Insurance Terms

Question 1

Exposure

Answer 1

basic unit of risk that underlies the insurance premium

Question 2

Written exposure

Answer 2

total exposures arising from policies issued during a specified period of time

Question 3

Earned exposure

Answer 3

(as of a certain point in time) the portion of the written exposure for which coverage has already been provided

Question 4

Unearned exposure

Answer 4

(as of that point in time) the portion of the written exposure for which coverage has not yet been provided

Question 5

In-force exposures

Answer 5

number of insured units that are exposed to loss at a given point in time

Question 6

Written premium

Answer 6

total premium associate with policies that were issued during a specified period

Question 7

In-force premium

Answer 7

full-term premium for policies that are in effect at a given point in time

Question 8

Estimated Ultimate Losses

Answer 8

Paid losses + case reserve + IBNR Reserve + IBNER Reserve

Question 9

IBNER

Answer 9

aka development on known claims

Question 10

ALAE

Answer 10

LAE that are directly attributable to a specific claim

Question 11

Example of ALAE

Answer 11

Fees associated with outside legal counsel hired to defend a claim

Question 12

Example of ULAE

Answer 12

salaries of claims department personnel

Question 13

Characteristics of LAE

Answer 13

claim-related expenses

Question 14

Underwriting expenses

Answer 14

aka. operational and administrative expenses. Non claim-related expenses in the acquisition and servicing of policies

Question 15

4 Categories of underwriting expenses

Answer 15

1. Commissions and brokerage
2. Other acquisition
3. General
4. Taxes, licenses, and fees

Question 16

Commission and brokerage expenses

Answer 16

Paid as a percentage of premium written

Question 17

Other acquisition expenses

Answer 17

expenses other than commissions and brokerage expenses paid to acquire business

Question 18

Example of “other acquisition”

Answer 18

Costs associated with media advertisements

Question 19

General expenses

Answer 19

Remaining expenses associated with the insurance operations and any other miscellaneous costs

Question 20

Example of “General expenses”

Answer 20

costs associated with the general upkeep of the home office

Question 21

Taxes, licenses, and fees

Answer 21

include all taxes and miscellaneous fees paid by the insurer (excluding federal income taxes)

Question 22

Underwriting profit

Answer 22

aka. operating income, the sum of the profits generated from the individual policies

Question 23

Two main sources of profit for insurance companies

Answer 23

1. Underwriting profit

2. Investment income

Question 24

Investment income

Answer 24

income generated by investing funds held by the insurance company

Question 25

Possible reasons for restatement of the historical experience

Answer 25

1. Rate changes
2. Operational changes
3. Inflationary pressures
4. Changes in the mix of business written
5. Law change

Question 26

frequency

Answer 26

number of claims / number of exposures

Question 27

Pure premium

Answer 27

Losses / Number of Exposure = Frequency * Severity

Question 28

Average premium

Answer 28

Premium / Number of Exposures

Question 29

LAE ratio

Answer 29

LAE/Losses

Question 30

UW expense ratio

Answer 30

UW expenses / Premium

Question 31

UW expense ratio at the onset of the policy (e.g. commissions, other acquisition, taxes, licenses and fees)

Answer 31

UW expenses / written premium

Question 32

UW expense ratio incurred throughout the policy (e.g. general expenses)

Answer 32

Measure of the portion of each premium dollar used to pay for underwriting expenses.
UW expenses / earned premium

Question 33

OER (Operating Expense Ratio)

Answer 33

Measure of the portion of each premium dollar used to pay for loss adjustment and underwriting expenses.
UW Expense Ratio + LAE/Earned premium.

Question 34

Combined ratio

Answer 34

Combination of loss and expense ratio.

Loss ratio + LAE/Earned Premium + Underwriting Expenses / Written Premium. the loss ratio does not include LAE.

Question 35

Combined ratio in cases when the companies want to compare underwriting expenses throughout the policy

Answer 35

Loss Ratio + OER

Question 36

What does Retention ratio measure

Answer 36

Measure of the rate at which existing inured renew their policies upon expiration). gauge the competitiveness of rates

Question 37

Retention ratio

Answer 37

Number of policies renewed / number of potential renewal policies

Question 38

What does close ratio measure?

Answer 38

aka. hit ratio, quote-to close ratio or conversion rate, measure of rate at which prospective insured accept a new business quote

Question 39

Close ratio

Answer 39

Number of accepted quotes / Number of quotes