C16 Flashcards
What is a stock company
- privately held or publicly traded
- Stocks sold hopefully for a future profit
- Premiums fund Liabilities
- If premiums don’t cover, investors funds fall short
- expected to pay dividends
What is a mutual company
- Operates for the mutual benefit of its members
- operates on premium assessment plan
- Levies limited
- full premium calculated once expenses are tallied.
- If insurer suffers loss, members must make up the loss
- Share profits amongst members
What is Coperate Governance
- How a company directs itself
- Encompasses the process, structure and info used to manage company.
- who is accountable for what.
What are the characteristics of a pyramid management structure.
- Traditional
- industrial enterprise
- top- down decision making
- internally focused top-down governance.
What are the characteristics of a flat or networked management structure.
- Newer design
- changing economic environment
- recognizes information and knowledge as wealth creating assets
- distributed decision making
- internal and external distributive governance.
How are insurance companies organized for high level oversight?
- most have a pyramid structure
- Canadian companies the board directs the company
- Foreign owned companies appoint a chief agent
- some have advisory boards
- Board appoints CEO/other exec
- Board establishes rules and guards against conflict of interests
- Audit committees for financial oversight
- Review committees to watch for conflict of interest (self-dealing)
3 core functions unique to insurance
1) Actuarial
2) Underwriting
3) claims
3 core functions to ALL businesses
1) Admin
- HR
- IT/systems
- Office management
2) Marketing
3) Accounting and finance
Pros and Cons to Multiple company Structure
Pro - Flexible - Allows broker and direct sales - more product lines - secondary company can be acquired either complete with book or just shell Con - When buying - compatibility in operations - computer systems - liabilities of other company
What is the fundamentals Principle of Insurance?
1) To create financial security against particular accidental losses.
2) The premium shall be commensurate with the risk. (large enough to off set probable losses)
Why is insurance a difficult concept to explain?
It is intangible. A promise to protect, but one does not know the value of their policy until a claim is made. Premiums of the many pay for the losses of the few.
How do Insurers spread risk?
Subscriptions on the same risk. Hand off some of the risk to a reinsurer, who may then hand it off to a retrocessionaire (reinsurer for reinsuers). Insurers may spread the risk geographically so all of their eggs aren’t in the same basket. Lastly, through the formation of risk pools.
Define Adverse Selection
It describes the process by which potential policyholders use private knowledge of their own high level of risk when deciding whether or not to buy insurance. Higher risk clients are more apt to pay higher premiums because they know they will probably claim. Whereas low risk clients will decline because they don’t think there will be a loss.
What is the Law of Large numbers?
A mathematical principle that states that the degree of certainty in a probabilities increases as the number of events increase.
Long tail vs. Short tail lines
A “tail” is the amount of time between a loss and the final settlement of a claim. The faster the loss or injury becomes know the shorter the tail. Property are generally shorter then liability claims. Some liability claims can extend for decades.
What are CAT injury claims
Severe injuryLong tail trends for prior accident yearsinadequate reserving at the primary insurance level
What are provinces doing to limit soft tissue claims?
Alberta, NB, NS have caps on soft tissue and “pain and suffering” claims and ON has a treatment framework for whiplash related injury. But these reforms miss CAT injuries.
What is currently happening in the auto reinsurance market in Canada?
Legislation in many provinces have reduced the amount of small claims but big claims keep getting bigger. Reinsurance is getting more expensive because they see the trend of larger claims.
- Reinsurance bases rates on future risk.
- shrinking capacity as more reinsurers will only cover excess loss- Long tail claims getting worse.
- Rates need to increase and the market is not receptive.
Value of the Canadian auto insurance market
over 15 million
What recently changed in the definition of a CAT impairment?
Broadened to include psychological disorders.
How do Insurance companies spread risk
1) Share with other insurance companies2) Reinsure the risk3) She with the insured (deductible)4) spread risk over geographic location5) form risk pools
Compare short and long tails
- A tail refers to the amount of time between the indecent and the payment of the claim. - short tail = short time between- long tail = a long timeLong tails- can take years even decades to settle- much more costly- estimating total cost hard as inflation and other costs unknown.
Negative consumer perceptions of the insurance industry and how to fix them
- The business cycle frustrates insured as they don’t understand why their premiums are increasing
- Media portrays the industry poorly
- Politicians use insurance as a platform, promising to do something about the right rates.
- Insureds do not understand the industry
- they don’t understand their rate
- why they need to have the coverages
- they don’t understand premium flux
Need to - educate
- attempt to find common ground.
10 ways insurance affects society & economy
1) Banks will lend to insured locations
2) Developers will advance funds to insured businesses
3) Retailers will rent to insured business
4) Professionals feel confident providing service when they are insured.
5) Manufactures can accept the risk of making and selling stuff if insured.
6) People are more willing to accept the risks of cars
7) Provides peace of mind
8) Contributes to the economy
9) Hold a lot of funds in investments
10) Claims process boosts economy and creates jobs.
Goal of Reinsurance
- Give peace of mind to insurers - Provides confidence that disaster will not equal financial ruin
4 Basic functions of Reinsurance
1) For Financing
2) For Stabilization
3) for Capacity
4) Protect in case of CAT loss
Define Capacity
IS the amount of capital that individual insurers or entire markets make available for insuring a risk
Define Bull Market
- Market on the rise
- Strong demand for securities
- weak supply of securities
- opportunistic investors
- strong economy + high employment
Define Bear Market
Market in decline - Share prices dropping - Economy Sluggish - Investors cautions high unemployment
Define Market Dislocation
Happens when consumers are forced to find a new insurer after their current insurer withdraws from the market, after consumers have come to rely on that insurer for the product.
Define Social Inflation
Increase in claims costs as a result of generous jury awards, legislated benefit increases and changing legal concepts of tort and negligence that benefit plaintiffs.
Effect of market cycle on Insurers
- loss profitability when soft
- when hard public displeasure at rate increases.
Effect of market cycle on Brokers
- Soft - lower premiums and easier UW rules
- Hard - hard to find capacity
- higher commisions
Effect of market cycle on Risk Managers
Soft - Less demanding loss control requirements
Hard - Have to be more creative in offering a deal
Effect of market cycle on consumers
Soft - neutral to the insurance industry
Hard - Upset, wary and angry
How distributive channals affects the dynamics of the P&C marketplace
Brokerages - History in UK - Feels more intimate, but less easy Direct - Fast Banks - moving in direct lines Some do multi channel
How companies affects the dynamics of the P&C marketplace
New Product offerings
- Capacity
- Rates
- Market consolidation
How Reinsurers affects the dynamics of the P&C marketplace
Retrocession Market the first to show signs of a hardening market
as they firm up so will the primary market rates
affect larger risks first
Supply and Demand in insurance
Pricing regulated by balancing supply and demand
- healthy economy leads to increased demands
- organic growth
- when economy is poo insurance still does well as people want to protect their assets
What is a Financial Statement and why are they used
Insurers are custodians of large sums of money. Financial statements show the how the company is doing provides valuable tools -investors -regulators -analysits
4 Sections of Financial Statements
1) Statement of Operations
- shows income and expenses
2) Balance Sheets
- assets, liabilities and capital
3) Statement of Retained Earnings
- capital as result of earnings and dividends
4) Statement of comprehensive income
- gains and losses by area
5 Techniques for analysing financial statements
1) Time Comparison
2) Budget Comparison
3) Relationship Comparison
4) Detailed Breakdown
5) Benchmark Comparison
What is Written Premium
Total of all premiums written in accounting period. shows premium amounts for sold policies
Compare earned and unearned premium
Earned
- portion of premium applying to the expired part of the policy
- insurance premiums payable in advance
- not fully earned until policy period expires
Unearned
- portion of the premium applying to the part of the policy tear that is still left
- premium not yet exposed to loss
Earned Premium calculation
+ Unearned premium at beginning
- unearned premium at the end
= premiums earned for the period.
Types of Commission
1) Regular commission
2) Contingent Profit Commission
Financial Ratios
Expressed as
- less then one (100%) as percentage
- more than on (100%) as a comparison (3:1)
Reveal info about companies financial situation
- Express relationships between number on balance sheet
- Compares results over different time periods
Used to asses
- Solvency (regulators
- Capacity (regulators)
- Profitability (investors)
- Work processed by staff (managers)
- Areas needing improvement (managers)
Combined Ratio
Total of Three key ratios
- incurred claims to premiums earned
- commissions
- other acquisition costs to earned premiums
Measures overall underwriting performance
- less the 100% = profit
Does not account for investment income
IS a overall cost of running business as a ratio to revenue
Return of Equity
ROE
Net income after taxes/equity*100=ROE
Expression of the companies next income after taxes as a percentage of equity
- Measures how well a company generates profit from assets
Written Premium to Equity (Leverage Rate)
Net Written Premium/Equity=Premium to Equity
This determines the companies capacity to write insurance
4 parts of setting up claims reserve
1) Claims (current) reserves
2) IBNR
3) Adverse Loss Deployment reserve (for long tails)
4) Claims Adjustment costs
Incurred loss calculation
+ Loss payment
- Salvage
- Outstanding loss reserves from start
= Incurred loss for period.
Define “Healthy Insurance Marketplace”
is on where consumers needs are met by products that are readily available and affordable priced and where both insureds and claimants are treated fairly to societal expectations
Risk based regulatory model + 5 objectives
have regulators working with insurance companies to find solutions to their own problems.
1) Informed and empowered consumers
2) Timely and fair claims management
3) Meaningful choice for insurance consumers
4) Low system costs
5) Market Stability
The focus of insurance regulation
- Solvency
- Market Conduct
- Affordability
- Availability
OSFI - Mission and fuction
Office of the Superintendent of Financial Institutions
Mission
- Protect interests of policy holders from undue loss
- advance and administer regulatory frameworks
- contribute to public confidence in a competitive financial system
Function
- Develop and interpret legislation
- Supervisory functions
- Asses the safety and soundness of the institutions under its mandate
- Evaluate risk profiles
- Ensure Compliance with laws.
OFSI - 4 main inspection focuses
1) Insurance Risks
2) Underwriting risks
3) Legal and regulatory compliance
4) Dishonesty and Error Detection
MCT
Minimum Capital Test
- Ensures insurers have assets worth at least a certain multiple of their liabilities and margin of additional assets.
- Requires insurers assets to exceed liabilities by a specified ratio
- MCT does not give optimum capital requirement
- Insurers who use registered reinsurers have a smaller margin than those who use and unregistered reinsurer.
There are regulator assessment measures for these 3 things
1) reserves
2) receivables
3) Investment risks
CCIR
Canadian Council of Insurance Regulators
CCIS is an inter-jurisdictional association of regulators what works cooperatively with other financial service regulators and stakeholders to facilitate and promoted an efficient and effective regulatory system in Canada to serve public interest
Define Marketing
Is a process of planning and executing the conception, pricing, promotion and distribution of goods, ideas or services to create exchanges that satisfy consumers and organizational objectives.
Discuss IBAC and IBC’s Marketing campains
IBAC - Liases with Gov't, consumers groups, insurance companies to safeguard the interests of independent insurance brokers in Canada - Unify brokers and promote public and political awareness to brokers - National ad campaign - Bipper (dude with blanket) - helpful - care received with a broker IBC - Positive image of insurance industry - community outreach - injury prevention groups - road safety - helping people avoid accidents
4 marketing strategies
1) Dominance
2) Competitive Advantage
3) Innovation
4) Growth
What is in a Marketing Plan
- Outlines actions needed to implement marketing strategy
- Maps current marketing activities
- presents budgets
- states goal and priorities
- formulates written strategy
- sets guidelines for objectives
- states accountabilities
Discuss Crisis Communication Model
- Use a Press conference
- message delivered professionally by CEO
- CEO will need prep
- Prep for negative questions and statements
- Avoid “no-comment”
- Avoid denying inflammatory accusations
- Focus on key statement and repeat it
- Talk Plaining
- Have facts, stats and research
- Show awareness and caring.
Outline Company Employed Agent
- Works directly for insurer
- Paid Salary (maybe + bonus or commission)
Insurer - issues policy
- services policy
- collects premium
- Insurer owns client list
Outline Independent agent
- Entrepreneur
- Separate office from insurer
- pays own expenses
Paid by commission - has contract with insurer which states limits and who owns client list
- insurer has less control over staffing
- insurer has less obligations for pay/benefits, as well as staffing
Outline Exclusive Agent
- Places Business with one insurer
- remains independent with own office
- contract with insurer to be exclusive unless insurer declines risk “right of first refusal”
- Can be reversed insurer exclusive to agent
Outline Sub-Agent
- Appointed to perform functions of agent by insurer
- Appointing agent responsible for sub-agent
Discuss the role of a wholesaler
- Provides coverage for risks that the agent/ broker cannot place
- acts as auxiliary market to brokers and agents
places risk in return for commissions and other fees. - Typical venue for small producer
- reduces broker/agent commissions when used
May specialize in risks
Discuss General Agents, MGAs and MGUs
General Agents, Managing General Agents and Managing General Underwriters.
- Operate entrepreneurial style
- have authority to appoint agents
- handle policy admin
- often specialize in speciality risks
What is in an agency contract
It will establish - rights - obligations - duties of both parties - agreed UW guidelines - necessary schedules Contract governed by provincial legislation authorities of agent must be spelled out Producer must act within those authorities for... - selling - UW - Claims - premium management - accounting There will be E&O provisions
Discuss Internet use in underwriting risk
There are on-line rating systems for quoting
- still used cautiously and not given to all producers
Anything flagged by the rating engine must be reviewed by an underwriter.
- Web apps need to be audited to ensure validity of information
less time and money spent on paper transactions/storing/filing
4 ways to define customer characterists
1) Demographics
2) Buying Behaviours
3) Psychographics (attitudes and aspirations)
4) Location segmentation
What is in a due diligence review
- strength and weekness review
- Network analysis
- ownership
- financials
- business plan
- business process
- computer system
- other insurers
Producer assessment criteria
Good standing licence growth plan capacity to grow ability to sell business mix support for insurer compatibility with insurer producer staff customer loyalty receptiveness to other duties
Plan for implementation of UW
-Develop for managing and overseeing producers
develop to implement corrective actions for any weakness
Plan for audits to monitor progress
mutual agreement of plans
analysis of resources available
Is there compliance with insurers standards.
Components of any rate
1) Anticipated costs of settling claims
2) Acquisition cost of the business
- commissions
- marketing
- other costs
3) Costs of administering the process
Discuss Ratemaking
Actuaries process involves
- analyse stats on frequency and severity of claims
- Estimate the cost to settle all outstanding claims
- Estimate the cost to settle future claims
- rates don’t increase because of past claims, but in order to pay future claims.
Retrospective rating plan
Where the cost is based on the actual losses
- very large commerical files
- min and max premiums negotiated
- insured pays actual losses
- insurer administers claims
Types of rating
1) Class Rating
- most common
- for large number of risks that share common characteristics (car, home, small business)
- average class cost developed
- larger pool of data more accurate trending
- less underwriter judgement required.
2) Scheduled Rating
- used when data is more fragmented
- larger or unique risks
- more judgement on the underwriter needed
- Base rate is created
- then loaded +/-
Risks that affect rate
occupancy wall/floor type height of building wiring heating storage of flammables floor area fire suppression systems adjacent buildings \+ more
Discuss Government and Rating
Most provinces must submit auto rates for approval
- rules vary on implementation of those rates
- Insurers have to justify any rate increases.
- Rate freezes can really mess up insurers if they are already undergoing rate changes.
- New Brunswick 2006 ( rate freeze, any found not compliant were subject to 20% rate reduction)
- Regulations cost insurers lots of money to implement
Sometimes gov’t actions do not have desired affect 1990s ON when they limited who could sue to lessen the # of cases in court in reality = more cases in court.
Types of Cybercrime
- Organized Crime
- Espionage
- Extortion
- Money Laundering
- Fraud
- Identity Theft
- Child Pornography
- Illegal Gambling
- Loan Sharking
Cybercrime and insurance coverage
Traditional products many not cover cyber exposures
- cybercrime and e-commerce insurance available
- traditional insurance covers tangible things like hardware.
Traditional do not cover
- DoS
- Viruses
- loss of intellectual property
Demand to cover these losses growning
Define Epidemic
- Above average limited incidence on infectious disease
- Infectious viruses or bacteria are easily transmitted
ex, influensa, SARS
Define Endemic
Presence of infectious disease - in certain regions - at all times - affects large portion of population ex malaria
Define Pandemic
Spread of highly infectious disease
- over wide geographic area
- global transmissions affecting exceptionally high proportion of population
ex the flu
Discuss Pandemic continuity plans
- Examinw risk exposures Decide how operations could be affected include preparation to overcome long period of infection - employee absenteeism - macroeconomic - service supply chain - travel restrictions Test your plan
Discuss Host liquor Liability
2007 SSC ruled private hosts do not owe duty of care to monitor intoxicated guests
- rejected host responsibility for guest actions
- Good new for HO insurers
Exceptions
- host who creates risk of harm (drinking games)
- defendant in paternalistic role
- control of defendant engaged in public function or commercial enterprise (drinking at work functions)
CIP Society Purpose
Create Venue for CIP grad to meet
- be involved in the industry
- promote professionalism
- leadership for all insurance people
- networking
CIP Society objectives
Provide advanced level - professional development - life-long learning for grads -act as an information source - provide current insurance industry information Promote designations
CIP Code
1) Subordinate personal interests
2) do not violate the law
3) no misrepresenting of material fact
4) no false reports
5) keep informational confidential
6) Due diligence for customer needs
7 ) use full knowledge
8) act with dignity
Define Ethics
The systematic critical study of the basic underlying principles and concepts that we use to think about and to evaluate our human morals.
