Liability / Risk Takers – Financial Service Companies / Insurers / Guarantors

Question 1

Business liability

Answer 1

1. Tort / Negligence
2. Strict Liability
3. Product Liability (defective)
4. Breach of Contract
5. Failure to Perform / Complete
6. Breach of Fiduciary Duty
7. Regulatory violation

Question 2

Product liability for an insurance company

Answer 2

♠ Manufacturing - typo, for example
♠ Design - insurance contract hard to understand, confusing.
♠ Warning - potential exposure when legislation is changed.

Question 3

Breach of Contract

Answer 3

• Contractual Term
• Representation
• Warranty

Question 4

Stowers doctrine

Answer 4

Holds that a liability insurer that undertakes the defense of an insured has a duty to act in good faith in settling a liability claim; Courts have interpreted the “duty to defend” language in standard insurance policies as giving liability insurers absolute control over the conduct of the defense. Whether to settle a liability claim is therefore completely within the discretion of the liability insurer under the terms of the policy contract. If the injured party makes a pretrial offer to settle a liability claim for an amount within the liability policy limit, the insurer is not obligated to accept the offer and has the contractual right to take the claim to trial. To protect insureds from abusive practices, courts impose an extracontractual duty on insurers to act in good faith when deciding whether to reject a pretrial settlement offer that is within policy limits. If the insurer acts unreasonably and rejects a good pretrial settlement offer within policy limits, unwisely takes the claim to trial, loses, and the jury returns a verdict against the insured for an amount above policy limits, the defaulting insurer may be liable to pay the entire judgment under the Stowers Doctrine, even the excess portion above policy limits.

Question 5

Reinsurance

Answer 5

Insurance for insurance companies - law of large numbers.

Question 6

Earned insurance premium

Answer 6

An earned premium is the amount of total premiums collected by an insurance company over a period that have been earned based on the ratio of the time passed on the policies to their effective life. This pro-rated amount of “paid in advance” premiums have been earned and now belong to the insurer.

Question 7

Unearned insurance premium

Answer 7

Unearned premium is the premium corresponding to the time period remaining on an insurance policy. Unearned premiums are proportionate to the unexpired portion of the insurance and appear as a liability on the insurer’s balance sheet, since they would be paid back upon cancellation of the policy.

Question 8

Insurance commissioner

Answer 8

An insurance commissioner (or commissioner of insurance) is a public official in the executive branch of a state or territory in the United States that, along with his or her office, regulate the insurance industry.

Question 9

Additional concepts in liability risk

Answer 9

1. Dispute resolution

2. Appraisal clauses

Question 10

Dispute resolution

Answer 10

♠ Mediation  
-  Contractual
-  Judicial
-  Regulatory
♠ Arbitration  
-   Binding
-  Non-binding

Question 11

Non-binding arbitration

Answer 11

Non-binding arbitration helps you understand more facts because people are less protective.

Question 12

Appraisal clauses

Answer 12

Property insurance provision allowing either the insurer or the insured to demand a binding appraisal of damaged property in the event of a dispute as to its value and establishing the required appraisal procedure.

Question 13

Types of Private Insurers

Answer 13

♠ Stock Insurance
♠ Mutual Insurers
♠ Reciprocal Exchange
♠ Risk Retention  Groups
♠ Risk Purchasing Groups
♠ Captives
♠ Lloyd’s Associations

Question 14

Stock Insurance

Answer 14

1. Ownership and governance – owned by stockholders.
2. Status of the policyowner – contracts are nonassessable.
3. Dominant in the property and liability industry.

A capital stock insurance company is one that gets a majority of its assets or money from the sale of shares or stock to stockholders.

Question 15

Mutual Insurers

Answer 15

1. Ownership and governance – owned by policyowners
2. Dominant in the field of life insurance
3. Types include assessment, advance premium, and fraternal

A mutual insurance company is an insurance company owned entirely by its policyholders. Any profits earned by a mutual insurance company are rebated to policyholders in the form of dividend distributions or reduced future premiums. In contrast, a stock insurance company is owned by investors who have purchased company stock; any profits generated by a stock insurance company are distributed to the investors without necessarily benefiting the policyholders.

Question 16

Reciprocal Exchange

Answer 16

1. Defined as an unincorporated mutual
2. Managed by an attorney-in-fact, which may be a corporation
3. Its an unincorporated association of subscribing members who exchange contracts of indemnity with each other. Capital in an unincorporated reciprocal interinsurance exchange is provided by the subscribing members’ current payments which are not called “premium” but rather “premium deposits”.

Question 17

Risk Retention Groups

Answer 17

A type of liability insurer owned by the policyholders. The members in this type of organization must be in the same type of business, so that they are exposed to the same type of liability risks. The organization spreads liability equally between the members and offers a different way of financing a liability.

Question 18

Captive

Answer 18

Captive insurance companies are insurance companies established by a parent group or groups with the specific objective of covering the risks to which the parent is exposed. Hence, the use of such companies constitutes a type of self-insurance. Captive insurance companies sometimes insure the risks of the group’s customers.

Question 19

Lloyd’s Associations

Answer 19

1. Lloyd’s of London
2. American Lloyd’s – differ from Lloyd’s of London in that they are smaller, less prestigious, and not as financially strong.

Question 20

Lloyd’s of London

Answer 20

♠ Provides a meeting place – individual syndicates do the insuring.
♠ Has great financial strength
♠ Major lines of business are ocean marine, reinsurance, and surplus lines.

Lloyd’s of London is an exchange. You get a policy issued by a syndicate, which sells through Lloyd’s.

Question 21

Principal Agent-Relationship

Answer 21

The principal–agent problem, in political science and economics, (also known as agency dilemma or theory of agency) occurs when one person or entity (the “agent”) is able to make decisions on behalf of, or that impact, another person or entity: the “principal”.

Question 22

Legal status of an agent

Answer 22

1. Authorized agent can bind the principal to a contract.
2. Sources of authority:
   
   • express
   • implied
   • apparent

Question 23

Express authority

Answer 23

you are authorized to act under specified circumstances (Stated in the contract)

Question 24

Implied authority

Answer 24

Naturally comes out of the express authority - home owners insurance and taking a picture of the home.

Question 25

Broker

Answer 25

1. Sells, solicits, or negotiates insurance for compensation.
2. Marketing Systems - provide services such as risk management, loss control, and knowledge where insurance can be best placed
3. Are important in the surplus lines market

Question 26

Admitted vs. non-admitted markets:

Answer 26

♠ Admitted - placed under specific regulations
♠ Non-admitted - surplus lines market. Its riskier. Non-admitted carriers are usually referred to as “surplus” or “excess lines insurers”. Non-admitted carriers are not regulated in that state and do not contribute to the State Guaranty Fund, which protects policyholders from the bankruptcy of its insurance carrier.

Question 27

Basic objectives of claim settlement

Answer 27

1. Verification that a covered loss has occurred
2. Fair and prompt payment of claims
3. Providing personal assistance to the insured

Question 28

Texas Unfair Claims Settlement Act – Brief Discussion

Answer 28

Every state has provisions that require the fair treatment of the claimant. In Texas, for example, you have 15 days to acknowledge a claim.

Question 29

Reinsurance - Key Definitions

Answer 29

♠ Reinsurance 
♠ Ceding company 
♠ Reinsurer 
♠ Net retention 
♠ Retrocession

Question 30

Reinsurance

Answer 30

– shifting of part or all of the insurance to another insurer

Question 31

Ceding company

Answer 31

– insurer that initially writes the business

Question 32

Reinsurer

Answer 32

– firm that accepts insurance from the ceding insurer

Question 33

Net retention

Answer 33

– the amount of insurance kept by the ceding company

Question 34

Retrocession

Answer 34

– reinsurer obtains reinsurance. Sometimes the retrocession is done to the ceding company.

Question 35

4 Reasons for Reinsurance

Answer 35

1. To increase underwriting capacity
2. To stabilize profits
3. To reduce drain on surplus because of the unearned premium reserve
4. To protect against a catastrophic loss

Question 36

Generally accepted accounting principles (GAAP)

Answer 36

a common set of accounting principles, standards and procedures that companies must follow when they compile their financial statements. GAAP is a combination of authoritative standards (set by policy boards) and the commonly accepted ways of recording and reporting accounting information. GAAP improves the clarity of the communication of financial information.

Question 37

Statutory Accounting Principles (SAP)

Answer 37

a set of accounting regulations prescribed by the National Association of Insurance Commissioners for the preparation of an insuring firm’s financial statements. SAP are regarded as more regulatory and conservative than the GAAP method of preparing financial statements.

Question 38

Two Main Types of Reinsurance

Answer 38

♠ Facultative reinsurance

♠ Treaty reinsurance

Question 39

Facultative reinsurance

Answer 39

Reinsurance on a risk by risk basis. The reinsures considers each risk individually. This is applied to large risks - the Dell complex (unique risk)

Question 40

Types of automatic treaties

Answer 40

♠ Reinsurance pool
♠ Quota share
♠ Surplus share
♠ Excess of loss

Question 41

Quota share treaty

Answer 41

requires the primary insurer to cede a certain percentage of every risk within the agreement to the reinsurer (paying a proportional premium). In return, the reinsurer agrees to indemnify losses suffered by the ceding company in the same proportion. If the reinsurer agrees to reinsure 35 percent of the risk (accepting a proportional premium for that agreement); they pay 35 percent of any losses

Question 42

Surplus share treaty

Answer 42

allows the primary insurer to cede a certain percentage of liabilities exceeding a pre-determined retention. The ceded amount can vary from risk to risk. Premiums and losses are received and paid by the reinsurer in the same proportion.

Question 43

Excess of loss reinsurance treaty

Answer 43

a type of reinsurance in which the reinsurer indemnifies the ceding company for losses that exceed a specified limit. Excess of loss reinsurance is a form of non-proportional reinsurance. Depending on the language of the treaty, it can apply to either the all loss events during the policy period or can apply to losses in aggregate. Treaties may also use bands of losses that are reduced with each claim.

Question 44

Reinsurance pool

Answer 44

A risk financing mechanism used by insurance companies to increase their ability to underwrite specific types of risks. The insurer cedes risk to the pool under a treaty reinsurance agreement.

Question 45

Claims process

Answer 45

♠ Notice of lis to the insurance company
♠ Proof of loss
♠ Decision to pay or not to pay

Question 46

Loss adjustment expense

Answer 46

The cost of investigating and adjusting losses. LAEs need not be allocated to a particular claim. If they are allocated to a particular claim, they are called “allocated loss adjustment expenses” (ALAE); otherwise, they are unallocated loss adjustment expenses (ULAE).

Question 47

Contract of Idenmnity

Answer 47

Type of insurance cover (such as property insurance, but not personal accident insurance) that only restores the insured to his or her original financial position. The insured cannot gain from a contract of indemnity