Study 1 - The Insurance Industry in Canada Flashcards
List the two Fundamental principles of insurance
1) The premiums of the many are used to pay the losses of the few.
2) The premium shall be commensurate with the risk
Why would an insurer spread risks over diverse geographic areas?
Risks spread over a larger geographic area softens the burden of localized disasters on insurers.
For example, a severe windstorm in part of the country would have a major effect on an insurer who had concentrated its risks in that area.
What is a risk pool?
The sharing and spreading of risk between insurers and reinsurers.
Risk pools are syndicates of insurance or reinsurance companies that have organized to underwrite a particular risk or group of similar risks.
Explain the Law of Large Numbers
- A mathematical premise which states that the degree of certainty increases as the number of events increases.
- Insurance companies rely on loss forecasts built on using data from large groups of similar risks.
Define Adverse Selection
- A term that describes when potential policyholders use private knowledge of their own level of risk when deciding whether or not to buy insurance.
- High-risk individuals, if allowed, will buy lots of insurance and pay a higher rate of premium.
- Low-risk individuals may not buy insurance because they feel the price is too high.
What is the period of time between when the claim occurs and its final resolution?
“Tail” refers to the amount of time between an incident and the determination of a claim.
- Short-tail lines are those where the injury or harm becomes known quite quickly. There is a short period between the incident and the claim, such as in a property loss.
- Long-tail lines occur when a claim may be separated from the circumstances that caused it by as many as 1-,15,25 years or more. Such as product’s liability exposures.
Name two concerns of Ontario automobile excess reinsurers that relate to the effects of long-tail liabilities.
- Severe injuries
- Long-tail trends for prior accident years
- Inadequate reserving at the primary insurance level
List 3 ways that insurance benefits society
1) Insurance facilitates growth and societal development
2) Insurance allows activities to flourish (ex. banks willing to issue mortgages on buildings that are insured)
3) Contributes to the economy by providing employment to thousands of canadians
Why is there a need for residual market mechanisms?
Residual market mechanisms have been established by the automobile insurance industry to provide a last resort insurance facility to consumers.
- This ensures that insurance coverage is available even to those who are considered a high-risk or unattractive to mainstream insurers.
- Every insurer licensed to write auto insurance is required to be a member and to follow rules set by the board regarding the scope, terms and standards of coverage to be provided.
- The Facility Association doesn’t issue policies, instead, it designates certain companies to provide specific services and this includes claims handling.
What are the 2 traditional methods of distribution and how do they differ?
2 traditional methods are:
- Selling through independent brokers or through agents.
- Brokers solicit consumers and then choose an insurance company to fit the clients’ needs.
- Agents also solicit consumers but sell the direct writer’s policies to the client.
List 3 perceived advantages of the direct response method as a distribution channel
A hybrid direct writer sometimes called “the direct response” method, distributes insurance directly to consumers by using different types of media to encourage customers to respond to insurance marketing campaigns.
Advantages include:
-Professional advice with no commission costs or fees paid to brokers
-Technology-enabled sales and service (phone/internet)
-Extended hours of access for consumers
What are 4 basic functions of reinsurance?
FSC,RP
- Financing: frees up capital that would otherwise be tied up to meet obligations
- Stabilization: Used to keep operational results from fluctuating dramatically
- Capacity: insurer might require the ability to insure a business that’s beyond their resources.
- Resource protection against catastrophes: protects resources, their loss ratio and their investment position against catastrophic loss.
What are the 7 potential effects of foreign ownership on a property and casualty insurance company operating in Canada?
1) Deploying Capital
2) Divesting certain lines
3) Cost of retrocession covers and reinsurance
4) Emerging Risks
5) Setting underwriting philosophies and procedures
6) Technology
7) Investment markets
Describe an obstacle to deploying capital into Canada
- Canada is not the most capital-friendly jurisdiction in the world
- It has a complex mark-to-market tax scheme for insurers’ investment portfolios. (Any security held at the end of the tax year is treated as if it were sold and reacquired at its fair market value. Govt then benefits from accelerated tax revenues when gains are made.)
- Multi-tiered regulatory system requires multiple licenses and several filings to be completed each year.
What are 3 effects of mergers within the insurance industry?
- Reduce capacity, from what is already a tight market.
- Smaller reinsurance universe - to glean capacity
- Give other reinsurers the opportunity to grow, albeit to a smaller degree.
