Module 5 Flashcards
Refers to the pricing of insurance and the calculation of insurance premiums.
Ratemaking
price per unit of insurance
rating
is the unit of measurement used in insurance pricing, which varies by line of insurance
Exposure unit
the person who determines rates and premiums
actuary
these organizations calculate the historical or prospective loss cost that individual companies can use in calculating their own rates
Insurance Services Office (ISO)
refers to the process of selecting, classifying, and pricing applicants for insurance
underwriting
underwriting starts with a clear statement of underwriting policy. An insurer must establish an underwriting policy that is consistent with company objectives
statement of underwriting policy
Basic Underwriting Policy
- attain an underwriting profit
- select prospective insureds according to the company’s underwriting standards.
- provide equity among the policyholders.
agent is told what types of applicants are acceptable, borderline, or prohibited
Field Underwriting
sources of underwriting information
- application
- agent’s report
- inspection report
- physical inspection
- physical examination
the type of information required depends on the type of insurance requested
application
many insurers require the agent or broker to give an evaluation of the prospective insured
Agent’s report
in property insurance, the company may require an inspection report by some outside agency, especially if the underwriter suspects moral hazard. In life insurance, the report may provide information on the applicant’s financial condition, marital status, outstanding debts or delinquent bills, felony convictions, any drinking or drug problems, whether the applicant has ever declared bankruptcy and additional information as well
inspection report
in property insurance and casualty insurance, the underwriter may require a physical inspection before the application is approved
physical inspection
in life insurance, a physical exam may be required to determine if the applicant is overweight; has high blood pressure; or has any abnormalities in the heart, respiratory system, urinary system, or other parts of the body
physical examination
Basic underwriting decisions with respect to an initial application for insurance:
- accept the application
- accept the application subject to certain restrictions or modifications.
- reject the application
other factors are considered in underwriting.
- Rate adequacy and underwriting
- reinsurance and underwriting
- renewal underwriting
property and casualty insurers are more willing to underwrite new business for a specific line if rates are considered adequate
rate adequacy and underwriting
availability of reinsurance may result in more liberal underwriting
reinsurance and underwriting
in life insurance, policies are not cancellable
renewal underwriting
refers to the sales and marketing activities of insurers.
production
agents who sell insurance are frequently referred to as
producers
This department is responsible for recruiting and training new agents and for the supervision of general agents, branch office managers, and local agents
agency departments
Basic Objectives in Claims Settlement
- verification of a covered loss
- fair and prompt payment of claims
- personal assistance to the insured
the person who adjusts a claim is known as a
claim adjustor
Types of Claims Adjustors
- agent
- company adjustor
- independent adjustor
- Public adjustor
Steps in Settlement of a Claim
- Notice of loss must be given
- The claim is investigated
- A proof of loss may be required
- A decision is made concerning payment
an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer
reinsurance
the primary insurer that initially writes the insurance
ceding company
the insurer that accepts part or all of the insurance from the ceding company
reinsurer
the amount of insurance retained by the ceding company for its own account
retention limit or net retention
the amount of insurance ceded to the reinsurer
cession
the reinsurer in turn may reinsure part or all of the risk with another insurer
retrocession
the second reinsurer
retrocessionaire
reasons for reinsurance
- increase underwriting capacity
- stabilize profits
- reduce the unearned premium reserve
- provide protection against a catastrophic loss
types of reinsurance
Faculty reinsurance
Treaty insurance
an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit
faculty Reinsurance
the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business.
treaty reinsurance
the ceding company and reinsurer agree to share losses and premiums based on some proportion.
pro rata method
the reinsurer pays only when covered losses exceed a certain level
excess-of-loss method
methods for sharing losses
- quota-share treaty
- surplus-share treaty
- excess-of-loss reinsurance
- reinsurance pool`
an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as catastrophe bond, futures contract, options contract, or other financial instrument
securitization of risk
are made available to institutional investors in the capital market through an entity called a special purpose reinsurance vehicle (SPRV)
Catastrophe bonds
when one party extends money to another party and does not
expect repayment until after a circumstantial event
float
is a corporation owned exclusively by the
policyholders who are “contractual creditors” with a right to vote on the board of
directors
mutual insurance company
is a corporation owned by its stockholders or
shareholders, and its objective is to make a profit for them
stock insurance company
