Cpcu 520 Lists

Front 1

Underwriting policy is subject to constant review and periodic change and must consider the following four constraints:

Back 1

1. Financial capacity
2. Regulation
3. Personnel and physical resources
4. Reinsurance

Front 2

COPE

Back 2

Property underwriters analyze these four areas:

1. Construction
2. Occupancy
3. Protection
4. External loss exposures

Front 3

ISO Construction Class 6

Back 3

Fire-resistive construction (construction that incorporates load-bearing members and that has a fire-resistance rating of at least two hours)

Front 4

ISO Construction class 5

Back 4

Modified fire-resistive construction

(construction that has load-bearing walls and columns of masonry or reinforced concrete construction and that has a fire-resistance rating of one to two hours)

Front 5

ISO Construction class 4

Back 5

Masonry noncombustible construction

(Masonry construction or construction that includes exterior walls of fire-resistive construction with a fire-resistance rating of not less than one hour)

Front 6

ISO Construction class 3

Back 6

Noncombustible construction

(Construction that has exterior walls, roof, and floor made of and supported by metal/noncombustible materials. These buildings are noncombustible but not fire resistive.

Front 7

ISO Construction class 2

Back 7

Joisted masonry construction

(Contruction that has load-bearing exterior walls made of brick, adobe, concrete, gypsum, stone, tile, or similar materials; that has floors and roofs of combustible materials; and that has a fire-resistance rating of at least one hour

Front 8

ISO Construction class 1

Back 8

Frame construction

(Construction that has load-bearing components made of wood or other combustible materials.)

Front 9

Common occupancy hazards

Back 9

Hazards existing in almost every class of business occupancy:

1. Housekeeping
2. Heating equipment
3. Electrical equipment
4. Smoking

Front 10

Earthquake underwriting considerations include three major factors

Back 10

1. Areas of earthquake activity
2. Soil conditions
3. Building design and construction

Front 11

Two steps to determining the probable maximum business income loss

Back 11

1. Project expected earnings for the coverage period
2. Select a coinsurance percentage that approximates the expected interruption period (should loss occur); 50% co-insurance for a 6 month interruption period; 125% for a 1.25 year interruption period.

Front 12

Categories of ocean marine insurance

Back 12

1. Yachts
2. Commercial hulls
3. Protection and indemnity
4. Cargo

Front 13

Some categories of inland marine insurance

Back 13

1. Contractors' equipment
2. Builders' Risk/installation
3. Transportation
4. Instrumentalities of transportation and communication
5. Bailee coverages

Front 14

Underwriters analyzing robbery, burglary, and theft loss exposures consider the following five factors:

Back 14

1. Susceptibility and marketability
2. Property location
3. Occupancy
4. Public protection
5. Coverage and price modifications

Front 15

Sources of legal liability

Back 15

1. Torts (tort liability)
2. Contracts (contractual liability)
3. Statutes that impose liability without regard to fault (statutory liability)

Front 16

Elements required to bring a civil suit for negligence

Back 16

1. Legal duty owed to the plaintiff to use due care
2. Failure to conform to the standard of care required in the situation, which creates an unreasonable risk of harm (the 'reasonable person' standard)
3. Causal connection exists b/w the negligent act and the bodily injury or property damage
4. Bodily injury or property damage

Front 17

Intentional torts

Back 17

* Assault and battery
* Unlawful detention (false imprisonment, false arrest)
* Defamation (libel, slander)
* Invasion of the right of privacy
* Copyright violations

Front 18

Strict liability tort principals

Back 18

* Abnormally dangerous instrumentalities
* Ultrahazardous activities
* Sale of dangerously defective products

Front 19

Vicarious liability relationships

Back 19

* A principal-agent relationship
* An employer-employee relationship
* A parent-child relationship
* A contractual relationship
* A partnership

Front 20

Financial responsibility

Back 20

Financial responsibility laws require a motor vehicle's owner or operator to show proof of financial responsibility in one of three instances:

1. After an auto accident that causes bodily injury or property damage greater than a specified dollar amount
2. After conviction for serious offenses, such as reckless driving, driving under the influence of alcohol, or leaving the scene of an accident
3. After failure to pay a final judgment arising from an auto accident

Front 21

Truck classification factors

Back 21

1. Vehicle weight and type
2. Vehicle use
3. Radius of vehicle operation
4. Special industry classifications

Front 22

Some elements of a good fleet safety program

Back 22

* Driver selection
* Driver training and motivation
* Accident reporting & review
* Management support of the program

Front 23

Ideal characteristics of rates (from a ratemaking standpoint)

Back 23

1. Be stable
2. Be responsive
3. Provide for contingencies
4. Promote loss control
5. Be simple

Front 24

Ratemaking methods

Back 24

1. Pure premium method
2. Loss ratio method
3. Judgment method

Front 25

Ratemaking data development process

Back 25

1. Collect data
2. Adjust data
3. Determine territorial and class relatives
4. Prepare rate filings and submit rate filings to regulatory authorities as required

Front 26

Ratemaking data collection methods

Back 26

1. Policy-year data collection method
2. Calendar-year data collection method
3. Accident-year data collection method

Front 27

Seven items that must be included in rate filings:

Back 27

1. Schedule of the proposed new rates
2. Statement about the percentage change, either an increase or a decrease, in the statewide average rate
3. Explanation of why the same percentage change does not apply to the rates for all territories and rating classes, if applicable
4. Data to support the proposed rate changes, including territorial and class relatives
5. Calculation showing how investment income is reflected in the rates, if applicable
6. Expense provision data
7. Explanatory material to enable state insurance regulators to understand and evaluate the filing

Front 28

Goals of the claim function

Back 28

1. Complying with the contractual promise
2. Supporting the insurer's profit goal

Front 29

Claim adjusting process

Back 29

1. Determine whether the loss is covered by the applicable policy
2. Determine the cause of loss and legal liability, if necessary
3. Determine the amount of damages or extent of loss
4. Settle the claim

Front 30

Reasons for exclusion

Back 30

* Coverage is provided elsewhere
* Most policyholders do not need the coverage
* Occurrences are within the policyholder's control
* Causes of loss are uninsurable

Front 31

Categories of claim reports

Back 31

1. Preliminary
2. Status
3. Summarized
4. Closing

Front 32

The three methods of establishing case reserves are

Back 32

1. The average value method
2. The tabular method
3. The judgment method

Front 33

In determining whether something is a fixture or personal property:

Back 33

1. How permanently attached it is to the real property?
2. Is the fixture well adapted to the real property?
3. What was the intent of the owner?

Front 34

Causes of loss that are difficult to verify

Back 34

* Water damage
* Collapse
* Theft
* Vandalism

Front 35

Troublesome exclusions

Back 35

* Gradual causes of loss
* Ordinance or law
* Faulty design, construction, or material
* Intentional acts of the insured

Front 36

Estimate factors

Back 36

1. Specifications
2. Materials
3. Labor
4. Overhead
5. Profit

Front 37

Insured's duties after a loss

Back 37

1. Provide prompt notice
2. Protect property
3. Assist with the Loss Adjustment process
4. Provide proof of loss
5. Submit to examination under oath

Front 38

Adjuster's goals

Back 38

1. Address the policyholder's concerns
2. Enforce policy provisions and protect the insurer's rights

Front 39

Adjuster's priorities following a serious loss to a home:

Back 39

1. Ensuring the physical safety of the policyholder's family
2. Ensuring the safety and security of the damaged home and its contents to prevent further damage
3. Explaining the coverage and adjustment procedure to the policyholder

Front 40

Business income issues

Back 40

1. Identifying the best loss settlement approach
2. Determining business income loss
3. Determining the period of restoration

Front 41

Liability claim adjustment process

Back 41

1. Determine coverage
2. Determine legal liability
3. Determine damages
4. Settle or negotiate the claim

Front 42

Civil procedure

Back 42

1. Pleadings (papers filed in which each side gives its account)
2. Discovery (pretrial exchange of all relevant information b/w the plaintiff and defendant)
3. Motions (formal request for the court to take a particular action)
4. Trial
5. Appeal

Front 43

3 ways to manage UW risk

Back 43

An insurer can avoid UW risk to some extent by not operating in a certain state or by not selling a particular type of insurance

An insurer can control underwriting risk by following sound underwriting guidelines, charging adequate rates, and providing loss control and claim services

An insurer can finance underwriting risk by transferring the potential financial consequences of certain loss exposures to another insurer (reinsurance)

Front 44

Reinsurance marketing systems

Back 44

* Professional reinsurers
* Reinsurance depts. of primary insurers
* Reinsurance pools, syndicates, and associations

Front 45

Features of pro rata quota share

Back 45

No - stabilize loss exposure
Yes - improve large line capacity
No - provide cat protection
Yes - provide surplus relief (primary)

Front 46

Features of pro rata surplus share

Back 46

No - stabilize loss exposure
Yes - improve large line capacity (esp.)
No - provide cat protection
Yes - provide surplus relief

Front 47

Features of excess of loss per risk/policy

Back 47

Yes - stabilize loss exposure
Yes - improve large line capacity (esp.)
Sort of - provide cat protection
No - provide surplus relief

Front 48

Features of excess of loss per occurrence

Back 48

Sort of - stabilize loss exposure
No - improve large line capacity
Yes - provide cat protection (prim)
No - provide surplus relief

Front 49

Features of aggregate excess of loss

Back 49

Yes - stabilize loss exposure
Sort of - improve large line capacity
Yes - provide cat protection
No - provide surplus relief

Front 50

Benefits of facultative re

Back 50

1. An insurer might not have any treaty covering a particular type of ins
2. Treaties have exclusions
3. Treaties have upper limits
4. Can be used to protect its treaty reinsurance from adverse loss experience

Front 51

In a facultative obligatory treaty reinsurance agreement, a reinsurer is bound to:

Back 51

accept all loss exposures ceded according to the treaty agreement.

Front 52

Six important factors in determining reinsurance needs/setting up a reinsurance program:

Back 52

1. Stability of loss frequency and severity
2. Loss exposures subject to catastrophes
3. Number of exposure units
4. Available financial resources
5. Stability and liquidity of investment portfolio
6. Growth plans

Front 53

The reinsurer's principal considerations in underwriting a treaty:

Back 53

* The primary insurer's mgmt characteristics
* The primary insurer's financial strength
* The primary insurer's UW policies and UW results
* The existence and terms of other reinsurance
* The primary insurer's loss experience

Front 54

To protect against insurer insolvency, insurance laws and regulations impose financial requirements on insurers, including:

Back 54

1. Insurers must have minimum capital to begin operations and sufficient capital to continue operations
2. The amount of premiums an insurer can write is constrained by its capital
3. Premiums are considered earned over the period for which insurance protection is provided rather than when revenue is received
4. Reserves for incurred losses should be set at adequate levels to pay claims when due

Front 55

Assets include

Back 55

Bonds
Stocks
Cash
Reinsurance recoverables
Premium balances

Front 56

Liabilities include

Back 56

Loss expenses
Loss adjustment expenses
Unearned premium reserves

Front 57

General Interrogatories section of NAIC Annual Statement

Back 57

explores matters such as:
* changes in the corporate charter or bylaws
* dealings with affiliated entities

Front 58

Five-Year Historical Data section of NAIC Annual Statement

Back 58

includes:
*key operating ratios
*one-year and two-year reserve development factors for each of the five years

Front 59

Part 1A of Schedule D

Back 59

Lists bond holdings by quality and maturity distribution (Class 1 through Class 6)

Front 60

Part 3 of Schedule F

Back 60

Provides details about ceded reinsurance, especially information about reinsurance recoverables. Reinsurance recoverables that prove to be worthless or uncollectible create a critical financial vulnerability for insurers.

Front 61

Schedule P

Back 61

"Analysis of Losses and Loss Expenses"

More than 50 pages of the annual statement

Shows the insurer's premiums earned versus losses incurred and other expenses from year-to-year. Allows an analyst to determine how promptly the reporting insurer recognizes its loss reserve development.

Front 62

Profit measurements other than the combined ratio are determined by:

Back 62

1. Combining UW and Investment results
2. Relating profits to sales, assets, and net worth
3. Expressing earnings on a per-share-of-stock basis

Front 63

Capacity ratio

Back 63

Net written premiums/surplus

Front 64

Liquidity ratio

Back 64

(Cash + invested assets (market value)) /
(unearned premium reserve + loss and loss adjustment expense reserves)

Front 65

Loss ratio

Back 65

(incurred losses + loss adjustment expenses) /
earned premiums

Front 66

Expense ratio (financial basis)

Back 66

Expenses incurred /
earned premiums

Front 67

Expense ratio (trade basis)

Back 67

Expenses incurred /
net written premiums

Front 68

Combined ratio

Back 68

Loss ratio + expense ratio

Front 69

Operating ratio

Back 69

Combined ratio - investment income ratio

Front 70

Investment income ratio

Back 70

Net investment income/
earned premiums

Front 71

Investment earnings ratio

Back 71

net investment income/
average admitted assets

Front 72

Investment profit ratio

Back 72

Total investment profit (loss) /
average admitted assets

Front 73

Return on net worth ratio

Back 73

Net income /
Surplus

Front 74

Earnings per share (EPS)

Back 74

Net income /
(Weighted average number of common shares outstanding during the accounting period)

Front 75

A.M. Best's quantitative tests

Back 75

1. Profitability (e.g., change in surplus, return on surplus ratios)
2. Liquidity (e.g., quick liquidity, class 3-6 bonds to surplus ratio)
3. Leverage tests (e.g., change in net premiums written, net leverage ratio)

Front 76

Quick assets used in the quick liquidity ratio include

Back 76

1. Assets
2. Short-term investments issued by companies not affiliated with the insurer
3. Bonds maturing within one year and issued by companies not affiliated with the insurer
4. Government bonds maturing w/in 5 years

Front 77

Examples of qualitative tests run by A.M. best:

Back 77

* Spread of risk
* Management
* Market position
* Surplus adequacy

Front 78

Constraints on insurer investments

Back 78

Done by regulators to promote prudent and well-diversified portfolios:

1. Asset restrictions
2. Investment restrictions

Front 79

Cash matching

Back 79

The process of matching an investment's maturity value with the amount of expected loss payments

Front 80

3 important characteristics of duration:

Back 80

1. The greater the duration, the more sensitive the security is to interest rate changes
2. The duration of a zero-coupon bond is always equal to its time to maturity
3. The duration of a bond that pays interest over its life will always be less than its time to maturity

Front 81

Bond duration

Back 81

Measures the time it takes for the present value of a bond's cash inflows to equal the bond's price.

Front 82

To be effective, cash matching must meet two conditions:

Back 82

1. The zero coupon bond's maturity dates and maturity values must precisely match the expected cash outflows from the UW portfolio
2. The insurer must be able to purchase enough of each type of security to match its expected claims, assuming that such bonds are available

Front 83

3 components of IBNR

Back 83

1. Reserves for unreported losses
2. Reserves for losses that have been reported but for which the established case reserves are inadequate
3. Reserves for losses that have been settled and then reopened

Front 84

2 possible approaches to IBNR estimates

Back 84

1. Estimate the ultimate total amount of incurred losses for the period and subtract the paid losses and case reserves for reported losses
2. estimate the pure IBNR reserve independently, without considering the case reserves. Then, separately calculate the reserve deficiencies to determine the total IBNR reserve

Front 85

2 reserving systems maintained by insurers

Back 85

Case reserves and the actuarial/bulk reserving system

Front 86

An insurer that has difficulty meeting RBC requirements can choose either, or both, of two options:

Back 86

1. reduce the risks to which it is exposed, or
2. increase its capital

Front 87

RBC formula takes into account these three types of risk:

Back 87

Asset risk
Credit risk
Underwriting risk

Front 88

RBC Company Action Level

Back 88

200 percent of minimum RBC; insurer files comprehensive plan

Front 89

RBC Regulatory Action Level

Back 89

150 percent of minimum RBC; regulator conducts exam as necessary; insurer files comprehensive plan

Front 90

RBC Authorized Control Level

Back 90

100 percent of minimum RBC; regulator may seize control

Front 91

RBC Mandatory Control level

Back 91

70 percent of minimum RBC; regulator required to place insurer under regulatory control

Front 92

Four steps of strategy formulation:

Back 92

1. Creating mission and vision statements
2. Establishing organizational goals
3. Analyzing the external and internal environments
4. Determining strategy at different organizational levels

Front 93

Five forces that drive competition:

Back 93

1. Threat of new entrants
2. Threat of substitute products or services
3. Bargaining power of buyers
4. Bargaining power of suppliers
5. Rivalry among existing firms

Front 94

Assets that management would consider in a SWOT analysis to determine the current state of their companies include:

Back 94

* Managerial expertise
* Available product lines
* Skill levels and competencies of staff
* Customer loyalty

Front 95

Three generic corporate-level strategies are available for companies in a growth mode:

Back 95

1. Single business
2. Vertical integration
3. Diversification

Front 96

Business-level strategies:

Back 96

1. Cost leadership
2. Differentiation
3. Focus

Front 97

Strategy implementation involves:

Back 97

1. Designing an effective organizational structure to support the strategy
2. Implementing organizational strategic controls

Front 98

The four steps in the organizational control process are:

Back 98

1. Establish standards
2. Create and apply measurements
3. Compare actual results to standards
4. Evaluate and implement corrective actions if goals are not met.

Front 99

Factors influencing an organization's decision about global expansion

Back 99

1. Culture
2. Language
3. regulations
4. Laws
5. Economic considerations
6. Political risks

Front 100

Risks involved with international licensing

Back 100

potential for loss of control over the product or service, illegal use of the trademark, and possible conflicts with licensees

Front 101

Risks of franchising

Back 101

Potential loss of control of the franchiser's company name and the quality of the products and services provided by the franchisee. Also, disagreeing with a franchiser and creating a future competitor by providing the franchisee with expertise in the company's operation

Front 102

Foreign direct investment

Back 102

A global-market entry method involving owning or controlling assets in a foreign country

Front 103

Joint venture

Back 103

A specific type of strategic alliance in which companies share ownership, responsibilities, and management of a foreign venture

Front 104

Incidental international loss exposures include those arising from activities conducted outside the U.S., such as

Back 104

Overseas travel by company representatives (execs, salespersons, mechanics, and engineers)
Sales made in foreign countries
Participation in foreign trade shows/exhibits
Small, pilot sales offices
Imports from foreign countries

Front 105

Advantages of admitted insurance

Back 105

Favorable tax laws
Premiums and losses paid in local currency
Easier compliance w/ government laws and regulations

Front 106

Disadvantages of admitted insurance

Back 106

Higher premiums required
Policies might be written in a foreign language
Risk mgmt philosophy may be difficult to establish
Solvency of locally admitted insurer might be difficult to determine