Unit
- Insurable interest: An entity must suffer a direct financial loss if the insured property is damaged or destroyed. This principle prevents wagering and ensures the insured has a legitimate stake in the property's preservation. Examples include ownership, mortgagee rights, and leasehold interests.
- Risk transfer mechanisms: Property insurance transfers the financial consequences of specified perils from the insured to the insurer in exchange for premium payments. This shifts the burden of large, unpredictable losses to a pooled risk-bearing entity, enabling business continuity.
- Utmost good faith: Both parties must disclose all material facts before contract formation. Nondisclosure or misrepresentation can void the policy. This duty applies to the insured's property condition, occupancy, and loss history.
- Indemnity principle: Insurance restores the insured to the financial position held just before the loss, but no better. Valuation methods like actual cash value or replacement cost ensure indemnity. Over-insurance can create moral hazard.
- Proximate cause: The dominant cause of loss determines coverage. If a peril excluded in the policy sets off a chain of events, coverage may be denied. For instance, flood damage following a storm may be excluded under a standard property policy.
- Subrogation: After paying a claim, the insurer steps into the insured's shoes to recover from a negligent third party. This prevents double recovery and keeps premiums lower by recovering costs.
- Policy structure basics: A typical property policy includes declarations, insuring agreement, conditions, exclusions, and endorsements. Understanding each component helps in tailoring coverage to specific needs.
- Types of property insurance: Coverage can be written on a named-peril or all-risk basis. Named-peril policies list covered causes of loss; all-risk policies cover all perils except those expressly excluded. Commercial package policies often combine property and liability.
- Coinsurance clause: Many property policies require the insured to carry coverage equal to a specified percentage of the property's value, often 80% or 90%. Failure to meet this threshold results in a penalty where the insurer reduces claim payments proportionally. This encourages adequate coverage and equitable premium distribution across policyholders.
- Deductibles and self-insured retentions: A deductible is a fixed amount the insured must pay before coverage applies, reducing small claims and administrative costs. Self-insured retentions operate similarly but apply to larger losses, often used by larger entities. Both mechanisms align insured and insurer interests by controlling moral hazard and claim frequency.
- Business interruption and extra expense coverage: Beyond physical damage, property policies can include time element coverage for lost income and ongoing expenses when operations are suspended. Business interruption indemnifies against profit loss, while extra expense covers costs to continue operations elsewhere. Proper valuation of these exposures is critical for comprehensive risk management.
Loss Ratio
65%
-2% YoY
Regulatory Requirement
Regulation: NAIC Model Act on Property Insurance
Insurers must maintain minimum capital and surplus based on premium volume and risk exposure. Adherence ensures claim-paying ability and consumer protection.
Quick Revision
- Insurable interest is required at the time of loss to avoid wagering.
- Insurance transfers financial risk in exchange for a premium.
- Utmost good faith demands full disclosure of material facts.
- Indemnity ensures the insured is restored but not enriched.
- Proximate cause determines which perils triggered the loss.
- Subrogation allows insurers to recover from responsible third parties.
- Policy components must be understood for effective coverage design.
- Named-peril and all-risk policies offer different degrees of protection.