# Insurance premiums, valuations, and limits ## Premiums/binding The insurance agent (technically named as a field underwriter) is responsible to write insurance policies. - The underwriter's job is to evaluate loss exposure and determine whether to insure that risk by gathering information from various sources: - Insurance applications - Insurance reports (e.g., CLUE from LexisNexis, loss run reports) - Inspection reports - Motor vehicle reports (MVR) - Loss records - Consumer credit bureaus (e.g., Equifax/TransUnion/Experian) - Financial sources (e.g., Dun and Bradstreet) - An underwriter is legally forbidden to give any [preferential bias](mind-bias.md) when making a judgment, and can only use the criteria of the given facts to determine a premium. - An underwriter is also effectively forbidden legally to misrepresent or [lie](people-lying.md) in any capacity about an insurance policy that [influences](power-influence.md) the insured's decisions (twisting, false advertising, or illegal inducement). - Underwriters can't receive more money or give back *any* money (e.g., part of their commission) in the course of binding ("rebating"). - When producing insurance, an underwriter can create an underwriting decision that can issue the policy, reject it, or provide specific exclusions or limitations for the policy. - An insurance agent's knowledge is considered their principal's knowledge, so their judgment represents the "vicarious liability" of their principal. - If an agent acts outside their authority, it's a presumption of agency, which can *easily* happen through their implied or apparent authority. - In general, an insurance producer is *very* beholden to staying ethical and fair, on the same level as many other formal roles such as [public accounting](money-accounting.md). - They're responsible to report the information they gather through legislation like the Fair Credit Reporting Act. - Much of it is enforced through the Unfair Trade Practices Act and Unfair Claims Settlement Practices Act. - The agent of record is the underwriter or agency assigned to the policy, and is the only agent permitted to change the policy. - If that agency goes out of business or an insured doesn't like them, they must submit an agent of record change or cancel the policy directly through the insurer. No matter what insurance, premiums are calculated with a relatively straightforward process: 1. An underwriter uses that rating to capture key pieces of information during the binding or renewal of the policy. - That rating may be based on the underwriter's judgment, or in a manual provided by the insurer. 2. If the insured is an organization, the underwriter will include group policy discounts. - Generally, [larger groups](groups-large.md) tend to be more stable and less likely to migrate to other carriers, meaning a lower premium. 3. The underwriter clarifies any exclusions to the coverages. - These exclusions are any perils clarified as omitted from the policy. - They may be certain people, or certain perils, or specific conditions. - Without exclusions, insurance companies are often legally obligated to pay claims on unspecified perils. 4. The rating formula adds a margin to ensure profitability across the duration of the term. 5. The formula adapts for further decisions by the insured. - Liability limits - Deductible amount - How the insured wishes to pay (e.g., paid-in-full, month-to-month, autopay) - The insured's consent to a data-gathering device - Extra features (e.g., gap coverage, built-in savings plans) - Discounts for multiple drivers, vehicles, policies, etc. 6. The underwriter's policy quote will give a premium for the entire term. - This premium is the quote, which is most of the work. - If not paid-in-full, chop up that premium into periodic installments (usually monthly), then add an installment fee each payment. 7. The policy will bind when the insured pays, which may or may not have an effective date on that same day. - Sometimes, a policy will have an enrollment period for 1-2 months (e.g., group policies) that permits binding or endorsing, with only qualifying events permitted for endorsement during the rest of the term. 8. As the insured pays, the billing is either handled by the agency (agency billing) or by the insurer (direct billing) - If the insured can't pay, the policy can sometimes become a [financing product](money-2_debt.md). 9. If the insured must make an endorsement, prorate the premium from that day to the end of the term, then adapt the billing to reflect it. 10. At the end of the contract, the policy is re-rated for a new period and the company issues a renewal. 11. If the insured cancels the policy, the unearned premium is prorated to that day, has an administration fee added, and balances with either a prorated refund or short rate final bill. - When a policy is bound, the premium is completely unearned, and the insured can perform a flat rate cancel (i.e., no premium exchanged, and no coverage provided). - As the days transpire, the insurer earns the premium. 12. If the *insurer* wants to cancel the policy, they typically issue a non-renewal for that policy, which will typically show up on the insured's insurance report. The billing for the premium is relatively confusing for some people, since *how* the premium is paid determines *what* the price will be. Occasionally, your lifestyle or situation can create a non-standard situation, and some insurance companies will outright refuse to insure you: - Owning high-value possessions. - Operating salvage title vehicles that were previously declared a total loss. - Living in a region with a high crime rate. - Being inexperienced (which includes the conditions that come with being [foreign](people-image-modern.md)). - Having a condition that makes you more likely to be irresponsible (young, elderly, psychological disorders). - Having no prior insurance, a gap in days covered, or an insurance policy canceled or non-renewed. - Having many claims or accidents within a short window of time. - Having many moving violations or convicted of driving [drunk](fun-alcohol.md). - Poor [credit history](money-2_debt.md). A first-loss policy is a type of property policy that only provides partial coverage. - It's under-insured, but often with the advantage of not rating the loss when the policy contract renews. ## Property valuation/limits For any property, an insurable interest of that property *must* exist at the time of the loss. The property calculation can come from multiple possible valuation methods: - Replacement Cost Value (RCV) - the cost to actually replace it (often simply by applying a simple formula to square footage or consulting a chart). - Functional Replacement Cost - the cost of the insurer replacing the damaged property with a functional equivalent (e.g., sheet rock walls replacing plaster). - Actual Cash Value (ACV) - the RCV, minus depreciation (typically the most common property insurance valuation). - Market Value - how much it could have been sold for right before the loss (policies are *rarely* written on this basis). - Agreed Value - the insurer and insured agree to a discrete coverage limit, with no attachment to anything else, and becomes coinsurance if it's not extended during a renewal. - If the insured and insurer can't agree on a coverage amount, the insurer can waive the coinsurance requirement with an Agreed Value Approach with an inflation guard endorsement to reflect automatic coverage increases. - Stated Value - a value given by the insured, where the insurer pays the lower of their stated amount, the ACV, or the repair cost. - Salvage Condition - the remaining value of a total loss, typically used to recuperate some costs to the insurance company. This valuation or its calculation is often clearly defined in the policy contract. - The property's value must typically be determined before binding, meaning most of the underwriters' work comes *before* the policy starts. - ACV conforms to the philosophy of indemnity, while RCV gives *more* than indemnification would imply. - Older buildings tend to be valued through ACV, with newer ones through RCV. Property coverages have a few scopes: - Specific coverages indicate coverages for one type of property. - Blanket coverages indicate set coverage for multiple classifications of property. - Scheduled insurance covers specific property for specific amounts when it surpasses standard peril coverages (e.g., a diamond ring). - Sometimes, there will be *no* dollar limit on some property coverages. - Other times, insurers can place special lowered limits on property with a high possibility of a severe or total loss. - One form of lowered limit is a sublimit, where a fixed percentage of the total limit will go to a specific type of coverage (e.g., business lawsuit liability policy for $500,000 will have a 10% sublimit for punitive damages). Coinsurance can allow an insurance policy that will cover less than the property is worth, which is common in commercial property: 1. The property is assessed for a specified value. 2. The insured makes an agreement to coinsure for less than 80% of the insurable value (e.g., 75%). 3. If a loss happens, the insurance will pay the percentage of that coinsurance (e.g., 75% of a $5,000 loss). ## Liability valuation/limits Since liability can theoretically be unlimited, all liability insurance has a limit up to a specific, even amount. - The strict liability doctrine (everyone is responsible for themselves) applies when conduct is hazardous in nature or a defect must be proven. - Otherwise, the vicarious liability doctrine (an entity is responsible for other entities) applies. All liability claims have 3 parties: 1. The claimant who is seeking a remedy 2. The insured who holds the policy 3. The insurer who pays the claim For a liability claim to be valid negligence, it *must* have 4 non-negotiable components: 1. A "duty" for the insured to act or not act. 2. Violation of a "standard of care". 3. "Proximate cause" that connects to the liable party. 4. An actual, measurable damage or injury toward another person (e.g., earnings, medical expenses, etc.) Anything that isn't resolved within insurance liability will make its way directly into the domain of tort law. - Intentional torts/acts are carried out with purpose and knowledge of their consequences (e.g., assault) and generally excluded from *all* liability policies. - Unintentional torts (aka negligence) is failing to exercise care that a reasonable/prudent person would take under similar circumstances, and is generally covered by liability insurance. Liability insurance clarifies precise limits: - Split limits specify different coverage amounts for different types of losses. - Bodily injury (BI) and property damage (PD) are often separate limits. - BI - bodily injury, sickness, or diseases sustained by a person, including death. - PD - all damage to *tangible* property, including loss of use. - Per person - limits coverage per person. - Per occurrence - limits coverage per occurrence. - Most standard auto insurance policies give barely adequate liability coverage of $100K bodily injury per person capped at $300K per occurrence, with $100K property damage per occurrence (100/300/100). - Boring and small cars (e.g., Toyota Camry, Honda Civic) are cheaper to insure than [identity-associating](identity.md) vehicles (e.g., Dodge Challenger). - Liability limits can also be aggregate limits instead of broken out. - Auto policies can have a combined single limit (CSL) instead of broken into BI/PD. - Liability policies can also point some of that liability back toward the insured as well. - Some states also accommodate for personal injury protection (PIP) to protect the insured for their injury. - Most states cover uninsured motorists (UM) and under-insured motorists (UIM), where the insurance company will cover the insured's losses in the event of the *other* person not having sufficient insurance.