Insurance Chapter 5 & 6

Major types of private insurers

- Stock insurers

– Mutual insurers

– Reciprocal exchanges

– Lloyds of London

– Managed care health plans

– Captive insurers

Distribution systems for selling life insurance

• personal selling systems

• direct response systems

Distribution system for property and casualty insurance

-- Independent agency system

– Exclusive agency system

– Direct writer

– Direct response system

Top writer of life insurance written in 2016

• MetLife Inc

Top writer of property insurance in 2016

• Statefarm

Stock Insurance

• a corporation owned by stockholders

Objective of stock insurers

• earn profit for stockholders/shareholders by increasing the value of stock and paying dividends

-stockholders elect board of directors

-stockholders bear all losses of the corporation

-insurer’s issue non-assessable policies

Mutual Insurer

• a corporation owned by the policyholders

-elect board of directors

-may receive dividends or rate reductions

Three types of mutual insurers

• advanced premium mutual

• assessment mutual

• fraternal insurer

Advanced premium mutual

▪ Premiums are designed to cover claims and expenses

▪ Any losses are paid out of surplus, or net worth

Assessment mutual

▪ Insurer has the right to assess policy owners if the insurer’s

financial operations are unfavorable

Fraternal Insurer

▪ insurer providing life and health insurance to members of a

social or religious organization

Why are mutual company mergers increasing?

• merger activity is an attempt to improve efficiency and increase product line

Demutualization

• where a mutual company is converted into a stock insurer

- easier to raise capital

- growth opportunities

Mutual Holding Company

• a company that directly or indirectly controls an authorized insurer

Lloyd’s (formerly Lloyd’s of London)

• NOT an insurer

• the world’s leading insurance market

Captive Insurer

• an insurer owned by a parent firm

• single parent captive: captive insurer owned by one parent to insure the parent firm’s loss exposures

• association captive: owned by several parents that insure exposure for several parent firms

Savings Bank Life Insurance

• Designed to offer low-cost life insurance that is sold by savings

banks, over the phone or through Web sites

• The cost savings comes from not paying agent commissions

Agent

• someone who legally represents the principal (the insurance company) and has the

  authority to act on the principal's behalf

Authority

• received by the agent is in three forms

• Expressed – received from insurer (usually a written contract)

• Implied – perform necessary activities to exercise authority

• Apparent – the public believes the agent has the authority

Principal

• (the Insurer) is legally responsible for all acts of an agent

when the agent is acting within the scope of authority

• Principal is not responsible for wrongful or fraudulent acts of the

agent

A property and casualty agent has…

• has authority bind the insurer

• A binder provides temporary insurance

• Binder can be oral or written

A life insurance agent…

• does not have the authority to bind the insurer

• The applicant for life insurance must be approved by the

insurer before the insurance becomes effective

A broker

• someone who legally represents the insured

• solicits applications to get coverage from an insurer

• is paid a commission from the insurer

• does NOT have the authority to bind

Surplus line broker

• licensed to place business with a non-admitted insurer

• taxes are paid on each policy

• is not part of state insurance guaranty

• surplus lines are types of insurance used when there is no market within the state

Marketing Insurance

• varies for different insurance products

Most life insurance policies and annuities are…

• sold today are through personal selling distribution systems

• Commissioned agents solicit and sell life insurance products

• Career, or affiliated, agents are full-time agents who usually

represent one insurer and are paid on a commission basis.

Independent property and casualty agents are…

• independent contractors

• represent several insurers and sell P & C insurance

Personal- producing general agent

• independent agent who places substantial amounts of business

with one insurer

• Have a special financial arrangement with that insurer

• Can hire sub agents and receive overriding commissions

Brokers

• independent agents who do not have an exclusive contract with any single insurer

• cannot bind coverage

Direct Response System

• marketing system by which insurance products are sold directly to consumers without a face-to-face meeting with an agent

-complex products difficult to sell this way

-no ability to reach large audience

Worksite marketing

• insurance sold at the job site

Stock-brokers

• can sell life insurance and annuities

Financial planners

• May be licensed to sell insurance products including life,

  health, disability, auto and homeowner policies

Independent Agency system

• a major distribution form for property and casualty insurance

Exclusive Agency System

• the agent represents only one insurer

Direct writer

• an insurer in which the salesperson is an employee of the insurer

Direct response

• insurer sells directly to the consumer by television or some other media

Chapter 6 starts here

Important operations of an insurance company include:

• Rate making

• Underwriting

• Production

• Claims settlement

• Reinsurance

• Investments

Ratemaking

• Is the pricing of insurance and the calculation of insurance

  premiums based on risk factors

Rate

• price per unit of insurance

Exposure unit

• the unit of measurement used in insurance pricing

• premium= rate x exposure unit

Rating Bases

• used for commercial policies

• Units: A-area, B-payroll, C-gross sales, D-units, E-other

Liability premiums

• based on square footage, sales, number

  of apt units, or payroll depending on type of business.

Property premiums

• based on age, construction type,

  protective safeguards, occupancy, area;

  e.g. an .08 rate per $100 of replacement cost value*

  • $100,000,000 bldg. complex = 1,000,000 *.08 = $80,000

How do actuaries determine a rate

• uses company’s past loss experience, industry statistics, and mortality tables

Underwriting

• refers to the process of selecting, classifying, and

  pricing applicants for insurance

Statement of underwriting policy

• establishes policies that are

  consistent with the company’s objectives, primarily to earn a profit

Underwriting guide

• outlines the underwriting policy, that specifies:

– Acceptable, borderline, and prohibited classes of business

– Allowable amounts of insurance that can be written

– Territories to be developed

– Forms and rating plans to be used

– Businesses that requires approval by a senior underwriter

Adverse selection

• the tendency of people with a higher-

  than-average chance of loss to seek insurance at standard

  rates; if not controlled by underwriting it will result in higher-

  than-expected loss levels

The process of underwriting starts with

• the agent

• also called field underwriting

Underwriter has three options

• Accept the application and recommend that the policy be

issued

• Accept the application subject to restrictions or

modifications

• Reject the application

Other factors considered in underwriting include

• rate adequacy - sufficient to cover expenses

• availability of reinsurance - did values increase to level where reinsurance is needed

• renewal- should a policy being considered for renewal or modification, non-renewed, re-pricing, or cancellation

Production

• refers to the sales and marketing activities

Agents are referred to as

• producers

P&C insurers have

• marketing departments

Life insurers have

• sales departments

Insurance marketing is characterized by

• professionalism

Professional Designation Programs for Insurance

• American college- CLU, ChFC

• American Institute for Chartered Property and Casualty Underwriters- CPCU

• Certified Financial Planning Board of Standards- CFP

• National Alliance for Insurance Education and Research- CIC

Claim settlement objectives

• Verification of coverage

• Fair and prompt payment

• Provide personal assistance to the insured

Staff claim representative adjuster

• salaried employee who investigates

  claims, determines the amount of loss, and arranges for payment.

Independent adjuster

• is an organization or individual that

  adjusts claims for a fee by the insurance company.

Public adjuster

• is hired and represented by the insured and their

  fee is based on the amount of the claim settlement

The claim process

1. insured files a notice of loss

2. the claim is investigated by adjuster

3. an adjuster must determine if loss is covered

4. policy provisions address how disputes may be resolved

Reinsurance

• an agreement by which the primary insurer that

initially writes the insurance transfers part or all the potential losses

to another insurer.

Ceding Company

• the primary insurer who buys reinsurance

Reinsurer

• accepts the insurance from the ceding insurer

Retention limit

• amount of insurance retained by the ceding insurer

Cession

• the amount of insurance ceded to the reinsurer

Retrocession

• when a reinsurer insures part or all or part the risk with another insurer

Two types of reinsurance

1. Facultative

2. Treaty

Facultative

• sold on a case by case method

• used when the ceding company receives an application for

  insurance that exceeds its underwriting retention limit

Treaty reinsurance

• primary insurer automatically cedes insurance

  to the reinsurer, and the reinsurer has agreed to accept the business

  through previous agreed contract

Two basic methods for sharing losses between the primary ceding company and reinsurer

• Pro-rata method (quota-share): the ceding company and

reinsurer agree to share losses and premiums based on

some proportion, agreed to by contract

• Excess method (excess of loss): the reinsurer pays only

when covered losses exceed a certain level

Pro Rata/Quota share

• the ceding insurer and the reinsurer agree to

  share premiums and losses based on some proportion

Excess of loss treaty

• designed for protection against a catastrophic loss

Securitization of risk

• an insurable risk is transferred to

  the capital markets through the creation of a financial instrument,

  such as a catastrophe bond or futures contract

Catastrophe bonds

• corporate bonds that permit the issuer

  of the bond to skip or reduce the interest payments if a

  catastrophic loss occurs

Information systems are…

• extremely important in the daily operations of insurers

Accounting

• department prepares financial statements and

  develops budgets

Legal

• department, attorneys are used in advanced underwriting and

  estate planning

Loss Control Services

• Used by Property and liability insurers to provide service to the insureds