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RMIN 4000 Exam 2 > Ch. 6 & 7: Insurance Company Operations > Flashcards

Ch. 6 & 7: Insurance Company Operations Flashcards

1
Q

What are the major operations of insurance companies?

A
  1. Ratemaking
  2. Underwriting
  3. Production
  4. Claims Settlement
  5. Reinsurance
  6. Investments
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2
Q

What is ratemaking?

A

Ratemaking is the process of insurance pricing and calculation of premiums

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3
Q

What is an Actuary?

A

Someone who uses complex statistical models and technology to analyze loss and other date to determine sales and premiums

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4
Q

What kind of goals are there for ratemaking?

A

There are regulatory and business goals for ratemaking

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5
Q

What are the regulatory goals for ratemaking

A

The regulatory goals for ratemaking are:
* Rates should be adequate
* Rates must not be excessive
* Rates should not be unfairly discriminatory

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6
Q

What are the business goals for ratemaking?

A

The business goals for ratemaking are:
* rates should
1. be stable
2. be responsive
3. provide for contingencies
4. promote loss control
5. be simple

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7
Q

What are the components of gross rate?

A
  • Prospective Loss Costs (Pure Premium)
  • Expense Provision (Load)
  • Profit and Contingencies (Risk Charge)
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8
Q

What is the Prospective Loss Costs component?

A

It includes the amount needed to pay future claims and loss adjustment expenses

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9
Q

What is the Expense Provision components?

(Load)

A

This is the amount needed to cover future expenses (acquisition, overhead, premium taxes)

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10
Q

What is the Profit and Contingencies Component?

(Risk Charge)

A

This is the amount needed to protect against the possibility that actual claims and expenses might exceed projections

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11
Q

What are the ratemaking definitions?

A
  • Loss Adjustment Expenses (LAE)
  • Exposure Unit
  • Gross Premium
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12
Q

What are loss adjustment expenses?

A

These are the expenses associated with claim adjusting

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13
Q

What are exposure units?

A

Unit of measurement used for pricing (car-years, per $1,000 in coverage, etc)

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14
Q

What is gross premium?

A

Gross Premium = Gross Rate * (# exposure units)

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15
Q

What are the P&C Ratemaking Methods?

A
  • Class (Manual) Method
  • Merit Method
  • Judgment Method
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16
Q

What is Class (Manual) Rating?

A

Pure Premium Method: This is where rates are made based on past experiences
* (Incurred Losses + LAE) / # Exposure Units

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17
Q

What is Merit Rating?

A

It is where rates are adjusted upward or downward based on experience
* Three types:
1. Schedule
2. Experience
3. Retrospective

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18
Q

What are the three types of Merit Ratings?

A
  1. Schedule: each exposure individually rated
  2. Experience: class rate adjusted upward or downward based on past loss experience
  3. Retrospective: loss experience during current policy period determines the premium paid for that period
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19
Q

What is Judgment Rating?

A

It is where rates are determined by the judgment of the underwriter

Used when data is limited

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20
Q

What is Underwriting?

A

It is the process of selecting, classifying, and pricing applicants for insurance

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21
Q

What is the purpose of underwriting?

A

To develop and maintain a profitable book of business

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22
Q

What does an underwriter do?

A

Makes the decision to accept or reject and application for insurance

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23
Q

What are the two parts of the Underwriting Guide?

A
  • States the company’s underwriting policy
  • Shows underwriting principles
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24
Q

What does an underwriting policy include?

A
  • lines of business written
  • policy forms and rating plan used
  • acceptable, borderline, and prohibited business
  • amounts of insurance that can be written
  • geographic territories
  • business that requires approval from a senior underwriter
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25
Q

What are the underwriting principles?

A
  • attain an underwriting profit
  • select prospective insureds according to the company’s underwriting guidelines
  • provide equity among the policyholders
26
Q

What are the sources of underwriting information?

A
  • application
  • agent
  • physical inspection
  • physical examination (life insurance)
  • claim files (existing policies)
  • vendor reports
27
Q

What does a vendor report include

A
  • Fire Protection (Public Protection Clause - PPC)
  • Motor Vehicle Record (MVR)
  • Credit-Based Insurance Score
  • Comprehensive Loss Underwriting Exchange (CLUE)
28
Q

What decisions does an underwriter make?

A
  • Accept the application
  • accept the application with a few restrictions
  • reject the application
29
Q

What are some other underwriting considerations?

A
  • Are rates currently adequate?
  • In reinsurance available?
  • Should existing business be cancelled or non-renewed?
30
Q

What is the production operation?

A

The sales and marketing activities of insurers

31
Q

What is a producer?

A

An agent who sells insurance

32
Q

An agent should: ?

A
  • be a competent professional
  • have a high degree of technical knowledge in a particular field of insurance
  • place the needs of his/her client first
33
Q

What is the Claims Settlement Operation?

A

It involves Claims Adjusting, which is the process of determining coverage, legal liability and damages, and settling the claim

34
Q

What are the objectives of claims settlement?

A
  • Verification of a covered loss
  • Fair and prompt payment of claims
  • provide personal assistance to the insured
35
Q

What are the different types of claims?

A
  • First party and Third party
36
Q

What is a first party claim?

A

Claim submitted to the insured’s insurer where the insured makes a claims payment to the insured

fire, theft, hail, etc

37
Q

What is a third party claim?

A

A claim placed on an at-fault’s insurer by the injured third party where the at-fault’s insurer pays damages to the injured

physical damage, bodily injury, personal injury, car crashes

38
Q

What are the different types of claims adjusters?

A
  • Insurance Agents
  • Staff Claims Representatives/Adjustors
  • Independent Adjustor
  • Public Adjustor
39
Q

What adjusting does an insurance agent do?

A

An insurance agent may have the authority to settle small claims

40
Q

What is a Staff Claims Representative/Adjustor?

A

A salaried employee who investigates a claim, determines the amount of the loss, and issues payment

41
Q

What is an Independent adjustor?

A

An individual or organization that adjusts the claim for a contracted fee

*very common following catastrophes

42
Q

What is a public adjustor?

A

Represents the insured and are paid a fee based on the amount of the claims settlement

43
Q

What is the Claims Process?

A
  • Notice of Loss
  • Claims Investigation
  • Proff of Loss
  • Payment of Loss or Denial of Claim
44
Q

What are the steps in a claims investigation?

A
  • did the loss take place during the policy period?
  • was the damage caused by a covered peril?
  • is the damaged property covered by the policy?
  • are there policy exclusions that apply?
  • does any other insurance apply?
45
Q

What is reinsurance?

A

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

46
Q

What are some reinsurance definitions?

A
  • ceding company
  • reinsurer
  • retention limit
  • cession
  • retrocession
47
Q

What is a ceding company?

A

A primary insurer that initially wrote the insurance

48
Q

What is a reinsurer?

A

A company that accepts the insurance from the ceding company

49
Q

What is a retention limit?

A

The amount of insurance retained by the ceding company

50
Q

What is a cession?

A

The amount of insurance ceded to the reinsurer

51
Q

What is a retrocession?

A

When an insurer insures part or all of its risk with another reinsurer

52
Q

What are the functions of reinsurance?

A
  • increase underwriting capacity
  • stabalize profits
  • reduced the unearned premium reserve
  • provide protections against a catastrophic loss
  • retire from a line of business
  • obtain underwriting advice on a line for which the insurer has little experience
53
Q

What are the methods of ceding risks?

A

Facultative Reinsurance and Treaty Reinsurance

54
Q

What is facultative reinsurance?

A

It is reinsurance that is transacted on an individual risk (ex. large factory) where the primary insurer cededs the individual risk to the reinsurer

55
Q

What is treaty reinsurance?

A

Primary insurer cedes all risks within one or more specific lines of business to the reinsurer
*primary insurer must cede all risks and reinsurer must accept all risks included within the terms of the reinsurance agreement

56
Q

What are the types of reinsurance agreements?

A

Propertional (Pro-Rata) and Non-Propertional (Excess of Loss)

57
Q

What is a propertional (pro-rata) reinsurance agreement?

A

It is when the ceding company and reinsurer agree to share a predetermined percentage of losses and premium

58
Q

What is a non-proportional (excess of loss) reinsurance agreement?

A

It is when the reinsurer only pays when covered losses exceed a pre-determined dollar amount

59
Q

Investments Operations?

A
  • Insurance premiums are invested for the time period between the receipt of the premium and the payment of a claim
  • Extremely important in reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experiences
60
Q

What types of Investments?

A
  • state laws restrict the riskiness of the portfolio
  • typically invested in “safe” investment -> mostly bonds
  • life insurance is a long-term exposure so premiums can be invested in long-term assets including real estate
  • P&C is a short-term exposure (usually sub one year) so premiums are invested in marketable securities such as high-quality bonds and stocks
61
Q

What are some other insurance company operations?

A
  • information systems
  • accounting
  • legal department
  • loss control services

RMIN 4000 Exam 2 (3 decks)

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