Chap 9: Insurance operations Flashcards
Insurance Regulation
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.
Insurance operations / Underwriting
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
3 steps of the underwriting process
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.
Insurance Operations: Claims
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.
Insurance Operations: Production
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
Insurance operations/ production : Express authority
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
Insurance operations/ production: Implied authority
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
Life Insurance Reserve
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.
Accounting in the insurance industry
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
Insurance Accounting: Admitted Asset
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
Insurance Accounting: Non Admitted Asset
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
3 purposes of the underwriting principle
1) select insured according to the company’s underwriting standards
2) have a proper balance between each rate classification
3) provide equity among policyholders
Principle of adverse selection
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
3 rate categories ( underwriting)
- preferred risk category
- standard rates
- sub-standard rates for people with rated policies ( the insured presents a higher risk)
Renewal underwriting
Re-check the assumptions under which the policy was written
Loss adjustment
Settling claims by verifying that a loss is covered, providing fair and prompt payment to the insured and assisting the insured
Name of the employee in a claim department
In life and health: claim representatives or benefit representatives
In property and liability: adjusters
Representing the insured: public adjuster
Claim settlement: contributions by equal shares
When there is more that one insurer, each insurer pays equally to the limit of the coverage
Claim settlement : pro rata liability
Each pays in proportion to the total amount of insurance
Claim settlement : second payor
The amount of the benefit is reduced by the amount of benefit under other policies covering the same risk
Insurance operation: production / apparent authority
If a third party believes an agent has authority, the principal is bounded by the agent’s actions
Insurance agent V broker
An agent legally represents the insurer while a broker is an independent agent who represents the insured
What commissions are paid to agents or brokers
The commission paid to an agent or a broker is a % of the premium before provincial sale tax
What are the 2 basic ways of calculating insurance rate
Class or manual rating ( places similar insured in the same underwriting class)
Individual or merit rating ( reflects the loss experience of the individual risk)
Gross premium
Pure/net premium + expense loading
Rate making in property and liability insurance : 2 class or manual rating
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)
Rate making in property and liability insurance : 4 individual or merit rating (reflects the risk of the individual insured)
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)
Policy/ legal reserve
Fund set aside to pay claims = PV of future claims - PV of future net premiums
Terminal reserve
Policy reserve balance at the end of the year
Initial reserve
Balance in the reserve at the BOY = terminal reserve from prior year + current year premiums collected
Mean reserve
The average of the terminal reserve and the initial reserve
Office of the Superintendent of Financial Institutions (OSFI)
Regulates and supervises federally regulated insurance companies and has the power to intervene in insurance companies to address concerns about their financial viability
6 Types of risks faced by insurance companies
- Credit Risk
- Insurance risks
- Liquidity risk
- Market risk
- Operational risk
- Strategic risk
