Insurance Company Operations Quiz 2 Study Guide

A complete set of vocabulary flashcards covering insurance company operations, job functions, reinsurance, business models, financial ratios, and market cycles based on the Quiz 2 Study Guide.

Underwriter

An individual who decides if the insurance company should insure a person, evaluates how risky they are, and determines the premium to be paid before issuing a policy.

Producer (Insurance Agent)

A salesperson who sells insurance, explains policies, and helps customers purchase coverage.

Actuary

A professional who uses statistics, probability, and mathematics to determine premiums, future losses, and overall company risk.

Claims Adjuster

A person who works after an accident to investigate claims, determine if the claim is covered, estimate damages, and decide the payment amount.

Legal Counsel

The insurance company's attorney who handles lawsuits, contracts, regulations, and provides legal advice.

Loss Control Engineer

An individual whose goal is to reduce future losses by visiting businesses and recommending safety improvements such as better sprinklers or fire extinguishers.

Underwriting

The process of evaluating risk, deciding whether to insure someone, and determining the appropriate premium.

Adverse Selection

The concept where high-risk people are more likely to buy insurance than low-risk people; if unidentified, it causes losses to increase.

Pure Premium

The portion of the premium that covers only the expected losses.

Loading

Extra money added to the premium for operating expenses, such as employee salaries, rent, advertising, profit, and taxes.

Gross Premium

$$\text{Gross Premium} = \text{Pure Premium} + \text{Loading}$$

Class Rating

A rating method where everyone in the same group pays roughly the same premium and no individual history is considered.

Experience Rating

A rating method where the premium depends on the individual's history, including claims, accidents, and safety records; usually used for large businesses.

REINSURANCE

Insurance for insurance companies where a primary insurer transfers some risk to another insurer.

Underwriting Capacity

The maximum amount of insurance a company can safely insure, measured by the Policyholder's Surplus.

Policyholder's Surplus

$$\text{Assets} - \text{Liabilities} = \text{Policyholder's Surplus}$$

Treaty Reinsurance

An automatic reinsurance agreement where the reinsurer agrees beforehand to accept certain risks.

Facultative Reinsurance

A type of reinsurance where an individual policy is negotiated separately, such as for a specific building.

Pro Rata Reinsurance

A reinsurance arrangement where premiums and losses are shared by a specific percentage (e.g., Company keeps $40\%$ and Reinsurer takes $60\%$).

Per Risk Excess of Loss

A reinsurance type that applies to one individual risk when the loss exceeds a specific retention amount.

Per Occurrence Excess of Loss

A reinsurance type where the reinsurer pays for losses resulting from a single catastrophe (e.g., a hurricane) after the company pays its retention.

Stock Insurer

An insurance company owned by stockholders that issues stock and aims to make a profit.

Mutual Insurer

An insurance company owned by policyholders that does not issue stock and may return dividends to policyholders.

Lloyd's

A marketplace, not an insurance company, where investors join together to insure unusual risks like celebrity body parts or space launches.

Independent Agency System

A marketing system where an agent sells policies for multiple different companies.

Exclusive Agent

An agent who represents and sells insurance for only one insurer.

Direct Writer

A system where insurance company employees sell policies directly to customers without independent agents.

Direct Response System

A system where customers buy insurance directly via online, phone, or mail without an agent involved.

Loss Ratio

$\text{Claims} \div \text{Premiums}$; it measures claim costs.

Expense Ratio

$\text{Expenses} \div \text{Premiums}$; it measures operating expenses.

Combined Ratio

$\text{Loss Ratio} + \text{Expense Ratio}$; a ratio over $100\%$ indicates an underwriting loss, while a ratio under $100\%$ indicates an underwriting profit.

Investment Ratio

A ratio that measures investment income relative to premiums.

Operating Ratio

$$\text{Combined Ratio} - \text{Investment Ratio}$$

Hard Market

A phase of the underwriting cycle characterized by higher premiums, strict underwriting, and fewer companies willing to insure.

Soft Market

A phase of the underwriting cycle characterized by lower premiums, easier underwriting, and more competition.

Solvency Rating Agencies

Agencies that evaluate insurance companies' financial strength, such as A.M. Best, Moody's, S&P Global Ratings, and Fitch Ratings.

State Guarantee Fund

A fund designed to protect policyholders by paying covered claims up to legal limits if an insurance company becomes insolvent.