Study 1 - The Commercial Insurance Context Flashcards
How did Blockbuster adapt to a changing market?
DVD players were introduced and they adapted for DVD rentals over VHS rentals
What three categories play a major role in evolution of a business?
Technological developments
Climate risk
Globalization
What do technological developments improve?
Business processes
Productivity
Efficiencies
People’s personal lives
What were the four major technological revolutions?
Industrial revolution (1760-1840)
Technical revolution (1870-1920)
Scientific/technical revolution (1940-1970)
Information & telecommunications revolution (1975-present)
Explain the impact of the industrial revolution
- Transitioned to new manufacturing processes spurred by technological innovations
- Productivity increased; many jobs replaced by machines
Explain the impact of the technical revolution
- Improved communication increased distribution of scientific theories
- Advancements in technology began to meet needs faster
Explain the impact of the scientific/technical revolution
- Global events spurred the necessity of technological solutions
- The modern era of computers was triggered
Explain the impact of the information & telecommunications revolution
- Technology has become faster, more efficient and more portable
- The virtual world is ever expanding, bringing the world closer together
What are two key inventions during the industrial revolution?
Spinning jenny & the light bulb
What are three concerns for businesses with the development of technology?
- Goods being carried across larger distances have an increased potential for damage from accidental vehicle upset
- Mechanical breakdown of production line equipment could lead to huge repair costs and loss of contracts
- Personal data and sensitive information are prone to electronic data theft, and network systems are susceptible to cyber attacks
What are some examples of what could be covered under cyber insurance?
- Cost of a professional firm to replace lost or corrupted data
- Loss of business income and extra expenses incurred while the system and data are being recovered
- The cost of a public relations firm to communicate with outside parties regarding cyber attack
- Data recreation costs from non electronic sources
- Defence and liability costs arising from an action alleging system security failure, including settlement and judgment costs
How has technology helped make policy issuance, claims handling and risk analysis easier?
- Delivery of policies has evolved from handwritten to eDocs or electronic formats
- Complex integrated policy management systems and claims handling systems have been developed to reduce handling times
- Automated underwriting can be accessed by anyone on the Internet, claims can be reported, analyzed and paid through an app
What are some factors businesses must consider in relation to climate risk?
- Their physical location and its ability to withstand environmental conditions
- Their business activities and employees
- The length, location, and diversity of their supply chain
- Their customer base
What are some examples of climates that could have a negative impact on business operations?
Flooding, strong winds, hail storms and droughts
Define direct writer
Insurance company selling directly to the public and not through independent agents or brokers
Define insured
Any person or corporation covered by an insurance policy. In some policies, the term may be defined exhaustively to limit the coverage or defined broadly to expand coverage
Define insurer
The insurance company that undertakes to indemnify for losses and perform other insurance-related operations
Define loss ratio
The ratio of total losses paid out in claims plus adjustment expenses divided by the total earned premiums. Usually expressed as a percentage
Define broker
Licensed independent person or firm who acts on behalf of an insured in placing business with insurance companies
Define producer
A broker or an agent who sells insurance
Define reinsurance
Insurance purchased by an insurance company from another insurance company
Define cede
An insurer’s transferal or signing over part of an insurance risk to a reinsurer
What are some examples of “supporting players”?
- Independent adjusters
- Inspection companies/independent inspectors
- Preferred contractors/restoration companies
- Preferred repair garages
- Education and data-collection companies (Insurance Bureau of Canada, Insurance Institute of Canada, Fire Underwriters Survey, etc)
Define premium
Price of insurance protection for a specific risk for specific time
Define capacity
Measure of an insurer’s ability to issue contracts of insurance. Measured usually by the largest amount it will accept, or in certain situations, by the maximum volume of business that the company is prepared to accept
What three factors affect market cycles?
- Economic conditions
- Legal climate
- Catastrophes
Define soft market
Phase in which insurers increase the amount of coverage they are willing to write, causing supply to increase and premiums to fall
Define hard market
Phase in which insurers reduce the amount of coverage, causing supply to shrink and premiums to rise
What are some effects of a soft market?
- Lower premium rates/deductibles
- Relax policy terms and conditions
- Relax loss prevention and control measures
- Write classes of business that they would not normally write
What are some effects of a hard market?
- Approach each risk very cautiously
- Set more exacting underwriting standards
- Give loss control and loss prevention measures significant consideration
- Tighten policy terms to limit exposures
- Make substantial rate increases
- Terminate relationships with brokers with unprofitable results or with only a small volume of business
- Withdraw from a jurisdiction, class of business, or individual risk when sufficient market share has not been gained or a portfolio or individual risk is not profitable
- Withdraw from the market altogether by selling the policy to another insurer or placing it into what is known as run-off
Define class action
Civil procedure used to secure a judicial remedy for a group of persons who have common interests
Define punitive damages
In excess of required to compensate for wrong done
What three conditions may trigger a hard market?
- Economic
- Legal climate
- Catastrophies
What are some examples of economic conditions which reduce profitability?
- Under performance of insurance companies investment portfolios
- Falling interest rates
- Government regulation
Define insurance claims catastrophe
Sudden and unexpected event causing many insured claims
What is OSFI?
Office of the Superintendent of Financial Institutions
What is the mission of OSFI?
To protect the interests of depositors, policyholders, pension plan members and creditors of financial institutions
What does OSFI evaluate?
Company risk profile
Financial condition
Risk management practices
Compliance with laws and regulations
What are the different insurance regulators?
IBC - Insurance Bureau of Canada
IAIS - International Association of Insurance Supervisors
Provincial/territorial regulatory boards
OSFI - Office of the Superintendent of Financial Institutions
FCAC - Financial Consumer Agency of Canada
CCIR - Canadian Council of Insurance Regulators
IBAC - Insurance Brokers Association of Canada
What factors does OSFI assess during an on-site review?
Insurance risk (product and pricing)
How risks are underwritten (insurer’s exposure through risk selection, retention and transfer, effect of claim reserves)
Legal and regulatory compliance (does it confirm with ethical standards)
Dishonesty or Error Detection
Disaster Recovery Plans
What is the role of IAIS?
International Association of Insurance Supervisors
Worldwide convergence of solvency regulation; has developed ICPs (insurance core principles) that govern the supervision of insurers
What is the role of IBC?
Insurance Bureau of Canada
Identify regulatory issues, secure legislative efficiency and harmonization, and to promote self-regulation
Develops industry positions, briefs and responses to regulatory issues
Creates standard wordings
What is the role of FCAC?
Financial Consumer Agency of Canada
Oversees consumer issues and expands consumer education
What is the role of CCIR?
The Canadian Council of Insurance Regulators
Improves the efficiency and effectiveness of Canadian regulatory framework
Goal is to simplify, coordinate and harmonize regulation of insurance in Canada
What is the role of IBAC?
Insurance Brokers Association of Canada
Liaises with government, consumer groups and insurance companies to safeguard the interests of independent insurance brokers
Define solvency
Business entity’s ability to meet its long term financial commitments
Define reinsurer
An insurance company that reinsures primary insurance companies
When is a company considered to be solvent?
When they can honour all debts even if closed down immediately, typically by more assets than liabilities
Define minimum capital test (MCT)
Measure of solvency applied to insurance companies by OSFI. It shows whether insurers have assets worth at least a certain multiple of the amount of their liabilities, as well as a margin of additional assets
What are some other market considerations that can be considered other than solvency?
- Licensing insurers to operate in a jurisdiction
- Licensing and supervising adjusters, brokers & agents
- Approving classes of business
- Controlling an insurer’s advertising
- Reviewing insurance contract wordings
- Approving policy forms
- Enforcing underwriting eligibility criteria
- Overseeing claim settlement practices
- Overseeing the electronic marketing of insurance
- Overseeing the ethical, operational and trade practices of insurers
What must an insurance company do when seeking approval for a new product or class of insurance?
- Conduct a detailed analysis of its available underwriting expertise, claims handling capabilities and other important functional areas
- Establish appropriate controls and reporting to accurately monitor the performance of the new product or class of insurance
- Educate its distribution network about the new product or class of insurance
- Prepare financial forecasts to demonstrate the viability of the new product or class of insurance
- Develop an exit strategy to minimize the effect of market dislocation
What three themes are important in the evolution of commercial insurance?
Building strong relationships
Rise of risk management
Understanding exposures
What are the two main relationships that must be built?
Broker-client
Broker-underwriter
What are some factors of great service?
- Timely and prompt responses
- Accurate and comprehensive information
- Complete submissions
- Flexibility
Define exposure
Hazard threatening a risk because of external or internal physical conditions
What factors must businesses consider when evaluating their climate risk?
Businesses and climate risk
• Physical location and its ability to withstand environmental conditions
o Subject to extreme weather (e.g., storms, flooding)
o Changing weather patterns (e.g., temperature changes)
• Business activities
o Potential suspension of activities
o Higher risk for outdoor businesses—construction, farming, transportation
• Employees
o Employees’ ability to get work
o Employee productivity
• Length, location, and diversity of their supply chain
o Climate risks around the world have a local impact
• Customer base
o Access to business’s goods and services
o Need for business in event of climate risk
List at least five (5) ways that underwriters may respond to hard market conditions.
- Approach each risk very cautiously.
- Set more exacting underwriting standards.
- Give loss control and loss prevention measures significant consideration.
- Tighten policy terms to limit exposures.
- Make substantial rate increases.
- Terminate relationships with unprofitable or small volume brokers.
- Withdraw from jurisdictions, classes of business, or individual risks.
- Withdraw from the market altogether.
How does a strong broker–client relationship help address client needs and bring value to the insurer?
• The broker is a key component of the flow of information in a broker-driven market.
• Commercial insurance requires a deep understanding of a client’s business.
• Without a strong relationship, a broker or agent might miss vital operations that could lead to
inadequate or irrelevant coverage.
• Brokers can build a relationship with clients by visiting the operations and having face-to-face
communication.
• By understanding the business, a broker is able to determine the best coverage for the client,
bringing value to the insured.
How has technology improved the insurance industry?
• Technological development has helped make policy issuance, claims handling, and risk analysis
easier.
• Delivery of policies has evolved from handwritten policies to eDocs or electronic formats.
• Complex integrated policy management systems and claims handling systems reduce handling times.
• Automated underwriting can be accessed by anyone on the Internet.
• Claims can be reported, analyzed, and paid through an app on a smartphone.
What can cyber insurance protection coverage provide?
• The cost of a professional firm to replace lost or corrupted data
• Loss of business income and extra expenses incurred while the system and data are being recovered
The cost of a public relations firm to communicate with outside parties regarding the cyber attack
• Data re-creation costs from non-electronic sources
• Defence and liability costs arising from an action alleging system security failure, including
settlement and judgment costs
