Title: Insurance Fundamentals — LearnCoachAssist

Q: What is insurance fundamentally?
A: Insurance is a mechanism for transferring financial risk from an individual or entity to a larger group, where members share the losses of the few through pooled resources and calculated premium contributions.

Q: What is risk pooling?
A: Risk pooling is the practice of combining risks from many policyholders so that the predictable cost of losses can be distributed across the entire group, leveraging the Law of Large Numbers to stabilize outcomes.

Q: Why is the size of a risk pool important?
A: Larger risk pools reduce variance in losses per policyholder, allowing more accurate predictions and lower relative risk charges. Smaller pools face greater volatility and may require higher premiums or reinsurance.

Q: What is moral hazard in insurance?
A: Moral hazard is the tendency of insured parties to take on greater risks or behave less carefully once protected by insurance, because they do not bear the full consequences of potential losses.

Q: What is the difference between pure risk and speculative risk?
A: Pure risk involves only the possibility of loss or no change (e.g., fire, theft), while speculative risk involves the possibility of both gain and loss (e.g., stock investments). Insurance typically covers only pure risk.

Q: What is an insurance underwriting?
A: Underwriting is the process by which an insurer evaluates the risk of insuring a person or asset and decides whether to accept the risk, and on what terms—including pricing and coverage conditions.

Q: What factors do underwriters consider for life insurance?
A: Underwriters assess age, gender, health status, family medical history, occupation, lifestyle (smoking, alcohol use), hobbies (aviation, extreme sports), and the type and amount of coverage requested.

Q: What factors do underwriters consider for property insurance?
A: Property underwriters evaluate location, construction type, age of building, occupancy, fire protection availability, security measures, prior claims history, and exposure to natural hazards like floods or earthquakes.

Q: What is risk classification in underwriting?
A: Risk classification groups policyholders into homogeneous risk categories based on shared characteristics, allowing insurers to charge premiums that reflect each group's expected loss costs.

Q: What is an actuarial table?
A: An actuarial table presents statistical data on mortality, morbidity, or other contingencies, showing the probability of events at various ages or durations. It serves as a core tool for pricing and reserving.

Q: What is a risk premium?
A: The risk premium is the portion of an insurance premium that reflects the expected payout for the insured risk, above the pure premium. It may include loadings for uncertainty, capital costs, and profit margin.

Q: What is a pure premium?
A: The pure premium equals the expected loss per exposure unit, calculated as total expected losses divided by the number of exposure units. It represents only the cost of claims, with no expense loadings.

Q: What is the difference between net premium and gross premium?
A: The net premium covers only the expected benefits and risk costs. The gross premium adds expense loadings for administration, commissions, taxes, contingencies, and profit to the net premium.

Q: What is expense loading in a premium?
A: Expense loading is the portion of premium added to cover the insurer's operating costs, including commissions to agents, underwriting expenses, policy administration, and overhead.

Q: What is manual rating?
A: Manual rating uses a published rate manual where premiums are based on class-level characteristics (e.g., driver's age, vehicle type) rather than the individual insured's own claim history.

Q: What is retrospective rating?
A: Retrospective rating determines the final premium after the policy period based on actual losses incurred, subject to minimum and maximum premium limits—aligning cost with experience.

Q: What is reinsurance?
A: Reinsurance is insurance purchased by an insurance company from another insurer (the reinsurer) to transfer part of its risk, stabilize underwriting results, and protect against large or catastrophic losses.

Q: What is the difference between proportional and non-proportional reinsurance?
A: Proportional reinsurance (quota share, surplus) shares premiums and losses proportionally. Non-proportional reinsurance (excess of loss, stop-loss) only covers losses exceeding a specified threshold or attachment point.

Q: What is an insurance claim?
A: An insurance claim is a formal request by a policyholder to the insurer for compensation for a covered loss. The insurer reviews, investigates, and either approves or denies payment based on policy terms.

Q: What is a first notice of loss (FNOL)?
A: FNOL is the initial report submitted by the insured (or a representative) to inform the insurer that a loss has occurred. It triggers the start of the formal claims handling process.

Q: What is a claims adjuster?
A: A claims adjuster investigates insurance claims on behalf of the insurer. They assess damages, determine coverage, estimate repair or replacement costs, and negotiate settlements with the insured.

Q: What is subrogation in insurance claims?
A: Subrogation is the right of the insurer, after paying a claim, to pursue recovery from a third party whose negligence caused the loss. It prevents the insured from collecting twice for the same loss.

Q: What is actual cash value (ACV)?
A: Actual cash value is the replacement cost of property minus depreciation. It reflects the value of an item at the time of loss rather than its original purchase price.

Q: What is replacement cost in insurance?
A: Replacement cost is the amount needed to replace damaged property with new property of like kind and quality, without deducting for depreciation—typically yielding higher claim payments than ACV.

Q: What is a policy limit?
A: A policy limit is the maximum amount an insurer will pay for a covered loss, either per occurrence, per claim, or aggregate over the policy period. Limits define the insurer's maximum exposure.

Q: What is an exclusion in an insurance policy?
A: An exclusion is a specific peril or circumstance listed in the policy as not covered. Exclusions clarify and limit the scope of coverage, helping insurers manage risk and price accurately.

Q: What is a waiting period or elimination period?
A: A waiting period is the time that must pass after policy inception (or after a covered event) before certain benefits become payable. Common in health and disability insurance.

Q: What is an insurance reserve?
A: An insurance reserve is a liability on the insurer's balance sheet representing funds set aside to pay future claims. It includes claim reserves (for reported/unreported losses) and premium reserves.

Q: What is a claim reserve?
A: A claim reserve is the estimated liability for a specific claim, including both amounts already paid and case reserves for future payments. It is adjusted as the claim develops.

Q: What is the role of an actuary in insurance?
A: An actuary uses mathematics, statistics, and financial theory to evaluate risk, price policies, calculate reserves, and ensure the insurer's financial solvency. They are central to premium pricing and risk modeling.

Q: What is a rate filing in insurance regulation?
A: A rate filing is the submission of proposed insurance rates to a state regulatory authority for approval before use. Regulators review to ensure rates are adequate, not excessive, and not unfairly discriminatory.

Q: What is insurance fraud?
A: Insurance fraud involves intentional misrepresentation to obtain an undeserved benefit from an insurer. It includes staged losses, inflated claims, false applications, and arson for profit, costing the industry billions annually.

Q: What is a reinsurance treaty?
A: A reinsurance treaty is a standing agreement between a ceding insurer and a reinsurer that automatically covers a defined category of risks, as opposed to facultative reinsurance handled case by case.

Q: What is catastrophe (CAT) insurance?
A: Catastrophe insurance covers losses from low-probability, high-severity events such as hurricanes, earthquakes, or floods. Pricing relies heavily on simulation models and reinsurance due to limited historical data.

Q: What is a captive insurance company?
A: A captive insurer is an insurance company wholly owned by the insureds it covers, formed to provide coverage for the parent organization's specific risks, often achieving lower costs than commercial markets.

Q: What is a deductible buy-down?
A: A deductible buy-down reduces the insured's out-of-pocket cost in exchange for a higher premium, often used before anticipated claims (e.g., hurricane season) to enhance coverage.

Q: What is risk-based capital (RBC)?
A: Risk-based capital is a regulatory minimum capital requirement for insurers, calculated based on the inherent risks of assets, liabilities, and operations. It ensures the insurer can absorb unexpected losses.

Q: What is loss development in claims?
A: Loss development refers to the change in estimated claim costs over time as more information becomes available. Actuaries use loss development triangles to project ultimate losses from initial reports.

Q: What is an insurance pool or syndicate?
A: An insurance pool is a voluntary grouping of insurers sharing specific risks (e.g., terrorism, aviation) that may be too large or volatile for any single carrier. Members underwrite jointly and share profits/losses proportionally.

Q: What is the difference between risk avoidance, reduction, transfer, and retention?
A: These are four risk management strategies: avoidance eliminates exposure entirely; reduction lowers loss frequency/severity (e.g., sprinklers); transfer shifts risk (e.g., insurance); retention accepts the risk (e.g., deductibles).

Q: What is the principle of utmost good faith (uberrima fides)?
A: Utmost good faith requires both parties in an insurance contract to disclose all material facts honestly. Unlike ordinary contracts, the insurer relies heavily on the applicant's representations because they cannot easily verify all risk information before underwriting.

Q: What is the difference between a representation and a warranty in insurance?
A: A representation is a statement of fact made by the applicant that, if materially false, voids the contract. A warranty is a promise or guarantee that a condition is or will be true, and breach of warranty automatically voids coverage regardless of materiality.

Q: What is the difference between a peril and a hazard?
A: A peril is the direct cause of a loss (e.g., fire, theft, windstorm), while a hazard is a condition that increases the likelihood or severity of a peril. Hazards are classified as physical, moral, or morale hazards.

Q: What is a physical hazard versus a morale hazard?
A: A physical hazard is a tangible condition that increases risk (e.g., defective wiring, slippery floors). A morale hazard arises from a careless attitude toward loss because of the existence of insurance (e.g., leaving doors unlocked because coverage exists).

Q: What are the main structural components of an insurance policy?
A: A typical insurance policy includes declarations (specific policyholder information), the insuring agreement (what is covered), exclusions (what is not covered), conditions (rights and duties of both parties), and endorsements or riders that modify the contract.

Q: What are policy declarations?
A: Declarations (or 'dec page') summarize the specific details of an insurance contract, including the named insured, policy period, coverage amounts, premiums, and property covered. They personalize the standard policy form for each insured.

Q: What is an insurance endorsement?
A: An endorsement is a written amendment to an existing insurance policy that alters its terms, such as adding coverage, removing exclusions, or changing limits. Endorsements are legally binding and customize the base policy form.

Q: What is the difference between term life and whole life insurance?
A: Term life provides coverage for a specified period (e.g., 20 years) with no cash value and pays only on death. Whole life is permanent coverage that builds cash value over time and pays the face amount upon death, with fixed premiums.

Q: What is universal life insurance?
A: Universal life is a flexible permanent policy that separates death protection from a cash value account earning interest. Policyholders can adjust premium payments and death benefits within policy limits, subject to keeping the policy funded.

Q: What is an annuity?
A: An annuity is a contract, typically issued by a life insurer, that converts a lump sum or series of payments into a stream of income over time. It is essentially the inverse of life insurance—designed to protect against outliving one's savings rather than dying too soon.

Q: What is the difference between health insurance and disability insurance?
A: Health insurance covers medical expenses for illness or injury, while disability insurance replaces a portion of lost income when an insured cannot work due to injury or illness. The two address different financial consequences of health events.

Q: What is liability insurance?
A: Liability insurance protects the insured against claims arising from bodily injury or property damage caused to others. It covers legal defense costs and any judgments or settlements up to policy limits, and is often required by law or contract.

Q: What is umbrella insurance?
A: Umbrella insurance provides excess liability coverage above the limits of underlying policies such as auto or homeowner's liability. It also typically extends to claims not covered by underlying policies, offering broad personal or commercial protection.

Q: What is facultative reinsurance?
A: Facultative reinsurance involves the ceding company offering individual risks to a reinsurer, who can accept or reject each one separately. It is negotiated on a case-by-case basis for unusual or high-value risks not suited to treaty arrangements.

Q: What is stop-loss reinsurance?
A: Stop-loss reinsurance protects the primary insurer against an unexpectedly high frequency or severity of losses over a period. It is a form of non-proportional reinsurance triggered when aggregate losses exceed a predetermined threshold.

Q: What is excess of loss reinsurance?
A: Excess of loss reinsurance covers losses on a single risk above a specified retention amount. The reinsurer pays the difference between the loss and the deductible up to a stated limit, protecting the ceding company from large individual losses.

Q: What is quota share reinsurance?
A: Quota share reinsurance is a proportional arrangement where the ceding company transfers a fixed percentage of every risk in a defined class to the reinsurer. Both parties share premiums and losses in the same proportion.

Q: What is surplus share reinsurance?
A: Surplus share reinsurance is a proportional treaty where the reinsurer takes a portion of each risk above the ceding company's retained line, up to a stated surplus limit. Coverage varies by risk size rather than being a flat percentage.

Q: What is the solvency ratio in insurance?
A: The solvency ratio measures an insurer's ability to meet long-term obligations by comparing capital and surplus to liabilities or premiums. Regulators use solvency benchmarks to ensure insurers maintain sufficient financial strength to pay future claims.

Q: What are insurance guaranty funds?
A: Guaranty funds are state-mandated associations that protect policyholders when an insurance company becomes insolvent. They provide limited coverage for unpaid claims and continue policies, funded by assessments on remaining solvent insurers in the state.

Q: What is the NAIC?
A: The National Association of Insurance Commissioners is the U.S. standard-setting organization governed by state insurance regulators. It develops model regulations, coordinates regulatory oversight, and supports state insurance departments in supervising insurers.

Q: What is the difference between an insurance agent and broker?
A: An insurance agent legally represents one or more insurers and binds coverage on their behalf, while a broker represents the policyholder and shops the market on the client's behalf. Agents typically receive commission from insurers; brokers are paid by the insured.

Q: What is a direct writer in insurance?
A: A direct writer is an insurer that sells policies directly to consumers without using independent agents, often through salaried employees, mail, phone, or online channels. Examples include GEICO and State Farm (for many products), which can reduce commission costs.

Q: What is the MIB (Medical Information Bureau)?
A: The Medical Information Bureau is a nonprofit data-sharing organization that maintains coded records of medical conditions disclosed in past life insurance applications. Underwriters use MIB reports to detect omissions and verify applicant information.

Q: What is a proof of loss in insurance claims?
A: A proof of loss is a formal, sworn statement submitted by the policyholder detailing the circumstances, amount, and scope of a loss. It is typically required before a claim is settled and serves as the insured's official documentation supporting the demand for payment.

Q: What is a structured settlement?
A: A structured settlement is a claims payment arrangement in which the insurer pays the claimant through periodic installments over time rather than a lump sum. It is often used in liability cases to provide ongoing income and may have tax advantages.

Q: What is workers compensation insurance?
A: Workers compensation provides medical benefits, wage replacement, and rehabilitation to employees injured on the job, regardless of fault. In exchange for these guaranteed benefits, employees typically waive the right to sue their employer for negligence.

Q: What is a credit-based insurance score?
A: A credit-based insurance score is a statistical tool insurers use, based partly on credit history, to predict the likelihood of an insured filing a claim. It is used in underwriting and pricing in many states, though its use is restricted or banned in others.

Q: What is a catastrophic risk?
A: A catastrophic risk is a low-probability, high-severity event capable of producing losses large enough to threaten the solvency of insurers or reinsurers. Examples include hurricanes, earthquakes, terrorist attacks, and pandemics.

Q: What is self-insured retention (SIR)?
A: Self-insured retention is the dollar amount of loss a policyholder agrees to absorb before insurance coverage begins. Unlike a deductible, the insured pays the SIR directly to the claimant and the insurer does not adjust or pay defense costs within the SIR.

Q: What is a policyholder dividend?
A: A policyholder dividend is a refund or credit returned to participating policyholders of mutual or participating stock insurers. It reflects favorable experience, investment income, or overcharges and is not guaranteed but is commonly paid by mutual insurers.

Q: What is an experience modification factor?
A: An experience modification factor (experience mod) adjusts workers compensation premiums based on a company's actual claim history compared to industry average. A mod above 1.0 indicates worse-than-average experience and increases premiums; below 1.0 reduces them.

Q: What is schedule rating in underwriting?
A: Schedule rating is a pricing method where underwriters add or subtract specific debit or credit items for individual risk characteristics not captured in the manual rate. Each item has a percentage adjustment, producing a customized final premium.

Q: What is a no-claims discount equivalent and how does it work?
A: A no-claims discount (NCD) reduces premiums for policyholders who have not filed claims during a defined look-back period. The discount increases with each claim-free year up to a maximum and resets or reduces upon filing a claim, incentivizing loss prevention.

Q: What is the difference between occurrence and claims-made coverage?
A: Occurrence coverage pays claims arising from incidents that happen during the policy period, regardless of when they are reported. Claims-made coverage pays claims reported during the policy period for incidents occurring on or after a stated retroactive date.

Q: What is prior approval of rates in insurance regulation?
A: Under prior approval regulation, insurers must submit proposed rates to the state insurance department and obtain approval before using them. This contrasts with open competition or file-and-use systems and is used in some personal lines like auto insurance.

Q: What is the principle of contribution in insurance?
A: Contribution allows an insured who has duplicate coverage from multiple policies to recover from each insurer only its proportional share of the loss. It prevents the insured from profiting from insurance and applies when multiple policies cover the same interest and peril.

Q: What is a binder in insurance?
A: A binder is a temporary, informal agreement providing immediate insurance coverage until a formal policy is issued. It is commonly used when coverage must begin before underwriting is complete, and contains the essential terms of the eventual policy.

Q: What is a surety bond?
A: A surety bond is a three-party agreement guaranteeing that one party (the surety) will fulfill the obligations of a second party (the principal) to a third party (the obligee) if the principal fails to perform. It is commonly used in construction and licensing.

Q: What is a long-term care insurance?
A: Long-term care insurance covers the cost of custodial care, such as nursing home, assisted living, or in-home help, when an insured can no longer perform activities of daily living. It addresses gaps left by health insurance and Medicare.

Q: What is the difference between rated and unrated insurers?
A: Rated insurers have had their financial strength independently evaluated by agencies such as A.M. Best, S&P, or Moody's. Unrated insurers have not been evaluated, making it harder for consumers and regulators to assess their financial stability.

Q: What is the difference between admitted and non-admitted insurers?
A: Admitted insurers are licensed by a state insurance department and must comply with state regulations, including rate filings and guaranty fund participation. Non-admitted (surplus lines) insurers operate without state licensure, often covering risks admitted carriers decline.

Q: What is a certificate of insurance?
A: A certificate of insurance is a document issued by an insurer or producer summarizing key policy information to demonstrate that coverage is in force. It is not a policy itself and does not amend coverage; the actual policy terms govern.

Q: What is a claims-made tail or extended reporting period?
A: An extended reporting period (ERP), or 'tail,' allows a claims-made policyholder to report claims after the policy has expired, provided the incident occurred during the original policy period. It protects insureds who retire, change carriers, or cancel policies.

Q: What is the loss adjustment expense (LAE)?
A: Loss adjustment expenses are costs insurers incur to investigate, defend, and settle claims. They include allocated LAE (assigned to specific claims, such as adjuster fees and legal costs) and unallocated LAE (general overhead like claims department salaries).

Q: What is underwriting profit and contingency loading?
A: Underwriting profit loading is the portion of premium intended to produce a profit for the insurer beyond expected losses and expenses. Contingency loading adds a margin for unexpected losses, catastrophes, or adverse development beyond actuarial estimates.

Q: What is a rate adequacy test in insurance?
A: A rate adequacy test determines whether current premium rates are sufficient to cover expected losses, expenses, and a reasonable profit margin. Regulators and insurers use this analysis to decide whether rate increases or decreases are warranted.

Q: What is an insurance holding company system?
A: An insurance holding company system is a corporate structure where one company (the parent) controls one or more insurance subsidiaries. Regulators supervise these arrangements to ensure transactions between affiliates are fair and do not impair subsidiary solvency.

Q: What is expected loss in insurance?
A: Expected loss is the average loss per exposure, calculated as the probability of a loss multiplied by the average severity of that loss. It represents the central estimate used by insurers to price risk, with variability around this mean quantified through variance or standard deviation.

Q: What is variance of collective risk?
A: Variance of collective risk measures how much the total losses of an entire risk pool might deviate from the expected total. As pool size increases, the relative variance decreases, which is why larger pools experience more stable underwriting results.

Q: What is a homogeneous risk pool?
A: A homogeneous risk pool consists of exposures with similar loss characteristics, such as all drivers of the same age and vehicle type. Insurers prefer homogeneity because it allows more accurate pricing, though some heterogeneity is acceptable and permits risk spreading within the pool.

Q: What are the costs of participating in a risk pool?
A: Participants in a risk pool pay premiums, including expense loading, profit loading, and risk charges, plus potential deductibles and coverage limits. They also give up the possibility of full recovery without claim, since pools operate on the principle of average losses rather than individual outcomes.

Q: What is the difference between social insurance and private insurance?
A: Social insurance is government-run and compulsory (e.g., Social Security, Medicare), funded through taxes and based on social solidarity. Private insurance is voluntary, market-based, and driven by individual risk assessments and actuarial pricing.

Q: What is a mutual insurance company?
A: A mutual insurance company is owned by its policyholders rather than outside shareholders. Surplus and profits may be returned to members through policyholder dividends, lower premiums, or improved coverage, aligning company interests directly with insured members.

Q: What is the role of capital in supporting a risk pool?
A: Capital (or surplus) provides a financial buffer to absorb losses that exceed expected levels, ensuring solvency. Regulators set minimum capital requirements based on the size and risk profile of the pool, so capital adequacy is essential for insurer stability.

Q: What is an underwriting guideline?
A: An underwriting guideline is a set of rules and criteria that underwriters follow to evaluate and classify applicants. It defines acceptable risks, requires referral thresholds, and ensures consistency in decisions across the underwriting team.

Q: What is the underwriting cycle in insurance?
A: The underwriting cycle refers to recurring periods of soft markets (loose pricing, broad coverage) and hard markets (tight pricing, restricted coverage), driven by competitive pressures and loss experience. Cycles typically last several years and reflect capital flows into and out of the industry.

Q: What is a soft insurance market?
A: A soft market is a period of intense competition, abundant capital, and lower premiums with broader coverage terms. Insurers relax underwriting standards to grow market share, which can lead to deteriorating profitability and eventually trigger a shift to a hard market.

Q: What is a hard insurance market?
A: A hard market features scarce capacity, stricter underwriting, reduced coverage availability, and rising premiums. It typically follows heavy loss events or investment losses, when insurers raise standards and prices to restore profitability.

Q: What is adverse selection in insurance?
A: Adverse selection occurs when asymmetric information causes higher-risk individuals to purchase insurance more often or for greater amounts than lower-risk individuals. It can lead to premium insufficiency and market failure if not mitigated through underwriting and risk classification.

Q: What is anti-selection in insurance?
A: Anti-selection is the tendency of policyholders with a higher probability of loss to seek or maintain coverage more aggressively than lower-risk applicants. It is closely related to adverse selection and is countered through underwriting, eligibility rules, and renewal controls.

Q: What is credibility theory in insurance pricing?
A: Credibility theory blends an insured's own experience with manual/industry rates by assigning a credibility factor (Z) between 0 and 1. A Z close to 1 gives heavy weight to the insured's data; a Z near 0 relies more on manual rates. The minimum sample size required for full credibility depends on the line of business.

Q: What is the difference between loss frequency and loss severity?
A: Loss frequency is the number of losses per unit of exposure (e.g., claims per 100 vehicle-years), while loss severity is the average dollar amount per loss. Expected pure premium = frequency × severity. Insurers analyze both separately to detect changes in risk patterns.

Q: What is an exposure base in insurance rating?
A: The exposure base is the unit used to measure the quantity of risk and determine premiums, such as payroll for workers comp, sales for general liability, or vehicle-years for auto. The selected base should correlate strongly with potential losses.

Q: What is earned premium?
A: Earned premium is the portion of a written premium that corresponds to the coverage period already elapsed. For example, on a one-year policy paid in full at inception, after six months, half of the premium has been earned and the other half remains unearned.

Q: What is an unearned premium reserve (UPR)?
A: The unearned premium reserve (UPR) is a liability representing the portion of written premium attributable to the unexpired portion of coverage. It must be held so the insurer can refund or return premium if the policy is canceled before expiration.

Q: What is pro-rata cancellation?
A: Pro-rata cancellation refunds the unused premium based on the exact time remaining on the policy. The insurer keeps the earned portion proportional to the time coverage was in force and returns the rest to the policyholder.

Q: What is short-rate cancellation?
A: Short-rate cancellation applies when the insured cancels the policy; the insurer retains more than the pro-rata earned premium to cover administrative costs. The refund is computed from a short-rate table and is always less than the pro-rata unearned premium; how much less depends on the table and how far into the term the cancellation occurs. Many jurisdictions restrict or prohibit short-rate cancellation on personal lines.

Q: What are the main steps in the underwriting process?
A: The underwriting process typically includes: (1) collecting applicant information, (2) classifying the risk, (3) evaluating hazards, (4) applying rating plans/credits/debits, (5) deciding to accept, modify, refer, or decline, and (6) issuing the policy and binding coverage.

Q: What is a declination in underwriting?
A: A declination (or decline) is the underwriter's decision to reject a submitted risk because it falls outside the insurer's appetite or presents unacceptable exposure. The applicant is notified and may seek coverage in a non-standard market or specialty insurer.

Q: What is salvage in insurance claims?
A: Salvage is the recovered value of damaged property after a loss (e.g., a totaled vehicle or scrapped equipment). Insurers may take possession of the salvage, sell it, and offset some of the claim payment through the salvage recovery.

Q: What is the difference between a total loss and a partial loss?
A: A total loss occurs when the insured property is completely destroyed or damage exceeds its insured value (e.g., ACV or replacement cost). A partial loss involves damage to part of the property, with the insurer paying only the cost to repair the damaged portion.

Q: How is depreciation applied in property claims?
A: Under actual cash value coverage, depreciation (based on age, condition, and useful life) is subtracted from replacement cost to arrive at the claim payment. This accounts for wear and tear so the insured is made whole but not better off.

Q: What is a case reserve in claims?
A: A case reserve is an estimated dollar amount set aside for a specific, individual claim that has been reported but not yet settled. It is established by the adjuster and adjusted as the claim develops, distinct from IBNR reserves for unreported claims.

Q: What is a bordereau in reinsurance?
A: A bordereau is a periodic report (usually monthly or quarterly) submitted by a cedent to a reinsurer summarizing the premiums written, losses paid, and outstanding reserves for a treaty. It allows the reinsurer to monitor the portfolio and bill premiums or settle accounts.

Q: What is a layer of coverage in reinsurance?
A: A layer is a horizontal band of coverage between an attachment point and a ceiling in excess-of-loss reinsurance. For example, a $500,000 xs $1,000,000 layer covers losses between $1M and $1.5M, with multiple layers stacking to build the total tower.

Q: What is an attachment point in reinsurance?
A: The attachment point is the loss amount at which reinsurance coverage begins to respond. It can refer to the deductible above which a treaty pays (e.g., "$100,000 xs $500,000" attaches at $500,000) or the priority in a layered tower.

Q: What is a reinstatement provision in reinsurance?
A: A reinstatement provision restores the limit of an excess-of-loss reinsurance contract after a covered loss, allowing the same layer to respond to subsequent losses during the contract period, often for an additional premium. It protects the cedent against multiple events exhausting coverage.

Q: What is a reciprocal insurance exchange?
A: A reciprocal insurance exchange is an unincorporated group of subscribers who exchange insurance contracts through an attorney-in-fact. Each subscriber is both an insurer and an insured, sharing profits and losses proportionally rather than paying fixed premiums.

Q: What is a risk retention group (RRG)?
A: A risk retention group (RRG) is a liability insurance company owned by its members, organized under the federal Liability Risk Retention Act of 1986. It allows similarly exposed businesses to self-insure together across state lines without being licensed in each state.

Q: What is a purchasing group?
A: A purchasing group is formed under the federal Risk Retention Act to buy liability insurance on a group basis for its members with similar or related exposures. Members benefit from group purchasing power while each remains individually insured by the same carrier.

Q: What are Statutory Accounting Principles (SAP)?
A: Statutory Accounting Principles (SAP) are the accounting rules prescribed by state insurance regulators (NAIC) for preparing insurer financial statements. They emphasize solvency, conservatism, and valuation of invested assets at amortized cost rather than fair value used in GAAP.

Q: What are IRIS ratios in insurance regulation?
A: IRIS (Insurance Regulatory Information System) ratios are financial benchmarks calculated by the NAIC from insurer statutory filings to flag companies that may need regulatory attention. Examples include the gross change in capital and surplus ratio, the investment yield ratio, and the liabilities to liquid assets ratio.

Q: What is a Best's rating?
A: An A.M. Best rating is an independent assessment of an insurer's financial strength and ability to meet ongoing obligations. Financial Strength Ratings range from A++ (Superior) at the top down to D (Poor); separate non-rating designations include E (Under Regulatory Supervision), F (In Liquidation), and S (Rating Suspended). Best's ratings are widely used by agents, brokers, and buyers to evaluate insurer quality.

Q: What is Lloyd's of London?
A: Lloyd's of London is a specialized insurance market where multiple members (syndicates) underwrite risks individually through a central platform. It is famous for insuring unusual or large risks and operates under a unique corporate structure governed by the Lloyd's Act.

Q: What is the insuring agreement in a policy?
A: The insuring agreement (or insuring clause) is the core promise of an insurance policy stating what the insurer agrees to cover and under what circumstances. It defines the scope of coverage and is the foundation upon which the rest of the contract builds.

Q: What is concealment in insurance?
A: Concealment is the intentional or negligent failure of an insured to disclose material information that the insurer would consider important in evaluating the risk. Under the principle of utmost good faith, concealment can render the contract voidable by the insurer.

Q: What is a waiver in insurance?
A: A waiver is the voluntary and intentional relinquishment of a known right by the insurer, such as accepting a late premium or paying a claim that technically falls outside policy terms. Waiver can prevent the insurer from later enforcing that right against the insured.

Q: What is estoppel in insurance?
A: Estoppel prevents an insurer from denying a position that the insured reasonably relied upon to their detriment, even if no formal waiver occurred. For example, if an adjuster repeatedly tells the insured a loss is covered, the insurer may be estopped from later denying coverage.

Q: What is a reservation of rights letter?
A: A reservation of rights letter is a notice from an insurer stating that it is investigating or defending a claim, but is not conceding coverage. It preserves the insurer's right to later deny the claim based on policy provisions while still protecting the insured during litigation.

Q: What is adverse development in claims?
A: Adverse development (or adverse loss development) occurs when claim reserves for prior periods must be increased because losses are turning out worse than originally estimated. Persistent adverse development signals under-reserving or deteriorating claim trends.

Q: What is a coverage trigger?
A: A coverage trigger determines when an insurance policy's obligations activate, such as the date of loss (occurrence), date of claim (claims-made), or manifestation of injury. The chosen trigger materially affects which policy responds to long-tail liability claims.

Q: What is stacking of coverage limits?
A: Stacking is the combining of coverage limits from multiple vehicles, policies, or policy periods to increase the total available for a single loss. Anti-stacking provisions may limit this in auto insurance so that limits are not aggregated beyond the stated per-vehicle amount.

Q: What is blanket insurance coverage?
A: Blanket coverage applies a single limit across multiple properties or items rather than scheduling each individually. It provides flexibility because the insured can apply the limit where it is most needed, though subject to a per-location cap in some policies.

Q: What is scheduled coverage?
A: Scheduled coverage lists specific items or locations and assigns each an individual limit in the policy declarations. It provides precise coverage but requires updating whenever assets change, and is typical for personal property like jewelry or art.

Q: What is a beneficiary in insurance?
A: A beneficiary is the person or entity named in a life (or annuity) insurance policy to receive the death benefit when the insured dies. Beneficiaries can be revocable or irrevocable, primary or contingent, and should be reviewed regularly as life circumstances change.

Q: What is assignment of an insurance policy?
A: Assignment transfers the rights under an insurance policy from one party to another, typically by sale of the insured property. Most policies prohibit assignment without the insurer's consent, since the contract is based on the original insured's characteristics.

Q: What is an appraisal clause in property claims?
A: An appraisal clause is a policy provision allowing each side to appoint an appraiser to independently value a disputed loss. If the appraisers disagree, an umpire resolves the difference, providing an alternative dispute resolution mechanism before litigation.

Q: What is mediation and arbitration in insurance claims?
A: Mediation uses a neutral third party to facilitate negotiation, while arbitration produces a binding or non-binding decision from a neutral arbitrator. Both are alternative dispute resolution methods commonly required by policy provisions for claim disputes.

Q: What is insurance float?
A: Float refers to the funds an insurer holds between collecting premiums and paying claims. Insurers invest float in interest-bearing securities, generating investment income that supplements underwriting profit. Float is a key component of overall insurer profitability.

Q: What is cream skimming in insurance?
A: Cream skimming is the practice of selecting only the lowest-risk applicants within a market segment to maximize profit. It is the opposite of adverse selection and can harm risk pools by leaving competitors with disproportionately poor risks.

Q: What is a trend factor in premium pricing?
A: A trend factor adjusts historical loss data to current or future cost levels by accounting for inflation, economic shifts, claim severity changes, and frequency trends. Annual trends are compounded to project losses to the policy period being priced.

Q: What is a reinsurance pool?
A: A reinsurance pool is an arrangement where multiple insurers share risks through a common reinsurance entity, often used for rare or catastrophic exposures. Pools provide capacity that individual members could not obtain alone and stabilize pricing for volatile classes.

Q: What is a loss portfolio transfer (LPT)?
A: A loss portfolio transfer (LPT) is a reinsurance transaction in which one insurer cedes a block of liabilities—typically for past claim events—to another insurer for a premium. It allows the seller to free capital and exit a line of business while shifting ultimate loss exposure.

Q: What is an actuary's role in claims reserving?
A: Actuaries estimate claim reserves using methods such as the chain-ladder, Bornhuetter-Ferguson, and expected loss techniques. They analyze past claim development triangles, projecting ultimate losses from reported or paid data to determine adequate reserves.

Q: What is an underwriting referral?
A: An underwriting referral occurs when an agent or junior underwriter encounters a risk that exceeds their authority or falls outside guidelines. The file is escalated to a senior underwriter who reviews additional information and makes the final accept, modify, or decline decision.

Q: What is the principle of indemnity in insurance?
A: The principle of indemnity requires that an insured be restored to approximately the same financial position as before a loss—no better and no worse. It prohibits insurers from paying more than the actual loss sustained, preventing insurance from becoming a source of profit.

Q: What is insurable interest and why is it required?
A: An insurable interest is a legal or factual relationship such that a person suffers direct financial loss if the insured event occurs. Without it, an insurance contract is treated as a wager and is unenforceable, because insurance must protect against genuine loss rather than create speculative gain.

Q: What constitutes a fortuitous loss in insurance?
A: A fortuitous loss is one that is unexpected, accidental, and outside the insured's control. Insurance is designed to cover fortuitous losses; it excludes losses that are certain to occur or that are deliberately caused by the insured.

Q: What is information asymmetry in insurance markets?
A: Information asymmetry occurs when one party in an insurance transaction possesses more or better information than the other. It leads to adverse selection (insurers cannot fully assess risk at the offered price) and moral hazard (behavior changes after coverage takes effect).

Q: What is the difference between pure premium and gross premium?
A: The pure premium equals the expected losses per exposure unit, representing only the cost of claims. The gross premium adds loading for expenses, profit, contingencies, and risk charges, so gross premium = pure premium + loading.

Q: What are loading factors in insurance premium calculation?
A: Loading factors are additions to the pure premium that cover acquisition costs, administrative expenses, taxes, profit, contingencies, and risk charges. They ensure the insurer collects enough premium beyond expected losses to remain solvent and profitable.

Q: What is the combined ratio and what does it indicate?
A: The combined ratio equals the loss ratio plus the expense ratio, expressed as a percentage. A combined ratio below 100% indicates an underwriting profit; above 100% indicates an underwriting loss; equal to 100% represents a breakeven underwriting result.

Q: What is the loss ratio in insurance?
A: The loss ratio is incurred losses and loss adjustment expenses divided by earned premiums, expressed as a percentage. It measures the share of premium dollars consumed by claims and is a key indicator of pricing adequacy.

Q: What is the expense ratio in insurance?
A: The expense ratio is underwriting expenses (commissions, salaries, acquisition, and administration) divided by net written or earned premiums, expressed as a percentage. It reflects the insurer's operational efficiency in relation to its premium volume.

Q: What is burning cost in insurance rating?
A: Burning cost is a rating method that calculates the average loss cost per unit of exposure over a historical period, often adjusted for trend and exposures. It is commonly used to price reinsurance treaties and large commercial risks where credible individual experience exists.

Q: How does experience rating work in insurance?
A: Experience rating adjusts an insured's premium based on their own loss history, giving credit for favorable experience and surcharging for poor experience. It is widely used in workers compensation and other large commercial lines where the insured's losses are statistically credible.

Q: What is prospective rating?
A: Prospective rating sets future premiums based on the insured's past experience, applied to upcoming policy periods. It rewards good prior experience with lower rates and is the most common experience-rating approach in property and liability insurance.

Q: What is a premium audit and when is it used?
A: A premium audit is a post-policy review of an insured's records to verify estimated exposure bases used to calculate the premium. It is commonly used for auditable lines such as workers compensation and general liability, where premiums depend on payroll or sales.

Q: What are the main types of insurance deductibles?
A: Common deductible types include straight (a flat dollar amount per claim), aggregate (capped total deductibles across all claims), and franchise (deductible waived entirely once a loss exceeds the threshold). Each affects both premium and insured behavior differently.

Q: What is the coinsurance clause in property insurance?
A: The coinsurance clause requires the insured to maintain coverage equal to a specified percentage (commonly 80%) of the property's replacement value. If underinsured, the insured becomes a co-insurer and receives only a proportional share of any loss, computed as (insurance carried / insurance required) × loss.

Q: What is a fronting arrangement in insurance?
A: Fronting is when a licensed (admitted) insurer issues a policy on behalf of a non-admitted insurer or captive, then cedes 100% of the risk via reinsurance. It enables the ultimate risk-bearer to operate in jurisdictions where it lacks a license, while the fronting insurer earns a fee.

Q: What is retrocession in reinsurance?
A: Retrocession is reinsurance purchased by a reinsurer to cede part of its assumed risk to other reinsurers. It is essentially reinsurance of reinsurance, allowing reinsurers to manage their own accumulations and stabilize results.

Q: What is risk diversification in insurance?
A: Risk diversification spreads exposures across geographic regions, lines of business, and risk types so that a single event or correlated set of losses cannot overwhelm the pool. It is a fundamental technique for stabilizing underwriting results and protecting capital.

Q: What is catastrophe modeling?
A: Catastrophe modeling uses computer simulations combining historical data, scientific analysis, and engineering to estimate potential losses from natural perils like hurricanes, earthquakes, and floods. Insurers use it for pricing, accumulation management, and reinsurance purchase decisions.

Q: What is treaty reinsurance?
A: A reinsurance treaty is an automatic agreement covering a defined class or portfolio of risks, where all eligible risks are reinsured under contract terms without individual selection. It is more efficient than facultative reinsurance for high-volume portfolios and provides the cedant with automatic capacity.

Q: What is underwriting capacity?
A: Underwriting capacity is the maximum amount of insurance an insurer can write, constrained by surplus, available reinsurance, regulatory limits, and stated risk appetite. It determines the largest single risk and aggregate accumulations the insurer can safely accept.

Q: What is risk appetite vs. risk tolerance in insurance?
A: Risk appetite is the aggregate level and type of risk an organization is willing to accept to pursue its objectives. Risk tolerance is the narrower, measurable variation around specific objectives—such as a maximum combined ratio or capital adequacy threshold. Both guide underwriting and portfolio management.

Q: What is the role of notice of loss in claims handling?
A: Notice of loss is the insured's formal communication to the insurer that a covered event has occurred, usually required promptly as a policy condition. Timely notice allows the insurer to investigate, mitigate further loss, and preserve rights; failure may jeopardize coverage.

Q: What are the main steps in the claims settlement process?
A: The typical claims process includes (1) notice of loss, (2) coverage investigation, (3) loss adjustment and documentation, (4) proof of loss and damage valuation, (5) negotiation of settlement, and (6) payment or denial with reservation of rights. Each step requires careful documentation to support the insurer's actions.

Q: What is coordination of benefits in health insurance?
A: Coordination of benefits prevents double payment when an insured is covered under multiple health plans. It establishes which insurer is primary based on rules such as the birthday rule, and the secondary plan covers remaining eligible expenses up to 100% of allowed charges.

Q: What is an insurance pool and how does it function?
A: An insurance pool aggregates similar risks from multiple parties so that losses are shared according to predetermined rules. By leveraging the law of large numbers, pools provide coverage that individuals could not obtain alone and stabilize pricing across participants.

Q: What is adverse development cover?
A: Adverse development cover is a form of reinsurance that protects an insurer against upward revisions to loss estimates on prior accident years. It typically covers deterioration of case reserves and IBNR beyond an agreed attachment point, transferring the tail risk of reserve volatility.

Q: What is a deductible and how does it function?
A: A deductible is the amount of a covered loss that the insured must pay out of pocket before insurance benefits apply. Higher deductibles reduce premium by transferring small-loss frequency to the insured, aligning their interests in loss prevention.

Q: What is IBNR (Incurred But Not Reported)?
A: IBNR is a reserve for losses that have occurred but have not yet been reported to the insurer, plus development on already-reported claims. It is a critical component of total loss reserves, especially for long-tail lines where reporting delays are significant.

Q: What is alternative risk transfer (ART)?
A: ART encompasses non-traditional risk financing techniques beyond conventional insurance, including captives, risk retention groups, finite risk programs, multi-year treaties, and structured solutions. Large organizations use ART to customize coverage, reduce cost, and access reinsurance pricing directly.

Q: What is the role of reinsurance in supporting a primary insurer's risk pool?
A: Reinsurance allows primary insurers to write more coverage than their own capital would safely support, stabilizing results against large or catastrophic losses and effectively expanding the risk pool across multiple balance sheets. It enables capacity, smooths earnings, and protects solvency.

Q: What is the difference between treaty and facultative reinsurance?
A: Treaty reinsurance is an automatic agreement covering a portfolio of risks, with the reinsurer bound on all eligible business. Facultative reinsurance is arranged case-by-case for individual risks, giving the reinsurer discretion to accept or decline each submission.

Q: What is the Law of Large Numbers and why is it critical to insurance risk pooling?
A: The Law of Large Numbers states that as the number of independent exposure units in a risk pool increases, the actual loss experience converges toward the expected (probabilistic) loss. This statistical principle is the foundation of risk pooling because it allows insurers to predict aggregate losses with increasing accuracy as the pool grows, enabling stable premium pricing and solvency.

Q: What are the typical conditions that must be met for a risk to be insurable?
A: The widely-cited conditions of insurability are: (1) a large number of similar exposure units (enabling the Law of Large Numbers), (2) losses that are accidental and random, (3) losses that are determinable and measurable, (4) losses that are not catastrophic for the insurer, (5) a calculable probability of loss, and (6) an insurable interest. When these conditions hold, premiums can be reliably set and risk pooling becomes viable.

Q: What is the difference between moral hazard and morale hazard?
A: Moral hazard is a behavioral change that increases loss frequency or severity after insurance is purchased (e.g., arson for profit, neglecting safety because coverage exists). Morale hazard is a careless or indifferent attitude toward risk caused by having insurance, but without intent to cause loss (e.g., leaving doors unlocked). Moral hazard involves intent and may be fraudulent; morale hazard is merely attitudinal.

Q: What is the difference between a first-party and a third-party insurance claim?
A: A first-party claim is filed by the policyholder against their own insurer for covered losses to their own property or person (e.g., a homeowner claiming fire damage). A third-party (liability) claim is filed by an injured party against the policyholder, and the insurer pays on the policyholder's behalf to that third party (e.g., an auto liability claim). First-party claims cover the insured's losses; third-party claims cover liability for someone else's losses.

Q: What is the difference between actual cash value (ACV) and replacement cost in property insurance?
A: Replacement cost is the amount needed to replace damaged property with new property of like kind and quality, without deduction for depreciation. Actual cash value is replacement cost minus depreciation for age, wear, and obsolescence. Replacement cost policies generally cost more but provide fuller recovery; ACV policies reflect the property's diminished value at the time of loss.

Q: What is proximate cause in insurance claims?
A: Proximate cause is the dominant, effective cause that sets in motion a chain of events producing the loss, without which the loss would not have occurred. Insurance policies cover losses when an insured peril is the proximate cause. For example, if a covered windstorm causes a tree to fall on a house, the windstorm — not the falling tree — is treated as the proximate cause for coverage analysis.