Chap 9: Insurance operations

Question 1

Insurance Regulation

Answer 1

An insurance company in Canada is federally regulated. To ensure financial viability, the government monitors the size of its assets compared to the premiums it underwrites. Their investments are also regulated to insure financial solvency.

Question 2

Insurance operations / Underwriting

Answer 2

the process of selecting and classifying applicants so that the insurer charges each policyholder the correct rate. It sets standards by which each applicant is assessed, make sure each category is balanced, provide equality so that each policy holder is charged farely

Question 3

3 steps of the underwriting process

Answer 3

1) The applicant applies for coverage
2) The agent or the broker supplies the initial information the insurer requires to write the policy
3) The insurer reserves the right to solicit information from other sources, like the motor vehicle licensing bureau or a family doctor before providing coverage.

Question 4

Insurance Operations: Claims

Answer 4

Is the process of settling a claim and it varies from insurer to insurer. It generally involves an assessment of the coverage to see if the insured is covered, checking the validity of the claim, as well as assisting the insured if the claim is approved.

Question 5

Insurance Operations: Production

Answer 5

The production for an insurance company (and other service industry operations) is their sales and marketing activities. Each insurer will structure their sales department differently giving their agents and brokers the authority to express and imply authority

Question 6

Insurance operations/ production : Express authority

Answer 6

This authority is specifically conferred. The agent has the authority through an agency agreement to act on behalf of the insurance company. The agent has the authority to order medical examination but not to change the provisions on the contract

Question 7

Insurance operations/ production: Implied authority

Answer 7

The agent has the authority to perform all incidental acts necessary to fulfill the purposes of the agency agreement. The agent has the authority to deliver the contract and collect the first premium

Question 8

Life Insurance Reserve

Answer 8

is the funds set aside to pay future claims and represents the difference between the present value of the future benefits (claims to be made in the future) and the present value of the future net premiums.

Question 9

Accounting in the insurance industry

Answer 9

Insurance companies must comply with special accounting rules called statutory accounting requirements or statutory reporting requirements. They differ from GAAP and assets are devided in Admitted and Non Admitted Assets

Question 10

Insurance Accounting: Admitted Asset

Answer 10

assets recorded at full market value and they can be readily turned into cash to meet policyholder obligations. Include Cash, High quality investment, Account receivable under 90days, Computer Equipment

Question 11

Insurance Accounting: Non Admitted Asset

Answer 11

re assets recorded at no value, they cannot be quickly converted into cash. Include Furniture and fixture, poorly rated investment, AR over 900 days and office Equipment

Question 12

3 purposes of the underwriting principle

Answer 12

1) select insured according to the company’s underwriting standards
2) have a proper balance between each rate classification
3) provide equity among policyholders

Question 13

Principle of adverse selection

Answer 13

It states that those who have a greater than average risk of producing a loss tend to try to seek insurance more often than people who are average or less that average risk

Question 14

3 rate categories ( underwriting)

Answer 14

• preferred risk category
• standard rates
• sub-standard rates for people with rated policies ( the insured presents a higher risk)

Question 15

Renewal underwriting

Answer 15

Re-check the assumptions under which the policy was written

Question 16

Loss adjustment

Answer 16

Settling claims by verifying that a loss is covered, providing fair and prompt payment to the insured and assisting the insured

Question 17

Name of the employee in a claim department

Answer 17

In life and health: claim representatives or benefit representatives
In property and liability: adjusters
Representing the insured: public adjuster

Question 18

Claim settlement: contributions by equal shares

Answer 18

When there is more that one insurer, each insurer pays equally to the limit of the coverage

Question 19

Claim settlement : pro rata liability

Answer 19

Each pays in proportion to the total amount of insurance

Question 20

Claim settlement : second payor

Answer 20

The amount of the benefit is reduced by the amount of benefit under other policies covering the same risk

Question 21

Insurance operation: production / apparent authority

Answer 21

If a third party believes an agent has authority, the principal is bounded by the agent’s actions

Question 22

Insurance agent V broker

Answer 22

An agent legally represents the insurer while a broker is an independent agent who represents the insured

Question 23

What commissions are paid to agents or brokers

Answer 23

The commission paid to an agent or a broker is a % of the premium before provincial sale tax

Question 24

What are the 2 basic ways of calculating insurance rate

Answer 24

Class or manual rating ( places similar insured in the same underwriting class)
Individual or merit rating ( reflects the loss experience of the individual risk)

Question 25

Gross premium

Answer 25

Pure/net premium + expense loading

Question 26

Rate making in property and liability insurance : 2 class or manual rating

Answer 26

1) pure premium method (calculates the rate based on total claims and number of insured)
2) loss ratio method ( adjust the rate to reflect actual claim)

Question 27

Rate making in property and liability insurance : 4 individual or merit rating (reflects the risk of the individual insured)

Answer 27

1) experience rating ( uses the loss ratio method over 3 years adjusted by a credibility factor)
2) judgment rating ( the rate is determined by the underwriters judgement, ocean marine insurance)
3) schedule rating ( certain characteristics of the insured’s operations are going to influence the insured’s future loss experience)
4) retrospective rating ( the actual premium is not determined until the actual period covered is over)

Question 28

Policy/ legal reserve

Answer 28

Fund set aside to pay claims = PV of future claims - PV of future net premiums

Question 29

Terminal reserve

Answer 29

Policy reserve balance at the end of the year

Question 30

Initial reserve

Answer 30

Balance in the reserve at the BOY = terminal reserve from prior year + current year premiums collected

Question 31

Mean reserve

Answer 31

The average of the terminal reserve and the initial reserve

Question 32

Office of the Superintendent of Financial Institutions (OSFI)

Answer 32

Regulates and supervises federally regulated insurance companies and has the power to intervene in insurance companies to address concerns about their financial viability

Question 33

6 Types of risks faced by insurance companies

Answer 33

• Credit Risk
• Insurance risks
• Liquidity risk
• Market risk
• Operational risk
• Strategic risk