Key Point Review Questions Study 10

Question 1

1) What are the defining disciplines specific to the insurance industry?

Answer 1

The defining insurance disciplines are underwriting, which determines the risks accepted by an insurer; and claims adjusting, which fulfills the insurer’s obligation to the insured after a loss.

Question 2

2) Who is the first point of contact in the insurance transaction?

Answer 2

As intermediaries between the insurer and insured, brokers and agents are the first point of contact in the insurance transaction – the insurance professional who first participate in the underwriting and claims processes.

Question 3

3) What are brokers and what do they do?

Answer 3

A licensed independent person or firm who acts on behalf of an insured in placing business with insurance companies.

Question 4

4) What are agents, and what do they do?

Answer 4

A person who is employed or authorized to act on behalf of another. Agents can be independent or direct writers.

Question 5

5) How do the various types of agents differ?

Answer 5

An independent agent is one who contracts with at least two or more insurance companies to sell their insurance policies to the public and is paid a commission based on the percentage of each premium paid. This includes a fee for each policy serviced. A direct agent represents only one company and is also paid on a commission basis similar to the independent agent.

Question 6

6) What is the roles of the underwriter in the insurance transaction?

Answer 6

Underwriters are the second point of contact in the transaction. They receive the risks that have been first underwritten by the brokers or agents; they review the risks to determine whether they are acceptable to the insurer and they may become involved with their adjuster colleagues in the claims process.

Question 7

7) What is the role of the adjuster in the insurance transaction?

Answer 7

They are the third point of contact in the insurance transaction. They work with insured, the brokers or agents, and the underwriters.

Question 8

8) What is meant by insurers “giving brokers the pen”?

Answer 8

Vesting underwriting authority in their brokers within specified limits.

Question 9

9) How do brokers and underwriters differ in their perspective of writing risk?

Answer 9

The broker underwrites for the insured and the insurer; the underwriter underwrites for the insurer. The broker has personal contact with the insured. The underwriter has only the information supplied by the broker and generally does not know the insured.

Question 10

10) What is the typical underwriting process followed by insurers?

Answer 10

• Evaluating the risk
• Making the underwriting decision
• Pricing the risk

Question 11

11) How is risk defined in the insurance industry?

Answer 11

The chance of loss. Specifically, the possible loss or destruction of property or the possible incurring of a liability. Sometimes referred to as the subject of an insurance contract.

Question 12

12) What is a line guide?

Answer 12

A listing of the maximum amounts of exposure an insurance company is prepared to accept on various classes of risk, as well as parameters for acceptable risk in each class.

Question 13

13) Why is claims history important in the underwriting process?

Answer 13

The losses a risk has incurred in the past are a critical tool for assessing the exposure to future loss that the risk represents. The record of past losses describes the types of loss and the amount paid out for each loss. The underwriting process should also determine what preventative measures, if any, have since been taken to help prevent loss in the future.

Question 14

14) What is frequency of loss, and why is it important during the underwriting process?

Answer 14

The ratio of the number of losses to the number of exposure units. “Exposure units” can mean whatever is appropriate to the risk – for example the number of locations on a property policy. Assuming the average size of loss is constant, the higher the loss frequency, the worse the loss experience.

Question 15

15) What is severity of loss, and why is it important during the underwriting process?

Answer 15

The average size of losses. The size of losses incurred on a property policy may depend on the number of tenants in a building, the occupancy of the building, the type of construction and the nature and proximity of other buildings near the insured building The larger the average loss, the higher the loss severity. Assuming the loss frequency is constant, the higher the loss severity, the worse the loss experience.

Question 16

16) Why do brokers and underwriters have less control over severity of loss than frequency?

Answer 16

The broker and underwriter have not control over inflation or repair costs, among the many factors that may determine the final size of a claim.

Question 17

17) What financial factors might a broker or underwriter consider?

Answer 17

The financial strength of an applicant or insured in part reflects the number and quality of the mortgages on the property. Risks with more than two mortgagees must be carefully reviewed and may be unacceptable to many insurers.

Question 18

18) What does COPE stand for, and how is it used in the underwriting process?

Answer 18

Construction, occupancy, protection and exposure. The factors assessed by underwriting for a physical risk.

Question 19

19) What construction factors must a broker or underwriter consider when writing a property risk?

Answer 19

Includes the types of material used in the walls and roof of the applicant. Size of the building, its age, number of stories, and the type of heating system and fuel used.

Question 20

20) What occupancy factors must a broker or underwriter consider when writing a property risk?

Answer 20

It includes the number of occupants, the space each occupies, the hazards associated with each occupancy, and any measures taken to reduce those hazards.

Question 21

21) What protection factors must a broker or underwriter consider when writing a property risk?

Answer 21

Includes both public and private protection. Public fire protection based on town grades. Private protection includes sprinklers or other extinguishing systems and fire alarm systems.

Question 22

22) What exposure factors must a broker or underwriter consider when writing a property risk?

Answer 22

The chance the applicant will suffer a loss as a result of proximity to one or more risks or potential causes of loss to the applicant.

Question 23

23) What are the Three (3) main risks that insurers may consider when insuring a heritage or historical building?

Answer 23

1. Heritage buildings carry higher risks due to old wiring, piping, heating sources, foundations, and roofs.
2. In the case of a claim, it may be too costly for insurance companies to replace the materials of designated heritage sites.
3. Heritage buildings may require specific types of repairs with specific materials due to the various acts and by-laws in the different provinces and municipalities that apply once a building has been designated a heritage building.

Question 24

24) What are the legal requirements in the event of a total loss to a heritage building?

Answer 24

There is usually no legal requirement to replicate the original structure if it is rebuilt – but the agreement and by-laws need careful review to ensure that is the case.

Question 25

25) What are the legal requirements in the event of a partial loss to a heritage building?

Answer 25

In the event of a partial loss, the cost of repair will be significantly higher than similar repairs to a modern building.

Question 26

26) What are the traits of a good underwriter when making a decision on writing a risk?

Answer 26

A good underwriter will always seek to understand a risk and its context as thoroughly as time and resources permit. He or she will be as creative as is possible or necessary to insure the risk in terms acceptable to both the insurer and the insured.

Question 27

27) What considerations will an underwriter contemplate when rejecting a risk?

Answer 27

1. The risk of a class not permitted by the line guide or in some other way falls short of minimum requirements specified in the line guide.
2. Market conditions or competitive considerations.
3. The risk, on its own merits, too flawed to be accepted, and it is not possible to negotiate terms on which the risk could be made acceptable.

Question 28

28) How does an insurer decide what premium will adequately compensate for a risk it accepts?

Answer 28

The insurer must have enough money to indemnify insureds for their losses. It must also have money for other expenses, as well as money to provide the insurer a reasonable profit.

Question 29

29) What is rate?

Answer 29

The price of a unit of insurance for the policy period (usually one year). For example, the rate for fire insurance on a building for a given risk might be $0.50 per $100 of insurance.

Question 30

30) What is the role of the actuary?

Answer 30

A professional skilled in the application of mathematics to financial problems.

Question 31

31) What is ratemaking?

Answer 31

The process of compiling and analyzing data to establish rates for different classes of risk. Usually performed by actuaries.

Question 32

32) What are the major components that make up a rate?

Answer 32

• The anticipated cost of settling claims
• The acquisition costs of the business, such as commissions
• The cost of administering the process, including taxes levied on the premiums.

Question 33

33) What factors must an insurer consider regarding perils and hazards in ratemaking?

Answer 33

Geographic variations, windstorm and hail,

Question 34

34) How can geographic variations influence rate making?

Answer 34

Geographic variations can bring about differences in rates even between classes of risk that are otherwise similar. Large cities have a greater chance of vandalism than in small towns or rural areas. Fire can spread more quickly between building in densely built urban areas. But urban areas are better serviced by fire hydrants and fire departments.

Question 35

35) How can windstorm and hail occurrences influence ratemaking?

Answer 35

Insureds in high-risk hail zones can expect to see not only coverage restrictions but also rate increases. All of the large loss hail events recorded in Canada have occurred in Alberta.

Question 36

36) What is rating?

Answer 36

The process by which underwriters apply the rates developed by actuaries to the information that underwriters have gathered to determine premium for individual risks.

Question 37

37) What is a premium, and how is it calculated?

Answer 37

The total cost of insurance. It is derived by multiplying the rate of insurance by the amount of insurance.

Question 38

38) How can professional appraisals be used to determine a building’s replacement cost?

Answer 38

A professional appraisal is the best way to determine a building’s replacement cost, but most insureds would find this too expensive to have it done regularly.

Question 39

39) What is the role of the broker during the claims process?

Answer 39

• Help report a loss to the insurer by taking the first notice of loss from the insured and transmitting it to the insurer
• Explain the claims process to the insured, thereby reducing anxiety and setting realistic expectations
• Monitor the progress of the claim
• Advocate on the insured’s behalf when the insured has concerns.

Question 40

40) What might an insurer consider using independent claims adjusters?

Answer 40

Independent adjusters may also be needed in the regions where the insurer does not have offices. Or in situations where a loss affects many insureds.

Question 41

41) Why is service important in the claims process?

Answer 41

Service is critical to the success of any business entity. Insurance is an intangible product, most insureds do not realize its true value until a loss occurs. The settlement process for any claim often represents the insured’s first direct dealing with the insurer. Relationships with claimants can be enhanced by a sincere desire to resolve claims promptly and professionally.

Question 42

42) What is a soft skill, and what are some examples of soft skills?

Answer 42

Intangible skills that are hard to measure and generally useful in any job rather than only one job in particular. Examples: Being patient, being observant, using tact and diplomacy to reassure and calm an insured.

Question 43

43) What are the TEN (10) steps followed in claims adjusting?

Answer 43

1. Does the loss fall within the policy period?
2. Does the loss fall within the insuring agreement?
3. Do any exclusions apply?
4. Do any endorsements apply?
5. Have all policy conditions been met?
6. Is there a deductible to be applied?
7. How much should be paid?
8. Any other reason not to pay the claim?
9. Pay the claim
10. Notify the underwriter of any information material to the risk that the insurer may be unaware of.

Question 44

44) What is the importance of a Proof of Loss Form?

Answer 44

The insurance acts of the common-law provinces require that a blank Proof of Loss form be provided to an insured within 60 days of notice of loss. If an insured asks for the form, then the insurer must promptly comply. This is not a requirement in QC.

Question 45

45) What criteria make up the IBC industry claims agreement requirements?

Answer 45

1. The amount of the loss falls below a specified threshold
2. There is no suspicion of fraud in the claim
3. There is no possibility of subrogation
4. There is no threat of litigation by the insured.

Question 46

46) Why is confirmation of coverage important to the claims adjuster?

Answer 46

A claims adjuster must develop a fact base of information for a claim that will allow them to determine whether a loss is covered under the policy and its value.

Question 47

47) What are the FOUR (4) steps in the investigation of a loss?

Answer 47

a. Obtaining a written statement from the insured
b. Interviewing the insured
c. Obtaining photographs of the damaged property from before and after the loss
d. Arranging emergency services and assigning a contractor

Question 48

48) What Fifteen (15) pieces of information must be collected on a statement from the insured?

Answer 48

• The insured’s name, address and policy number
• The date and time of the loss
• The specific location at which the loss occurred
• A description of the loss
• How the loss was discovered
• Whether police were called
• Names of the household occupants
• A description of the damaged item or items that includes:
o The ownership of the item, to evaluate insurable interest
o The location of the item
o The make, model, size and serial number of the item
o Information on the purchase of the item: when, where, cost, receipt
o Whether any items have been in storage or repaired recently
o Whether a financing contract exists on the damaged item
o Any other information pertinent to the loss

Question 49

49) Why is it better to complete in-person interviews for large-loss claims?

Answer 49

A personal interview is usually best, because it produces more comprehensive information for larger, more complicated losses. It is critical that everyone be treated fairly.

Question 50

50) What are the NINE (9) recommended steps for conducting an interview?

Answer 50

1. Plan: a checklist should be prepared of subjects to be covered in the interview
2. Listen: the interviewer should never interrupt the interview subject. The later part of an interview often reveals the most as the subject becomes comfortable with the interviewer and the interview process.
3. The interviewer must avoid threatening language or gestures.
4. The interviewer must maintain her composure and not get excited or upset.
5. Only one question should be asked at a time
6. The interviewer should be alert to and prepared to evaluate the body language of the subject.
7. The interviewer should ask for explanations whenever the subject says something unclear
8. Notes should be taken even if the interview is recorded. Notes should be reviewed with the interview subject.
9. A respectful attitude must be maintained at all times.

Question 51

51) Why are photographs important in the claims process?

Answer 51

Photographs and videos are used to document evidence and remind all parties of what the affected area looked like directly after the loss occurred. Photos help to quantify the claim.

Question 52

52) What is the claims procedure for conducting emergency services for large losses?

Answer 52

A detailed scope of emergency repairs should be agreed by the insured, the emergency contractor and the adjuster within 48 hours of the loss.
Emergency Repairs: The immediate and necessary remediation required to protect, secure, and make reasonably safe a loss location, while protecting the premises from further damage.

Question 53

53) What is involved in the settlement stage of a loss during the claims process?

Answer 53

After negotiations are complete and a settlement amount has been agreed to, the claims adjuster sends the cheque, accompanied by a covering letter to the claimant.
Alternatively a denial of coverage will be communicated in writing.
Once a claim has been settled, the claimant has no right to reopen it

Question 54

54) How can underwriters play a role in the claims process?

Answer 54

Adjusters and underwriters may be in contact throughout the claims process, or the adjuster may find a problem with the loss or the risk and notify the underwriter. Underwriting after a claim usually occurs when the adjuster finds that there is a substantial change to the risk as presented in the insurer.