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54 Cards in this Set
- Front
- Back
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Insurance Production
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refers to the sales and marketing activities of insurers
*insurance buyers = offering *insurance sellers = application/consideration = |
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Agents & Brokers are often referred to as producers. Why????
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An agent should be a competent professional with a high degree of technical
knowledge in a particular area of insurance and who also places the needs of his or her clients first |
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Claim settlement
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This is the product. Promise to pay in the event of a loss.
My brother-in-law’s best friend’s sister’s boyfriend said that his insurance company denied his claim…and got away with it! Laws and Steps when the Insurance Company is not acting in Good Faith. |
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What are the objectives of the Claims Settlement Process?
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reputable companies will send their claims adjuster
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Claims Adjuster:
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Face of the Insurance Company
Steps in the Claims Process Types of Adjusters (frequent for auto insurance) (in areas of natural disaster insurance adjusters drive RVs out to meet ppl) sometimes parts of claims are paid rather than all |
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risk manager
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decides to buy insurance
*insured "insurance buyer" more coverage, less $ |
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intermediary: brokers/agents
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help put together info for insurance co
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underwriter
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decides type of clients they want to take on
betting $ against loss & understanding client's business goal is to find clients where they understand risk profile less coverage, more $ |
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independent agent
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*job to know what risks each insurance co is good @ handling
*determine what type of insurance to sell |
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Underwriting =
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refers to the process of selecting, classifying, and pricing applicants for insurance (sets terms, conditions, pricing)
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A line underwriter
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makes daily decisions concerning the acceptance or rejection of business
daily decisions concerning the acceptance or rejection of loss |
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You mean there are standards to this process??? Standards and Guidelines are
set by |
Chief Underwriting Officer
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Underwriters balancing act
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*Making Money for the Insurance Company
*Keeping Producers & Clients Happy…and coming back for more insurance. Avoid Pitfalls ….like Adverse Selection! ØJob is to accept exposures at appropriate rate ØReject application if underwriting rules do not allow acceptance ØMust be a skillful judge of people / industries / product lines (casualty, property, health, etc) ØGoal is to produce a group of insureds by categories whose actual experience will approach expected. |
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Underwriters do NOT reject exposures simply because they expect losses
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TRUE
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Underwriting Steps
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The Submission
Quotations & Declinations Binders of Insurance Policy Issuance |
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RATE
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COST PER UNIT
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Premium example
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2 cars insured receives discount based on likelihood of both cars in accident
*for a couple, many times both ppl will travel together in one car - lower risk of both cars being in accident |
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auto insurance policies
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policy rates must be filed w/gov't
that is why progressive can report the info for other companies |
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commercial lines insurance
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heterogeneous exposures
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Ratemaking:
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Extremely technical in most lines of insurance
Involves the selection of classes of exposure units on which to collect statistics regarding the probability and severity of loss |
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Ratemaking: life insurance
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In life insurance, this task is relatively uncomplicated
Because the major task is to estimate mortality rates according to age and other factors such as sex, smoking, drinking habits, and occupation |
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Ratemaking: liability and workers’ compensation
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In other fields, such as liability and workers’ compensation
Elaborate classifications are necessary |
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Rate making usually supervised by
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by specialists known as actuaries
Once the appropriate classes have been set up The problem becomes one of developing reliable loss data for each class over a sufficiently long period of time The next step is converting that data into a useful form for the purpose of developing a final premium Requires incorporating estimates of the cost of doing business into the premium structure on an equitable basis |
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PREMIUM CALCULATION:
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•Insurance “Rate”: Charge per unit of exposure
•“Premium” = (Rate)*(# of exposure units) GP = (PP) + (LP)*(GP) Þ GP = (PP) / (1 – LP) Where: PP = Pure premium LP = Expense loading ratio GP = Gross premium And: PP = E(L) / (# of exposure units) |
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Interest rates GO UP means
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Premiums GO DOWN
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Gross Premium Rate Determinants:
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PV of Expected Claims Costs: Pure Premium)
PV of Expense Loading: Administrative Costs *Profit Loading: Return/Reward to investors for providing capital *Investment Income (Interest Earnings): Premiums ß by amount of investment income earned on premiums |
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Underwriting Cycle - The Property & Liability Insurance markets fluctuate between:
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Hard Market: Tight Underwriting Standards & High Premiums (An Insurer’s Market)
Soft Market: Loose Underwriting Standards & Low Premiums. (An Insurance Buyer’s Market) |
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Hard Market:
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Tight Underwriting Standards & High Premiums (An Insurer’s Market)
more restrictive coverage terms, not worth risk |
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Soft Market:
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Loose Underwriting Standards & Low Premiums. (An Insurance Buyer’s Market)
not much $ to be made |
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Policyholder’s Surplus =
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Insurers Assets – Liabilities
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Casualty =
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Liability
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Capacity –
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(1) Refers to the relative level of surplus; the greater the surplus, the more willing underwriters will write new business or reduce premiums; therefore
(2) Capacity also refers to the maximum limit of insurance, the insurance company will provide to any one Insured. |
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Combined Ratio (aka combined Loss Ratio)
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(Losses + Loss Adjustment Expenses + Underwriting Expenses)/ Premiums
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combined Loss Ratio >1
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If the ratio is greater > 1, the underwriting operations are UNprofitable.
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combined Loss Ratio<1
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If the ratio is < 1, the underwriting operations are Profitable.
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hard market due to higher demand for insurance, but insurance co offered less covered
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ideal situation for insurance co and underwriters
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9/11 caused property damages and
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contingent business losses
insurers didn't know their losses so they offered less coverage - hard market |
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after 9/11, time it takes to start insurance co
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2-3 yrs, in Bermuda 6 months
with the new capacity the market increases- recovers and there is now a soft market |
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Reinsurance
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is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance
re insuring book of business that you underwrite |
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ceceding company =
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primary insurer
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reinsurer
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insurer that accepts the insurance from the ceding company
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retention limit
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is the amount of insurance retained by the ceding company
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cession
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amount of insurance ceded to the reinsurer is known as a
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Why would an insurance company want to do get reinsurance?
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Increase underwriting
Stabilize profits Reduce the unearned premium reserve (What is this & why do insurers want to reduce it????) Provide protection against a catastrophic loss Retire from business or from a line of insurance or territory Obtain underwriting advice on a line for which the insurer has little experience |
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Reduce the unearned premium reserve (What is this & why do insurers want to reduce it????)
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buying policy & pay premium upfront day 1 insurance co has $, but if buyer cancels after 2 months, 4 months mus be repaid for 6 month policy
allows to invest more premium to use more premium reserve toward investment |
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There are 2 principal forms of reinsurance:
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Facultative reinsurance
Treaty reinsurance |
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Facultative reinsurance
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is an optional, case-by-case method that is used
when the ceding company receives an application for insurance that exceeds its retention limit –Facultative reinsurance is often used when the primary insurer has an application for a large amount of insurance |
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Treaty reinsurance
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means the primary insurer has agreed to cede
insurance to the reinsurer, and the reinsurer has agreed to accept the business –All business that falls within the scope of the agreement is automatically reinsured according to the terms of the treaty can include/exclude any deal, but once parameters are set, anything falling within scope applies |
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There are 2 basic methods for sharing losses:
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Under the Pro rata method, where the ceding company and reinsurer agree to share losses and premiums based on some
Under the Excess method, where the reinsurer pays only when covered losses exceed a certain level Contrary to the book’s information, each method may be used with either Treaty or Fac Reinsurance! |
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Some insurers use the capital markets as an alternative to
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traditional reinsurance
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Securitization of risk
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means that an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a futures contract
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Catastrophe bonds
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are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs
Catastrophe bonds are growing in importance and are now considered by many to be a standard supplement to traditional reinsurance. |
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some insurers are proud of not using re-insurance
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*shows financial health
*underwriting has to rely on reinsurance, but if reinsurance changes terms for next year, then there will be issues for next year |
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Other Insurance Company Functions
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The electronic data processing area maintains information on premiums, claims, loss ratios, investments, and underwriting results
The accounting department prepares financial statements and develops budgets In the legal department, attorneys are used in advanced underwriting and estate planning Property and liability insurers provide numerous loss control services |
