Chapter 7 Flashcards
Define pure premium
Portion of the total premium that is needed to pay expected losses. It does not take into account money needed for company expenses
Define premium
The price of insurance protection for a specified risk for a specific period of time
Define accusation cost
The cost of putting a business on the books and acquiring the premium period the items involved are not standard with all insurers, but generally may include such items as agents or brokers commissions, field representative costs, premium tax, and perhaps some of the relevant head office acquisition costs of operation
Define commission
Compensation based on the amount of production, for example, Independent Insurance agents are compensated on the basis of a percentage of the premium. The percentage varies with different lines of insurance
Define a bucket of premium analogy
To understand how much money is sufficient for an insurer, think of that money as filling a bucket, with all required payments to be made by taking money from the bucket. To make good on the promise in its insurance policies to indemnify insurance for their losses, the insurer must have enough money in the bucket to pay those losses. It must also have money in the bucket to pay other expenses, as well as money to provide the insurer with reasonable profit.
Define development factors
Development factors are adjustments to current reserves for claims that have yet to be settled to reflect the estimated final cost of those claims.
Define trend factors
Trend factors are adjustments applied to all losses to reflect what they could possibly cost if they were to occur next year rather than having occurred at some time in the past
Define administrative expenses
Administrative expenses are the general expenses the ensurer encouraged to operate its business. They include the cost of providing and maintaining premises in which to operate, buying or leasing equipment, purchasing office supplies, paying salaries and benefits for staff, and covering interest cost on debt
What does it mean to offset underwriting loss with investment income
An underwriter is an investor of shareholders capital. If the shareholders are to receive a return on their capital - value for their investment Dash then the premium the underwriter charges for exposing the shareholders capital to risk must include some allowance for profit. Moreover, poor underwriting results have an impact on the insurer surplus - that is, the access of the insurers assets over the sum of its liabilities and shareholders capital
The effect of poor under writing results on the insurer’s surplus
Define underwriting profit
The amount of money in insurance company gains as a result of its Insurance operations. Access of earned premiums collected over loss payments and expenses
Define underwriting loss
The amount of money that an insurance company loses as a result of its Insurance operations. It excludes investment transactions and income taxes
Define actuary
One who specializes in the mathematics of insurance, mortality rates, and the like
Define ratemaking
The process of compiling and analyzing data to establish rates that accurately reflect the level of risk. Usually performed by actuaries
Define rate
Amount charge to an insured that reflects the expectation of loss for a covered risk, insurance company expenses, and profit. In other words, it is the basis of premium calculation for insurance provided for the exposure
List the three major components of any rate
- Anticipated cost of settling claims
- Acquisition cost of the business, such as commissions
- Cost of administering the process, including taxes levied on the premiums
