RMIN 4000 (Chapters 5-9)

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Premium Taxes Paid in 2021

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2.8 million

of people employed in the insurance industry

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1.6 million to 1.2 million

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

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  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

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Most are not US companies

Note to remember about the Top 5 Global Insurers

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  1. State Farm

  2. Berkshire Hathaway

  3. Progressive

  4. Liberty Mutual

  5. Allstate

5 P&C Insurers in US

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

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

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Stock Insurers, Mutual Insurers, & Lloyd's

3 Major Private Insurers

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  1. Stock Insurers

A corporation owned by stockholders

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

Objective of Stock Insurers

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  1. Mutual Insurers

A corporation owned by policyholders

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Dividends or rate reductions

Mutual Insurers: Profits are distributed to policyholders by

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Assessment Mutuals, Advance Premium Mutual, & Fraternal Insurers

3 Types of Mutual Insurers

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  1. Assessment Mutuals

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

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  1. Advance Premium Mutual

insurer does not issue assessable policies

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  1. Fraternal Insurers

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

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  1. Lloyd’s

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

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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

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London

Lloyd's Origin

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Lloyd’s Brokers & Lloyd’s Syndicates

2 Components of Lloyd’s Structure

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  1. Lloyd’s brokers

represent policyholders to arrange coverage with syndicates

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  1. Lloyd’s Syndicates

offer insurance contacts in the market

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Members, Managing Agents & Underwriters

3 Roles of Lloyd’s Syndicates

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  1. Members

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

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"Names"

high net worth individuals

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  1. Managing Agents

manage the syndicates, typically specialize in certain lines

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  1. Underwriters

work for the syndicates to assess risks and determine premiums

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TRUE

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

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

4 Marketing Systems

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  1. Agents

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

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Principal

legally responsible for all of the acts of the agent

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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

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  1. 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

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  1. Marsh

  2. Aon

  3. Willis Towers Watson

  4. A. J. Gallagher

  5. HUB International

5 Largest Insurance Brokers (2021)

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  1. Surplus Lines Brokers

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

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Surplus Lines

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

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Nonadmitted Insurer

an insurer not licensed to do business in the state

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  1. Managing General Agent

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

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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

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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

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Captive Agents

Exclusive Agency System are Synonymous with

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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

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Direct Response

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

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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

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

6 Major Insurance Company Operations

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  1. Ratemaking

The pricing of insurance and the calculation of the insurance premiums

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

Challenge of Ratemaking

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Actuary

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

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Ratemaking: Regulatory Goals

  • Rates must be adequate

  • Rates must not be excessive

  • Rates should not be unfairly discriminatory

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Ratemaking: Business Goals

Rates should:

  • Be Stable

  • Be Responsive

  • Provide for contingencies

  • Promote loss control

  • Be Simple

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

3 Components of Gross Rate

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***1. Components of Gross Rate

Amount needed to pay future claims and loss adjustment expenses

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  1. Expense Provision “Load”

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

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  1. Margin for Profit and Contingencies “Risk Charge”

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

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Loss Adjustment Expenses (LAE)

expenses associated with adjusting claims

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Exposure Unit

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

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***Gross Premium

gross rate multiplied by number of exposure units

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

3 P&C Ratemaking Methods

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***Pure Premium Method

  • Rates developed based on past experience

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

  • Type of Class (Manual) Rating

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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

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Merit Rating

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

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Judgment Method

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

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***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).

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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

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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

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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

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  1. 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

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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

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Underwriting Principles

  • Attain an underwriting profit

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

  • Provide equity among policyholders

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  1. Accept the application and issue the policy

  2. Accept the application subject to restrictions or modifications

  3. Reject the policy

Underwriting Decisions

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  1. Production

  • The sales and marketing activities of insurers

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

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  1. Claims Adjusment/Settlement

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

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

Basic Objectives of Claims Settlement

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***“First-Party” Claims

  • Claim submitted by the insured to the insurer

  • Insurer makes claims payment to the insured

  • EX: fire, theft, hail, etc.

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***“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

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Insurance agents

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

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Staff claims representatives/adjustors

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

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Independent Adjusters

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

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Public adjusters

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

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  1. Notice of Loss

  2. Claim Investigation

  3. Proof of Loss

  4. Payment of Loss or Denial of the claim

Claims Process

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  1. 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

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Ceding company

the primary insurer that initially wrote the insurance

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Reinsurance

the company that accepts the insurance from the ceding company

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Retention limit

the amount of insurance retained by the ceding company

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