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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
What are the underwriting principles?
* attain an underwriting profit * select prospective insureds according to the company's underwriting guidelines * provide equity among the policyholders
26
What are the sources of underwriting information?
* application * agent * physical inspection * physical examination (life insurance) * claim files (existing policies) * vendor reports
27
What does a vendor report include
* Fire Protection (Public Protection Clause - PPC) * Motor Vehicle Record (MVR) * Credit-Based Insurance Score * Comprehensive Loss Underwriting Exchange (CLUE)
28
What decisions does an underwriter make?
* Accept the application * accept the application with a few restrictions * reject the application
29
What are some other underwriting considerations?
* Are rates currently adequate? * In reinsurance available? * Should existing business be cancelled or non-renewed?
30
What is the production operation?
The sales and marketing activities of insurers
31
What is a producer?
An agent who sells insurance
32
An agent should: ?
* 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
What is the Claims Settlement Operation?
It involves Claims Adjusting, which is the process of determining coverage, legal liability and damages, and settling the claim
34
What are the objectives of claims settlement?
* Verification of a covered loss * Fair and prompt payment of claims * provide personal assistance to the insured
35
What are the different types of claims?
* First party and Third party
36
What is a first party claim?
Claim submitted to the insured's insurer where the insured makes a claims payment to the insured ## Footnote fire, theft, hail, etc
37
What is a third party claim?
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 ## Footnote physical damage, bodily injury, personal injury, car crashes
38
What are the different types of claims adjusters?
* Insurance Agents * Staff Claims Representatives/Adjustors * Independent Adjustor * Public Adjustor
39
What adjusting does an insurance agent do?
An insurance agent may have the authority to settle small claims
40
What is a Staff Claims Representative/Adjustor?
A salaried employee who investigates a claim, determines the amount of the loss, and issues payment
41
What is an Independent adjustor?
An individual or organization that adjusts the claim for a contracted fee ## Footnote *very common following catastrophes
42
What is a public adjustor?
Represents the insured and are paid a fee based on the amount of the claims settlement
43
What is the Claims Process?
* Notice of Loss * Claims Investigation * Proff of Loss * Payment of Loss or Denial of Claim
44
What are the steps in a claims investigation?
* 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
What is reinsurance?
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
What are some reinsurance definitions?
* ceding company * reinsurer * retention limit * cession * retrocession
47
What is a ceding company?
A primary insurer that initially wrote the insurance
48
What is a reinsurer?
A company that accepts the insurance from the ceding company
49
What is a retention limit?
The amount of insurance retained by the ceding company
50
What is a cession?
The amount of insurance ceded to the reinsurer
51
What is a retrocession?
When an insurer insures part or all of its risk with another reinsurer
52
What are the functions of reinsurance?
* 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
What are the methods of ceding risks?
Facultative Reinsurance and Treaty Reinsurance
54
What is facultative reinsurance?
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
What is treaty reinsurance?
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
What are the types of reinsurance agreements?
Propertional (Pro-Rata) and Non-Propertional (Excess of Loss)
57
What is a propertional (pro-rata) reinsurance agreement?
It is when the ceding company and reinsurer agree to share a predetermined percentage of losses and premium
58
What is a non-proportional (excess of loss) reinsurance agreement?
It is when the reinsurer only pays when covered losses exceed a pre-determined dollar amount
59
Investments Operations?
* 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
What types of Investments?
* 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
What are some other insurance company operations?
* information systems * accounting * legal department * loss control services

RMIN 4000 Exam 2 (3 decks)

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