1.3 Fundamentals of Insurers Flashcards
What are Residual Markets?
Residual markets are a last resort private coverage source for businesses and individuals who have been rejected by the voluntary insurance market. Coverage is typically written as Workers’ Compensation, personal auto liability or property insurance on real property.
Joint Underwriting Association or Joint Reinsurance Pool – Requires insurers writing specific coverage lines in a given state to assume their share of profits/losses of the total voluntary market premiums written in that state.
Risk Sharing Plan – Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.
What are Reinsurance Companies?
Reinsurance companies are insurance companies that operate to accept all or a portion of the financial risk of loss from the primary (or “ceding”) insurance company. The risk of loss is shared with one or more insurance companies. All contractual obligations are on the original (primary) company and consumers have no direct contact with reinsurance companies.
Reinsurance is what makes insurance affordable. No single insurance company is exposed to 100% of the losses it insures. When claims are paid by the insurer to the consumer, the actual source of the funds may come from both the insurer and their reinsurer but the consumer will not know how much came from each.
Types of Reinsurance Agreements
Treaty – Reinsurance agreement that automatically accepts all new risks presented by the ceding insurer (the company seeking or requesting the reinsurance from the reinsurer).
Facultative – Reinsurance agreement that allows the reinsurance company an opportunity to reject coverage for individual risks, or price them higher due to their substandard (higher risk) nature.
What are Financial Rating Services?
Independent financial rating services evaluate and rate the claims-paying ability and financial stability of insurance companies. These firms assign letter ratings that indicate the financial strength of each company, which may be based on both public and nonpublic data.
The higher the rating, the higher likelihood that the insurer has the ability to pay claims. The lower the rating, the less likely the insurer is to be able to pay claims. The ratings are made available to the public, though insurers may purchase reprints of their ratings for use as marketing tools.
Producers are responsible for placing business with insurers that are financially sound. Examples of rating services include: A.M. Best Company, Standard & Poor’s, Moody’s Investment Services, Weiss Insurance Rating, and Fitch Ratings.
