PC1 - A6-8 Flashcards
Insurer Goals (5)
Profit
Mett customer needs
Meet legal req
Diversify Risk
Fulfill duty to society (at the least don’t cause harm)
Internal insurance constraints
Efficiency
Expertise
Size
Financial Resources
External insurance constraints
Regulation
Rating agencies
Public opinion
Competition
Economy
4 Classifications of Insurers
1 - Legal form of ownership
Proprietary - Lloyd’s, stock insurers, insurance exchanges
2 - Cooperative (owned by policy holders)
Mutual insurers, fraternal groups, captives
3 - Licensing status (licensed vs un)
4 - Insurance distributors (independent agencies, direct writer, or exclusive agency)
What is the investment ratio?
Net investment /
Earned premium
What is net underwriting?
net underwriting = earned premium - (incurred losses + und expense)
What is expense ratio?
und expenses /
written premium
What is combined ratio?
losses und expenses
——— + ———————–
earned written
Lower is better
What is rentention ratio?
Percent of customers who renew
What is lapse ratio?
lapsed policies /
total policies
What are the goals of underwriting?
A profitable book of business
Guard against adverse selection
Ensure adequate policyholder surplus
Types of insurance customers
Individuals (least knowledgeable)
Small businesses (no risk manager)
Middle Market - have loss history to review, a risk manager, might negotiate
National accounts - fortune 500 company, most knowledgeable and most alternatives
Underwriting cycles
Hard market - low competition, more profit
Soft market - high competition, less profit
Marketing Activities
Research - gather data and report. use focus groups
Development - ensure success w/ training, funding, tech
Information - market monitoring, internal accounting
Planning (plan sales and marketing goals, project outcomes)
Product development
Advertising
PR
Sales fulfillment
Independent Agency and Brokerage
are independent contractors
agent - represents companies
broker - represents customers
They own the expiration list
compensation: either flat percent commission or profit sharing on volume
MGA - managing general agent, does claims and underwriting
Surplus lines - do this with unlicensed insurers
Exclusive Agency
independent contractors who are captive agents
represent 1 insurer
commission: one rate for NB, one for Renewal
Can do claims
Expiration list owned by insurer, but might be sold
Direct Writer
sales agents are employees
get salary or commission
No ownership of expiration list
All other functions done by insurer
Distribution Channels
internet, call center, direct mail
group marketing (sell to members of an org)
affinity marketing (alumni trade groups)
sponsorship marketing (think Costco)
financial institutes - strong customer base open to cross-selling
omnichannel - use multiple, but keep consistent message
Insurance producer functions (8)
Prospecting
Risk management review (‘loss run’ to list losses and cost)
Sales
Policy Issuance
Premium collection ‘agency bill’ (go through agent first) or ‘direct bill’ (straight to insurer)
Customer Service
Claim handling
Consulting
Line underwriting
Evaluate incoming submissions
Select insureds
classify and price accounts
Recommend coverage (can write a manuscript policy for unique items)
Manage a book of business
Support producers
Staff underwriting
work on policy and procedure
research the market
revise guidelines
develop coverage forms
review pricing
arrange treaty reinsurance
do underwriting audits
conduct training
Underwriting policy
decides mix of business, rating
Underwriting constraints
Financial capacity - premiums within size of surplus (premium to surplus is too high is 3:1). Watch return on equity, SAP calc (net income \ average surplus), GAP calc (net income / owners equity) 5-15% is acceptable
Regulation (licenses, rate filing)
Personnel
Reinsurance
Underwriting Process
1 - Evaluate submission
2 - Develop UW alternatives (add risk control or change rate or policy terms)
3 - select alternative
4 - determine premium
5 - implement decision (tell the agent, issue documents)
6 - monitor (typically through an event trigger, big loss or audit result)
What can distort UW results
Premium volume change (perhaps due to change in guidelines)
CAT loss
delay in reporting
the underwriting cycle
nonfinancial UW result measurements
selection goals (% highly desirable)
product mix
retention ratio
hit ratio - policies written vs quoted
What is the COPE method?
Rating property
Construction, Occupancy, Protection, External Exposure
UW property - Construction
key factor. Interior finish matters, and insulation, roof (asphalt shingles are good). Height (fire dept can’t reach over 8)
Class 1 - frame - typical, weight supports are combustible
Class 2 - joisted masonry - masonry walls, or rated for 1 hr. External walls hold load. 3 floors or less
Class 3 - noncombustible - steel. supports can still twist in heat
Class 4 - Masonry, noncombustible - ext walls masonry, concrete floor. Lost cost and low maintenance
Class 5 - Modified fire-resistive - same as above, rated 1- 2 hrs
Class 6 - fire resistive - rated at least 2 hrs, load bearing parts won’t buckle
Fire division
fire wall - 8 inches of masonry, free standing, and must extend past wall (parapet)
firestop - in concealed spaces to add resistance
UW property - Occupancy
categories:
habitational- hotel, apartment
office - low hazard
institutional - schools, usually own risk retention group
mercantile - hazard varies by merch. Smoke and water damage big
service - dry cleaner, barber
manufacturing
contents - susceptible to fire? dust, gas, plywood. Friction, electricity
UW property - Protection
quantity and quality of fire protection
public/municipal or private
Public - classes are protected (1000ft to hydrant, 5 mi to dept), partially protected, unprotected. PPC system 1 to 10, 1 is best
Private - could have guards, patrols, smoke detectors, sprinklers
Guards may be best on timed schedule
Auto sprinklers are most effective. Standpipes are in stairwells. Deluge sprinklers are always open, go all at once
UW property - Ext. Exposure
Fires that start elsewhere
single occupancy (fire from nearby properties) vs multi occupancy (fire from other occupants)
Measures of loss severity
policy amount (easy but not very useful)
amount subject (‘within 4 walls’, all property exposed to loss)
normal loss expectancy (NLE) - loss expected under normal conditions w/ fire protection
probably max loss (PMC) - estimate of largest loss to occur, typically it’s everything
max foreseeable loss (MFC) - if all protection measures fail
UW - Business Income/Extra Expense
Also on BOP, BOP is broader than this with fewer conditions
cannot occur w/o direct property damage
PLM - determine most serious direct loss, calculate the period of restoration, calculate largest loss of income
Consider time to rebuild, seasonality, whether there’s a business plan
UW - Commercial Crime
moral hazard is the biggest concern
employee dishonesty and crimes by others are 2 varieties
employee losses are often hidden until they are huge
crimes by others influenced by susceptibility to being stolen, marketability to a fence, cash on hand
Warranty is done on this to ensure good faith and cover holes
UW- General Liability
PremOps - exposure to the public (bodily injury, primary concern)
Can also be prop damage (plumbers). Contractors GL automatically covers subcontractors through ‘vicarious liability’
Products & Completed Operations - defect away from a premise. Negligence or breech of warranty, strict liability tort (most common). UW’ing the product is important. Completed Ops (think repairs, maintenance)
Personal and Ad Injury - automatically on Cov B unless excluded. Covers slander, libel, false arrest
Premise MedPay - automatically included in Cov C. Does not require insured to be liable
UW - Personal and Comm Auto
Personal - consider age, type of car, DMV record, gender
Comm:
typically class rated but large ones are experience rated
Classes: vehicle weight, use (service, retail (high risk), commercial), radius of operations, special industry (dump, farm, food delivery)
Fleet safety program is a desirable sign
UW - Workers Comp
includes death benefits and disability insurance
compulsory every where but Texas
provides complete coverage of bodily injury
fairly strict UW guidelines (no window washers, roofers)
exp mod factor - an index of desirability over 1 needs investigation, experience ensures you pay more if you have more losses
seasonal/temp workers high risk
maritime operation big risk, federally regulated
# of employees together/density
off-prem hazards - duration of travel, mode of transport, hazards at remote sites
UW - Umbrella and Excess Liability
cover large, low frequency losses usually with deductible
cover 1) excess liability above underlying policies
2) coverage where other limits are exhausted
3) coverage for gaps
Excess is strict - only covers what you already have insured
UW must analyze underlying policies
