; speculative risk involves the chance of gain or loss and is not insurable.

Six characteristics of an insurable risk: many similar exposure units, accidental loss, definite and measurable loss, calculable probability, losses that are not catastrophic, and an economically feasible premium.

Law of large numbers: as the number of similar independent exposure units increases, actual loss experience converges toward expected loss experience, improving predictability.

Three hazard types: physical (tangible conditions), moral (dishonest intent such as arson), and morale (carelessness or indifference that arises from carrying insurance).

Principle of indemnity: the insured is restored to approximately the pre-loss financial position and may not profit from a loss; actual cash value = replacement cost minus depreciation.

Insurable interest must exist at the time of loss in property-liability insurance, but only at inception in life insurance.

Utmost good faith imposes a duty to disclose material facts; violations include misrepresentation, concealment, and breach of warranty.

Subrogation transfers the insured's recovery rights against a negligent third party to the insurer after payment, preventing double recovery and holding wrongdoers accountable.

Risk management process: identify and analyze loss exposures, select techniques (avoidance, loss control, retention, transfer), implement the program, then monitor and revise.

Value chain flow: product development and marketing/distribution, underwriting and rating, policy issuance and administration, claims handling, with actuarial, investment, and reinsurance as support functions.

Underwriting performs risk selection and classification: accept, decline, modify (through deductibles or subjectivities), or refer, all within stated underwriting authority and guidelines.

Claims handling sequence: acknowledge and verify coverage, investigate, evaluate damages, negotiate and settle, pursue subrogation where applicable, then close and document the file.

Reinsurance types: treaty reinsurance automatically covers a defined class of policies while facultative reinsurance is negotiated risk by risk; pro rata shares losses proportionally while excess of loss responds above a retention.

Key ratios: loss ratio = incurred losses and LAE divided by earned premium; expense ratio = incurred expenses divided by written premium; combined ratio = loss ratio plus expense ratio; below 100 percent indicates an underwriting profit.

Premium = rate multiplied by exposure units; the rate must fund expected losses, loss adjustment expense, fixed expenses, and a provision for profit and contingencies.

Distribution channels include independent agents representing several insurers, exclusive or captive agents, brokers who represent the buyer, direct response, and managing general agents.

Producers hold premium in a fiduciary capacity; collected funds may not be commingled with personal or agency funds and must be remitted to the insurer promptly.

Principal balance-sheet reserves: the unearned premium reserve for unexpired coverage and loss and loss adjustment expense reserves for reported and unreported claims.

HO-3 pays open-perils coverage on the dwelling and broad named-perils coverage on personal property; HO-5 covers both on open perils; HO-4 renters and HO-6 condo owners insure personal property, liability, and improvements rather than the building itself.

Homeowners coverage parts: A Dwelling, B Other Structures, C Personal Property, D Loss of Use, E Personal Liability, F Medical Payments to Others.

Homeowners loss settlement commonly uses replacement cost for the dwelling and actual cash value for personal property unless replacement cost is endorsed, and special sublimits apply to items such as money, jewelry, silverware, and firearms.

Personal auto policy parts: A Liability, B Medical Payments, C Uninsured/Underinsured Motorists, D Damage to Your Auto; the coverage territory includes the United States, its territories and possessions, Puerto Rico, and Canada.

A personal umbrella provides excess limits over underlying auto and homeowners policies and may drop down, subject to a self-insured retention, for exposures the underlying policies do not cover.

The businessowners policy is a package for eligible small businesses such as offices, retail stores, and apartment buildings combining property and general liability; auto dealers, bars, and larger or unusual risks generally are not eligible.

Commercial general liability parts: A Bodily Injury and Property Damage, B Personal and Advertising Injury, C Medical Payments; an occurrence form covers injury occurring during the policy period while a claims-made form covers claims first made or reported during the period.

Commercial property causes of loss forms are basic, broad, and special; a coinsurance clause requires a limit equal to a stated percentage of value or the claim payment is reduced proportionally.

Workers compensation is statutory, no-fault coverage with an exclusive remedy against the employer; Part One pays statutory benefits and Part Two provides employers liability coverage.

The McCarran-Ferguson Act (1945) confirms that the states regulate the business of insurance and exempts state-regulated insurance activities from federal antitrust law unless the state fails to regulate.

State insurance departments license insurers, producers, and adjusters; review rates and policy forms; examine financial condition; conduct market conduct examinations; and resolve consumer complaints.

The NAIC is an association of state regulators that drafts model laws and regulations, accredits state departments, and maintains tools including IRIS financial ratios and a national producer licensing database.

Producers must be licensed in each state where they solicit business and generally must be appointed by each insurer they represent; appointment and continuing education requirements vary by state.

Unfair trade practices include misrepresentation, false advertising, twisting (inducing replacement through misrepresentation), rebating (offering inducements not stated in the policy), coercion, and unfair claim settlement practices.

Risk-based capital requirements set minimum capital tied to an insurer's asset and underwriting risk, permitting regulators to intervene before an insolvency occurs.

State guaranty associations pay covered claims of policyholders of insolvent insurers, funded through assessments on member insurers and subject to statutory limits and residency rules.

Ethical conduct requires producers to disclose conflicts of interest, recommend coverage consistent with the client's needs, protect confidential information, and avoid rebating and misrepresentation regardless of local practice.

Federal statutes affect insurance indirectly, including ERISA for employee benefits, the NFIP for flood, TRIA for terrorism, and Gramm-Leach-Bliley for consumer financial privacy.