• Shuffle
    Toggle On
    Toggle Off
  • Alphabetize
    Toggle On
    Toggle Off
  • Front First
    Toggle On
    Toggle Off
  • Both Sides
    Toggle On
    Toggle Off
  • Read
    Toggle On
    Toggle Off
Reading...
Front

Card Range To Study

through

image

Play button

image

Play button

image

Progress

1/114

Click to flip

Use LEFT and RIGHT arrow keys to navigate between flashcards;

Use UP and DOWN arrow keys to flip the card;

H to show hint;

A reads text to speech;

114 Cards in this Set

  • Front
  • Back
Retrospective rating plan
A hybrid risk financing plan in which an organization buys insurance subject to a rating formula that adjusts the premium after the end of the policy period based on the insured organization's actual losses during the polciy period.
Experience rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Maximum premium
The most an insured organization is required to pay under a retrospective rating plan, regardless of the amount of incurred losses.
Minimum premium
The least an insured organiztion is required to pay under a retrospective rating plan, regardless of the amount of incurred losses.
Loss limit
The level at which each indvidual accident or occurrence is limited for the prupose of calculating a retrospective rating insurance premium.
Retrospective rating insurance premium formula
(basic premium + converted losses + excess loss premium) x Tax multiplier
Standard premium
A premium that is calculated by using state insurance department authorized rating classificaitons, applying them to an insured organization's estimated exposures for the policy period, and allowing for various adjustments.
Basic premium
A component of the retrospective rating insurance premium formula that covers insurer acquistion expenses, administrative costs, overhead, and profit, as well as the insurance change.
Converted losses
A component of the retrospective rating insurance premium formula that is the product of incurred losses and an application loss conversion factor.
Loss conversion factor
A factor applied to incurred losses so that the coverted losses reflect loss adjustment expenses.
Excess loss premium
A component of the retrospective rating insurance premium formula that compensates the insurer for the risk that an indvidual loss will exceed the loss limit.
Tax multiplyer
A component of the retrospective rating insurance premium formula that covers the insuer's cost for state premium taxes, licenses fees, insurance organization assessments, and residual market loadings that the insurer must pay on all collected premiums.
Incurred loss retrospective rating plan
A retrospective rating plan in which the insured organization pays a deposit premium during the policy period; after the end of the policy period, the insurer adjusts the premium based on the insured organzation's actual incurred losses.
Paid loss retrospective rating plan
A retrospective rating plan in which the insured orgainzation pays a deposit preimum at the begining of the policy period and reimburses the insurer for its losses as the insurer pays for them and in which the total amount paid is subject to the minumum and maximum premiums
Explain why a retrospective rating plan is considered a hybrid risk financing plan
A retrospective rating plan is considered a hybrid risk finincing plan because it contains elements of both retention and transfer. It is a risk retention plan because the insured organization is paying of losses through the retrospective rating plan premiums. It is a transfer plan because the insurer assumes the insured's losses above a specified monetary limit.
Explain why a retrospecive rating plan encourages an insured orgainzation to control its losses.
A retrospective rating plan encourages an insured organzation to control losses because the retrospective premium reflects losses incurred during the policy period. The insured is rewarded through lower premiums to the extent that is controls losses.
Describe the types of loss exposures for which retrospective rating plans are commonly used
Retrospective rating plans are commonly used to finance low - medium-severity losses arising from liability loss exposures covered by workers comp, auto liability, and general liability insurance policies.
Explain how the premium calculation under a retrospective rating plan differs from that under a guaranteed-cost insurance plan
The premium under a guaranteed-cost insurance plan does not vary with the insured's losses that occur during the policy period. Under a retrospective rating plan, a premium deposit is paid at the beginning of the policy period and the insurer adjusts the premium upward or downward after the end of the policy period based directly on a portion of covered losses the insured organization incurs.
Describe how the following retrospective rating factors affect the loss amounts paid by an insurer
Max premium - limits the premium amount an insured organization is required to pay regardless of the amount of incurred losses.

Minimum premium - establishes a minimum amount the insured organization is required to pay regardless of the amount of incurred losses.

Loss limit - caps the insured's losses used in calculating the retrospectively rated premium by using a loss limit for each individual loss or occurrence.
Identify costs, other than retained losses, that are included in the premium under a retrospective rating plan
insurance charges including the insurer's overhead and profits, residual market loadings, and premium taxes.
Identify costs, other than retained losses, that are included in the premium under a retrospective rating plan.
Insurance charges that include the insurer's overhead and profits, residual market loadings, and premium taxes.
Formula used to calculate the retrospective rating insurance premium
Retrospective rating plan premium = (basic premiumm + converted losses + excess loss premium) x Tax multiplier
Describe the following components of the retrospective rating insurance premiums formula
Standard premium - manual premium multipled by an experience modifcaiton factor.

b. Basic premium - includes insurer acquistion expenses, administrative costs, overhead, profit, and the insurance charge, which is expressed as a percentage of the insured organizations standard premium.

c. Coverted losses - the product of incurred losses and an applicable loss converation factor which reflects allocated loss adjustment expenses.

d. Excess loss premium - product of the standard premium and the excess loss premium factor, which compensates the insurer for the risk that an individual loss will exceed the loss limit.

e. Tax multiplier - a factor that covers the insurer's cost for state premium taxes, license fees, insurance organzation assessments, and residual marketing loadings.
Explain the implication of the inclusion of a high loss conversion factor in an insurer's estimation of loss settlement cost?
A high loss conversion factor implies that the insurer expects that the losses will be costly to settle.
Explain how an incurred loss retrospectiv e rating plan differs from a paid loss retrospective rating plan.
the insured organization pays a deposit premium during the policy period and the premium is adjusted at the end of the policy perod based on the insured organization's actual incurred losses. Under a paid loss retrospective rating plan the insured organzation pays a deposit premium at the beginning of the policy period and reimburses the insurer for its losses as the insurer pays for them.
Describe the cash flow availbable to the insurer using incurred loss and paid loss retrospective rating plans
Under an incurred loss retrospective rating plan the insured organization does not recieve the cash flow avialble on its loss reserves. The cash flow is held by the insurer. Under a paid loss plan, the insured organization benefits from cash flow available on the funds it retains rather than paying them to the insurer.
Explain factors an orgainzation should consider when choosing between a paid loss and incurred loss retrospective rating plan.
The relationship between the amount that the insurer adds to the basic premium and the value of the cash flow benefit.

The additional administrative tasks associated with a paid loss retrospective plan.
Identify the administrative duties performed by the following entities under a retrospective rating plan:

a. The insurer.

b. The insured
a. Insurer - adjusting losses, making necessary filing with the state regulatory authorities, and paying premium taxes and residual market loadings.

b. Insured - making premium payments and arranging for any required security collateral.
Explain why many insurers using a paid loss retrospective rating plan require the insured organzation to provide collateral
to guarantee that furture premium adjustments will be paid.
Identify the financial accounting issues an insured organzation considers when using a retrospective rating plan
An insured organzation considers the following finaincial accountin issues when using a retrospective rating plan.
Identify two advantages of a retrospective rating plan over a guaranteed-cost insurnce plan
1. its long run cost trends lower than the cost of transfer.

2. it encourages risk control becasue of the indirect link between losses and premium
Identify three possible disadvantages of a retrospective rating plan compared with a guaranteed-cost plan
If not properly desgned, a retrospective rating plan can make financial planning difficult for the insured.

The insured organization could set unrealistically high reserves for the retained portion of losses, resulting in a loss of cash flow.

The losses ultimately retained by the insured are intially paid to the insurer and may result in premium tax and residual market loading expenses.
Identify a potential objection to the insurer's premium adjustment process under retrospective rating plans.
an insurer may not adjust losses when it knows the insured orgaization is retaining them, resulting in loss payments that are higher than necessary.
Reinsurance
The transfer of insurance risk from one insurer to another through a contractural agreement under which one insurer agrees, in return for a reinsurance premium, to indemnify another insurer for some or all of the financial consequences of certain loss exposures covered by the primary insurer's policies.
Reinsurer
The insurer that assumes all or part of the insurance risk from the primary insurer.
Reinsurance premium
The consideration paid by the primary insurer to the reinsurer for assuming some or all of the primary insurer's insurance risk.
Primary insurer
The insurer that transfers or cedes all or part of the insurace risk it has assumed to another insurer.
Insurance risk
Uncertainty about the adequacy of insurance premiums to pay losses.
Retrocession
A reinsurance agreement whereby one reinsurer transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer
LIne
The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure
Large line capacity
An insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide.
Policy holder's surplus
An insurer's net worth as reported on the financial statement prescribed by state insurance regulators
Net written premiums
The gross premiums charged to policyholders minus the premiums ceded to reinsurers plus reinsurance premiums assumed.
Capacity ratio
The ratio of net written premiums to policy holder's surplus
Ceding commission
An amount paid by the reinsurer to the primary insurer to cover part or all of a primary insuer's policy acquistion expenses.
Surplus relief
A replenishement of policyholders' surplus privided by the ceding commission paid to the primary insurer by the reinsurer.
Portfollio reinsurance
A reinsurance agreement that reinsures the loss expoures of an entire type of insurance, class of business or geographical area
Novation
An agreement under which one insurer or reinsurer is substitued for another
Treaty reinsurance
A reinsurance agreement that covers an entire class or portfollio of loss exposures and provides that the primary insuer's individual loss expoures that fall within the treaty are automatically reinsured
Facultative reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer and reinsurer can accept or reject any loss expoures submitted.
Adverse selection
The decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures is undersireable.
Facultative certificate of reinsurance
An agreement that defines the terms of the facultative reinsurace coverage on a specific loss exposure.
Professional reinsurer
An insurer whose primary business prupose is to service other insuer's reinsurance needs
Direct writing reinsurer
A professional reinsurer whose employees deal directly with primary insurers
Reinsurance intermediary
A broker who negotiates reinsurance agreements between the primary insurer and one or more reinsurers.
Reinsurance pools, syndicates, and associations
Groups of insuers that share the loss exposures of the group, usually through reinsurance.
Pro rata reinsurance
A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance policy premiums and losses.
Loss adjustment expenses
Expenses incurred by an insurer to settle claims
Flat commision
A ceding commission that is fixed percentage of the ceded premiums
Profit sharing commision
A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures
Sliding scale commission
A ceding commission based on a formula that adjusts the commission according to the profitibility of the reinsurance agreement.
Quota share reinsurance
A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance policy premiums and losses using a fixed percentage.
Loss ratio
The ratio of incurred losses and loss adjustment expenses to earned premiums
Variable quota share treaty
A quota share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed.
Surplus share reinsurance
A type of pro rata reinsuance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount or line
Bordereau
A report the primary insuer provides periodically to the reinsurer that contains a detailed listing of premiums and losses reinsured under the treaty.
Line guide
A document that provides the minimum and maxium line a primary insurer can retain on a loss exposure
Excess of loss reinsurance
A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount.
Attachment point
The dollar amount above which the reinsurer responds to losses.
Subject premium
The premium the primary insuer charges in its underlying policies and to which a rate is applied to determine the reinsurance premium.
Working cover
An excess of loss reinsurance agreement with a low attachment point.
Co-participation provision
A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point.
Per risk excess of loss reinsurance
A type of excess of loss reinsurance that covers propery and that applies separtely to each loss occuring to each risk.
Catastrophe excess of loss reinsurance
A type of excess of loss reinsurance that protects the primary insuer from an accumlation of retained losses that arise from a single catastrophic event.
Loss occurrence clause
A reinsurance agreement clause that defines the scope of a catastrophic occurrence for the purpose of the agreement.
Per policy excess of loss reinsurance
A type of excess of loss reinsurance that applies the attachement point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occuring under each policy.
Per occurrence excess of loss reinsurance
A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies
Aggreage excess of loss reinsurance
A type of excess of loss reinsurance that covers aggregated losses that exceed the attachement point and that occur over a stated period, usually one year.
Finite risk reinsurance
A nontraditional type of reinsurance in which the reinsurance's liability is limited and anticipated investment income is expressly acknowledged as an underwrting component
Cut through endoresement
An endorsement attached to an insurance policy that gives the insured a direct cause of action against the reinsurer for the reinsured amount of a loss if the primary insurer become insolvent.
Identify the parties involved in a reinsurance agreement
Reinsurer - insurer that assumes all or part of the insurance risk

Primary insurer - insurer that transfers or cedes all or part of the insurance risk.
List terms that may be used to refer to the primary insurer in a reinsurance agreement
The ceding comapny the cedent, the reinsured or the direct insurer.
Describe the conditions usually included in a reinsurance agreement
Usually requires the primary insurer to keep part of its original liability.

Does not alter the terms of the underlyng insurance policies or the primary insurer's obligations to honor them

Specifies the terms under which the reinsurance is provided.

Identifies the policy group or policies or other categories of insurance that are included in the agreement.
6 principle functions of reinsurance
1. increase large line capacity

2. Provide catastrophe protection.

3. Stabilize loss experience.

4. Provide surplus relief

5. Facilitate withdrawal from a market segment.

6. Provide underwriting guidance.
Decribe factors that influence the maximum amount of insurance of limit of liability that an insurer will accept on a single loss exposure
Maximum allowed by insurance regulations.

The size of a potential loss or losses that an insurer can safely retain without impairing earnings or policyholders' surplus.

Specific characteristics of a particular loss exposure.

Amount types and cost of available reinsurane.
Describe the possible financial consequences volatile loss experience may have on a primary insurer
Affect the stock value of a publicly traded unsurer.

Alter an insuer's financial rating by independent rating agencies.

Cause abrupt changes in the approaches the insurer takes in manageing the underwriting claim and marketing departments.

Undermine the confidence of the sales force.

Possibly lead to insolvency.
Describe the ways in which reinsurance can stabilize the loss experience of primary insurers
Limit liability for a single loss exposure.

Limit its liability for several loss exposures affected by a common event.

Limit its liability for loss exposure that aggreagate claims over time.
3 reasons why a primary insurer may choose to withdrawal from a market segment
unprofitable

undesireable,

does not fit into its strategic plan
Options a primary insurer may have when it decides to withdrawal from a market includes
To stop selling new insurance policies and continue in- force insurance until all policies expire.

To cancel all policies and refund the unearned premiums to insureds.

To withdrawal from the market segment by purchasing portfollio reinsurance.
Portfolio reinsurance and novation differ in the following way:
In a portfolio reinsurance transaction, the primary insurer accepts all the liability for certain loss exposures covered under the primary insurer's policies, however must continue to fulfill its obligations to its insureds.

In a novation, the subsitute insurer assumes the direct obligations to insureds covered by the underlying insurance.
Two types of reinsurance transactions
1. Treaty - covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.

Facultative - The reinsurer underwrites each loss exposure separately.
Why is Treaty reinsurance sometimes called obligatory reinsurance?
Treaty reinsurance agreement covers an entire class or portfolio of loss exposures and loss exposures and loss expoures that fall within the treaty are automatically reinsured.
Why is facultative reinsurance sometimes called nonobligatory reinsurance
because the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
4 functions that facultative reinsurance provides primary insurers
1. To provide large line capacity for loss exposures that exceed the limits of treaty reinsurance agreements.

2. To reduce the primary insurer's exposure in a given geographic area.

3. To insure a loss exposure with a typical hazard characteristics and thereby maintian the favorable loss experience of the priamry insurer's treaty reinsurance and any associated profit sharing arrangement.

4. To insure particular classes of loss exposures that are excluded under treaty reinsurance.
2 appropriate types of reinsurance for each company
1. Lawton Insurance will need facultative reinsruance to provide the capacity to insure his loss exposure because the suggested size of this loss exposure will likely exceeded the large line capacity of its existing treaties.

b. Spring Insurance will need treaty reinsruance to insure
the many loss exposures and obtain automatic acceptance by its reinsurance. Spring needs a treaty because of the volume of loss exposures it can expect in this new market.
3 sources for purchasing reinsurance
professional reinsurers

reinsurance departments of primary insurers
reinsurance pools
syndicates and associations.
Marketing relationship of professional reinsurers with primary insurers is as follows
Direct writing reinsurer - employees deal directly with primary insurer and also solicit reinsurance business through reinsuance intermediaries.

Reinsurance intermediary - The broker represnets the primary insurer and negotiates reinsurance agreement b/w the primary insurer and one or more reinsurers.
Describe issues that professional reinsurers and primary insurers should consider before entering a reinsurance agreement
Professional reinsurers should gather information about the primary insurer's financial strength by analyzing financial statements, by using information developed by a financial rating service or from state insurance department bulletings. Reinsurers should also consider the primary insuer's experience, reputation, and management.

Primary insurers should evaluate the reinsurer's claim paying ability, reputation, management competence.
2 types of pro rata reinsurance
Quota share reinsurance - The primary insurer and the reinsurer share the amounts of insurance, policy premiums and losses using a fixed percentage.

Surplus share reinsurance - The policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line.
Describe the basis on which policy premiums and losses are shared between the primary insurer and the reinsurer in a surplus share treaty
premium and losses are shared proportionately between the primary insurer and the reinsurer on a percentage basis. The primary insurer's share of the policy premiums and losses is that proportion that the line bears to the total amount of insurance. The reinsurer's share is that proportion that the amount ceded bears to the total
Explain how primary insurer underwriters establish the retention for each loss exposure subject to a surplus share treaty
Through a line guide. The line guide provides the minimum and maxiumum line that the primary insurer can retain on a loss exposure.
5 types of excess loss reinsurance
1. Per risk excess of loss - typcally used for property loss exposures and applies separately to each loss occurring to each risk.

2. Catastrophe excess of loss - typically used for property loss exposures to protect the primary insurer from an accumulation of ratained losses that arise from a single catastrophic event.

3. Per policy excess of loss - typcially used for liability loss exposures and applies the attachment point and the reinsurance limiet searately to each insurance policy issued b y the primary insurer regardless of the number of losses occuring under each policy.

4. Per occurrence excess of loss - typically used for liability loss exposures and the attachment point and the reinsurance limet to the total losses arising from a single event affecting one or more of the primary insurer's policies.

5. Aggregate excess of loss - used for both property and liability loss exposures and covers aggregated losses that exceed the attachment point and that occur over a stated period.
Importance of the attachement point in excess of loss reinsurance
it represents the point at which the loss amount exceeds a specified dollar amount and the point at which the reinsurer responds to a loss. The primary insurer fully retains losses that are less than the attachment point and the reinsurer sometimes requires the primary insurer to also retain responsibility for a percentage that exceed the attachment point.
2 factors that affect the extent of a reinsurer's obligation to indemnify a primary insurer in excess of loss reinsurance.
1. amount of the loss

2. the layer of coverage that the reinsurer provides
Describe how a reinsurance agreement with a low attachment point benefits the primary insurer.
A reinsurance agreement with a low attachment point may anticipate that the primary insure's volume of losses will be significant. The low attachment point benefits the primary insurer by enabling it to spread its losses over several years.
Identify 2 common approaches to handling loss adjustment expenses
Pro-rata in addition - Loss adjustment expenses are prorated b/w the primary insurer and the reinsurer based on the same percentage share that each is responsible for the loss.

2. Included in the limit - Loss adjustment expenses are added to the amount of the loss when applying the attachment point of the excess of loss reinsurance agreement.
Identify how the scope of a catastrophic occurence is defined in a catastrophic excess of loss reinsurance agreement.
The scope of a catastrophic occurrence is defined in a catastrophic excess of loss reinsurance agreement through a loss occurrence clause. The clause specifies a perid in hours during which the primary infurer's losses arising out of the same catastrophic occurrence can be aggregated and applied to the attachment point and reinsurance limits.
Explain why finite risk reinsruace is sometimes called financial reinsurance
this type of reinsurance transfers a limited amount of risk to the reinsurer with the objective of improving the primary insurer's financial result.
Identify the characteristics of finite risk reinsurance
- A limited transfer of insurance risk to the reinsurer.

- Anticipated investment income is expressly acknowledged as an underwriting component.

- Used with a combination of traditionally insurable and traditionally uninsurable loss exposures.

-Usually provided for a multi-year term.

-Reinsurer premium can be a substantial percentage of the reinsurance limit.

-Designed to cover high severity losses.
Identify the types of loss expousres effectively handled by finite risk reinsurance
Insurable loss exposures such as a building loss due to explosion.

Traditional uninsurable loss exposures such as loss due to economic variables.

Extremely large and unusual loss exposures such as catastrophic losses.
Situations in which a risk management professional would deal directly with a reinsurer
A reinsurer takes the place of an insurer as a result of a portfolio reinsurance arrangement.

A reinsurer takes the place of an insurer through a cut through endorsement added to an insurance policy.

An organization establishes a subsidiary that insures or reinsures the orgainzation's loss exposures.

An organization purchases reinsurance for a pool of which it is a member.

A reinsurer or several reinsurer team up with an insurer or seveeral insurers to privide coverage.
Explain why a risk management professional whose insurance plan has be reinsured through a portfolio reinsurance arrangement should be aware of details of tghe transaction
A risk management professional whose insurance plan has been reinsured through a portfolio reinsurance arrangement should learn the details of the transaction in order to ascertain that coverage is maintained and that the reinsurer is at least as financially as sound as the retiring insurer.
Explain how adding a cut-through endoresemtn to a reinsurance agreement is advantageous to the insured
Is advantageous to the insured in situations of reinsurer insolvency because it provides the insured with direct rights against the reinsurer, bypssing the primary insurer's insolvency proceedings.
Explain what factors a risk management professional should consider when reinsuring risk through a pool
The pools reinsurer's finaincial strength, integrity, and opertine efficiencyk, which all affect the pool's reliability and the solidarity and effectiveness of the organization's risk finiancing program