RMIN 4000 (Chapters 5-9)

$75 per person

$75 per person

Premium Taxes Paid in 2021

2.8 million

of people employed in the insurance industry

1.6 million to 1.2 million

What is the split of insurance companies to agents, brokers, and other providers?

1. Berkshire Hathaway (Warren Buffet) (US)

2. Ping An Insurance Company of China Ltd. (China)

3. China Life (China)

4. Allianz (Germany)

5. AXA S.A. (France)

Top 5 Global Insurers

Most are not US companies

Note to remember about the Top 5 Global Insurers

1. State Farm

2. Berkshire Hathaway

3. Progressive

4. Liberty Mutual

5. Allstate

5 P&C Insurers in US

#1 is personal auto #3 is homeowner’s coverage

US Property & Casualty By Line Coverage (#1 & #3)

Stock Insurers, Mutual Insurers, & Lloyd's

3 Major Private Insurers

1. Stock Insurers

A corporation owned by stockholders

To earn a profit for shareholders by increasing the value of stock and paying dividends

Objective of Stock Insurers

2. Mutual Insurers

A corporation owned by policyholders

Dividends or rate reductions

Mutual Insurers: Profits are distributed to policyholders by

Assessment Mutuals, Advance Premium Mutual, & Fraternal Insurers

3 Types of Mutual Insurers

1. Assessment Mutuals

insurer has the right to asses policyholders an additional amount if the insurer’s financial operations are unfavorable

2. Advance Premium Mutual

insurer does not issue assessable policies

3. Fraternal Insurers

provides life and health insurance to members of a social or religious organization

3. Lloyd’s

World’s leading market that provides services and physical facilities for its members to write specialized lines of insurance

FALSE: NOT an insurer. They are a group who underwrite insurance for syndicates and do not directly supply insurance

True/False: Lloyd's is an insurer

London

Lloyd's Origin

Lloyd’s Brokers & Lloyd’s Syndicates

2 Components of Lloyd’s Structure

1. Lloyd’s brokers

represent policyholders to arrange coverage with syndicates

2. Lloyd’s Syndicates

offer insurance contacts in the market

Members, Managing Agents & Underwriters

3 Roles of Lloyd’s Syndicates

1. Members

Join together & provide capital to form syndicates, receiving profits or bearing losses. Most are corporations or limited partnerships

"Names"

high net worth individuals

2. Managing Agents

manage the syndicates, typically specialize in certain lines

3. Underwriters

work for the syndicates to assess risks and determine premiums

TRUE

True/False: Must meet Lloyd’s stringent capital requirements

Agents, Brokers, Surplus Lines Brokers, & Managing General Agent

4 Marketing Systems

1. Agents

Someone who legally represents the principal (insurance company). Acts on behalf of the principal

Principal

legally responsible for all of the acts of the agent

Agent Binding Authority

Provide temporary insurance until the policy is actually written. Can typically be provided for property and casualty (P&C) agents. Life insurance agents usually have no authority to issue binders

2. Brokers

Someone who legally represents the insured and:

• Solicits applications and places coverage with the appropriate insurer

• Is paid a commission from the insurer

• In general, does NOT have the authority to bind

1. Marsh

2. Aon

3. Willis Towers Watson

4. A. J. Gallagher

5. HUB International

5 Largest Insurance Brokers (2021)

3. Surplus Lines Brokers

Like “wholesalers” who work with retail agents and brokers. Licensed to lace business with a “non-admitted” insurer

Surplus Lines

refer to any type of insurance for which there is not an available market in a state

Nonadmitted Insurer

an insurer not licensed to do business in the state

4. Managing General Agent

specialty producer that has underwriting authority from an insurer(s) Example: Childcare Centers

Independent Agency

• Usually represent multiple unrelated insurers

• Agents are paid a commission which varies by the line of insurance

• The agency owns the expirations or renewal rights to the business

• Agents may be authorized to adjust small claims and may provide loss control services to their insurers

Exclusive Agency System

• Agent represents only one insurer or group of insurers under common ownership

• Agents are generally paid a lower commission rate on renewal business than on new business

• Agents usually do not own the expirations or renewal rights to the policies

• Insurers provide strong support services to new agents

Captive Agents

Exclusive Agency System are Synonymous with

Direct Writer

• An insurer in which the salesperson is an employee of the insurer, not an independent contractor

• Employees are usually compensated on “salary plus” arrangement

Direct Response

Insurer sells directly to the consumer by television or some other media

Group Insurance Marketing

• Products are sold through group representatives, employees who receive a salary and incentive payments based on sales

• Employees typically pay for insurance by payroll deduction

Ratemaking, Underwriting, Production, Claims Settlement, Reinsurance, & Investments

6 Major Insurance Company Operations

1. Ratemaking

The pricing of insurance and the calculation of the insurance premiums

Insurance company does not know in advance the cost of their products

Challenge of Ratemaking

Actuary

A person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums

Ratemaking: Regulatory Goals

• Rates must be adequate

• Rates must not be excessive

• Rates should not be unfairly discriminatory

Ratemaking: Business Goals

Rates should:

• Be Stable

• Be Responsive

• Provide for contingencies

• Promote loss control

• Be Simple

Components of Gross Rate, Expense Provision “Load”, & Margin for Profit and Contingencies “Risk Charge”

3 Components of Gross Rate

***1. Components of Gross Rate

Amount needed to pay future claims and loss adjustment expenses

2. Expense Provision “Load”

Amount needed to pay expenses (acquisition costs, overhead, premium taxes)

3. Margin for Profit and Contingencies “Risk Charge”

Amount needed to protect against the possibility that actual claims and expenses exceed productions

Loss Adjustment Expenses (LAE)

expenses associated with adjusting claims

Exposure Unit

unit of measurement used in pricing (car-years, per $1,000 in limits, etc.)

***Gross Premium

gross rate multiplied by number of exposure units

Class (Manual) Rating, Merit Rating, & Judgment Method

3 P&C Ratemaking Methods

***Pure Premium Method

• Rates developed based on past experience

• (incurred losses + LAE) ? # of exposure units

• Type of Class (Manual) Rating

Loss Ratio Method

• Modifies the existing rates by comparing the actual loss ratio to the expected loss ratio

• Loss ratio = (incurred losses + LAE) / earned premium

• Type of Class (Manual) Rating

Merit Rating

Rates are adjusted upward or downward based on experience 3 Types – schedule, experience, or retrospective

Judgment Method

Rates are determined by the judgment of the underwriter (when data is limited)

***Gross Premium = $2,000

• An independent insurance agent that represents Mountain Top Insurance Company is quoting a homeowners insurance policy for a client.

• The client seeks to insure their house for the estimated replacement cost of $500,000. Mountain Top charges a gross rate of $4.00 per %$1,000 in coverage (exposure unit).

Gross Premium = $1,000

The homeowner wants $500,000 in liability coverage and Mountain Top’s gross rate is $50 per $25,000 in coverage

Pure premium = $350

She has the following data for homeowners’ policies for the peril of fire:

• Incurred fire losses = $33,750,000

• Loss adjustment expenses – $1,250,000

• Exposure Unit (# of homes) – 100,000

Pure premium = $350

She has collected the following data for collision damage:

• Incurred collision losses = $34,000,000

• Loss adjustment expenses – $1,000,000

• Exposure Unit (# of homes) – 100,000

2. Underwriting

• The process of selecting, classifying, and pricing applicants for insurance

• The purpose is to develop and maintain a profitable book for a business

• An underwriter makes the decision to accept or reject an applicant for insurance

Underwriting Guide

States the company’s underwriting policy that includes:

• Lines of business written

• Policy forms and rating plan used

• Acceptable, borderline, and prohibited business

• Amounts of insurance that can be written

• Geographic territories

• Business that requires approval from a senior underwriter

Underwriting Principles

• Attain an underwriting profit

• Select prospective insureds according to the company’s underwriting guidelines

• Provide equity among policyholders

1. Accept the application and issue the policy

2. Accept the application subject to restrictions or modifications

3. Reject the policy

Underwriting Decisions

3. Production

• The sales and marketing activities of insurers

• Agents /Brokers who sell insurance are often called “producers”

4. Claims Adjusment/Settlement

The process of determining coverage, legal liability and damages, and settling the claim

Verification of a covered loss Fair and prompt payment of claims Provide personal assistance to the insured

Basic Objectives of Claims Settlement

***“First-Party” Claims

• Claim submitted by the insured to the insurer

• Insurer makes claims payment to the insured

• EX: fire, theft, hail, etc.

***“Third-Party”

• Claim submitted against a negligent insured for bodily injury, physical damage, death, personal injury, etc.

• Insurer pays the damages (caused by their insured) to an injured third party

Insurance agents

agents may have the authority to settle small “first-party” claims

Staff claims representatives/adjustors

salaried employee who investigates a claim, determines the amount of loss, and issues payment

Independent Adjusters

individual or organization that adjusts the claim for a fee (very common after catastrophes)

Public adjusters

represent the insured and are paid a fee based on the amount of the claim settlement

1. Notice of Loss

2. Claim Investigation

3. Proof of Loss

4. Payment of Loss or Denial of the claim

Claims Process

5. Reinsurance

An arrangement by which the primary insurer (that initially writes the insurance) transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance

Ceding company

the primary insurer that initially wrote the insurance

Reinsurance

the company that accepts the insurance from the ceding company

Retention limit

the amount of insurance retained by the ceding company

Cession

the amount of insurance ceded to the reinsurer

Retrocession

when a reinsurer insures a part or all of a risk with another reinsurer

Functions of Reinsurance

• Increase of underwriting capacity

• Stabilize profits

• Reduced the unearned premium reserve

• Provide protections against a catastrophic loss

• Retire from a line of business

• Obtain underwriting advice on a line for which the insurer has little experience

Facultative Reinsurance & Treaty Reinsurance

Two Types of Reinsurance

***Facultative Reinsurance

• Reinsurance that is transacted on an individual risk (ex: large factory) where the primary insurer cedes the individual risk to the reinsurer

• Optional, used on a case-by-case basis

***Treaty Reinsurance

• The primary insurer cedes all risks within one or more specific lines of business to the reinsurer

• The primary insurer must cede and the reinsurer must accept all risks included within the terms of the reinsurance agreement

Proportional (Pro Rata), Non-Proportional (Excess of Loss), & Reinsurance Pool

3 Types of Reinsurance Agreements

***1. Proportional (Pro Rata)

The ceding company and reinsurer agree to share a predetermined percentage of losses and premium

“Quota Share” & “Surplus Share”

2 Types of Proportional (Pro Rata)

***1) “Quota Share”

the ceding company and the reinsurer share premiums and losses based on a fixed percentage

Premiums: Ceding Company – $600,000 & Reinsurer – $400,000 Loss: Ceding Company – $240,000 & Reinsurer – $160,000 Loss Ratio: Ceding Company – 40% & Reinsurer – 40%

EX: 60% retention, $1,000,000 in annual premium, $400,000 in annual losses

***2) “Surplus Share”

• The reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit

• Losses and premium are shared in the same proportion that each party shares in the individual risk

• Proportion is determined by dividing the retention by the individual risk size

Ceding company retains and cedes 50% of premium and losses to reinsurer $50,000 loss = $25,000 recovery from reinsurer

EX: $200,000 risk with a $100,000 retention

***2. Non-Proportional (Excess of Loss)

• The reinsurer only pays when covered losses exceed a predetermined dollar amount

• The ceding company retains a predetermined dollar amount of a loss

• The reinsurer then pays losses that exceed the retention, up to a limit of the reinsurance agreement

TRUE

True/False: Non-Proportional was designed for protection from a catastrophic loss

If the loss is $500,000, reinsurer pays $400,000 and ceding company retains $100,000 If the loss is 2,250,000, reinsurer pays $2,000,000 and ceding company retains $250,000

EX: $100,000 retention with $2,000,000 treaty limit: A. $500,000 loss B. $2,250,000 loss