Exam Questions

Question 1

Why are consumers critical of the insurance industry? (3)

What can be done to educate and improve awareness? (7)

Answer 1

• When prices go and capacity tightens
• Leaves consumers with poor opinion
• Media portrays negative image as politicians
• promise to do something about the high rates
• Insurers want to educate
• Insurance protection is intangible
• Consumers are fortunate to pay so little for overall financial well being
• Premiums a nominal sum for possible million dollar claim
• or similarly to replace a house demolished by fire
• Would take a consumer many years to save to pay for a million-dollar claim
• Premiums of the many pay for the losses of th efew
• Plain language policies are more transparent
• cause less confusion leading to a positive consumer perception.

Question 2

Using an insurer’s claim’s department or underwriting department, explain the following objectives contributes to an insurer’s success:

1) Multi-layered goal setting (10)
2) Managing Department workflow (5)

Answer 2

1) multi-layered goal setting:
- Claims manager establishes department goals to respond to those set by upper management and BOD
- These goals will look to control claims and expense costs
- Target for customer satisfaction
- units within the claims department also develop goals to improve performance.
- subrogation unit might choose to improve it’s recovery rate by 2%.
- Might choose to meet face to face with 95% of policyholders within 25 hours of a claim
- In each department, individual goals are also formulated to meet the needs of each employee.
- can apply to technical performance or personal growth
- subject to performance review
2) Experienced underwriters could be chosen to handle all new business submissions while the less experienced underwriters are responsible for renewal business
- Staff must be organized to promote not only efficient effective processing of business.

Question 3

1) Accrual basis of accounting (2)
2) Dividend (2)
3) Balanced portfolio (5)
4) Liquidity (1)
5) Yield (2)
6) Asset liability management (3)

Answer 3

1) Accrual basis of accounting (2) - reporting business transactions in the accounting period or periods to which it belongs.
2) Dividend (2) - payment made to shareholders from the profits earned by the company
3) Balanced portfolio (5) - diversifying investments over a number of different securities and types of securities. Can diversify by industry, location. Any sudden problem will not significantly affect a portfolio.
4) Liquidity (1) - how easily a security can be converted to cash
5) Yield (2) - net rate of return from an investment
6) Asset liability management (3) - the management of assets in relation to liabilities to optimize the balance between risk and return.

Question 4

What does a balance sheet show about a company? Identify the 3 main items included? (10)

Answer 4

Assets - things of value that a company owns. These include furniture, equipment, and vehicles, investment securities
Liabilities - Are debts owed to creditors. For insurance, these are likely to include unearned premiums, outstanding claims reserves, accounts payable, and bank loans.
Equity - Is a company’s net assets. The share capital put into the business, plus the total profits made by the company since it was formed.

Question 5

Acadian General, prepare a presentation.

1) Explain how OSFI measures and assess a company’s solvency and why this should be a concern to them. (15)
2) Outline how reinsurance can help without causing undue financial concerns. Relating to solvency requirement.

Answer 5

1) -OSFI uses the minimum capital test (MCT) to measure solvency
-a single harmonized asset test applies to all Canadian insurers operating in Canada
-A similar test applies to branches of foreign insurers
-The test is intended to give regulators early warning of an insurers potential solvency problems
-OSFI communicates with insurers on the minimum amount of capital required to support premium volumes.
-The test requires that an insurer’s assets exceed it’s liability by a specified ratio
-The insurers have assets worth at least a certain multimple of their liabilities as well as a margin of additional assets.
-Over time when insurers grow or shrink they can become over capitalized or undercapitalized.
-Writing riskier business requires more capital, while writing less risky business requires less capital.
Reinsurance can be used for:
Financing:
-offers unique method of financing to insurance companies
-frees up capital that would otherwise be tied up
-Way to meet solvency regulations
Stabilization:
-Keep insurer’s growth and development
-Used to keep operational results reasonable without fluctuations
-Stability maintains confidence of investors
Capacity:
-Allows insurers to write business beyond their resources
-Take on risks they wouldn’t normally write
-Reinsurance to protect against catastrophic loss
-Insurers look to protect their capital, their loss ratio and investment position against catastrophic loss

Question 6

Outline 5 situations an underwriter must consider when statistical analysis does not yield useful conclusions to rate a risk. Provide an example of each (15)

Answer 6

Insufficiant claims data
familiarity with the industry
sufficient data but difficulty in comparing risks
underwriter looks beyond loss
statistical improbability of loss that does not rule its possibility

Question 7

Part of an insurers due diligence review in selecting a producer includes an analysis of the producers business plan and staff. Why would the insurer review these? (15)

Answer 7

-Looking at the producers business plan can tell the insurer a great deal about the producers plans for the future
-What has the producers record of growth been?
-insurer will want to see a history of good premium growth
-a solid income statement and balance sheet
-look at the history of planning and actual achievements
-See if there are any trends
-If the producer doesn’t retain as much as it plans, that may be a bad sign
-How does the producer plan to grow in the future?
-Does the growth strategy fit with the insurer’s strategy?
-A producers strategy to dramatically increase premium volume could sacrifice loss ratio and service to achieve premium volume and commission
-How can they handle the increased business due to growth?
Staffing
-Does the producer have enough staffing to handle the work
-Are they qualified?
-What are the experience and skills of the producer’s staff?
-How do they deal with business processes
-If key people leave, will it adversely affect the producer?
-Strong relationships with clients can impact retention if they leave etc.

Question 8

Explain 4 characteristics of a company that can affect the marketing strategy a company employs (10)

Answer 8

Dominance
-Classified based upon market share and dominance in the industry
-Are they the market leader? Market challenger?
Or follower?
Competitive Advantage
-strategies relating to market penetration and sustainable competitive advantage
-Cost - Product - Market segmentation
Innovation
strategies relating to organizations status with respect to innovation in products services or business model 1) pionner, close follower or late follower
Growth
Strategies related to achieving the organization’s growth
-increase sales to existing customers
-target new customers
-diversify market base
-intensify sales efforts

Question 9

Explain why traditional insurance would not meet coverage needs against cybercrime. Include specific exposures that would need coverage (10)

Answer 9

• Traditional insurance products may not cover cyber exposures
• Cyber insurance is available when traditional products do not respond to computer loss situations
• Traditional insurance covers tangible products like hardware,
• But has numerous exclusions like loss arising from data issues
• Traditional policies cover physical loss or damage of hardware - not cybercrime
• Traditional policies do not cover denial of service attacks
• viruses or
• intellectual-property damage
• Insurers will offer supplemental policies that cover viruses, security breaches, and DOS attacks.

Question 10

Two principal forms of commission (8)

Answer 10

• Regular commission
• Paid to borker
• In form of percentage of gross premium recorded
• Rates paid by insurers set by the market conditions
• Consistent among insurers
• Low rates for higher volume business
• Contingent profit commission
• Paid in addition to regular commission
• Insurance companies aknowlege profitability of broker’s book fo business by paying contingent
• Contingent agreements vary by insurers
• Part of contract between broker and insurer

Question 11

List 3 assessment measures used by regulators to determine if a company’s reported liabilities are realistic fo for the company’s claims, unearned premium and other amounts owing? (3)

Answer 11

Reserves -
premium reserves and claims reserves are subject to annual review by a qualified actuary.
Premium reserve is a test of the adequacy of premium rates
Claims reserve is a test of the adequacy of reserves held to pay outstanding claims and IBNR
Receivables
The collectibility of A/R and reinsurance recoveries are reviewed.
regulators do not allow an insurer to treat accounts receivable outstanding over 65 days as assets for the purpose of reporting capital or surplus.

Question 12

Define: (10)
Security
Bond
Common Share
Preferred Share
Dividend

Answer 12

Security: Certificate representing indebtness , in the case of bonds, or ownership in the case of common and preferred stock
Bond: Written promise by a borrower to repay money loaned, on a future stated date
Common share: security that represents part ownership of a company, common shareholder has voting rights
Preferred share: Security that represents part ownership of a company, has no voting rights but has priority with getting dividends
Dividend: Payment made to shareholders from profits earned by company
-paid like interest, when declared by BOD.

Question 13

Describe, Stock companies and mutual companies (9)

Answer 13

Stock companies
-either privately held or publicly held
-insurers have the same capital structures as other capital enterprises
-Stocks sold to shareholders who hope for a reasonable return on profit
-Premiums fund liabilities
Mutual companies
-Companies operate for the mutual benefit of their members
-operates on a premium assessment plan
-policyholders sign premium assessment identifying the limit they are willing to pay if company suffers a setback
full premium calculated once operating costs are factored in
-if insurer suffers loss, policyholders will be assessed a levy to make up the deficit.
-Share in the profits, but usually redistributed by reducing premiums.

Question 14

Outline 5 ways an insurance audit committee is distinct from audit committes in other industries? (10)

Answer 14

• the terminology used is quite distinct from that of other industries
• they operate in a highly regulated environment
• rely heavily on actuaries
• policies are sold and revenues collected well before costs are incurred, so the cost of the product is priced before the cost of the claims is known
• claims reserving practices have a significant impact on financial statements

Question 15

What are 3 duties of companies conduct review committee?

Answer 15

• Encourage management to establish procedures to enable compliance with legislation on issues such as self-dealing
• Reviewing procedures and their effectiveness
• reviewing the board’s policies and procedures

Question 16

Discuss how property insurance coverage and liability coverage would respond to a global influenza pandemic (25)

Answer 16

not certain how traditional policies will respond in such claims.
economic losses not covered
perhaps losses could occur from business interruption
travel insurance
Bodily injury liability
some insurers exclude infections epidemics
Some markets provide extension under property policies for damage due to infectious disease
subject to sub limits
arrange for analysis of policy wordings
BI extensions for loss from infectious diseases
contingent business interruption insurance may not require physical damage to trigger
coverage may trigger when public authorities seal off area due to infectious disease
not likely a civil authority will shut down a medical faciliity
traditional coverage that only trigger when tangible destructions occurs probably offer no coverage.

Question 17

Discuss the significan provisions that came out of the Childs v Desormeaux case with respect to liability of the social host and the different types of relationships for which a duty of care may exist. (7)

Answer 17

Judge distinguished social host from three types of special relationships:

• defendant who creates risk of harm - and profits from that creation
• defendant who acts in the paternalistic role of care
• Control over the defendant or engaged in public function or commercial enterprise

Question 18

With respect to the CCIR

1) what is it’s purpose? (5)
2) 4 guidelines developed for insurers by the CCIR (8)

Answer 18

The Canadian council of insurance regulators:
Its purpose is on improving the efficiency and effectiveness of the Canadian regulatory framework.

Guidelines:
-The insurer should conduct an analysis of its available underwriting expertise, claims handling and other functional areas to ensure a new product can be fully supported
-Appropriate controls and reporting must be established
-Must educate its distribution network about new product
-Financial forecasts to demonstrate the viability of the product or class must be prepared.
-

Question 19

6 Obstacles in the insurance industry to prevent it from growing (6)

Answer 19

• Globalization
• Rapid advances in technology
• Growing competition
• Increasingly severe weather
• Volatile investment markets
• Public image issues

Question 20

6 responsibilities of provincial regulators and 6 responsibilities of federal regulators (12)

Answer 20

Provincial responsibilities:
-Monitoring each insurers compliance with provincial legislation
-Monitoring the solvency of provincially incorporated insurers
-Licensing insurers to operate in its jurisdiction
-Licensing supervising adjusters, brokers, and agents
-Approving classes of business
-Approving policy forms
Federal Regulator responsibilities:
-incorporating new Canadian companies
-issuing orders to Canadian foreign companies to carry on business
-reviewing and assessing applications
-changes in ownership
-corporate reorganization
-acquisitions
-withdrawals

Question 21

Discuss the value of ethics as it relates to insurance professional and the industry in general (18)

Answer 21

• The notion of trust enables societies to function economically
• When trust breaks down, governments impose regulations to ensure that consumers are protected
• When unethical insurance business practice comes to the attention of regulators, a severe backlash can be expected
• Example, those that routinely deny claims without cause, can expect regulators to come down hard on the entire industry.
• Insurance professionals must approach their clients with honesty, integrity, fairness, due diligence and skill in their dealings
• Utmost good faith as a standard of conduct
• Providing high quality service
• Must respect a client’s right to confidentiality
• Must be respectful, courteous, and uphold the principles of utmost good faith
• Make decisions altruistically
• Abide by the code of ethics of the insurance institute

Question 22

Outline the 3 functions involved in the ratemaking process (3)
List the 3 Major components of rate (3)
Explain the retrospective rating plan operates (5)

Answer 22

• Analyzing statistics on the frequency and severity of past claims
• Estimating ultimate costs of settling outstanding claims
• Using the information that has been analyzed to estimate the cost of claims
• Anticipated costs of settling claims
• Acquisition costs of the business (commissions, marketing and other related costs)
• Costs of administering the process

Retrospective rating - used on some large commercial accounts.
It’s based on the insured’s actual loss experience during the policy term. The client and the insurer agree on a formula under which the ultimate cost of claims will be borne by the insured.
They agree to a minimum and maximum premium.
The idea is that the insurer recoups the cost of claims, expenses, and an insurance charge.
Basically the insured will bear the risk and the insurer merely provides the administrative services and financing.

Question 23

State the 5 adjustements that a company could be required to make in order to accomodate reform. (5)

Answer 23

• underwriting training is required
• computer systems need to be upgraded
• new rating software must be developed
• modifications for data capturing and reporting required
• new policy forms are required

Question 24

Explain the effects of human rights legislation on automobile rating criteria (6)

Answer 24

human rights groups allege some rating criteria were discriminatory, or not socially acceptable because they are based on age, gender or marital status.
The regulation aims to remove discriminatory practices from refusing to insure a person, cancelling or refusing to renew car insurance policies, based on grounds such as a person’s age, the age of a vehicle or a missing payment.
Tinkering with the cost-based rating process creates its own form of discrimination and results in inequities that cannot be justified. Good drivers are forced to subsidize the bad drivers. The drivers played in the open market end up subsidizing the inadequately rated risks because the loss suffered on pooled residual market business is factored into the rate levels of all the policyholders who are not in the pool.

Question 25

On site review of OSFI, what is reviewed under each of the 4 characteristics (8)

Answer 25

LUDI
Legal and regulatory compliance
-ensures that compliance is reviewed and conforms to the ethical standard
Underwriting Risks
-Insurer’s exposure through risk selection and approval, the retention and transfer of risk, and claims reserving and settlements are reviewed
Dishonesty and error detection
-controls to detect dishonesty or erros in data or disaster recovery plans are reviewed
Insurance Risk
-Products, pricing are examined to see if insurers exposure was greater than pricing, or if there is unhealthy trend developing

Question 26

Discuss how govt pressures affect automobile rate making (7)

Answer 26

Governments of most provinces intervene actively in automobile insurance.
4 Provinces have taken over most or all automobile business. The other provinces’ governments control premium levels and rating criteria.
Increased traffic density and more expensive automobiles amongst other reasons meant that insurance premiums had to increase at a faster rate than inflation. Consumers reacted unfavourably and began to complain.
In the 70s provinces began to introduce explicit price regulation with rating boards and public utility commission.

Question 27

4 Questions about the termination of the contract between an insurer and a producer that must be addressed in some way (8)

Answer 27

• What if the producer goes out of business? How will in-force business and claims be handled?
• How will the run-off business receive the proper service?
• Does the insurer have the resources to handle the runoff itself? Can they use a 3rd party?
• What will be the cost be to the insurer for terminating its contract with the producer, and how can the insurer protect itself against any additional costs?

Question 28

Explain the following two fundamentals of insurance

1) premiums of many are used to pay the losses of the few
2) the premiums shall be commensurate with the risk (10)

Answer 28

1) premiums of many are used to pay the losses of the few
It would take many years for someone to save enough money to pay for a million-dollar loss. For a nominal sum, transfer risks to an insurance company. Premiums of those that have not had a claim fund the losses of those that are less fortunate.
2) the premiums shall be commensurate with the risk
Insurance companies must survive to pay for claims that have yet to be filed.
If premiums charged were woefully inadequate to pay for the losses, the system would quickly crumble.

Question 29

Discuss the role of insurance in society and the economy (15)

Answer 29

Insurance is a constructive force in society and our economy.
It provides confidence, savings , encouragement of investment, and reductions in the price of goods.
It provides certain freedom of action.
Encouraging activities to flourish in industry.
Banks willing to issue mortgage on buildings that are insured
Developers willing to advance funds for construction projects guaranteed by surety bonds.
Retailers willing to operate a business with able to purchase liability
Members of society willing to use automobiles as long as they carry 3rd party insurance
Insurance underpins the economy
faciliates growth and societal development.

Question 30

Establish the importantce of authority levels in organizing departments (10)

Answer 30

• for the underwriting department, consideration will be given to such measures as premium level and account size.
• for the claims department, relevant factors include reserve amounts and complexity of claims
• a company will tend to seek a balance of authority and responsibility in each employee so
• There should be a balance between authority levels and functional processes
• When authority is properly delegated employees are empowered to handle the majority of business themselves

Question 31

4 elements you must consider when setting up a claims reserve (15)

Answer 31

• Individual claims reserves
• Incurred but not reported provisions
• adverse loss development reserves
• claims adjustment costs

Question 32

State the 5 adjustments that a company could be required to make in order to accommodate a government reform.

Answer 32

Insurers would have to look at areas that they can control such as internal expenses.
They may need to decrease salaries or stop paying bonuses due to cost-cutting measures.
They may have to reassess the company’s business plans.
Projections for premiums, loss ratios, and ROE must be redeveloped
May need to withdraw from their jurisdiction
adjust marketing plans
automobile insurers may need to consider withdrawing from the market.