CPCU 520 Flashcards
Cost leadership
A business-level strategy through which a company seeks cost efficiencies in all operational areas.
Underwriting
The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.
Loss ratio
A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.
Premium audit
Methodical examination of a policyholder’s operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.
National Association of Insurance Commissioners (NAIC)
An association of insurance commissioners from the 50 U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments.
Model law
A document drafted by the NAIC, in a style similar to a state statute, that reflects the NAIC’s proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry.
Model regulation
A draft regulation that may be implemented by a state insurance department if the model law is passed.
Insolvency
A situation in which an entity’s current liabilities (as opposed to its total liabilities) exceed its current assets.
Indemnify
To restore a party who has sustained a loss to the same financial position that party held before the loss occurred.
Third-party administrator (TPA)
An organization that provides administrative services associated with risk financing and insurance.
Claims representative
A person responsible for investigating, evaluating, and settling claims.
Producer
Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both.
Public adjuster
An outside organization or person hired by an insured to represent the insured in a claim in exchange for a fee.
Loss adjustment expense (LAE)
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.
Big data
Sets of data that are too large to be gathered and analyzed by traditional methods.
Internet of Things (IoT)
A network of objects that transmit data to each other and to central hubs through the internet.
Telematics
The use of technological devices to transmit data via wireless communication and GPS tracking.
Wearable sensor tag
A sensor attached to or embedded in clothing and accessories.
Reservation of rights letter
An insurer’s letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.
Nonwaiver agreement
A signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.
Diary, or suspense
A system to remind claims personnel to perform a particular task on a claim.
Activity log
A record of all the activities and analyses that occur while handling a claim.
Subrogation
The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.
Mediation
An alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a mutually agreeable settlement.
Arbitration
An alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a settlement, which can be final and binding.
Appraisal
A method of resolving disputes between insurers and insureds over the amount owed on a covered loss.
Mini-trial
An alternative dispute resolution method by which a case undergoes an abbreviated version of a trial before a panel or an adviser who poses questions and offers opinions on the outcome of a trial, based on the evidence presented.
Summary jury trial
An alternative dispute resolution method by which disputing parties participate in an abbreviated trial, presenting the evidence of a few witnesses to a panel of mock jurors who decide the case.
Manuscript policy or manuscript endorsement
An insurance policy or endorsement that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.
Book of business
A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.
Adverse selection
In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
Policyholders’ surplus
Under statutory accounting principles (SAP), an insurer’s total admitted assets minus its total liabilities.
Underwriting guidelines (underwriting guide)
A written manual that communicates an insurer’s underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.
Predictive modeling
A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes.
Catastrophe model
A type of computer program that estimates losses from future potential catastrophic events.
Capacity
The amount of business an insurer is able to write, usually based on a comparison of the insurer’s written premiums to its policyholders’ surplus.
Common-size statement
A financial statement in which amounts are reported as a percentage of a base figure.
Hazard
A condition that increases the frequency or severity of a loss.
Credit scoring
A decision-making tool that uses credit report information to develop a predictive score on the creditworthiness of an applicant for additional credit.
Loss history
A listing of past claims, including the date of occurrence, the line of business, the type or description of the claim, the date of the claim, the amount paid, the amount reserved, and the claim’s current status.
Telematics
The use of technological devices in vehicles with wireless communication and GPS tracking that transmit data to businesses or government agencies; some return information for the driver.
Usage-based insurance
A type of auto insurance in which the premium is based on the policyholder’s driving behavior.
Generalized linear model (GLM)
A statistical technique that increases the flexibility of a linear model by linking it with a nonlinear function.
Machine learning
Artificial intelligence in which computers continually teach themselves to make better decisions based on previous results and new data.
Focus group
A small group of customers or potential customers brought together to provide opinions about a specific product, service, need, or other issue.
Hit ratio
The ratio of insurance policies written to those that have been quoted to applicants for insurance.
Retention ratio
The percentage of insurance policies renewed.
Market segmentation
The process of identifying and dividing the groups within a market that share needs and characteristics and that will respond similarly to a marketing action.
Target marketing
Focusing marketing efforts on a specific group of consumers.
Niche marketing
A type of marketing that focuses on specific types of buyers who are a subset of a larger market.
Reinsurance
The transfer of insurance risk from one insurer to another through a contractual agreement under which one insurer (the reinsurer) agrees, in return for a reinsurance premium, to indemnify another insurer (the primary insurer) for some or all of the financial consequences of certain loss exposures covered by the primary’s insurance policies.
Portfolio reinsurance
Reinsurance that transfers to the reinsurer liability for an entire type of insurance, territory, or book of business after the primary insurer has issued the policies.
Facultative reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Ratemaking
The process insurers use to calculate insurance rates, which are a premium component.
Rate
The price per exposure unit for insurance coverage.
Premium
The price of the insurance coverage provided for a specified period.
Pure premium
The average amount of money an insurer must charge per exposure unit in order to be able to cover the total anticipated losses for that line of business, also known as loss cost.
Expense provision
The amount that is included in an insurance rate to cover the insurer’s expenses and that might include loss adjustment expenses but that excludes investment expenses.
Loss reserve
An estimate of the amount of money the insurer expects to pay in the future for losses that have occurred.
Incurred losses
The sum of paid losses, paid loss adjustment expenses, loss reserves, and loss adjustment expense reserves.
Actuary
A person who uses mathematical methods to analyze insurance data for various purposes, such as to develop insurance rates or set claim reserves.
Predictive model
A model used to predict an unknown outcome by means of a defined target variable.
Data mining
The process of extracting hidden patterns from data that is used in a wide range of applications for research and fraud detection.
Exposure unit
A fundamental measure of the loss exposure assumed by an insurer.
Experience modification
A rate multiplier derived from the experience rating computation.
Pure premium method to calculate insurance rate
Insurance rate = prospective loss costs (pure premium) + expenses + profit/contingencies
Loss ratio method
A method for determining insurance rates based on a comparison of actual and expected loss ratios.
Judgment ratemaking method
A method for determining insurance rates that relies heavily on the experience and knowledge of an actuary or an underwriter who makes little or no use of loss experience data.
Advisory organization
An independent organization that works with and on behalf of insurers that purchase or subscribe to its services.
Loss costs
The portion of the rate that covers projected claim payments and loss adjusting expenses, also known as pure premium.
Loss cost multiplier
A factor that provides for differences in expected loss, individual company expenses, underwriting profit, and contingencies; when multiplied with a loss cost, it produces a rate.
Experience period
The period for which all pertinent statistics are collected and analyzed in the ratemaking process.
Trending
A statistical technique for analyzing environmental changes and projecting such changes into the future.
Credibility
The level of confidence an actuary has in projected losses; increases as the number of exposure units increases.
Credibility factor
The factor applied in ratemaking to adjust for the predictive value of loss data and used to minimize the variations in the rates that result from purely chance variations in losses.
Basic limit
The limit for which a liability policy can be written without either a charge for an increased limit or a credit for a reduced limit.
Increased limit factor
A factor applied to the rates for basic limits to arrive at an appropriate rate for higher limits.
Experience period for fire
5 years
Premium auditors responsibilities
Accurately classifying an insured’s loss exposures and determining the exposure units on which the premium is based
Destructive Competition
Insurers underprice their products to increase market share by attracting customers away from higher-priced competitors. This practice drives down price levels in the overall market, which can lead to insurance rates that are inadequate to cover insured losses.
Overarching purpose of underwriting
To develop and maintain a profitable book of business.
Why may a public adjuster become involved?
If a claim is complex, or if settlement negotiations are not progressing with the insurer, the insured may hire a public adjuster to protect his or her interests.
Marketing planning
A marketing plan provides the roadmap to success by identifying the product or service to be promoted and the customers to be targeted. It also details the resources and strategies that will be used to create, price, promote, and sell the product or service.
Risk control support activity
Works with risk managers and commercial insureds to help prevent losses and reduce the effects of losses that can’t be prevented. Insurers typically provide three types of risk control services: conducting physical surveys, performing risk analysis and improvement, and developing safety management programs.
SIU support activity
This unit combats insurance fraud (and thus helps keep the cost of insurance down) by investigating suspicious circumstances that affect claims.
6 steps to product development
- Assessing opportunities
- Defining the product, underlying support and pricing
- Creating a business forecast
- Complying with regulatory requirements
- Selecting distribution channels
- Introducing the product
3 primary reasons for insurance regulation
- To protect consumers
- To maintain insurer solvency
- To prevent destructive competition
Reunderwriting
Used to correct results in a book of business that isn’t achieving established profitability goals.
4 Policy-level reunderwriting activities
Policy non-renewals, classification corrections, coverage changes, changes to policy terms
Organization-level reunderwriting activities
Change in underwriting guidelines for existing and newly acquired business
Potential drawbacks to the growing use of IoT and smart devices in homes
Data collected from them exposes homeowners and insurers to data breaches.
Key Policy Indicators
Policies in force (PIF), new policy count, and policy retention
3 basic techniques of risk profile analysis
Classification. Regression analysis. Association rule learning.
3 possible corrective portfolio actions
Product changes, underwriting changes & service changes
Producers functions
Prospecting
Risk management review
Sales
Policy issuance
Premium collection
Customer service
Claims handling
Consulting
Traditional distribution systems
Independent agent and broker system
Exclusive agent system
Direct writer system
Managing general agent system
Surplus lines broker system
Traditional distribution channels
Digital platforms (such as websites and apps)
Call centers
Direct response marketing (such as advertisements and email)
Marketing groups (such as trade groups)
Financial institutions
Exclusive agent
When an insurance company pays a third party to sell their products who is contractually obligated to sell only that insurer’s product
Independent agent
A person that sells insurance products from various companies in the insurance industry
5 characteristics rates should have
- Be stable
- Be responsive
- Provide for contingencies
- Promote risk control
- Reflect differences in risk exposure
5 steps of rate making
- Collect data
- Adjust data
- Calculate overall indicated rate change
- Determine territorial and class relativities
- Prepare rate filings and submit to regulatory authorities as required
Experience period for auto liab and other liab
1-3 years
Experience period for property
20 years or more to avoid rate swings from cats
3 factors used to determine experience period needs
Legal requirement, if any
Variability of losses over time
Credibility of ratemaking data
An insurer that finds it economically impractical to establish a claims office in a given state is likely to use which one of the following to perform the claims handling function?
Independent adjusters
Which is an advantage of using credit-based insurance scores in underwriting?
It allows insurers to improve rating methodologies and develop premiums commensurate with loss levels.
Insurance component of cat modeling
Current replacement values of all structures in the portfolio being analyzed
State regulator requirements for submission
Underwriting guidelines, new policy forms & ratings plans
Science component of cat modeling
Separate models are used to simulate the effects of each type of event based on the causes of loss covered under the book of business
Engineering component of cat modeling
Specific data on building construction, coverages provided, number of stories, and other similar factors
