Chapter 6 - Insurance Company Operations Flashcards
Define Actuary
A person who determines rates and premiums.
Define Catastrophe Bond
Corporate bonds that permit the issuer o the bond to skip or defer scheduled payments of principal or interest if a catastrophic loss occurs.
Define Ceding Commission
A commission paid by the reinsurer to the primary insurer to help compensate for the expenses incurred of the writing of the business.
Define Ceding Company
Insurer that writes the policy initially and later transfers part or all of the coverage to a reinsurer.
Define Certified Financial Planner
Professional who has attained a high degree of technical competency in financial planning and has passed a series of professional examinations.
Define Certified Insurance Counselor (CIC)
Professional in property and casualty insurance who has passed a series of examinations sponsored by the Society of Certified Insurance Counselors.
Define Cession
The amount of insurance ceded to the insurer.
Define Chartered Financial Consultant (ChFC)
An individual who has attained a high degree of technical competency in the fields of financial planning, investments, and life and health insurance and has passed professional examinations administered by The American College.
Define Chartered Life Underwriter (CLU)
An individual who has attained a high degree of technical competency in the fields of life and health insurance and has passed professional examinations administered by The American College.
Define Chartered Property Casualty Underwriter (CPCU)
Professional who has attained a high degree of technical competency in property and liability insurance and has passed professional examinations administered by the Institutes (formerly known as the American Institute for Chartered Property Casualty Underwriters).
Define Claims Adjustor
Person who settles claims; an agent, company adjustor, independent adjustor, or public adjustor.
Define Company Adjustor
Claims adjustor who is a salaried employee representing only one company.
Define Excess-of-Loss Reinsurance
Designed largely for protection against a catastrophic loss.
-A treaty can be written to cover a single exposure, a single occurrence, or excess losses.
Define Facultative Reinsurance
Optional, case-by-case method of reinsurance used when the ceding company receives an application for insurance that exceeds its retention limit.
Define Independent Adjustor
Claims adjustor who offers his or her services to insurance companies and is compensated by a fee.
Define Information Systems
Use of computer technology in the processing and storage of information and elimination of many routine tasks.
Define Insurance Agent
Person who sells insurance and often has authority to settle small first-party claims up to some maximum limit.
Define Loss Control
Where losses are limited by things like sprinklers.
Define Medical Information Bureau Report
A report from the MIB Group about a person’s known health. Companies that belong to this this trade association (MIB Group) report any health impairments, which are recorded and made available to member companies.
Define Producers
Agents who sell insurance.
Define Production
The sales and marketing activities of insurers.
Define Public Adjustor
Claims adjustor who represents the insured rather than the insurance company is paid a fee based on the amount of the claim settlement. A public adjustor may be employed in those cases where the insured and insurer cannot resolve a dispute over a claim, or if the insured needs technical assistance in a complex loss situation.
Define Quota-share Treaty
Under this treaty, the ceding company and reinsurer agree to share premiums and losses based on some proportion.
Define Rate Making
The process by which insurance pricing or premiums are determined for an insurance company.
Define Reinsurance
An arrangement by which the primary insurer that initially writes the insurance transfers to another insurer (called reinsurer) part or all of the potential losses associated with such risk.
Define Reinsurance Pool
An organization of insurers that underwrites insurance on a joint basis.
Define Reinsurer
An insurer that accepts part or all of the insurance from the ceding company/
Define Retention Limit (Net Retention)
Amount of insurance retained by a ceding company for its own account in a reinsurance operation.
Define Retrocession
Process by which a reinsurer obtains reinsurance from another company.
Define Retrocessionaire
When a reinsurer in turn reinsurers part or all of the risk with another insurer the second party is known as the retrocessionaire.
Define Securitization of Risk
Term to describe the transfer of an insurable risk to the capital markets through the creation of a financial instrument, such as a catastrophic bond, futures contract, options contract, or other financial instrument.
Define Surplus-Share Treaty
Under this treaty the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit, up to some maximum amount.
Define Treaty Reinsurance
Type of reinsurance in which the primary company must cede insurance to the reinsurer and the reinsurer must accept. The ceding company is automatically reinsured according to the terms of the reinsurance contract.
Define Underwriting
The selection and classification or applicants for insurance through a clearly stated company policy consistent with company objectives.
Define Unearned Premium Reserve
Liability reserve of an insurance company that represents the unearned part of gross premiums on all outstanding policies at the time of valuation.
Name the operations that are most important to an insurance company? 6
- Ratemaking
- Underwriting
- Production
- Claim Settlement
- Reinsurance
- Investments
What is rate?
Price per unit of insurance
What is an exposure unit?
The unit of measurement used in insurance pricing.
What is the objective of the actuaries?
Calculate premiums that:
- Will make the business profitable,
- Enable the company to compete effectively with other insurers, and
- Allows the company to pay claims and expenses as they occur.
What is an underwriting guide?
Where an underwriting policy is stated in detail that specifies the line of insurance to be written; territories to be developed; forms and rating plans to be used; acceptable, borderline, and prohibited business; amounts of insurance to be written; business that requires the approval by a senior underwriter; and other underwriting details.
What are three important principals of underwriting?
- Attain an underwriting profit
- Select prospective insureds according to the company’s underwriting standards.
- Reduce adverse selection against the insurer
- Provide equity among the policyholders.
- One group of policyholder should not unduly subsidize another group.
What are the three basic underwriting decisions to be paid after an insurer inspects an applicant’s information?
- Accept the application
- Accept the application subject to certain restrictions or modifications
- Reject the application
Besides the information directly regarding the applicant, what are some other consideration go into whether a company can underwrite or not?
- Rate adequacy
- Availability of Reinsurance
- Whether a policy can or should be canceled or renewed.
What is a special agent?
highly specialized technician who provides local agents in the field with technical help and assistance with their marketing problems.
What are the three basic objectives when settling a claim?
- Verification of a covered loss
- Fair and prompt payment of claims
- Personal assistance to the insured.
Name three unfair claim practices prohibited by law?
- Refusing to pay claims without conducting a reasonable investigation
- Not attempting in good faith to provide prompt, fair, and equitable settlements of claims in which liability has become reasonable clear.
- Compelling insureds or beneficiaries to institute lawsuits to recover amounts due under its policies by offering substantially less than the amounts ultimately recovered in suits brought by them
What are the four major types of claims adjustors?
- Agent
- Company adjustor
- Independent adjustor
- Public adjustor
What are the important steps in settling a claim? 4
- Notice of loss must be given
- The claim is investigated
- The proof of loss may be required
- The decision is made concerning payment
Name six reasons reinsurance is used
- Increase underwriting capacity
- Stabilize profits
- Reduce the unearned premium reserve
- Provide protection against a catastrophic loss.
- Retire from business or from a line of insurance or territory
- Obtain underwriting advice on a line for which the insurer has little experience.
What are the two principal types of reinsurance?
- Facultative Reinsurance
- Treaty Reinsurance
What are the two basic methods of sharing losses?
Pro Rata
Excess-of-Loss
What is the pro rata method of sharing losses?
The ceding company and reinsurer agree to share losses and premiums based on some proportion
What is the Excess-of-Loss method of sharing losses?
The reinsurer pays only when covered losses exceed a certain level.
What are some examples of loss sharing under the pro rata or excess-of-loss methods? 4
- Quota-share treaty
- Surplus-share treaty
- Excess-of-loss reinsurance
- Reinsurance pool
What is a special purpose reinsurance vehicle?
An entity through which catastophe bonds are issued
What do the assets in a general account support?
The contractual obligations for guaranteed fixed dollar benefits
What do the assets in a separate account support?
The liabilities for investment-risk products, such as variable annuities, variable life insurance, and private pension benefits.
What are the reasons that life insurance investments have an important economic and social impact on the nation? 3
- Life insurance contracts are long-term, and the liabilities of life insurers extend over long periods of time. Thus, safety of principal is a primary consideration. Therefore most investments in the general account are in bonds.
- Investment income is extremely important in reducing the cost of insurance to policyholders because the premiums can be reinvested and earn interest. This interest shows up as payment of dividend to policyholders
- Premiums are an important source of capital funds in the economy.
What two points must be taken into account when analyzing the investments of property and casualty insurers?
- In contrast to life insurance, property insurance contacts are generally short-term in nature.
- Investment income is extremely important in offsetting unfavorable property and casualty underwriting experience.
What is the basic formula for coming up with the premium?
rate * exposure units = premium
Where does the information needed to make an underwriting decision come from?
- The application
- The agent’s report
- An inspection report
- Physical inspection
- A physical examination and attending physicians’s report
- MIB report
What is the benefit of facultative reinsurance? 3
- Flexibility - can be tailored to fit any type of case
- Can increase the capacity of the primary insurer to write large amounts of insurance
- Can help stabilize operations of the primary insurer by shifting part of a large loss to the
What is the disadvantages of facultative reinsurance? 3
- Uncertainty - primary insurer doesn’t know in advance whether a reinsurer will accept any part of the insurance..
- Delay - Policy won’t be issued until reinsurance is obtained
- During periods of poor loss experience, reinsurance markets tend to tighten, and facultative reinsurance may be more costly and difficult to obtain.
What is the benefit of treaty reinsurance? 2
- It is automatic therefore no uncertainty or delay
- Economical because it is not necessary to shop around and negotiate reinsurance terms before the policy is written
What is the disadvantages of treaty reinsurance?
- Could be unprofitable to the reinsurer, relying on the judgement of the primary insurer.
- Premium could be inadequate
What are the two ways a reinsurance pool can work?
- Each pool member agrees to pay a certain percentage of every loss.
- Easy pool member pays for his or her share of losses below a certain amount; losses exceeding that amount are then shared by all members in the pool.
