CPCU 520 Ch 1 Overview of Insurance Operations

Proprietary insurer

Insurer formed for the purpose of earning a profit for its owners

Mutual Insurer

An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them

Reciprocal insurance exchange (interinsurance exchange)

Insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers) and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.

Fair Access to Insurance Requirements (FAIR) plans

An insurance pool thru which private insurers collectively address an unmet need for property insurance on urban properties, esp. those susceptible to loss by riot or civil commotion

Residual market

The term referring collectively to insurers and other orgs that make insurance available through a shared risk mechanism to those who cannot obtain coverage in the admitted market

Surplus lines broker

A person or firm that places business w/ insurers not licensed (non admitted) in the state in which the transaction occurs but that is permitted to write insurance because covg is not available thru standard market insurers.

Independent agency and brokerage marketing system

An insurance marketing system under which producers (agents or brokers), who are independent contractors, sell insurance, usu as representatives of several unrelated insurers

Direct writer marketing system

An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer

Exclusive agency marketing system

An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers)

Distribution channel

The channel used by the producer of a product or service to transfer that product or service to the ultimate customer

ID the 4 classifications that may be used to distinguish property-casualty insurers from one another.

1. Legal form of ownership

2. Place of incorporation

3. Licensing status

4. Insurance distribution systems and channels

Explain how stock and mutual insurers differ.

- Stock insurers are owned by their stockholders. Has board of directors, dividends are ret'd to shareholders.

- Mutual insurers are owned by their policyholders. Has board of directors. Profits ret'd to policyholders in the form of dividends.

Describe the role of each of these types of insurers:

a. Lloyd's of London

b. Reciprocal insurance exchanges

a. Lloyd's of London is a marketplace that provides the physical and procedural facilities for its members to write insurance. The members are investors. Lloyd's provides covg for difficult or unusual loss exposures, underwrites much of the global marine and aviation insurance.

b. Reciprocal insurance exchanges: consists of a series of private contracts in which subrscribers / members agree to insure each other. Reciprocal bc reciprocity of responsibility of all members to each other. Each member is both insurer and insured.

Describe what a domestic insurer is.

incorporated w/in a specific state, operating in its own domicile

Explain what it means when an insurer is licensed in a state.

When an insurer has been granted a license to sell insurance in a particular state. Also called admitted insurer.

- License = insurer has met the state's minimum standards for financial strength, competence and integrity.

- Unlicensed is nonadmitted, have not been granted license to operate in a particular state.

What are the 3 insurance distribution systems and channels?

1. Independent agency and brokerage marketing system

2. Direct writer marketing system

3. Exclusive agency marketing system

Stock insurers are owned by _______ _________.

their stockholders

List and describe each of the 3 types of places of incorporation.

1. Domestic insurers: incorporated w/in a specific state, operating in its own domicile

2. Foreign insurers: a domestic insurer licensed to do business in states other than its domiciled state

3. Alien insurers: incorporated or formed in other countries

List some common distribution channels that insurers use to promote products and services and to communicate with existing and prospective insureds.

- the Internet

- call centers

- direct response

- group marketing

- financial institutions

Explain how insurers earn money to meet their profit goal.

- Charge premium

- Invest surplus (the portion of premium not used to pay operating costs)

- The investments produce income when sold (in form of interest, dividends, and investment gains)

- The return on investment creates more income to be invested, used to expand insurer or returned to insurer's investors

Explain why the goal of meeting customer's needs can often conflict w/ the profit goal.

- Sometimes it conflicts to offer high-quality insurance at a price the customer can afford

- High cost for training, call centers, and up-to-date IT

Explain how compliance w/ legal requirements helps an insurer meet its goals.

- Promotes insurers reputation which supports their ability to attract capital and customers

Explain why diversifying risk has become an emerging goal for property-casualty insurers.

- to balance increased catastrophe losses during the past decade

- Insurers should spread risk over wider geographic areas and multiple types of insurance business

- diversifying helps insurer earn a profit and fulfill duty to society

Describe several ways that insurers fulfill their duty to society.

- insurers contribute funds to medical, educational and public service orgs

- employee benefits plans

Probable maximum loss (PML)

the largest loss that an insure is likely to sustain

Explain how an insurer's inefficiency in information technology can conflict with the insurer's customer needs and profit goals.

- Difficult for insurers to integrate the latest IT into their business bc of dependency on core legacy systems to maintain historical information on losses/insrds

- Difficulty in meeting customers' tech demands and the competition for funds, which creates conflict w/ insurer's customer needs and profit goals

Describe the advantages (representing fewer constraints) that large insurers have over small insurers in meeting their goals.

Large insurers use economies of scale, and have more $ to update IT & reach addt'l markets.

- large insurers can also invest more in market research and product dvpmt

In addition to efficiency, expertise, size and financial resources, ID and explain 2 examples of other internal constraints, that interfere with insurers achieving their goals.

1. lack of name recognition (I.e. when banks enter the insurance industry)

2. a reputation damaged by past problems (insurer needs to address this w/ a public campaign and ethics training of staff)

Explain how the external constraint of required regulatory approvals prevents insurers from meeting their profit and customer needs goals.

- regulations can deny premium rate increases which affects insurers' profitability

- policy form approval and time required for filing process also affects insurer

Explain how public opinion about the insurance industry as a whole acted as a constraint for some insurers in meeting their goals following catastrophic hurricane damages in the 2000s.

- during this catastrophe, some insurers questioned whether dmg was caused by windstorm (insrd loss) or flood (not an insrd loss) which damaged their reps. In some cases insurers paid for dmg that they were not responsible for insuring to curtail dmg to their reps.

Explain how competition during a soft underwriting cycle becomes an external constraint for insurers in meeting their goals.

- during soft cycle, competitive pressure to decrease prices affects insurers' profit goals.

- low profits can affect insurers' ability to meet societal goals

Explain how the increase in insurers' experimenting with multiple distribution systems and channels becomes an external constraint for insurers in meeting their goals.

Each channel meets the needs of some customers but each also fails to meet the needs of others.

ID 2 indicators of insurer profitability based on premiums.

1. Premium growth issues

2. the rate of growth that is sustained over time

ID the indicators that insurers can use to gauge their success in meeting customers' needs.

- Customer complaints (made directly to insurers or insurance dept)

- Customer surveys

- Insurers' retention ratio

- lapse ratio

- feedback from producers

- Consumer Reports magazine

Name 3 sources for measuring the success or failure of the insurer in meeting legal requirements.

1. The state insurance dept's market conduct regulation

2. State listings of regulatory actions taken against insurers

3. Summary info about insurer financial strength and financial ratings provided by ratings agencies (shows any outstanding legal action)

Explain how expenditures on loss control activities indicate an insurer's level of humanitarian concern and can be a measure of how well an insurer meets societal responsibilities.

- the expenditures may go beyond typical efforts to improve safety conditions for insureds

- Insurer may contribute to orgs that research and raise public concern for safety

- Insurer may contribute to medical, welfare and educational institutions / programs

Underwriting

The process of selecting insureds, pricing covg, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made

Book of business

A group of policies with a common characteristic, such as territory or type of covg, or all policies written by a particular insurer or agency

Underwriting guidelines (underwriting guide)

A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure

Adverse selection

In general, the tendency for people with the greatest probability of loss to be the ones mostly likely to purchase insurance

ID 3 core functions that exist within the structure of a typical insurer.

1. Marketing and distribution

2. Underwriting

3. Claims

ID 5 supporting functions that exist within the structure of a typical insurer.

1. Risk control

2. Premium auditing

3. Acutarial

4. Reinsurance

5. IT

ID 6 other common functional areas that may exist within the structure of an insurer or that may be outsourced to an external organization.

1. Investments

2. Accounting and finance

3. Customer service

4. Legal and compliance

5. Human resources

6. SIU

Mutual insurer surplus notes are repaid with ______

profits

Insurance industry underwriting cycles are referred to as either hard cycles or soft cycles. Which one of the following statements is true regarding insurer competition during these market cycles?

In soft cycles, excessive competition can entice some insurers to bend the rules, making insurers unable to attain their legal and regulatory goals.

One of the biggest problems in measuring insurer profitability arises from errors in estimating _____

loss reserves

Which one of the following formulas calculates the return on equity?

Net income divided by owners' equity

Argot Insurance Company (Argot) writes both property and casualty policies which include general liability. Valteri, the investment manager for Argot, should select which one of the following investments to support Argot's general liability lines of business?

Corporate bonds with long maturity