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
