Unit 3: Basics of Property & Casualty Insurance

Question 1

What is property insurance? What are first party losses?

Answer 1

Property insurance policies protect the insured from loss caused by damage from a covered peril to insured property. Property insurance pays the insured for covered losses to the property (buildings and personal belongings). These are referred to as first party losses. Insured property can be buildings (called real property), such as a house, or personal property (stuff), such as a television.

• Covers “my stuff”
• “My stuff* = buildings (real property) and personal belongings

Question 2

What is casualty insurance and third party losses?

Answer 2

Casualty policies, often called liability insurance, protect an individual or business when it is found legally liable for negligent acts or omissions that cause injury or property damage to others. Casualty insurance never pays the insured; it pays the “other guy”” These are referred to as third party losses.

Ex. if a person is injured at your house due to your negligence, your casualty policy will pay for the expense of their injury. If you, the insured, were also injured due to your negligence, your casualty policy would not pay for your injury.

Casualty Insurance
The
“other guy”
Casualty Insurance
• Casualty = Liability
• Always pays the other guy, never
• Third party losses
• First party–me (insured)
•Second party–my insurer
• ‘Third party-other guy

Question 3

What the parts of a policy? What is D.I.C.E.E. ?

Answer 3

•Declarations
• Insuring agreements
• Conditions
• Endorsements and additional supplementary coverages
• Exclusions

Question 4

Explain DICEE

Answer 4

Information relative to who, what, when, and where is found on the first page of the policy-the
Declaration section.
The name of the insured(s), a current address, a legal description of the insured property, the policy deductibles, and the term of the coverage are contained in this section. This information is used to help determine the premium cost of the policy.

‘The insuring agreement describes the covered perils or risks assumed by the insurer and makes reference to the contractual agreement between the insurer and insured. I the policy provides hability coverage, the promise to defend the insured, if sued, is found here. It summarizes the major promises of
the insurance company. as wellas states whatis covered
‘The conditions section states the policy provisions, rules of conduct, duties, and obligations required for coverage. Examples of conditions could include that the insured must file a claim and notify the police if the loss is crime-related, and that the insurer has the right to inspect the property being insured. If the insured does not adhere to the conditions of the policy, the insurer may deny coverage or a claim.
Endorsements add, modify, or take away coverage. An endorsement is attached to the policy and is part of the legal contract.
Exclusions take coverage away from the insuring agreement by describing property, perils, hazards, or losses arising from specific causes which are not covered by the policy. For example, flood damage may be an exclusion in a policy.

Policy Sections (DICEE)

• Declarations–who, what, when, where, and how much
• Insuring agreements)-promise to pay and perils covered (the heart)
• Conditions–rules for the policy
• Endorsements–changes to the original policy
• Exclusions- items not covered

Question 5

What is additional/supplementary coverage?

Answer 5

‘The definitions section clarifies the meanings of certain terms used in the policy. Definitions common to the entire policy are found in this section. Insurance contracts are legal documents, so there must be an attempt made to clearly define terms used in the contract.

Additional/supplementary coverage provides payment for certain additional expenses. Depending on the policy, this coverage may have separate limits of insurance and may be paid in addition to the maximum limit of liability. The cost to pay attorney fees for the insured if the insured is sued by another party, the cost of making temporary repairs to a damaged building, bail and appeal bonds, and other court-related costs are examples of additional/supplementary coverage.

Additional/Supplementary Coverage
• Payment for additional expenses
not normals covered
• May have separate limit of insurance.

Question 6

What does insured mean?

Answer 6

• ‘The named insured is the person, business, or other entity named in the declarations to which the policy is issued.
• ‘The first-named insuredis the person listed first on the declarations page when there is more than one named insured. The policy may assign a higher level of duties or rights to the first-named insured. (This is used in commercial insurance when there are multiple partners in a
• In addition to the named insured, the policy may cover other persons, businesses, or entities as insureds, such as the named insured’s resident relatives. These insureds are not listed by name but are insureds by definition.
• In some circumstances, another individual or business may be listed as an additional insured
This is usually done by endorsement.

Insureds
• Named insured–listed on the declarations
• First-named insured- first on the declarations(decision maker)
• Insureds–by delination
• Additional insured added by endorsement

Question 7

What is policy period (how long) and policy territory(where)?

Answer 7

‘The policy period is the duration of the policy. It is the date and time, including where and in what time zone, coverage begins and ends. Six months, one year, or even three years are common policy periods. The policy territory provisions state that a loss will not be covered unless it occurs within the policy territory. The territory may vary, but typically includes the United States, Canada, Puerto Rico, and other U.S. territories and possessions. Most insurance policies do not extend coverage into Mexico.

Policy Period and Territory
•Policy period–when the policy begins and ends
•Policy territory–where a loss must occur

Question 8

Explain cancellation of a policy

Answer 8

Insurance policies have a beginning date and an ending date, also known as an inception date and an expiration date. An insurance policy can be stopped by the insured before the expiration date, which known as cancellation. The named insured can cancel the policy at any time by notifying the insurer. The insurer can not cancel at anytime

For example, Joe discovers that he can save $150 a year by switching to a different insurance company for his car insurance. He notifies his insurer and cancels his policy in order to save the money. This is a
pertect example of how insurance policies are unilateral contracts: the insured can cancel at any time
but the insurer cannot. This protects the insured

it is common that a policy is extended at the end of it term or policy period unless cancelled by insured who no longer pays the premiums

Question 9

Explain unearned premium

Answer 9

If the insured had paid premiums in advance for future months, any unused premium- unearned premium must be returned to the insured upon cancellation of a policy.(refund)
Premiums paid in advance

Question 10

Explain prorated basis
(Portion of premium back if insurer cancels before expiration)

Answer 10

In a case where the insurer cancels the insured’s policy, the entire unearned premium is returned on a prorated basis. A prorated basis means that the insured will receive a portion of the premium back, depending on when the policy is canceled.

Insurer must notify the insured if cancellation (full refund)
Vice versa (half refund)

Question 11

Explain short rated basis
(Think penalty for early cancellation )

Answer 11

When an insured cancels a policy before the expiration date, the insurer is entitled to retain a larger percentage of the unearned premium. There is a surcharge or a penalty for early cancellation, and it is applied on a short-rated basis

Question 12

Explain flat cancellation
(Think times up-cancelled on effective date)

Answer 12

When a policy is canceled on the effective date, by either the insurer or insured, it’s called a flat
cancelation

Question 13

Explain renewal process

Answer 13

It is common that a policy is extended at the end of its term or policy period. However. the insurer may choose to not renew a policy for another term or the insured may choose to end their coverage and not pay the premium. The nonrenewal process has mandated state rules that must be followed.

Question 14

Explain Cancellation and Nonrenewal

Answer 14

Cancellation and Nonrenewal
• Cancellation occurs before the policy’s expiration date
• Insurer cancellation requires
advance notice
• Full refund of unearned premium–pro rata
• Insured cancellation–no
aavance nonce
• Partial refund of unearned premium- Short rate
• Nonrenewal- occurs at the
Insurer must ave savance
MOUCe
• No advance notice required by the insured

Question 15

What is a deductible?

Answer 15

The deductible is the amount that must be paid out of pocket by the policy owner before an insurer pays any expenses. The purpose of a deductible is to prevent small insurance claims and overuse of insurance claims. Deductibles are normally provided as clauses in an insurance policy that dictate how much of an insurance-covered expense is paid by the policyholder. Insurance premiums are typically cheaper when they involve higher deductibles.

Deductible
• Amount of the loss paid by the insured
•The higher the deductible, the lower the premium

Question 16

Provide an example of a deductible

Answer 16

Suppose Li has insurance protection for her home. Her policy has a $500 deductible. One night, a windstorm tears off part of the roof, causing $750 in damage. Li will submit the claim to her insurance company since the claim is greater than the deductible. The insurance company will pay Li $250 [$750 (claim amount) - $500 (deductible)]. On the other hand, let us suppose the roof damage was only $200. Since Li’s deductible is $500, she will not turn this small claim in to her insurance company since
her deductible is more than her loss. Deductibles prevent insureds from making small or unnecessary claims. Li would simply for the damages out of her own pocket.

Question 17

Explain the concept of indemnity and other insurance.

Answer 17

‘The concept of indemnity with insurance is to restore the insured to their original pre-loss condition no better and no worse. The insurance payment should not make a profit for the policyowner. There could be a situation where more than one of multiple policies covers the same loss or claim. The other
insurance condition dennes how reimbursement will occur when this happens and is also called other
sources or recovery or insurance under two or more coverages

Other Insurance
•More than one policy covers same loss or claim
• No more, no less!

Question 18

What is nonconcurrency?

Answer 18

Nonconcurrency is the result of two or more policies covering the same property but providing different or non-identical coverage. This situation is not ideal because it can cause gaps or disputed payments.

Nonconcurrency is most commonly seen in commercial insurance policies.

Non-identical

Question 19

What is primary insurance and excess coverage?

Answer 19

More than one policy can cover the same property. Primary insurance attaches immediately upon the occurrence or loss. Excess coverage, by definition, pays whatever is not paid by the primary policy up to the amount of the loss or excess coverage limit, whichever is less.

Ex. Company X has the insured property covered up to $10,000 and Company Y also has it covered for up to $10,000. Company X is the primary insurer and Company Y is the excess insurer. Assuming a $15,000 loss, Company X pays $10,000 and Company Y pays $5,000 for the loss.

Think first and back up insurance

Excess pays what is not covered by primary

Question 20

Explain pro rata

Answer 20

Pro rata is one method of preventing overpayment of a claim. In using this method, each company will pay part of the loss according to the percentage of the total amount of insurance the policy provides.

To calculate pro rata responsibility, determine the percentage each policy contributes to the total amount of insurance.
Ex. if you have two homeowners policies totaling $400,000-one for $100,000 and one for $300,000-the first policy will cover 25% of an actual paid loss and the second policy will cover 75%

Here is the formula for calculating the pro rata method:

policy limit of one company divide by(/)
policy limit of all companies x loss

Company A (or B) limit /Both Companies Limit x Loss

Question 21

Pro Rata Calculation Example

Answer 21

Policy A coverage limit = $100,000
Policy B coverage limit = $300,000
Claim/loss amount = $50,000
Total amount of insurance coverage from A and B = $400,000
Policy A calculation:

$100,000 / $400,000= .25 (or 25%)

.25 (25 %) × $50,000 loss = $12,500 (Policy A responsibility)

Policy B calculation:
$300,000/$400,00 =.75 (or 75%)

.75 (75%) × $50,000 loss = $37,500 (Policy B responsibility)

Insured claim payment: $12,500 (A) + $37,500 (B) = $50,000

Question 22

Explain contribution by equal shares

Answer 22

Under the contribution by equal shares provision, all insurers pay equal amounts, up to the limit of the policy with the smallest limit. When that company pays its policy limit, it stops paying and the other companies share in the remainder of the loss. This continues until each company has paid its policy limit or the loss is paid in full.

• Contribution by equal shares-each policy pays the same up to the smallest policy limit
• Prevents gain (indemnity)

EXAMPLE #I
$24,000 liability loss covered by two policies
Company XYZ = $5,000 policy limit
(24,000-5,000=19,000)
Company PDQ = $25,000 policy limit
XYZ would pay $5,000 (smallest limit).
PDQ would pay $19,000 ($5,000 smallest limit + $14,000 of its own share).

EXAMPLE #2
For a $4,000 loss, XYZ would pay $2,000 and PDQ would pay $2,000.

Think pizza split into equal parts

Question 23

Explain provisions and loss provisions

Answer 23

The conditions section of a property insurance policy lists the duties and rights of both the named insured and the insurer. ‘These are commonly known as provisions.

Most contracts include conditions that specify what the named insured and insurer must do when a loss occurs. Together, they may be referred to as loss provisions.

Question 24

Explain the duties of a loss

Answer 24

‘The duties after loss condition lists the named insureds responsibilities after a property insurance loss.

‘This includes: (PPC+MSC)

• PROMPT notice of claim to the insurer or agent;
• PROTECT the property from further damage;
• COMPLETE detailed proof of loss (an official inventory of the damages);(if asked)
• MAKE the property available for inspection by the company;
• SUBMIT to examination under oath if required; and
• COOPERATE with the insurer as required during the claim investigation procedure.

Question 25

What is an assignment condition?

Answer 25

The assignment condition specifies that a policy may not be transferred to anyone else without the written consent of the insurer. If the named insured dies, then the rights and duties under the policy are transferred to the insured’s legal representative and they remain insured up to the policy renewal date. This provision is sometimes called the transfer of rights or duties under this policy provision.

Assignment
Policy cannot be transferred
without written consent from the insurer
• Transfer of rights

Question 26

What is an abandonment condition?

Answer 26

The abandonment condition states that the insured may not abandon property to the insurance company and ask to be reimbursed for its full value.

Abandonment
• Insured cannot abandon property that can be repaired and expect to be paid as if the loss was total.

Ex.Suppose the insured hits a deer, causing damage to his 10-year-old vehicle, and the damage is repairable. The abandonment provision prohibits the insured from abandoning the car and demanding payment for the total loss of the automobile. The insurance company has the option to repair, rebuild, or replace the vehicle with like kind and quality.

Question 27

Describe a salvage condition

Answer 27

A salvage condition that states that the insurance company can take possession of damaged property after payment of a total loss.

INSURER has the right of salvage-
NOT the insured!
• Salvaged property can lower claim cost for the insurance company.

Question 28

What is liberalization? (Fair to everyone)

Answer 28

The liberalization condition states that if the insurer broadens coverage under a policy form or endorsement without requiring an additional premium, then all existing similar policies or endorsements will be construed to contain the broadened coverage.

For example, an auto insurer has decided to include in their auto policy $1,000 coverage for electronic items stolen from a covered auto. This includes cell phones, laptop computers, and any electronics found in the covered auto. This benefit is included in all new policies for no additional premium. If you already had an existing policy from this company, your policy would have this new benefit without having to wait until your policy is renewed.

Liberalization
•Extended coverage to insured
• No additional premium charged
• No action required by insured

Question 29

What is subrogation?

Answer 29

Subrogation is the transfer to the insurance company of the insured’s right of recovery (sue) against others.
The subrogation provision may also be called transfer of right of recovery against others to us.
Ex. Suppose an insured suffers a loss for which he is not at fault, and the party that caused the damage has no insurance or refuses to pay for the damages. The insured’s insurance company may step in and pay the insured for the damages and then bring suit or file a claim against the negligent party or the other party’s insurance company on the insured’s behalf. This transfer of recovery is affected when the insured signs a Release and Subrogation Assignment form.

Subrogation-Insurer has the right to sue an at-fault party for damages the insurer had to pay to the insured
• Common when at-fault party does not have insurance

Insurer sues at fault party to recover losses

Question 30

What is insurable interest?
(Think insured’s owned property at time of loss)

Answer 30

Insurable interest is often defined as ””legitimate risk of financial loss in the person or thing being insured.” Obviously, the owner of a home has an insurable interest in the home. However, financial interest can exist for a party other than the owner. The mortgage company that has a mortgage on the home also has an insurable interest in the home. They could lose money if the house burned down in a fire. Another example is a new car–a bank or an auto financing department has an insurable interest and could lose money if the car is stolen. In property insurance, insurable interest may be present at the time of application but must be present at the time of loss. If someone sells a home and it later is damaged in a fire, that individual cannot claim a loss, even if a policy remained in force because he forgot to cancel the policy when the home was sold.

Insurable Interest
• Risk of financial loss
• May be present at the time of application and MUST be present at the time of loss

Must prove interest(ownership) at time of loss

Question 31

What is underwriting?

Answer 31

Underwriting is the process of evaluating the risk and exposures of potential clients. During the underwriting process, the premium amount and coverage amount of the applicant is determined. The agent is responsible for field underwriting by using pre-established criteria. ‘They should seek out the types of risks that are likely to be acceptable to the company and deny those that are not. Insurance companies employ underwriters who ultimately decide whether to accept or reject the applications sent in by producers or agents on the basis of company underwriting standards.

Underwriting--process of evaluating a risk
• Field underwriting is performed by the agent or producer.
• Company underwriters decide if a policy is to be issued.

Question 32

What is some information used in underwriting?

Answer 32

There are multiple sources of information used in the underwriting process to evaluate risks. They include:
• the client application for insurance;
• inspection services;
• credit scores from Equifax or Transunion;
• government bureaus, such as the Bureau of Motor Vehicles;
• insurance industry bureaus, such as the Automated Property Loss Underwriting System;
• financial information services, such as Standard & Poor’s;
• previous insurers; and
• the insurance company claim files.

Question 33

What is an application?

Answer 33

The application is the primary source of underwriting information. It contains information that will help the insurance company underwriter decide whether to accept the risk, and, if so, how much premium the insured will be charged if the policy is issued. ‘The application must be completed accurately and submitted on a timely basis.

Application-primary source of underwriting information

the first thing an underwriter will look at

Question 34

What is a binder?
(Think immediate coverage-specified time)

Answer 34

A binder is a temporary oral or written statement made by the agent that gives the insured immediate coverage for a specified time. If it is an oral statement, it must be backed up in writing as soon as possible.

A binder does not guarantee that a policy will be issued (underwriters decide); it guarantees temporary coverage that is identical to the policy (short time)

Coverage under the binder will end at the later of:
•the effective date of the policy, if issued;
• the effective date of a formal cancellation notice from the insurance company; or
• when no cancellation notice is sent, the expiration date of the binder (e.g., 30, 60, or 90 days).

Binder
• Temporary insurance
• Usually given by the agent-verbal or in writing
• Can be canceled by the company
• Does not guarantee a policy will be issued
• Automatically ends if a policy is issued by the underwriter

Question 35

What is a loss ratio?(Ratios)

Answer 35

An insurance company evaluates its income and expenses for given periods of time to measure its financial performance. They also look for trends that may have occurred over an extended period of time.

An insurer uses three ratios to evaluate performance:
• Loss ratio
• Expense ratio
• Combined ratio

The loss ratio is calculated by dividing the amount of incurred losses by the amount of earned premium. It is used to compare the company’s operations from year to year. It shows the percentage of losses the company incurred for every dollar of earned premium.

Loss Ratio
• Compares company’s operations year over year

Question 36

How is loss ratio calculated?

Answer 36

Loss ratio = incurred losses/ earned premiums

Insured losses(Out) -$1,000,000/ Earned Premium(In)-$1,000,000 =$0

100% Loss Ratio

Not a good deal. No money made

Insured losses(Out) -$900,000/ Earned Premium(In)-$1,000,000 =$90

90% Loss Ratio
Anything below 100% is a positive. A profit was made

Question 37

What is an earned premium? Think amount of money makes over period

Answer 37

Earned premium is the premium the company actually earned by providing insurance protection for the designated period. When an insured pays premiums for months in advance, the insurer has to
“earn” that premium each month in return for coverage provided. Incurred losses include amounts paid and reserved on claims for covered losses and various expenses related to handling claims.

Question 38

What is an expense ratio and how is it calculated?

Answer 38

The expense ratio is calculated by dividing underwriting expenses by the amount of written premium.
It is an indicator of the cost of doing business(advertising, paid commissions, salaries, administrative cost to bring in business)

Expense Ratio
• Cost of doing business

Expense ratio = Underwriting Expenses/ Written Premium

Question 39

What is an underwriting expense?

Answer 39

Underwriting expenses are the costs to acquire and to keep policies. This includes expenses for advertising, commissions, salaries, other administrative costs, and regulatory costs such as taxes and licensing fees.

Question 40

What is a written premium?
Gross amount- earned and unearned

Answer 40

Written premium is the gross amount of premium income received from insureds. It includes both earned and unearned premium. Premiums for new business, renewals, and policy endorsements make up the written premium

Question 41

What is the combined ratio?

Answer 41

The combined ratio is simply the sum of the loss ratio and the expense ratio.
combined ratio = loss ratio + expense ratio
Traditionally, 100% is considered to be the breakeven point. A combined ratio of less than 100% indicates that the company had an underwriting profit; a ratio of greater than 100% indicates an underwriting loss.

Combined Ratio
• 100% is breakeven point
• < 100% = underwriting profit
• > 100% = underwriting loss

Question 42

What ways do underwriters assign rates?

Answer 42

There are three basic ways in which underwriters assign rates:
• Judgment rating
• Manual (class) rating
• Experience rating (merit)

Question 43

How is judgement rating used?
(Think the underwriters best judgement rate with nothing established) (careful judgement and experience)

Answer 43

When using judgment rating, the premium is determined by considering the individual risk. No books or tables are used; premiums are established through careful judgment and experience of the underwriter.

Question 44

How is manual rating used?
Think a book-with premium rates

Answer 44

Manual or class rating uses company rates for a particular state or area that are contained in a manual.
Rates are arranged by various categories or classes.
The underwriter classifies the risk according to defined criteria, and then looks up the appropriate rate. The rate per unit of insurance is then multiplied by the number of units of insurance being purchased to calculate the premium.

The formula looks like this:
Rate per unit x number of units = premium

For example, an insured purchases $60,000 of insurance at a rate of $2 per $1,000 of coverage. (To calculate units, just divide the amount of insurance by 1,000. In this case, there are 60 units.)
$2 Rate per unit × 60 units = $120 premium

Question 45

What’s experience rating?
Think of historical data-“experience” what losses are paid

Answer 45

Experience rating is most commonly associated with workers’ compensation. Actual loss experience is compared to historical loss data for a particular rating class. An experience modification factor is developed from this information that can either increase or decrease the premium on a policy based on
loss experience.
Other types of merit rating include retrospective rating, which bases the insured’s premium on losses incurred during the policy period, and schedule rating, which applies a system of debits or credits to reflect characteristics of a particular insured.

Question 46

3 ways to assign rating

Answer 46

Three ways to assign rates:
• Judgment-no set rates, based
upon underwriters experience
• Manual (class) set rates for specific risk classes
• Experience rating–modification factor based on loss experience
• Increases or decreases premium
• Usually a three-year period

Question 47

Explain loss costs

Answer 47

Loss Costs
companies use their own past claims information to help them project future claims costs. However, there are times when the company will use claims data from outside organizations for the purposes of estimating claim costs on different types of risk. One such organization that provides this information is called the Insurance Service Office (ISO). Their claims data includes pure losses and does not include any costs for company expenses or pronts.

Loss Costs
Loss costs–pure claims data
• No operating expenses included
• No profits included

Question 48

Fair Credit Reporting Act (FCRA) (15 USC Sections 1681-168 Id)
All agents must comply-credit is used

The maximum penalty for obtaining consumer information reports under false pretenses is $5,000, imprisonment for one year, or both

Notice must be sent NO LATER than 3 days

Answer 48

The federal Fair Credit Reporting Act requires consumer reporting agencies to adopt reasonable procedures for exchanging information on credit, personnel, insurance, and other subjects in a manner that is fair and equitable to the consumer with respect to the confidentiality, accuracy, relevancy, and proper use of the information.

a. All insurers and their producers must comply with the federal Fair Credit Reporting Act regarding information obtained from a third party concerning the applicant.

b. Reports on consumers are prohibited unless the consumer is made aware that an investigative
consumer report may be made, and that such report may contain information about the person’s character, reputation, personal characteristics, and lifestyle.

2. A notice to applicant must be issued to all applicants for property or casualty and life or health insurance coverage. This notice informs the applicant that a report will be ordered concerning their credit history and any other life or health insurance for which they have previously applied.
   ‘The agent must leave this notice with the applicant along with the receipt.

a. This notice must be given to the consumer no later than three davs atter a report is requested

b. A consumer may make a written request for a complete disclosure of the nature and scope of
the investigation underlying the report.

i. Disclosure must be made in writing within five days after the date on which the consumer’s request was received

3. Consumer Rights: Consumers who feel that information in their files is inaccurate or incomplete may dispute the information, and the reporting agencies may be required to reinvestigate and
   correct or delete information. Insurance companies may use consumer reports, or invesugative consumer reports, to compile additional information regarding the applicant. If applicants feel that the information compiled by the consumer inspection service is inaccurate, they may send a brief statement to the reporting agency with the correct information.
4. Penalties: Violators of the Fair Credit Reporting Act may be subject to fines and imprisonment and may be required to pay any actual damages suffered by a consumer, punitive damages awarded by a court, and reasonable attorney’s fees. The maximum penalty for obtaining consumer information reports under false pretenses is $5,000, imprisonment for one year, or both

Question 49

Fair Credit Reporting Act (summary)

Answer 49

Fair Credit Reporting Act
• All insurers and producers must comply
• Notice to the applicant within three days after report was requested
• Maximum penalty-$5,000, 1 year in prison or both

Question 50

Terrorism Risk Insurance Program Reauthorization Act of 2019
(TRIPRA)

An act of terrorism must be certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the U.S. Attorney General.

Answer 50

As a result of the terrorist attacks on the United States on September 11, 2001, Congress enacted, and
the president signed into law, the Terrorism Risk Insurance Act (TRIA) of 2002. It was re-enacted in 2007, 2015, and 2019. ‘The title of the act is now the ‘Terrorism Risk Insurance Program Reauthorization Act of 2019 (TRIPRA) and extends the program through December 31, 2027.

This federal law defines acts of terrorism and imposes certain obligations on insurers. The definition of terrorism is a violent act or an act that is dangerous to human lite, property, or intrastructure that results in damage within the United States, or outside the United States, committed by either domestic or foreign terrorist.

An act of terrorism must be certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the U.S. Attorney General. Originally, the Secretary of State, rather than the Secretary of Homeland Security, was one of the federal officials who were a part of the certification
process.

The Act is designed to limit the exposure of individual insurers and the insurance industry as a whole, and to make insurance available and affordable under a system where the federal government participates and shares the risk of loss. There are several key provisions included in the Act.
• The triggering event for the program to go into effect was $100 million.It increased to $200 million from 2015 to 2020 in $20 million increments.
• Each insurance carrier’s deductible is set at 20% of their direct earned premium from the prior calendar year. ‘This is the amount the insurer must pay before the federal program provides
compensations
• ‘The federal share of compensation that exceeds those deductibles decreased from 85% to 80% by 2020.
• ‘The aggregate retention in the insurance marketplace increased from $27.5 billion to $37.5 billion
by 2020.
• ‘The insurance marketplace aggregate retention amount was established at $37.5 billion.
• ‘The cap on federal liability is not to exceed $100 billion.

TRIPRA (TRIA)
• Result of 9/11 attacks on U.S.
• Congress originally enacted in 2002
• Limits exposure of insurers in case of another catastrophic event
• Triggering event-$200 million

Question 51

Gramm-Leach-Bliley Act (15 USC Section 206) (Physical safeguards to sensitive data-1999)-GLBA

Answer 51

The Gramm-Leach-Bliley Act (GLBA) was passed in 1999 to allow financial holding companies to engage in any activities that are financial in nature. Regulation of these holding companies is managed on a functional basis. This means that regulatory authority is based on what activity is occurring, rather than on what type of company is engaging in the activity. For example, the sale of insurance is regulated by state insurance regulators even if the company making the sale is a bank or securities brokerage.

The GLBA requires financial institutions; companies that offer consumers financial products or services like loans. Financial or investment advice: and insurance companies to exphin their informations sharing practices to their customers and to safeguard sensitive data. Financial holding companies have the potential to capture unprecedented amounts of information about their customers. To address these concerns, GIBA also establishes a minimum federal standard for financial privacy. GLBA states that each financial institution has a responsibility “to respect the privacy of its customers and to protect the security and confidentiality of those customers’ nonpublic personal information.”

The law requires that all the functional federal regulatory agencies establish appropriate standards for each regulated institution with respect to technical, administrative, and physical safeguards to:
• ensure the security and confidentiality of customer records and information:
• protect against any anticipated threats or hazards to the security or integrity of such records; and
access to or use of such records or information that could result in
substantialbarm or inconvenience o any customer

Question 52

Gramm-Leach-Bliley Act (15 USC Section 206) (cont)

Answer 52

• A consumer is anvone about
whom information is collected.

• A customer is someone who has an ongoing relationship with a
Financial institution

•The opportunity to opt out must be offered by financial institutions when an account is established and annually thereafter.

Question 53

Fraud and False Statements (18 USC Sections 1033 and 1034)
If guilty of fraud -Fine, up to 10 years in prison, or both

Up to 15 years in prison if false
statements jeopardize insurer

Answer 53

Fraud and False Statements (18 USC Sections 1033 and 1034)
1. A person who transacts insurance in interstate commerce and who intentionally makes false material statements in connection with financial reports or documents presented to insurance regulators appointed to investigate the person in attempt to influence the actions of such officials is subject to: a fine; imprisonment for up to 10 years; or both

Units Basics of Property and Casualty Insurance
2. Imprisonment may be ordered for up to 15 years if the false statements jeopardized the safety and soundness of an insurer and were a signihcant cause of the insurer being placed in conservation,rehabilitation or liquidation by the courts.

3. Officers, directors, agents, and employees of an insurance company who willfully embezzle or misappropriate funds are subject to the same consequence described above.

• It is illegal to make false
statements
• If guilty:
• Fine, up to 10 years in prison, or both
• Up to 15 years in prison it false
statements jeopardize insurer

Question 54

What are rate components?

Answer 54

**Rate Components
-Loss costs(estimated of claims costs)
-Claims handling costs
-Operating
-Expenses
-Profit