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MATH 3620 > Exam 2 > Flashcards

Exam 2 Flashcards

1
Q

Balance Sheet

A

A summary of the company’s overall financial position as of a given financial statement date

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2
Q

Structure of Balance Sheet

A

Assets = Liabilities + Surplus meaning assets are on the left side and liabilities and surplus on the right side

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3
Q

Income Statement

A

Reflects the activities of a company for a certain time period, a span of time

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4
Q

Three major components of Income Statement

A

Profit (or Loss) = Revenues - (Losses/Benefits and Expenses)

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5
Q

Reserve

A

The amount of money that an insurance company must set aside to pay future obligations to the policyholders. Typically the largest liability for most insurance companies

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6
Q

Two major liabilities for a P&C insurance company

A

Loss reserves and unearned premium reserves

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7
Q

Loss Reserves

A

Claims incurred (that have happened) but are not yet paid. An estimated amount for:

  • Claims reported and adjusted, but not yet paid
  • Claims reported and filed, but not yet adjusted
  • Claims incurred but not yet reported to the company
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8
Q

Case Reserve

A

A loss reserve established for each individual claim when it is reported but not yet adjusted. It is typical to set this for individual claims (but not group claims). Methods for calculating include:

  • Judgment Method
  • Average Value Method
  • Tabular Value Method
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9
Q

Incurred-but-not-reported (IBNR) Reserve

A

Reserve set for claims that have been incurred but have not been reported to the company yet

  • Used for losses that occur close to year-end
  • Policyholders report the claim in the new year even though it occurred in the prior year
  • Must be estimated because the exact amount is unknown
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10
Q

Unearned Premium Reserves

A

Premiums received, but not yet earned

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11
Q

Surplus

A

The difference between an insurance company’s assets and liabilities

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12
Q

What is surplus initially set by?

A

Capital paid by stockholders (stock company) and excess premiums paid by policyholders (mutual company)

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13
Q

How can surplus be distributed?

A

Through dividends which decrease surplus. Companies have to make sure they maintain enough surplus to run the business when deciding on the size of dividends

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14
Q

Reporting Losses

A

The insurance company has an obligation to pay the claim when a loss occurs. Takes time for the claim to be reported and for the insurance company to decide who is at fault and how much should be paid

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15
Q

Reasons for Insurance Regulations

A
  • Maintain Insurer Solvency
  • Compensate for inadequate consumer knowledge
  • Ensure reasonable rates that are neither excessive nor inadequate
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16
Q

Commerce Clause

A

Federal government has authority to regulate interstate commerce

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17
Q

10th Amendment

A

Powers not explicitly given to the federal government are reserved for the states

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18
Q

Paul vs. Virginia (1868)

A

Supreme court ruled insurance was not interstate commerce, and that the states (not federal government) had right to regulate the insurance. The reversal of this threw the industry in turmoil.

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19
Q

South-Eastern Underwriters Association (1944)

A

When the supreme court reversed itself and said insurance is interstate commerce when conducted across state lines

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20
Q

Sherman Anti-trust law

A
  • Prohibit business activities deemed to be anti-competitive
  • Prevent “per se” violations: any agreement to boycott, coerce, or intimidate
  • Prohibit price fixing
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21
Q

McCarran-Ferguson Act (1945)

A

Continued regulation and taxation of the insurance industry by the states are in the public interest

  • Federal antitrust laws apply to the insurance only to the extent that the insurance industry is not regulated by state law
  • Stated that insurance is commerce
  • Insurers/rating bureaus are exempt from federal antitrust law, provided activities are subject to state law, and do not involve boycott, coercion, or intimidation
  • States respond by formalizing state-level laws and regulations
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22
Q

Three principal methods used to regulate insurers

A
  1. Legislation - through both state and federal laws
  2. Court decisions - Interpreting policy provisions
  3. State insurance departments
    - Most active for day-to-day regulation
    - Implements laws, helps draft regulations
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23
Q

Four basic aspects of National Association of Insurance Commissioners (NAIC)

A
  • Voluntary participation by state insurance departments
  • Its goal is to encourage greater uniformity, cooperation, and coordination of laws and regulations
  • It produces model laws & regulations that individual states can adopt which will be uniform across the country
  • The NAIC has no authority on its own beyond what state’s give it. States can choose to modify or ignore the model laws and regulations
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24
Q

Areas of State Insurance Regulation

A
  • Formation & Licensing of Insurers
  • Solvency
  • Rate Regulation
  • Policy Forms (Approval)
  • Sales Practices/Consumer Protection
  • Taxation
  • Miscellaneous: Cybersecurity
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25
Q

Types of Licenses for Insurance Companies

A
  • Domestic: Located within the state
  • Foreign: Out-of-state insurer that is chartered by another state, but licensed to operate in the state
  • Alien: Insurer that is chartered by a foreign country, but is licensed to operate in the state
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26
Q

Solvency

A

Reserves, Surplus, Risk Based Capital. The assets must be sufficient to offset liabilities

27
Q

Admitted Assets

A

Assets that an insurer is allowed to show on its statutory balance sheet in determining its financial condition

  • Assets that can easily be converted into cash
  • Financial assets and real estate are admitted
  • Furniture and equipment is not admitted
28
Q

Risk-Based Capital (RBC)

A

Insurers holding a certain amount of capital, depending on the riskiness of their investments and insurance operations

29
Q

RBC Categories

A
  • Asset Risk (C1): Higher capital for riskier assets
  • Insurance Risk (C2): Covers severely adverse claims
  • Interest/Market Risk (C3): Covers large swings in interest rates or stock prices
  • Business Risk (C4): Management error, such as poor strategy decisions, operational risks
  • Affiliate Risk (C0): Covers risks of affiliate insurance of affiliate insurance companies that an insurance owns
30
Q

Actionable Levels of RBC

A

Most companies have RBC ratios of 300%-400%

  • 100%-124%: Red Flag
  • 75%-99%: Company Action Level
  • 50%-74%: Regulatory Action Level
  • 35%-49%: Authorized Control Level
  • <35%: Mandatory Control Level
31
Q

Investment Regulations

A
  • Prevent insurers from making unsound investments that could threaten the company’s solvency and harm the policy owners
  • Laws generally place a limit on the proportion of assets in a specific category, such as real estate or stocks
  • Many states limit the amount of surplus a participating life insurer can accumulate, rather than pay as dividends. Generational equity is a factor here
32
Q

Forms of Rate Regulation for Property and Casualty

A
  • Prior approval law
  • Modified prior approval law
  • File-and-use law
  • Use-and-file law
  • Flex-rating law
  • State-made rates
  • No filing required
33
Q

Policy Form Approval

A

State insurance commissioners have the authority to approve or disapprove new policy forms before the contracts are sold to the public. Purpose is to protect the public from misleading, deceptive, and unfair provisions

34
Q

Sales Practices

A

Regulated by laws concerning the licensing of agents and brokers. They prohibit a variety of unfair trade practices, such as misrepresentation, twisting, and rebating

35
Q

Twisting

A

Inducement of a policy owner to drop an existing policy and replace it with a new one that provides little or no economic benefit to the client

36
Q

Rebating

A

The practice of giving an individual a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy

37
Q

Complaint Division

A

State insurance departments typically have this for handling consumer complaints which typically involve claims. Information is provided to consumers on insurance department websites and in brochures

38
Q

Taxation

A

Insurers pay numerous local, state, and federal taxes such as premium and income taxes

38
Q

Cybersecurity

A

NAIC adopted insurance data security Model Act in October 2017 which requires insurers to protect data from theft, ransom, and malicious tampering

39
Q

Federal Regulation

A
  • Would provide uniformity in state regulations
  • More effective for international insurance agreements
  • More effective in the handling systemic risk
  • Would enable insurers to become more efficient
40
Q

Arguments for State Regulation & Shortcomings of Federal

A
  • More responsive to local insurance needs
  • Federal regulation could lead to a dual system of regulation and increase costs
  • Poor quality of federal regulation, ex. banking
  • Reasonable uniformity of laws can be achieved by the model laws of the NAIC
  • Facilitates experimentation and innovation
  • Unknown consequences of federal regulation
41
Q

What are the unknown consequences of federal regulation?

A
  • Already understand state regulation
  • Fed further from people, so harder to change flawed law
42
Q

What does Modernizing Insurance Regulation look like?

A

Critics believe the current regulatory system is broken, and lax regulatory oversight at both the state and federal levels contributed to the financial meltdown in 2008/2009

43
Q

Dodd-Frank Wall Street Reform and Consumer Protection Act (2010)

A

Contained numerous provisions to reform the financial services industry. Created the Financial Stability Oversight Council (FSOC) to identify and treat systemic risk and the Federal Insurance Office (FIO)

44
Q

Indemnity

A

The insurer agrees to pay no more than the actual amount of the loss

45
Q

Principle of Insurable Interest

A

The insured must be in a position to lose financially if a covered loss occurs. Its purpose is to prevent gambling, reduce moral hazard, and measure the amount of the insured’s loss

46
Q

What can support an insurable interest for P&C?

A
  • Ownership of property
  • Potential legal liability
  • Serving as a secured creditor
  • Contractual Rights
47
Q

How can an insurable interest for life insurance be supported?

A
  1. Your own life
  2. Life of another person
48
Q

When must insurable interest exist?

A
  • Property insurance: at the time of the loss
  • Life insurance: only at the inception of the policy
49
Q

Subrogation

A

Substitution of the insured for the purpose of claiming indemnity from a third party for a loss covered by insurance

50
Q

Utmost Good Faith

A

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on other contracts

51
Q

What are the three legal doctrines that support utmost good faith?

A
  • Representations
  • Concealment
  • Warranty
52
Q

Representations

A

Statements made by the applicant for insurance. A contract is voidable if the representation is material, false, and relied on by the insurer. Still applies if the misrepresentation is innocent

53
Q

Material

A

Means that if the insurer knew the true facts, the policy would not have been issued, or would have been issued on different terms

54
Q

Reliance

A

The insurer relies on the misrepresentation in issuing the policy at a specified premium

55
Q

Concealment

A

Is intentional failure of the applicant for insurance to reveal a material fact to the insurer

56
Q

Warranty

A

A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects

57
Q

Basic Parts of an Insurance Contract

A
  • Declarations: Statements providing information about what is to be insured (P&C). Life contracts have similar
  • Definitions: Insured is typically referred to as “you”
  • Insuring Agreements: What is the promise being made?
  • Exclusions: What is not intended to be covered like perils, losses, and property
  • Conditions: Limits on the promises; duties of insured. If you fail to pay the premium, insurer can cancel coverage
  • Miscellaneous: Cancellation, grace period
58
Q

Types of Coverage

A
  • Named perils
  • Open-perils, or special coverage
59
Q

Endorsement

A

Written provision that adds to, deletes from, or modifies the provisions in the original contract

60
Q

Rider

A

Provision that amends or changes the original policy

61
Q

Contractual Provisions that limit coverage

A
  • Deductibles
  • Coinsurance - P&C and Health
  • Policy Limits
  • Exclusions
62
Q

Why limit coverage?

A
  • Moral/Attitudinal Hazard
  • Adverse Selection
  • Administrative Costs
63
Q

Policy Limit

A

The maximum amount that the insurer will pay. Apply on a per occurrence or aggregate basis

MATH 3620 (9 decks)

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