RMIN 4000 Edmunds Exam 2

major types of private insurers

Stock, Mutual, and Lloyd's of London

stock insurers

corporation owned by stockholders.

objective is to earn profit for stockholders by increasing the value of the stock and paying dividends

Mutual insurers

a corporation owned by policyholders. profits are distributed to policyholders by dividends or rate reductions

types of mutual insurers

advance premium mutual, assessment mutual, and fraternal insurer

assessment mutual

insurer has the right to assess policyholders an additional amount if the insurer's financial operations are unfavorable

advance premium mutual

insurer does not issue assessable policies

fraternal insurer

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

Lloyd's of London

The world's leading insurance market that provides services and physical facilities for its members to write specialized lines of insurance. They underwrite insurance for syndicates.

Is Lloyd's of London an insurer?

No

Lloyd's of London brokers

represent policyholders to arrange coverage with syndicates

syndicates

offer insurance contracts in the market

who makes up a syndicate?

members, managing agents, and underwriters

insurance agent

Someone who legally represents the principal (insurance company) and has the authority to act on the principal's behalf

Is the principal responsible for acts of an agent?

Yes, when the agent is acting within the scope of authority

Agent Binding Authority

provide temporary insurance until the policy is actually written (typically with P&C, NOT life

brokers

someone who legally represents the insured, places appropriate coverage, is paid commission from insurer, and

importance of large brokerage firms

very important for commercial P&C, have knowledge of specialized markets, and provide risk management and loss-control services

surplus lines broker

"Wholesalers" who work with retail Agents and Brokers, licensed to place business with a "non admitted" insurer

surplus lines

any type of insurance for which there is no available market in the state

non-admitted insurer

an insurer not licensed to do business in the state

independent agency distribution

represent several unrelated insurers, agency owns expirations and renewal rights

exclusive agency system

the agent represents only one insurer or group of insurers under common ownership. agents do not own expirations or renewal rights to policies

direct writer system

an insurer in which the salesperson is an employee of the insurer, not an independent contractor. employees paid on "salary plus"

direct response system

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

what are some methods to sell individual insurance policies to

employer groups, labor unions, trade associations, college and university alumni, and others groups like AARP or AAA

group insurance marketing

Products are sold through group representatives employees who receive a salary and incentive payments based on sales (can pay for insurance by payroll deduction)

what are the major insurance company operations?

ratemaking, underwriting, production, claims settlement, reinsurance, and investments

ratemaking

the pricing of insurance and the calculation of insurance premiums

what is the problem with ratemaking?

Firms do not know the cost of their products in advance

actuary

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

what are the regulatory goals of ratemaking?

rates must be adequate, not be excessive, and should not be unfairly discriminatory

what are the business goals of ratemaking?

rates should be stable, responsible, provide for contingencies, promote loss control, and be simple

underwriting

The process of selecting, classifying, and pricing applicants for insurance to develop and maintain a profitable book of business

underwriting guide

states the company's underwriting policy which 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, and business that requires approval from a senior underwriter

what are some underwriting principles?

attain an underwriting profit, select prospective insureds according to guidelines, and provide equity among the policyholders

what are some sources of underwriting information?

application, agent, physical inspection, physical examination (life), or vendor reports (fire, auto)

Underwriting Decisions

1. Accept the application and issue the policy

2. Accept the application subject to restrictions or modifications

3. Reject the policy

what are some other underwriting considerations?

are the rates currently adequate, is reinsurance available, and should existing businesses be cancelled or non-renewed?

production

the sales and marketing activities of insurers

producers

Agents/Brokers who sell insurance

Claims Settlement objectives

Verification of a covered loss, fair and prompt payment of claims, and provide personal assistance to the insured

claims adjusting

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

"First-Party" claim

insured submits claim for insurer to make a payment to insured (fire, theft, hail)

"Third-Party" claim

Submitted against a negligent insured and insurer pays damages caused from their insured to injured party (for bodily injury, physical damage, death, personal injury, etc.)

claims process

notice of loss, claim investigation, proof of loss, and payment of loss or denial of claim

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

primary insurer that initially wrote the insurance

reinsurer

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 reinsurer insures part or all of its risk with another reinsurer

what are the functions of reinsurance

increase underwriting capacity, stabilize profits, reduce the unearned premium reserve, provide protections against a catastrophic loss, retire from a line of business, and obtain underwriting advice on a line for which the insurer has little experience

what are the two types of reinsurance?

facultative and treaty

facultative reinsurance

Reinsurance that is transacted on an individual risk (ex. Large factory) where the primary insurer cedes the individual risk to the reinsurer

treaty reinsurance

The primary insurer cedes all risks within one or more specific lines of business to the reinsurer (reinsurer must accept all risks included in agreement)

what are the different types of reinsurance agreements?

proportional (Pro Rata), non-proportional (excess of loss), and reinsurance pool

Proportional (Pro Rata)

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

Two types of Proportional (Pro Rata) Reinsurance agreements

Quota and surplus share

Quota share

The ceding company and the reinsurer share premiums and losses based on a fixed % (Example: Ceding Company and Insurer both take 60% retention, proportional)

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!

Non-proportional (Excess of Loss)

The reinsurer only pays when covered losses exceed a predetermined dollar amount (used mainly for catastrophic loss)

reinsurance pool

Organization of insurers that underwrite on a joint basis (usually used on specialty types of coverage)

insurance investments

Insurance premiums are invested for the time period between the receipt of the premium and the payment of a claim. Extremely important in lowering the cost of insurance to policyowners and offsetting unfavorable underwriting experience

what types of investments are made with premiums?

typically invested in "safe" investments like bonds. life insurance can be invested in long term assets like real estate. P&C is short term exposure so premiums are invested in securities like high quality bonds or stocks

what are some other insurance company operations?

information systems, accounting, legal department, and loss control services

Juliana Duvall

insurer-surplus lines broker-broker, social inflation,

what are the components of gross rate?

prospective loss costs (pure premium), expense provision (load), and margin for profit and contingencies

prospective loss costs (pure premium)

Amount needed to pay future claims and loss adjustments

expense provision (load)

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

Margin for Profit and Contingencies

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

Loss adjustment expense (LAE)

Expenses associated with adjusting claims

Exposure Units

Unit of measurement used in pricing (cars-years)

Gross Premium

Gross Rate multiplied by number of exposure units (GR * #exposure units)

What are the P&C ranking methods?

Class (Manual) rating, merit rating, and judgement method

Class (manual) Rating

pure premium method and loss ratio method

Pure premium method

Rates developed based on past experience. Formula=(Incurred loss + LAE) / # exposure units

Loss Ratio Method

Modifies the existing rates by comparing the actual cost ratio to the expected loss ratio. Loss ratio = (incurred loss + LAE) / earned premium

merit rating

Rates are adjusted upward or downward based on experience, 3 Types: Schedule, Experience, and Retrospective

judgement method

Rates are determined by the judgement of the underwriter (When data is limited)

what are the largest reinsurance brokers?

Aon, Marsh / Guy Carpenter, and Willis

balance sheet assets

Mostly financial investments vs. real property (buildings or factories) & production equipment

balance sheet liabilities

loss reserves (open claims, incurred but not reported losses, etc.) and unearned premiums (paid in advance but premium hasn't been earned yet

policyholders' surplus

Total assets - total liabilities

income statement revenues

premiums and investment income

income statement expenses

claims and claim adjusting expenses, underwriting, selling/general/admin. expenses, and taxes

loss ratio

ratio of incurred losses and loss adjustment expenses to premiums earned (incurred + LAE : premiums earned)

combined ratio

loss ratio + expense ratio

overall operating ratio

combined ratio - investment income ratio

National Association of Insurance Commissioners (NAIC)

Standard setting and regulatory support organization created and governed by chief insurance regulators from 50 states, D.C., and U.S. territories (GA - John King)

McCarran-Ferguson Act (1945)

Established that insurance should be regulated and taxed by the states. Antitrust laws don't apply to insurance usually which encourages competition

Financial Modernization Act (1999)

Insurers can have banking operations and banks can have insurance operations, leading to several mergers and eventually 2008 financial crisis

Dodd-Frank Wall Street Reform and Consumer Protection (2010)

Established general federal oversight of the insurance industry with FSOC (Financial Stability Oversight Council)

What does the FSOC do?

They have the authority to treat systemic risk and classify non-bank financial institutions as "systemically important financial institutions" (SIFIs), which receive tougher financial oversight and regulated by federal reserve

what are the goals of insurance regulation?

maintain insurer solvency, educate consumers, ensure reasonable rates, and make insurance available

Why do regulators care about solvency?

Insurance contracts are worthless if the insurer goes bankrupt

why is regulating consumers' education important?

to prevent unethical insurers or agents from taking advantage of consumers since it is complex and difficult to compare insurance coverages and costs

why is it important to ensure reasonable rates?

to prevent excessive/unsubstantiated rate increases and ensure premiums are sufficient to pay losses

what are some ways insurance is made available

restricting the market exit of insurers and the FAIR plans (fair access to insurance requirements)

What areas of insurance are regulated?

formation and licensing of insurers, solvency regulation, rate regulation, policy forms, sales practices and consumer protection, and taxation of insurers

domestic insurer

domiciled in the state