Chapter 6 Flashcards
what are the major insurance company operations?
-ratemaking
-underwriting
-production
-claims settlement
-reinsurance
-investments
what is ratemaking?
the pricing of insurance and the calculation of insurance premiums
what is the ratemaking challenge?
an insurance company does not know in advance the cost of their products
what is underwriting?
the process of selecting, classifying and pricing applicants for insurance
what is the purpose of underwriting?
to develop and maintain a profitable book of business
what decision does an underwriter make?
the decision to accept or reject an application for insurance
what is production?
the sales and marketing activities of insurers
what are agents/brokers who sell insurance often called?
producers
in production, what should an agent/broker do?
-be competent professional
-have a high degree of technical knowledge in a particular area of insurance
-place the needs of their client first
-code of ethics
what is claim adjusting ?
the process of determining coverage, legal liability and damages, and settling the claim
what are the basic objectives of a claims settlement?
-verification of a covered loss
-fair and prompt payment of claims
-provide personal assistance to the insured
what is reinsurance?
an arrangement by which the primary insurer transfer to another insurer part or all the potential losses associated with such insurance
who initially writes the insurance?
primary insurers
who is the reinsurer?
the person who gets the primary insurers transfer
when are insurance premiums invested?
the time period between the receipt of the premium and the payment of the claim
what is extremely important in lowering the cost of insurance to policy owners and offsetting unfavorable underwriting experience?
investments
who is an actuary?
a person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums
what are the regulatory goals of rate making?
-rates must be adequate
-rates must not be excessive
-rates should not be unfairly discriminatory
what are the business goals of rate making?
rates should
-be stable
-be responsive
-provide for contingencies
-promote loss control
-be simple
what states the company’s underwriting policy?
underwriting guide
what is included in the underwriting guide?
-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
what are the underwriting principles?
-attain an underwriting profit
-select prospective insureds according to the company’s underwriting guidelines
-provide equity among the policyholders
what are the sources of underwriting information?
-application
-agent/broker
-financial statements
-physical inspection
-physical examination
-claims file
-vendor reports
what are the underwriting decisions?
-accept the application and issue the policy
-accept the application subject to restrictions or modifications
-reject the policy
what are other underwriting considerations?
-are rates currently adequate?
-is reinsurance available?
-should existing business be cancelled or non renewed?
what are the insurance professional designations?
-chartered life underwriter (CLU)
-chartered property casualty underwriter (CPCU)
what are the different types of claims?
-“first party”
-“third party”
what are claims submitted by the insured to the insurer?
first party claims
for first party claims, who makes claims payments to the insured?
the insurer
what are claims submitted against a negligent insured for bodily injury, physical damage, death, personal injury, etc?
third party claims
for third party claims, who pays damages (caused by the insured) to an injured third party?
insurer
what are the types of claims adjustors?
-insurance agents
-staff claims representatives/adjustors
-independent adjustors
-public adjustors
who may have authority to settle small “first party” claims?
insurance agents
who is a salaried employee who investigates a claim, determines the amount of loss and issues payments?
staff claims representative/adjustors
who is an individual or organization that adjusts the claims for a fee (common after catastrophes)?
independent adjustors
who represents the insured and are paid a fee based on the amount of the claim settlement ?
public adjustors
what is the claims process?
-notice of loss
-claim investigation
-proof of loss
-payment of loss or denial of claim
what questions are asked for a claim investigation?
-did the loss take place during the policy period?
-was damage caused by a covered peril?
-is the damage property covered by the policy?
-are there policy exclusions that apply?
-does any other insurance apply?
what is a ceding company?
the primary insurer that initially wrote the insurance
what is the reinsurer?
the company that accepts the insurance from the ceding company
what is the retention limit?
the amount of insurance retained by the ceding company
what is cession?
the amount of insurance ceded to the insurer
what is retrocession?
a transaction in which a reinsurer transfers risks it has reinsured to another reinsurer
what are the functions of reinsurance?
-increase underwriting capacity
-stabilize profits
-reduced the unearned premium reserve
-provide protections against catastrophic loss
-retire from a line of business
-obtain underwriting advice on a line for which the insurer has little experience
what are two principal types of reinsurance?
facultative and treaty
what type of principal reinsurance is transacted on an individual risk (ex. large factory) where the primary insurer cedes the individual risk to the reinsurer?
facultative reinsurance
what type of principal reinsurance is used on a case by case basis?
facultative reinsurance
what type of principal reinsurance is where the primary insurer cedes all risks within one or more specific lines of business to the reinsurer?
treaty reinsurance
what are the types of reinsurance agreements?
proportional (pro rata) and non-proportional (excess of loss)
what type of reinsurance agreement is when the ceding company and reinsurer agree to share a predetermined percentage of losses and premium?
proportional (pro rata)
what are the two types of proportional (pro rata) reinsurance agreements?
“quota share” and “surplus share”
what is quota share under proportional reinsurance agreement ?
the ceding company and the reinsurer share premiums and losses based on fixed percentage
what is surplus share under proportional reinsurance agreement? (pro rata)
when the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit
when are losses and premiums shared in the same proportion that each party shares in the same individual risk?
surplus share (pro rata)
what is non proportional (excess of loss) reinsurance agreement?
the ceding company retains a predetermined dollar amount of a loss (retention)
what is designed for protection from a catastrophic loss?
excess of loss reinsurance
what is extremely important in lowering the cost of insurance to policy owners and offsetting unfavorable underwriting experience?
investments
what do state laws restrict?
the riskiness of the portfolio
what types of investments are typically invested?
“safe” investments - mostly bonds
what type of insurance is a long-term exposure so premiums can be invested in long-term assets including real estate?
life
what type of insurance is a short-term exposure so premiums are invested in marketable securities such as high-quality bonds and stocks?
Property and Casualty
what are other insurance company operations?
-information systems
-accounting
-legal department
-loss control services
