Unit 3 Insurance Co Profitability Flashcards
Actuarial Science
3-4
a field of study that uses mathematical and statistical models and tools to assess risk and develop rates
Underwriting
3-4
The process of evaluating, classifying, and selecting Ins applicants for Ins.
Loss Ratio
3-6
An indication of underwriting profit. A formula that measures losses in relation to earned premium.
Losses / Earned Premium = Loss Ratio %
Operating Expenses not included - overhead, taxes, marketing, etc.
Expense Ratio
3-6
An indication of operating efficiency. A formula that measures operating expenses in relation to earned premium.
Expenses / Earned Premium = Expense Ratio %
Combined Ratio
3-6
An indication of overall operating profitability. A formula that measures losses and expenses in relation to the earned premium. Measure of overall operating success.
Loss Ratio + Expense Ratio = Combined Ratio %
Operating Profit = Combined Ratio 100%
Cash Flow Underwriting
3-8
A practice in which an Ins Co continues to put new business on the books despite incurring an operating loss b/c it believes that it still may make an overall profit thru investment income.
Accident Year Loss Ratio
3-9
is the calendar year in which the policy was activated or triggered by a covered accident or incident regardless of when the losses were actually reported, booked, or paid. View of profitability for claims that devlp over time; provides a long-term view of u/w-ing results.
Cumulative Losses (Accident Year 1 + 2 + 3….) / Earned Premium for Accident year 1 = Accident Year Loss Ratio %
Earned premium remains the same, losses increase each year.
Calendar Year Loss Ratio
3-10
A calendar year accounting period in which losses are allocated back to the accounting period in which the losses occurred, regardless of when the losses were actually reported, booked, or paid. View of profitability for a specific year; is used in financial reporting.
Losses in a Specific Year / Earned Premium in a Specific Year = Calendar Year Ratio %
Reinsurance
3-14
A risk mgmnt tool that allows insurers to spread exposures across other Ins Cos (reinsurers) so that no single insurer is vulnerable to total financial collapse from unanticipated, severe, catastrophic losses.
Ins Cos’ Ins Co - AKA Pooling Risk
Ceding Company
3-14
An Ins Co that writes the ins policy that is being reinsured
Reinsurer
3-14
A type of Ins Co that accepts risk from the insurer that initially wrote the policy (ceding co)
Retrocessional Reinsurer
3-14
A type of Ins Co that accepts risk from a Re-Ins Co, no the ceding co.
Describe how insurers make profit
3-17
Insurers make profit by pricing their products according to the degree of risk that are willing to accept and by selecting applicants that will create a profitable business. Underwriting (selecting and classifying applicants) is a key factor in profitability. Also, by carefully estimating and projecting costs and losses and by earning investment profits, insurers are able to make $$$ while paying claims.
Describe how investments influence an insurer’s profitability
(3-17)
Investments are a source of income and help to offset losses insurers pay. Generally, the greater the income and the longer the time for investment, the greater the income potential. Because investments are risky, investment profit should not be the primary focus of profitability.
Identify some factors that constrain investments in the Ins industry
(3-17)
State regulations affect many facets of Ins Co operations, incl the amount of investing that is allowed. Industry-rating agencies also provide independent info on the insurer’s financial health, which can affect earnings as well as consumer and investor confidence.
