AINS 21 Insurers And Regulation Flashcards
Private Insuerers
One way to classify is based on ownership. Proprietary insurers are formed for their purpose of earning a profit for their owners. Stock and Lloyds fall into this classification. Cooperative insurers are formed to provide insurance at a minimum cost to policyholders who own the insurer.
Stock Insurers
Many of the largest property-casualty insurers
Primary objective is returning a profit to its stockholders
A stock insurer can finance expansion by selling additional shares of common stock
Elect the board of directors
Mutual INsuerers
Owned by policyholders and formed as a corporation for the purpose of providing insurance to them
Very similar to stock insurance
Mutual insurers generally seek to earn profits in their ongoing operations, like stock insurers
Stock Insurers may choose to share profits with its stockholders by the payment of dividends, mutual INsuerers may also opt to share profits, but pay dividends instead to policy holders as a return of the portion of premium paid
If a mutual insurance company decides to covert to stock then it’s called “demutualization”
Have the right to charge the insured’s an assessment or additional premium
Reciprocal Insurance Exchanges
Each member is both an insured and an insurer. Members agree to mutually insure each other and they share profits and losses in the same proportion as the amount of insurance purchased by the exchange by that member. Because the members, called subscribers, are not experts in running an insurance operation, they contract with a person or organization to operate the reciprocal; they are called an attorney-in-fact. They make up. As all percentage but include some major national and international insurers.
Lloyd’s
Insurance and reinsurance marketplace whose operations resembles that of a stock exchange.
Members are investors and hope to earn a profit.
Unincorporated association
Each individual investor, called “Name” belongs to one or more groups called syndicates
Reputation for accepting apps for unusual types of insurance (insuring a football player legs, for ex)
“American Lloyd’s”, mainly in Texas, also operate like Lloyd’s as unincorporated associations, but much smaller and narrower scope of operations.
Captive Insurers
When a subsidiary formed to insure the loss exposures of its parent company and the parents affiliates.
Low insurance cost- due to acquisition costs being eliminated
Insurance availability- eases the problems of availability and affordability for a parent company with loss exposures that may be difficult to insure.
Improved cash flow- premium paid to a captive remains within the corporate structure until it is used to pay claims; able to invest its funds until the time they are needed for claims; can receive a sig cash flow advantage by creating a captive.
Reinsurance Companies
Transfer of insurance risk from one insurer to another through contractural agreement under which one insurer agrees, in return for a reinsurance premium, to indemnify another insurer for some or all of the financial consequences of certain loss exposures covered by the primary’s insurance policies.
One of those most important reasons for this is to transfer some of its loss exposures to the reinsurer. For example, an insurer that writes a large amount of property insurance in an area where tornadoes commonly occur can use reinsurance to reduce its exposure to windstorm losses.
Marketing
Determines the products or services the client needs; uses market research; advertises; selects appropriate marketing systems; trains to prepare the sales force to meet the client’s needs; sets sales goals and implements strategies for meeting them; motivates and manages the sales force.
Underwriting
Determines what loss exposures will be insured, for what amount of coverage, at what price, and under what conditions. Must carry out a variety of activities to apply the underwriting process. Examples include selecting insured’s, pricing coverage, determining policy terms and conditions. A successful underwriting function ensures that those applicants who are selected receive the level of coverage that adequately reflects their loss exposures at the appropriate price.
After selecting the insured’s, underwriting determines the price for the insurance. Goal is to charge a premium that is commensurate with the loss exposure.
Determines the policy terms and conditions
Claims
Insurers expect to pay claims; without it insurance would be unless art; policyholders are buying protection for the potential financial consequences of covered losses; insurer promises to make payments to or on behalf of the insured for covered losses. The claims function is responsible for keeping this promise to the insured by providing promo and professional loss adjustment services.
The adjuster typically applies a claim handling process using 6 activities:
1) acknowledging claim, assign a rep
2) identifying the policy
3) contacting the insured or the insured’s rep
4) investigating and documenting the claim
5) determining cause of loss and loss amount
6) concluding the claim
Risk Control
Function is to prevent or reduce losses; controlling losses is preferable to insuring losses because it reduces the waste of valuable resources. As a practical matter, both insuring and controlling losses are likely to be used jointly for most large loss exposures, because prefer ting all losses is seldom possible. Rick control function supports underwriters when selecting which loss exposures to insure.
Premium Audit
Many commercial insurance policies are written subject to audit because the premium amount is calculated using a loss exposure measurement that can change during the policy period, which often is one year. Purpose of the audit, which occurs end of the policy period, is to determine any adjustments to the premium that may be required based on the insured’s actual loss exposures during that period.
For example, WC policy that pays when an employee is injured on the job is based on the amount of them players payroll. However, due to hires, raises, terminations, and retirements during this policy period, the employer won’t know the actual size of its payroll until the end of the policy period. It is only after the policy period is over that the insurer and the insured are able to determine how much the premium should be.
Government Insurance Programs
In some cases, property-casualty insurance for certain loss exposures can be obtained only through government insurance programs.
Reasons for Government Insurance Programs
To fill unmet needs in the private insurance market
To facilitate compulsory insurance purchase
To provide efficiently in the market and convince to insureds
To achieve collateral social purposes
Government Insurance Program: Fill Unmet Needs in the Private Insurance Market
When private insurers are unable or unwilling to satisfy certain insurance needs; government provides protection against loss that would otherwise not be provided. Examples the Terrorism RIsk Insurance Program- was intended as a temp provider of reinsurance for losses caused by terrorism and was designed to run until 2005, but was extended because private market for terrorism insurance and reinsurance was not deeper adequate
Government Insurance Programs: Facilitate Compulsory Insurance Purchases
For example, WC insurance has proven to efficiently manage workplace injuries. However, it is possible that some employers would not purchase workers compensation if they were not required to do so. Because states require employers to urchase this insurance (or provide proof of self-insurance), they must have a mechanism to ensure that WC is available at a reasonable cost.
Another ex is auto liability. This is required in almost all states and each state has a mechanism is place to provide insurance for those drivers who cannot obtain coverage at a reasonable price in the private market.
Government Insurance: Provide Efficiency in the Market and Convenience to Insureds
Legislators often find it is more efficient to establish government insurance plans for particular purposes than to invite and anazlyze bids from private insurers and then supervise and regulate the resulting plans. When insurance provided by the government is compulsory, spending money on marketing or paying sales commissions is unnecessary.
Government Insurance Programs: Achieve Collateral Social Purposes
By making use of the pooling mechanism, insurance can reduce risk to society. This is beneficial both to society and to the overall economy.
Issues arise when individuals do not have an incentive to purchase insurance even though it would benefit society.
Government as Exclusive Insurer
Either because of law or because no private insurer offers a competing plan. For ex in a few states, all employers must obtain their WC insurance from the state-owned insurer (called exclusive, or monopolistic, fund).
Government as partnership with private insurers
Can develop when private insurers are no longer able to adequately provide coverages they had typically offered previously. Two ex are TRIP and NFIP. TRIP is an ex of a partnership under which the government operates a reinsurance plan, providing reinsurance on specific loss exposures for which private insurers retain only part of the loss.
NFIP is an ex of a partnership under which the federal government underwrites the insurance policy but private insurers and insurance producers deliver the policies to consumers. The private insurers take a percentage of the premium as a sales commission and pass the remainder of the premium on to the NFIP.
Most states focus their regulatory efforts on the same key areas of insurer operations:
Licensing, insurance rates, insurance policies, market conduct, and insuerer solvency.
Insurers are regulated primarily for three reasons:
To protect consumers
To maintain insurer solvency
To prevent destructive competition
Protect Consumers
Complex legal documents that may be difficult to anazlyze- regulators help protect consumers by renewing insurance policy forms to determined whether they benefit consumers
Regulators can set coverage standards, specify policy language for certain coverages, and disapprove unacceptable policies
Regulators also protect consumers against frayed and unethical market behavior
Regulators try to ensure that insurance is readily available, especially ones that is views as a necessity.
Maintain Insurer Solvency
Insurance is regulated to maintain insurer solvency. They try to maintain and enhance the finial condition of private insurers for several reasons:
Premiums are paid in advance and the period of protection extends into the future. If an insuerer becomes insolvent, future claims might not be paid even though the premium was paid. Consumers may find it difficult to evaluate insuerer’ financial ability to keep their promises.
Regulation is needed to protect the public interest. Large numbers of people become affected when insurers become insolvent. For ex a large catastrophe that affects a large area can make an insurer’s financial ability to pay claims uncertain, such as when Hurricane Andrew struck and caused 7 insurer insolvencies.
Insurers hold substantial funds for the ultimate benefit of the policyholders. Government regulation is necessary to safeguard such funds.
Insurers have become insolvent, but regulation minimizes the number of insolvencies.
