Lecture Flashcards
What does insurance add to society?
- companies to can expand, add to society, etc. if they know their covered
- spreading losses so you don’t have a major loss in one area
- avoid having an entire area economically ruined from catastrophe
- home owners insurance (for a co. they take bonds)
how do we decide coupon rate?
their ability to pay it back; more risk, higher rate
what makes a risk insurable
- economically feasible premium
- accidental and unintentional
- calculable frequency and severity
why do co.s/ people buy insurance?
- helps economic profit in the long-run
- so they look prepared when something happens, don’t want to seem unprepared
- contractual obligations with other co.s
- regulatory requirements or can’t partake in certain events
- decrease variability by requiring insurance on their side
goals of insurance regulation
- protect insurance consumers
- maintain insurer solvency
- preventing destructive competitive
why not leave the market completely open to competition?
natural disasters- huge correlated effect in one region that wipes out its economy
stress testing
- run scenarios
- can you handle less likely but plausible events?
destructive competition
- can force prices of premiums down to a point where its underpriced (more risk of insolvency)
- can’t survive a crash; only big co.s survive
- eventually leads to monopoly or oligopoly (high barriers to entry and high industry exits)
who writes insurance laws?
the state legislature (the commissioner just enforces them)
NAIC
- a collection of all the insurance commissioners in all the states
- gives some direction or suggestions that states look to when writing insurance laws
- helps create some consistency btw states
insurer accreditation
- you need a license (helps protect consumers)
- minimum capital requirements (solvency)
- dif. based on domestic v. foreign v. alien
why are there different categories of accreditation?
- where the money comes from (state should get some tax $)
- you want to look out for your domestic insurers
- foreign/alien have higher thresholds b/c you’re protecting your states residents
surplus lines
none admitted insurers
- deal with higher variability consumers
- not readily available in current insurance mkt in the state of admitted insurers
- you have to apply for this too
- generally has less regulation b/c it makes co.s want to do this which makes coverage available for high risk consumers
must insurers still follow federal employment law?
YESSS
solvency core principles
- total written premiums
- reserves
- net income
rating agencies
- rate co.s based on their risk profile
- riskier you are higher interest rate
- to get capital: put shares on the mkt
- based on ability to pay out policies
premium:surplus ratio
3: 1
- for every expected $ of profit we write $3 of premiums (risk taken on)
insurance
a pooling of fortuitous losses by a transfer of risk to an insurer who indemnifies insured for losses
bankruptcy
can’t pay current liabilities - discharge the debt in order of priority (Shareholders last)
is the state guarantee fund guaranteed?
nope- you could just be liquidated
black swan
unknown, unknown (shit happens)
perfect market
- many buyers/sellers
- selling same product
- perfect info
adverse selection
info asymmetry causes this
adequate policyholders’ surplus
- ability to pay claims
- maintain insurer credit rating
- ability to expand business
if policyholders surplus drops…
credit rating drops
goals of uw guidelines
ensure consistent strategy
what should uw’s look at when determining an insureds category?
loss history, site visits, similar exposures, comparisons, the application itself
what are uws trying to accomplish?
- good policy to increase net premiums
- hopefully leads to increase in net income
constraints uws face
- financial capacity
- regulation
- human resources
- reinsurance
how do good uws overcome constraints?
- provide for structured decision making
- ensure uniformity and consistency
- synthesize insights from experience
- distinguish btw routine and unique risks
- avoid duplication of efforts (rework)
