Chapter 4 The Insurer

Question 1

What are captive insurers and how do they operate?

Answer 1

Captive insurers are formed by large industrial/commercial organizations to reduce insurances costs and because certain types of insurance are unavailable or difficult to acquire.

Captive insurers are set-up the same way as any insurance company except that the insured pays its premiums to the captive insurer who also pays losses when they occur.

Question 2

Define fronting and give examples.

Answer 2

• is an arrangement whereby an insurer issues a policy at the request of another insurance company with
  
  • • • the latter carrying the whole or substantial part of the risk and**

** - the former being paid a fee for the use of its name.**

Question 3

What is the main objective of cooperatives?

Answer 3

Mutual benefit for their members.

Question 4

Who owns a mutual insurance company?

Answer 4

Owned by its policyholders

Question 5

How does an assessment mutual insurance company operate?

Answer 5

Original Mutuals operated on the assessment or premium note plan. Policyholders signed a “premium note” which constitutes a reserve to draw upon if required.

Question 6

How does a reciprocal insurance exchange operate?

Answer 6

-is a contractually-based risk-sharing arrangement that is like a group captive insurer.

-Members are called subscribers who agree to share in the payment of each other’s losses to the extent that these losses are covered by insurance policies issued by the exchange.

Question 7

How is capital raised to organize a stock insurance company?

Answer 7

A number of individuals (or other corporations) subscribe and pay in capital to form a legal entity known as a corporation. These “shareholders” have an equitable interest in the assets of the corporation and hope to realize a reasonable profit on their investment.

Question 8

What expenses does an insurance company have?

Answer 8

Working expenses (rent, salaries, supplies)

claims payments.

Question 9

What are the TWO (2) main sources of an insurer’s revenue?

Answer 9

1. Underwriting gain - excess of premiums collected over loss payments and expenses

2. Investment income - as premiums are collected, they are invested until needed

Question 10

What is the responsibility of the board of directors?

Answer 10

They are the non-involved overseers of the corporation.

They are responsible for seeing that the company is run according to its by-laws and provincial and federal laws and regulations.

Question 11

What is the responsibility of the CEO?

Answer 11

The CEO is responsible for the overall operations of the company and its day to day management.

Question 12

What is the purpose of insurance pools?

Answer 12

Insurance companies join together to form pools so they can take on risks that has a great potential for loss.

Each insurance company agree to pay a fixed proportion of any loss.

Question 13

Why is the organizational structure of all insurers not the same?

Answer 13

Factors such as size, marketing philosophy and ownership affect management style and structural organization.

Question 14

What common functions must be carried out by all insurers?

Answer 14

1. Administration

2. Finance, Accounting and Investment

3. Actuarial

4. Branch Operations

5. Marketing, Agency, or Production

6. Underwriting

7. Claims

Question 15

Who regulates and monitors insurance companies?

Answer 15

(OFSI)

Question 16

What is the full name of OSFI and what is its purpose?

Answer 16

The Office of the Superintendent of Financial Institutions is responsible for the constant supervision and enforcement of safeguards so that inadequately financed insurance companies are not established and existing ones remain financially stable.

Question 17

How are foreign insurers regulated?

Answer 17

Foreign insurance companies are subject to the same restrictions and provisions as Canadian companies.

1. Obtain an Order of Commencement from the Superintendent approving the insuring of specified types of risks.
   a. Requirements must be fulfilled
   - assets of prescribed value has been vested in trust
   - an actuary has been appointed
   - location of head office has been established
2. Additional regulations also apply
   a. The approval to issue an order is not given unless the applicant’s home jurisdiction provides favourable treatment to Canadian insurance companies.
   b. Assets must be vested in trust in a Canadian Financial institution in the form of securities.
   c. If there is a new appointment of attorney or chief agent in Canada, a new power of attorney must be filed in Ottawa.
   d. Assets in Canada may only be released to the OFSI and upon satisfaction of the requirements of the Act.

Question 18

What is Lloyd’s?

Answer 18

is not an insurance company but an insurance market.

It consist of independent businesses called “members” who provide capital to the market and underwrite in syndicates.

Syndicates employ professional underwriters to accept risks on their behalf.

Question 19

Describe the functions of the following:

1. Lloyd’s brokers
2. Syndicates
3. Lloyd’s underwriters
4. Managing agents

Answer 19

Lloyd’s brokers - is required to demonstrate an understanding of the Lloyd’s market, as part of Lloyd’s assessment of its suitability to be accredited as a Lloyd’s broker.

Syndicates - are groups of members who employ professional underwriters who accept risks on their behalf.

Lloyd’s Underwriters - were wealthy private individuals called “names” who staked their fortunes by trading with unlimited liability. Now underwriting membership comes from corporate bodies who have converted to limited liability by forming limited companies or partnerships.

Managing Agents - is responsible for employing the underwriting staff and manage the syndicate on the members’ behalf.