The PC Professional
Chapter 1
The Agent’s Role
We hear a lot today about computers taking over our jobs. This has an element of truth to it for agents as well. The internet has multiple well-advertised websites supplying property and casualty policies to those willing to save a dollar at the expense of an agent living in their community. Many of the online companies do an excellent job so if the community agent is to survive, he or she must be willing to go the extra mile for their clients.
There was a time when we considered our title to be “career agent.” Career agents did not sell insurance as a sideline; it was their full-time job, and they valued their position as the person their friends and neighbors called on when some type of insurance policy was needed. While that title still applies it might also be time to call ourselves a “community agent” since we live and work in the same communities as our clients. We are at the Little League games with our children; we shop in the same local stores and gasoline stations; we donate to the local causes; step in to help when a neighbor experiences bad health; we do all the things good neighbors do for each other because we are part of the communities we live in.
Some of your clients will remain faithful because you are considered a friend and neighbor; others will move on to less expensive coverage. Often the difference depends upon how well the client knows his or her agent. If the agent is available, but not particularly special in any way there is no reason to remain faithful if coverage is available elsewhere for less money. With today’s rising gas and food prices your clients must make some hard choices. Lowering the cost of their auto or home insurance is likely to be involved in those choices.
There is no doubt that the growing use of the internet has forever altered the relationship between clients and agents. Even if the agent is not selling over the internet, their ability to link directly to their carriers when obtaining quotes and processing applications, even fulfilling service requests, makes their work faster and easier.
The internet has also allowed prospecting to be less work than before. With all the major carriers offering websites prospective clients often find their agents by looking online. Often the client obtains the quote online and is then connected to a local agent who actually processes the application.
With the increased competition, many companies also use call centers now. These are typically available to the insureds 24 hours a day, 7 days a week. Carriers hire customer service representatives to handle routine tasks such as answering telephones, providing answers to routine questions, making changes in policies, processing claims, and sometimes selling new products to those who call in. The intention of call centers, in part, is to take the load of such routine activities off the agent, allowing him or her to use their time to find new clients rather than servicing existing ones.
Special Designations
Some agents choose to acquire additional education through special programs. For example, an agent may choose to become a CPCU (Chartered Property Casualty Underwriter). Designations such as this means the individual has taken the time to acquire additional education in addition to that required by their state.
Required State Education
Agents must obtain a license in the states where they sell products, of course. Besides licensing, nearly every state now has specific educational requirements that must be met in order to become an agent and maintain their insurance license. Most states refer to agents as “producers” although our clients still tend to refer to us as agents. In addition to offering insurance products many agents sell mutual funds, annuities, securities, and offer comprehensive financial planning and retirement services. Much of these services would pertain to those agents licensed to sell life products.
Agents who work exclusively for one insurance company are called captive agents; independent agents represent several companies. Whether the agent is a captive or independent agent, he or she must become licensed in the state they sell policies in. If the agent wishes to sell in more than one state, a license must be obtained in each state. Typically, their domicile state is their resident state, with all other insurance licenses considered nonresident licenses.
Licensure requirements vary by state but usually require some insurance-related classroom or home-study training prior to issuance. Some states will require this pre-licensing education to be entirely acquired in a classroom; others will allow it to be acquired through the mail or from the website of an approved education provider. In all cases, regardless of how the pre-licensing education is acquired, the provider must be state approved. Generally, education is required prior to testing for the insurance license, but in some cases an individual may simply take the licensing test; if he or she passes they may obtain their license.
While a college education is not required to obtain a license many insurance companies are seeking out college graduates with a business or economics degree. This would especially be true if the insurer markets products for retirement and estate planning. Many colleges and universities offer courses specifically on insurance. Even if an individual has no plans to enter a sales career those who plan to enter into a business or economics field often take college courses on insurance since these products are so vital to successfully ran companies.
There was a time when insurers and brokerages resented the time agents had to invest in state-required continuing education. As the threat of lawsuits has risen dramatically, this attitude has mostly changed. Companies now realize that educated agents are much less likely to be engaged in dangerous sales practices. Of course, there will always be the few who live dangerously, but most agents now realize that education is also self-protection from being sued. Many insurance companies sponsor education for their agents in addition to that obtained from education-provider companies.
State licensing is based upon the products the agent intends to sell. While there are variances, most states issue licenses for property-casualty products and a separate license to sell life, health, and annuity products. Some types of continuing education are required for specific products that are considered important to consumers. Even the federal government is now in the education picture: due to terrorist and drug activity products that are considered suitable for money laundering require special education (anti-money laundering courses) to enable the agent to identify suspicious activity.
Property and casualty agents must often take a FEMA approved course on flood insurance since loss to flooding has become a widespread problem. The outline for the course material is mandated; each education-provider company creates a course that meets FEMA’s outline requirements, submits it to the various states for approval, and then makes it available to PC agents. Many insurers have developed their own Flood Insurance courses rather than seek outside vendors.
The long-term care industry has become so prominent that many states now require specialized long-term care education prior to promoting, selling, or negotiating such contracts. With the passage of the Deficit Reduction Act of 2005 many companies are marketing Partnership long-term care contracts (commonly called nursing home insurance) enabling the buyer to protect their assets from Medicaid’s spend-down requirements. Completing a long-term care Partnership CE course may be mandated as a training requirement or it may be a CE requirement for producers selling this type of product. Whether it happens to be merely a training requirement or mandated CE no producer should ever take a long-term care application without first knowing their state’s education requirements.
Many states now require specified education for producers selling annuity products since these are of prime interest to those wishing to launder illegal funds. Cash value life products may also see this requirement at some point. Money launderers deposit illegally obtained funds into cash-value products, then cancel them and receive insurer funds in place of the illegally obtained funds, thus laundering the money.
All states are steadily moving towards a uniform state licensing standard that would apply equally across the country. This would also provide uniform licensing standards and reciprocal licensing, allowing agents who earn a license in one state to become licensed in any other state. Again, most states also have mandatory continuing education requirements, which are also moving towards a uniform standard, typically 24 credit hours per two-year licensing period, with three of the 24 hours in mandated insurance ethics.
Agents wishing to market securities must acquire specific licensing. This licensing requires substantial study and passing an additional examination, either the Series 6 or Series 7 licensing exam, both of which are administered by the National Association of Securities Dealers (NASD). The Series 6 exam is for individuals who wish to sell only mutual funds and variable annuities, whereas the Series 7 exam is the main NASD series license that qualifies an agent as a general securities sales representative.
Multilingual Agents Being Sought
It is a sign of our shrinking world that many insurers are specifically seeking individuals who speak more than one language. Often these people are needed for call centers and other jobs where the clients calling in will need someone who has special language requirements.
A Tough Market for the Unprepared
Insurance is a tough market for an individual who has not properly prepared or who has not received sufficient training from their licensed insurance companies. Many beginning agents do not stay in the insurance field because they do not earn enough initially to pay their bills. As a result, insurance experiences a constantly changing field staff. Unfortunately, many brokers and insurers have not recognized that complete training and initial backup could have saved at least a portion of the turnover they experience. The old advice of: “Go out and sell everyone you ever knew your entire life” is not adequate anymore. Agents must be able to find new applicants on a routine basis in order to survive and meet their income goals (company websites are proving beneficial to agents because they often produce new buyers).
Statistically, a large number of agents are expected to retire over the next ten years. We are seeing an aging insurance sales force that has experienced success in their insurance sales career; they are now reaching their sixties and even seventies. Younger agents have not remained in the insurance field over the last three decades in sufficient quantities. In addition, with the advent of service centers and other insurer related developments America has not kept up with current and coming demands. Ironically, many insurance company service centers are being located outside of the US in countries such as India. The people being hired there are anxious to learn the trade and maintain employment in the insurance service industries. It is too early to know if these centers outside the United States will prove successful but even if they are that does not solve the issue of too few experienced agents in the coming years.
New Competition Coming from Traditional Entities
There was a time when a consumer went to his or her bank for Certificates of Deposit and to his or her property/casualty agent for their auto and homeowner insurance needs. Currently banks, savings-and-loan institutions, and other similar companies are invading the PC insurance market. For now, only the life and annuity insurance business is seeing much competition but it is expected to expand into all insurance areas within the next ten years. Industry analysts believe companies will, through mergers and cooperative agreements, begin having insurance centers in banks, credit unions, and perhaps even at the local Walmart store. While this will bring about employment opportunities it will also squeeze independent agents. They will need to examine how they currently operate and become more efficient and available agents. Most individuals and companies consider insurance a necessity; it is something they continue to need and buy even in hard economic times. An experienced agent will usually not need to worry about unemployment, even during a recession.
According to the U.S. Bureau of Labor Statistics, insurance producers made an average income of $59,080 per year in 2023 (the latest report available), but of course, averages are made up of highs and lows, so this amount varied. In fact, the report said on the low side, agents made under $34,940, but on the upper side, agents reported earning more than $134,420.
Income varies widely in the industry, with some individuals working part-time, and others working full-time. Most agents are commissioned based, but a few do receive a salary. Captive agents (those contracted with a single company versus multiple companies) have the luxury of receiving insurance leads and a more formal environment in which to work. However, it is limiting as well since only products from that company can be utilized. Captive agents are most likely to receive a base salary. Independent agents do not receive base salaries.
At one time insurance sales were a male dominated industry; that is no longer true. We are now seeing more women than men entering the industry.
Independent agents are typically not salaried, or wage based. For these professionals, commissions are their only source of income. Commissions are the most common form of compensation in the insurance industry sales division. Experienced agents would never limit themselves only to a wage or salary because they know how to earn much higher income through commissioned sales. Of course, the amounts of commissions that are possible depend upon the products being sold and the seller’s ability. The property/casualty field traditionally provides among the lowest commission base with life products bringing the highest commission base. Those in the financial planning field often do not work on commission at all, utilizing instead a fee-for-service compensation basis. It is felt this is best for the consumers since the financial planners do not have a financial stake in the products being recommended.
Anyone who has made insurance sales their career would never say it was an easy path, but chances are they would say it was a lucrative path if properly prepared for and diligently applied. The self-starter is more likely to succeed than an individual that requires supervision. In all cases, those who seek out continuing education, both state mandated and otherwise, will be better prepared than those who avoid additional education.
Products continually evolve as needs and competition change. At one time an agent could sell everything from an auto policy to life insurance to health insurance. That is much more difficult to do today. Like the medical and legal field, agents now tend to specialize. Whether it happens to be business insurance, retirement planning, property and casualty policies, or health plans, agents realize that it is harder to do it all and still do it all well.
A Value to Society
Insurance companies are a vital part of society and the economy. Insurance companies are financial intermediaries meaning they obtain money from one source and redirect it to another. Banks, savings and loan associations, as well as insurance companies collect small sums of money from their clients and policyholders, pool the money, and then lend larger sums to and/or invest larger sums into other entities. Of course, not all financial intermediaries operate in this exact manner. Consumer and sales finance companies generally obtain large sums of money in the commercial paper market and then lend it in smaller sums to individuals and businesses. However, the basic formula is the same either way; there is merely a difference in the direction money flows.
Because insurance companies transfer funds electronically, cash value products are considered a potential source of money laundering. As a result, those who deal with annuities and cash value life products must follow specific procedures when accepting cash from new clients and even existing clients.
There is a need for efficient collectors and distributors of capital because there is a demand for business capital. Business capital is in short supply as any small businessman or woman knows.
There are many economic aspects to insurance involving our society. Many areas of business, besides that of available cash flows, could not exist as it is today without the aid of insurance. Therefore, the benefits of insurance for society outweigh any cost involved.
Many industries take more than one form. This is also true for insurers. In the United States insurers are either owned privately or ran by a government unit.
Within both the privately ran and the government ran insurers, there are additional sub-categories. For example, a company may be a proprietary or a cooperative company. There is a general difference between a proprietary and cooperative company. A proprietary insurer is organized and operated for profit; a cooperative insurer is formed and operated to furnish insurance at cost to its members.
This is an oversimplification to some degree. For example, a proprietary insurer may be formed and operated by another business to obtain their insurance at cost. In this situation, the subsidiary insurance company is called a captive insurer. They may be formed as an alternative to self-insurance.
Risk
Insurance is purchased to offset the risk that exposes people or businesses to losses resulting from perils. The word risk is often interchanged with the terms hazard and loss. Risk is generally considered to be the uncertain potential for loss. There are varying degrees of risk; financial risk may be involved in many types of investments, but gain, rather than loss, is always the desired outcome.
In simplistic terms, insurance is the transfer of risk from one entity to another. An insurance policy transfers the threat of financial loss from the policyholder to the insurance company. Of course, if insurance were merely risk transfer, then insurance regulation would simply address this issue. As we know, insurance deals with much more than risk.
It has been said that an insurable exposure is one for which insurance may be purchased. That determination is the function of the analysts and the underwriters employed by insurance companies.
The ability to predict probabilities, a necessary part of predicting risk and loss, requires the use of the "law of large numbers." Insurance companies are in business to make a profit; it is more important than consumers often realize. If a company cannot remain profitable, they cannot remain in business. Many types of insurance policies do not experience losses for many years so it is important the company stay in business so they can cover those losses when they eventually happen.
The words "chance of loss" are often used in place of the word or term "risk." Even so, they may not always mean exactly the same thing. "Chance of loss is the long-run relative frequency of a loss" states the textbook Principles of Insurance written by Robert Mehr and Emerson Cammack. Chance of loss is often stated as a percentage since it often expresses mathematical probabilities of probable numbers and severity of losses out of a given number of exposures. To put this in simpler terms, if a person flips a coin, there is the 50/50 chance that heads will land face-up. This may be stated as 50/50, 1/2 or 50%; so, it is with chance of loss. The probable number of losses is the numerator, and the number of exposures is the denominator.
When insurance companies figure their chances of loss, it is a serious venture. Miscalculation could result in serious financial losses for the insurer. This is true regardless of the type of policy involved. Chance of loss is also the basis upon which premium rates are established by insurance companies. A degree of accuracy is absolutely necessary.
Insurance protection brings about another factor: morale and moral hazards. While similar, each type of hazard is actually distinct. A morale hazard involves human carelessness or irresponsibility, rather than an intentional act. This might occur because an individual or a business was aware of their insurance protection, so their actions were not well thought out. Moral hazard (no "e" at the end), on the other hand, involves an intentional human act. Moral hazards include such things as arson for profit and other types of fraud. Both types of hazards include humans and their actions.
Insurance, as we know, is purchased to offset the risks we are exposed to, whether that risk involves our homes, cars, health, or lives.
Insurance underwriters and analysts rely on specific risk numbers to offset their chance of loss. To use a gambling term, one might say that insurance companies "play the numbers." It has often been said that insurance companies are the best scorekeepers there are. They are more likely to know the possibilities of either loss or gain than anyone else.
The "law of large numbers" is related to the degree of risk. Of course, insurance agents and insurance agencies also play the "numbers" game. Most salespeople are well aware of how many times they must hear "no" before the "yes" comes along. Without becoming involved in the complicated mathematics, the law of large numbers basically states: the greater the number of similar units exposed to a similar loss, the more accurate the loss predictions based on that data will be. The law of large numbers may also be called the law of probability. Of course, the law of large numbers is not really a law at all. It is an entire branch of mathematics.
With life insurance, for example, statistics are readily available to the insurance companies. The statistics show the probability of death according to sex, ages and even professions. For auto insurance, companies know which cars are most likely to be stolen; in which zip code accidents most frequently occur, and which cars are the most expensive to repair following an accident.
While risk, in its simplest form (exposure to danger or adversity) is easy enough to understand, when risk is applied to the insurance field, it becomes more complex.
The insurance industry tends to tie risk and the possibility of financial loss together. The chances and types of risk may be divided into categories. There are basically two types of risk:
1. Fundamental and particular risk; and
2. Pure and speculative risk.
While fundamental and particular risk is linked together as are pure and speculative risk, each one is specific with individual characteristics. A fundamental risk is a risk that society in general (or at least a large number of people) is exposed to in a single occurrence. A particular risk is a risk that relatively few people are exposed to in a single occurrence. Sometimes it can be very difficult to make a distinction between the two types of risk. A recession involves large portions of society, so a recession is a fundamental risk, whereas investors who contribute to a specific project are involved in particular risk because only the investors are exposed to that potential investment loss.
Pure risk is a chance of financial loss that does not offer a simultaneous chance of financial gain. Speculative risk, on the other hand, offers the chance of both financial loss and financial gain at the same time.
These tend to be logical. If a person's car is damaged in an accident a financial loss occurs. If no accident occurs the car’s owner does not receive any financial gain. Pure loss is sometimes described as a loss or no loss situation. There is never any gain with pure risks.
With speculative risks, the person involved is taking some type of action which purposely exposes them to the possibility of a loss. There are two elements involved in speculative risks:
1. There is a chance for gain as well as loss,
2. The individual usually creates a speculative risk for themselves by their own intentional actions.
There are many types of speculative risks including such things as gambling and some forms of investing. Between pure and speculative risks, pure risks are more likely insurable. In most insurance matters, risks with low frequency and high severity lend themselves best to insurance coverage.
The basic function of insurance, as we know, is to handle risk. The accuracy with which losses may be predicted is the measure or degree of risk.
There is some amount of social risk as well as financial risk. Generally speaking, most people try to avoid most risks in their lives. The average person would not cross a street in heavy traffic, for example. Past such daily risk avoidance, however, fear of risk has an economic price. Risk may discourage investors and can affect how financial resources are placed. Poor areas of cities often experience this. As an agent, you may find that your companies do not like to place insurance in certain areas that experience high rates of claims.
Insurance does not completely eliminate risk because achieving an infinite number of exposure units is not possible. One may always expect some deviation of actual results from expected results. Statistics used for predictions can never be perfect either. Even if the statistics used for predictions were absolutely accurate, there is no reason to believe that tomorrow's losses will exactly duplicate yesterday’s losses. Therefore, there will always be uncertainties in predicting insurance losses.
Understanding Insurance Terminology
It should come as no surprise that agents must understand industry terms. It would be an advantage for consumers to know them as well, but if their agent is not familiar with specific terms, we certainly cannot expect their clients to be.
ACTUAL CASH VALUE: the replacement cost of an item less depreciation for its age and/or use. Often it is referred to simply as ACV.
ADVERSE SELECTION: when only a small number of policyholders are sharing a large risk.
ALL-RISK COVERAGE: the insurance company promises to pay for losses from all risks, except for specific exclusions which are listed in the policy.
BASIC FORM OR HO-1: also called Form 1, it generally covers the house and its contents against any of eleven different perils, which range from fire to broken glass. The Basic Form is considered to be limited coverage.
BODILY INJURY LIABILITY INSURANCE: covers someone else (other than the policyholder) who is hurt, or perhaps even killed, in an accident.
BROAD FORM OR HO-2: HO-2 is also called Form 2; this coverage costs more than does the HO-1 because it gives more benefits. It covers the house and its contents against specific losses as stated in the individual policies. The difference between the HO-1 and the HO-2 lies in the perils listed. The HO-2 insures against loss resulting from 18 listed perils rather than 11 or less, as in the HO-1.
CHANCE OF LOSS: the long-run relative frequency of a loss. It is often expressed as a percentage, since it often expresses mathematical probabilities of probable numbers and severity of losses out of a given number of exposures.
COLLISION COVERAGE: Collision coverage is usually required by the lender on new vehicles which have not yet been paid off. It applies only to the car itself. The lender wants to be sure they will receive their money in the event that the car is a complete loss, due to an accident. Collision coverage covers repairs to the policyowner's vehicle no matter who caused the accident. It usually covers the fair market value. (Also see fair market value)
COMPREHENSIVE COVERAGE: this gives coverage for damages that were not the result of a collision, such as damage from fire, flood, theft, vandalism, rocks thrown from the roadway, and so on. It is considered to be essential for new cars and sometimes even for older vehicles. Comprehensive covers the vehicle's fair market value, which normally declines with passing time.
COMPREHENSIVE FORM OR HO-5: also called Form 5, It is the same as HO-3, except that all risk protection is extended to coverage C, unscheduled personal property.
CONDITIONS: Conditions are the "ground rules" under which the contract operates. Insurance policies are conditional contracts. The conditions are those items which the policyowner must comply with in order for the policy to operate. They control the insurer’s liability for covered losses by imposing obligations on both the insured and the insurer.
CONDOMINIUM UNIT OWNERS FORM OR HO-6: also called Form 6, it was introduced in 1974 expressly for the unique needs of condominium unit owners who were exposed to risks similar to those of renters. HO-6 is a reproduction of HO-4, except for two changes, which offer limited coverage for damage to additions and alterations and also provides that the extra coverage will be excess insurance over and above any offered by the condominium association.
CONTENTS BROAD FORM OR HO-4: also called Form 4, or renters or tenants’ insurance, this type covers around 17 or 18 risks to personal property. It applies only to the contents of the house, not to the structure itself (which would presumably be covered by the building's owner).
CONTRIBUTORY NEGLIGENCE: allows a policyowner to collect damages only if they had no fault at all in the accident. If the driver had any fault at all, then he or she must collect from their own insurance company.
COVERAGE A: covers the actual dwelling or house.
COVERAGE B: covers all structures, except the house.
COVERAGE C: covers all personal property.
COVERAGE D: covers the loss of use of damaged property or belongs.
DECLARATIONS: descriptive phrases which describe the subjects covered, persons insured, premiums to be paid, period of coverage, policy limits and warranties made by the insured regarding the nature of a hazard. The declarations personalize the policy.
DEDUCTIBLES: many types of policies contain various types of deductibles. It is the amount of the loss that must be assumed (paid) by the policyholder before anything will be paid (covered) by the insurance company. It may be expressed as a dollar amount, a percentage or as time not covered.
DEFINITIONS: See Policy Definitions.
ENDORSEMENTS: used in property and liability insurance, they allow a standard or preprinted policy to be modified to meet specific situations. Riders are used in life insurance policies to modify mass-printed standard forms. They are used to complete policies as well as to take away benefits. For example, a standard fire policy is not considered complete until the endorsement is added, which describes the property which is to be covered. Also see Riders.
ENDORSEMENTS AND RIDERS: Often used when standard or preprinted policies do not entirely meet a specific situation. Modifications of the standard or mass-printed policy are met by adding special provisions to the basic contract. The term, endorsement, is used in property and liability insurance and the term, rider, is used in life insurance policies.
EXCLUSIONS: these eliminate specific benefits or coverage. Exclusions may also be referred to as limitations in some types of policies.
FAIR MARKET VALUE: this is determined by the book values (for automobiles) minus the cost of making repairs, minus a charge for unusually high mileage, if applicable.
FAMILY AUTOMOBILE POLICY (FAP): this has several parts to it, including:
1. Coverage A, bodily injury liability (Part 1);
2. Coverage B, property damage liability (Part 1);
3. Coverage C, reasonable & necessary medical expenses to the insured, their relatives and other persons injured (Part 2);
4. Coverages D through I, protection against loss resulting from physical damage to an automobile (Part 3); and
5. Coverage K, found in some though not all policies. The insurance company agrees to pay a stated accidental death benefit if the death was caused by bodily injury while occupying a vehicle or by being struck by an insured vehicle, providing that death occurs within 90 days of the actual accident. (Part 4)
Each part of the FAP contains its own recovery limitations, definitions and exclusions.
FIRE AND ALLIED COVERAGE INSURANCE: usually required by a mortgage lender, this means that the structures would be insured against just about everything that might damage it.
FIRST PARTY: In an insurance contract, the first party is the policyholder.
FRAUD: the deliberate attempt to steal or deceive. When applied to insurance policies, it often takes the form of applying for benefits that are not due.
FUNDAMENTAL RISK: a type of risk to which society in general (or at least a large number of people) is exposed to in a single occurrence. An example of this is a recession.
HAZARDS: the catalysts that bring about or increase perils (also see perils).
HOMEOWNER'S INSURANCE: a combination or package policy. The actual provisions contained in the policy will depend upon the needs and/or desires of the homeowner. A homeowner's policy contains a combination of several forms, in most cases. Homeowner policies are designed to protect owners and renters from loss or damage to their property and to provide protection against liability claims.
INFLATION GUARD CLAUSE: a clause in a policy which automatically increases the coverage by a specified percentage amount at specified time intervals. The premium typically increases as well. An inflation guard will not reflect any improvements made.
INSURANCE: the simplified term most often used is the transfer of risk from one entity to another. A more complete definition would be either the accumulation of a fund or a transfer of the risk, though not necessarily both. It must include a combination of a large number of separate, independent exposure units to make possible individual losses somewhat predictable. The predictable loss is then shared proportionately by all units involved. The definition of insurance should point out that both uncertainties are reduced, and losses are shared.
INSURANCE POLICY: the document containing the contract between the insured and the insurer (the policyowner and the insurance company respectively).
INSURANCE RATE: the cost for one unit of insurance. Typically, a unit of insurance is $1,000 of coverage, although this can vary.
INSURED: the insured is the policyholder in most cases.
INSURER: the insurance company.
INSURING AGREEMENTS: these are the coverages in an insurance policy that are broadly defined in the insuring agreements. They may sometimes define important terms in the contract. These usually appear immediately after the declarations. Also see Declarations.
LAW OF LARGE NUMBERS: relates to the degree of risk. It may also be referred to as the Law Of Averages or the Law of Probability. Without becoming involved in the complicated mathematics, basically it states that the greater the number of similar units exposed to a similar loss, the more accurate the loss predictions based on that specific data will be.
LEGAL HAZARDS: these hazards come as the result of court actions which increase the likelihood of a loss or increase the size of the loss itself.
LIABILITY: the state of being responsible or under obligation. Liability insurance covers a person's responsibility or obligation to another due to a loss. Liability insurance is the most expensive type of coverage.
MARKET VALUE: this is the dollar amount that the homeowner could sell their home for. It is not necessarily the same as the amount of money required to rebuild the home, should a loss (such as a fire) occur.
MEDICAL PAYMENTS INSURANCE: as the name implies, this pays the doctor and hospital bills and, if necessary, funeral expenses for the policyowner and members of his or her family who live in the same household, regardless of who caused the accident. It will also cover any passengers in the car being driven and even pedestrians.
MODIFIED COMPARATIVE NEGLIGENCE: bases what a policyowner can collect on the percentage of each person's (driver's) fault.
MORAL HAZARDS: this involves people and their actions. Arson is an example of a moral hazard because it involves the deliberate actions of a person or persons. Also see Morale (with an "e" on the end) Hazards.
MORALE HAZARDS: this involves human carelessness or irresponsibility, rather than an intentional act. Also see Moral Hazards.
MORATORIUM: the legal permission to delay action. This generally applies to such things as the selling of earthquake insurance immediately following the final aftershocks of an earthquake. By allowing a moratorium on the sale of earthquake insurance following such an occurrence, it allows insurance companies to determine their exact losses before assuming new risks. It also acknowledges the possibility of additional and damaging aftershocks, which could result in additional losses for the insurance companies.
NATIONAL FLOOD INSURANCE PROGRAM: this is administered by the Federal Emergency Management Agency (FEMA). Both the private and government flood insurance coverages are part of this program. Agents must now complete specific education on flood insurance in many areas.
NEGLIGENCE: the lack of proper care or attention; carelessness.
NO-FAULT: a system in which the driver's own coverage pays for the losses regardless of who actually caused the accident. It is due to this fact that it is referred to as "no-fault."
OLDER HOME FORM OR HO-8: also called Form 8, it is identical to HO-1, except losses under the 10 listed perils are settled on an Actual Cash Value (ACV) basis rather than on a replacement cost basis.
PARTICULAR RISK: a risk to which relatively few people are exposed to in a single occurrence. Particular Risk and a Fundamental Risk have much in common. The main difference is the number of people exposed to the risk itself.
PARTIES: There are several parties involved in insurance:
1. The first party is the policyowner;
2. the second party is the insurance company; and
3. the third party is the other driver.
PERILS: perils are the things that cause losses, such as fire, floods, explosions or negligence. Also see Hazards.
PERSONAL-INJURY PROTECTION: Often referred to as PIP or no-fault insurance, it is required by law in some states. It covers:
1. The policyowner's own medical bills up to a specified limit;
2. funeral expenses; and
3. replacement services in some states.
PHYSICAL HAZARDS: these come from material, structural or operational features. A physical hazard is, as the name implies, something that exists physically.
POLICY DEFINITIONS: a list of terms and phrases with their fully defined meanings stated. Wherever those words or phrases appear in the policy, they are printed in bold-face type to remind the reader that a specifically listed definition applies.
POLICY LIMIT: contained in most policies, it means there is a limit to the amount of money the insurance company (policy) will pay out on a covered loss.
PRODUCER: the insurance agent who is selling the product.
PROPERTY DAMAGE LIABILITY INSURANCE: this is usually the other driver's car which is damaged in an accident. It can, however, also include other types of property, such as signposts, fences or structures.
PURE COMPARATIVE NEGLIGENCE: this bases what a policyowner can collect on the percentage of each person's (driver's) fault.
PURE RISK: this is a chance of financial loss which does not offer any chance of financial gain simultaneously. Also see Speculative Risk.
RENTER'S INSURANCE: known as HO-4, Form 4 or Contents Broad Form, it covers only the personal property in a house; it does not cover the structure itself. It is identical to the HO-2, except that losses to the structure itself are not covered.
REPLACEMENT VALUE: the current cost of replacing an item or items that are lost, stolen or destroyed.
RIDERS: used in life insurance policies, they are used when standard or preprinted policies do not entirely meet specific situations. Modifications of the standard or mass-printed policy are obtained by adding special provisions to the basic contract. Also see Endorsements.
RISK: simply put risk is exposure to danger or adversity. For investments, risk is generally defined as uncertainty concerning loss. Risk is always connected to the uncertainty rather than to the loss itself. Also see Pure and Speculative Risk and Fundamental and Particular Risk.
SECOND PARTY: In an insurance policy, the second party is the insurance company.
SPECIAL FORM OR HO-3: also called Form 3, this plan offers still more coverage than either the HO-1 or the HO-2. It covers the house for all perils except those explicitly excluded by the policy. On personal property, it covers loss or damage from the same risks listed in the HO-2, but on the house itself, the policyowner is protected from all risks except any specifically excluded in the policy.
SPECULATIVE RISK: a risk which does offer the chance of both financial loss and financial gain at the same time. This is true in many types of investments; either a loss or a gain may be realized. A speculative risk is often created by the actions of the individual.
TENANTS COVERAGE: this is more commonly called "renter’s insurance" or HO-4. Also see Renter's Insurance or Contents Broad Form.
THIRD PARTY: In an automobile insurance policy, the third party is the other driver.
TOTAL LOSS: when the cost of an auto repair following an accident is higher than the value of the vehicle itself. A standard auto policy will not pay to repair a vehicle if the repairs would cost more than the cash value of the car.
UMBRELLA INSURANCE: often needed by individuals with relatively large asset bases. An Umbrella policy covers liability judgments that exceed the limits of the auto and homeowner's policies.
UNINSURED AND/OR UNDER-INSURED MOTORISTS: this type of coverage pays the cost of the policyowner's own injuries if they are hit by:
1. An uninsured driver who is at fault for the accident;
2. an at-fault driver whose small insurance policy will not cover all the damages incurred; or
3. a hit-and-run accident.
This type of coverage may also cover lost wages and, in some states, damages to the vehicle.
End of Chapter 1