C16 Business Of Insurance

Front 1

How is earned premium calculated?

Back 1

Total of premiums written during he period + unearned premium reserve at the beginning of the period - unearned premium reserve at the end of the period = premiums earned for the period.

Front 2

How do you calculate the incurred losses for the period?

Back 2

Outstanding loss reserve at the end of the period + loss payments (including loss expense payment) - salvage or recoveries - outstanding loss reserve at the beginning of the period= incurred losses for the period

Front 3

How do you calculate change in unearned premium?

Back 3

Unearned premium at the beginning of the period - unearned premium at the end of the period = change in unearned premium (usually a negative amount) + premiums written during the period (less cancellations and endorsements) = premiums earned for the period

Front 4

Calculate return on equity

Back 4

Net income after taxes ÷ equity x 100 = ROE

Front 5

Calculate ratio of written premium to equity

Back 5

Net written premium ÷ equity = ratio of written premium

Front 6

What is investing?

Back 6

Investing is the use of money to earn income ex. Into real estate; income through rent

Front 7

Discuss how OSFI (officer of the superintendant of financial institutions) gets involved when an insurance company is at financial risk

Back 7

Regulator becomes more actively involved when problem identified

OSFI may put company on regulatory watch

OSFI will meet with senior management to outline concerns and discuss remedial actions

OSFI may restrict business operations ex. limit the amount of premium written

OSFI may increase the frequency and scope of on-site examinations

OSFI may call for additional capital to be invested in the company

OSFI may discuss contingency plans with compensation funds/provincial regulators could include taking over control of company

Front 8

Briefly describe the main responsibilities of the Actuarial function

Back 8

Analyse statistical data and perform calculations to determine prices of insurance services

Determine amount of funds necessary for bulk reserves

Monitor overall financial situation and

Advising management of adequacy of reserves in connection with regulatory requirements

Front 9

Briefly explain the three key steps included in the process of “Marketing”

Back 9

Research – process of identifying the customer’s needs that fall within the scope of the organizations mission.Development – process of developing or designing coverages that respond to or meet the needs identified through research.Selling – process of convincing customers that the product or service will satisfy their needs.

Front 10

Define “Rating”

Back 10

Process undertaken by the underwriter in applying the information developed by the actuaries to the risk factors of an exposure to establish an appropriate premium for a specific risk.

Front 11

Discuss the contribution made by insurance to the economy.

Back 11

Provides a safety need from financial ruin

Provides for peace of mind

Allows economy to function for such things as non profits, business enterprises, commercial operations, professional liability exposures and many more.

Provides for the lending of money and financing of projects through surety bonds

Provides for employment of people in insurance operations

Purchases goods and services, repair materials, medical and rehabilitative treatments for injured parties.

Pays taxes and license fees to governments

Fuels economic expansion and thrives by the need created for insurance through that expansion

Front 12

Discuss the insurance cycle. Ensure to include in your answer the key occurrences in the cycle and how they influence price and insurer response and behavior

Back 12

The cycle involves six distinct steps. Negative results lead to reductions in capacity this leads to upward pressure on rates which leads to improved results which leads to increases in capacity leading to a lowering of prices and we start all over again.

Negative Results – Poor underwriting or claims results result in losses. some of the cost of those losses must be met by using investment income and equity. As the company may make no profit, the equity component to pay the losses must come from retained earnings.

Reduced Capacity – by using its equity, the insurer reduces that amount of capacity it has and thus is limited in its future business writings as the premiums it can write are a ratio of its equity (premium to equity ratio). This reduction in capacity leads to a tightening of market terms and conditions along with underwriting. As capacity is limited and underwriting is more particular and supply is limited. Underwriters become more particular of the risks accepted tending for the better quality risks.

Increased Prices – As supply is limited and underwriters more selective, the natural tendency under supply demand characteristics of an economy is that prices increase. As well, those questionable risks that might have been written at inadequate rates under more liberal terms are now placed in their appropriate markets at appropriate prices.

Positive Results – As a result of the better underwriting performance and more adequate pricing of the insurance service, results will tend to become profitable as the losses will resemble those on which the rates were originally based. Insurers will return to profitability and earn a reasonable return on their equity and profits will either be paid out to shareholders or retained in the company.

Increased Capacity – as results improve and the insurer returns to profitability it is able to return to its capacity he equity that may have been used when results were poor. Additionally if the insurer is profitable and retains its earnings it will be able to increase its capacity suing that money.

Lowering Prices – Insurers wish to put their capacity to work in order to earn a return. As capacity availability increases there is more equity available to write business but there is limited business growth generated by the economy overall. The issue is to attract new business from existing insurers and the best way to do this is by reducing prices and lowering underwriting standards. The price reduction and lowering of underwriting standards results in price inadequacy along with taking onto the books more questionable risk. As the results of these practices become known we start the cyclical pattern all over again with negative results.

Front 13

Identify (name) the five parties identified as stakeholders in the insurance industry

Back 13

Consumers

Distributors

Insurers/Shareholders

Reinsurer

Regulator/Government

Front 14

Identify and briefly discuss the two factors that prevent insurers from charging an adequate premium that is commensurate with the risk

Back 14

Competition –The ultimate determinant of the price paid by the consumer is competition in the marketplace.If competition is intense then it is not uncommon for the book rate to be substantially reduced or discounted in order to retain existing clientele or to attract new business from other insurers.

Government interference –Usually undertaken in response to consumer complaints in respect to the insurances industry.Interference may be found in the form of rate regulation where a government agency is empowered to review and approve rates.In these cases the process may entail hearings and the like which draws out the process making it time consuming.The ultimate in interference occurs where rates are frozen or rolled back. This has happened in a number of jurisdictions.Controlling price without controlling costs may lead some companies to vacate the marketplace.Other forms include interference with rating criteria.Usually driven by social pressures or claims of discrimination such as rates based on age, sex or marital status.Such interference interrupts the principles of fairness and in particular the concept that the premium must be commensurate with the risk.

Front 15

Name the remaining core functional departments

Back 15

Legal/Compliance

Finance and Accounting

Investments

Branch Operations

Underwriting

Claims

Marketing

Branch Management

Front 16

What is the cash flow underwriting theory? What are the arguments against this theory?

Back 16

Cash Flow TheoryPresumes insurers are willing to write risks at rate levels that are known to be inadequate in order to get cash flowing into the system.This cash can be invested and earn a. profit.The hope is that the return on invested funds would exceed any loss on underwriting and still produce a satisfactory result.More likely to take place when interest rates are high as returns on invested funds would be high.

Arguments against:Interest rates do not cause the competitive behavior that sees prices lowered.The lowering of price is a result of competitive forces acting in connection with capacity utilization.As capacity shrinks prices firm up writings decline, as unused capacity expands, insurers seek to put the capacity to work by increasing writings.One of the ways to accomplish this is to lower prices.As prices decline, business writing and cash inflows increase providing a surplus of cash.The surplus is invested to earn a return.The return is used to offset any decline in underwriting performance.While interest rates do play a role in the theory, they are a facilitator but not the primary root cause of the phenomena.

Front 17

Explain the general process by which rates are determined in class rating. Identify the main advantages of class rating.

Back 17

Class rates are determined based on statistics gathered on a large number of risks having similar characteristics making it possible to measure claims experience based on a variety of risk factors.Statistics can be subdivided by a variety of factors to provide more detailed information on losses such as by: territory; type of insured unit; value of insured unit; type of loss; number of losses and so forth. When divided by the number of insured units these statistics will yield a loss per insured unit for each of these factors.The larger the pool of loss costs that statistics are drawn from the greater the probability that the projected results will be more accurate. Data collected industry wide will yield more credible results than data limited to an individual company.The advantage of class rating is that resultant rates can be applied to a broad group of risks having similar risk characteristics and exposures to loss such as automobile or residential property.Class rating eliminates much of the underwriting judgement in respect to price and allows for a streamlined policy issuance process, faster processing time and reduced production costs.

Front 18

What are the two basic principles of insurance and what are the effects if an appropriate balance is not maintained in the application of these principles?

Back 18

-The premiums of the many pay the losses of the few- The premium shall be commensurate with the risk
If premiums charged were inadequate, and if too many losses had to be paid, then insurance as a risk management system would crumble.
Price discipline, as determined by sound underwriting and actuarial practices, should help insures avoid price swings that challenge a companies ability to plan and create balanced sound sheets.

Front 19

Discuss why it is said that the purchase of insurance requires a high level of trust on the part of the customer

Back 19

Customers have to trust that the information they are providing is going to be kept confidential, unless disclosure is authorized by the client or required by law, we are going to put their interests first and remain uninfluenced by the basis of remuneration, being impartial and objective and holding up the principle of good faith and they have to trust that we are knowledgeable and proficient, and able to competently perform the services required

Front 20

Describe the seven core functions of an insurer that has no branch offices

Back 20

Human resources- recruiting new staff members, overseeing company payroll, monitoring labor regulations, keeping employee records

Computer Systems and Management Information- provide technical assistance or arrange for that assistance from external sources, develop and maintain systems that automate rating, underwrite and policy issuance. Also may develop and maintain the electronic communication systems that link insurers with branches, agents or brokers, and policy holders.

Marketing- Institute plans that will respond to the needs of the customer. Doing so many include researching customer needs, designing products and services to respond to those need and directing sales efforts. Public relation, media control publicity, advertising and event management.

Finance and Accounting- keeping the accounting records, producing financial statements, preparing income tax returns, handling accounts receivable

Actuarial Function-Two main actuaries within insurance company operations, pricing actuaries are responsible for analyzing and performing calculations to determine pricing for insurance policies. Reserving actuaries determine the amount of money to be held in bulk claims reserves.

Underwriting- ensures that risks submitted to the company meet its standards of acceptability and that an appropriate premium is charged.

Claims- Investigate and document the circumstances under which claims occur, to determine whether a policy covers the event, set a reserve for the estimated expected cost of each claim and initiate payment of the claim when established criteria for distributing funds is met.

Front 21

Define Rating

Back 21

Rating is the process by which underwriters apply the information developed by actuaries to the risk information which has been gathered in order to establish a premium for specific risks.

Front 22

What is class rating?

Back 22

Used when statistics can be gathered on a large number of risks that share common characteristics. Ex. Same basic risk factors are either present or absent in all automobile insurance policies. The record of losses for the period under review can be subdivided into territories, type of unit inured, value insured etc. When this total is produced and divided by the number of units it will produce an average class cost per unit insured. The larger the pool of information the greater the possibility the results will be accurate.

Front 23

What is schedule rating?

Back 23

Used when the body of statistical data is to fragmented to permit class rating. The process of schedule rating involves the fixing of a base rate or key rate, the base rate is intended to represent the charge for a standard building, unoccupied and unexposed, in a standard city. Debits and credits are then applied based on factors that either make the risk better or worse then the average risk.

Front 24

What are two factors that prevent insurers from charging a premium that is commensurate with the risk?

Back 24

Competition- When the marketplace is buoyant, insurance companies feel the pressure to lower prices in order to compete.
Government Intervention- When consumers reacted unfavorably and complain about increases in costs of insurance the government steps in and imposes rules and regulations in regards to rates.

Front 25

Define the theory of supply and demand

Back 25

Analyzes the way pricing is regulated by balancing the amount of a product made available for purchase with the quantity require by consumers

Front 26

Name the provincial regulators for Alberta and BC

Back 26

Alberta - Alberta finance, Alberta insurance council, Superintendent, Insurance and Financial Institutions

BC- Financial Institutions Commission, Insurance Council of BC, Superintendent, Insurance and Financial Institutions

Front 27

What are the responsibilities of the provincial insurance regulators?

Back 27

-monitoring each insurers compliance with provincial insurance legislation

-monitoring the solvency of provincially incorporated insurers

-licensing insurers to operate in its jurisdiction

-licensing and supervising adjusters, brokers and agents

-approving classes of business

-controlling an insurers advertising

-reviewing insurance contract wordings

-approving policy forms

-enforcing underwriting eligibility criteria

-overseeing claim settlement practices

-overseeing the electronic marketing of insurance

-overseeing the ethical, operational and trade practices of insurers

Front 28

What are the four main sections of financial statements?

Back 28

Statement of operation (statement of income of income statement)- This displays operating results (income and expenses) for the period

Balance sheet- this displays assets, liabilities and capital at a particular point in time

Statement of retained earnings- This displays changes in capital as a result of earnings or dividends

Statement of comprehensive income- this displays gains and losses produced by financial instruments

Front 29

Describe the case and verdict in regards to host liquor liability

Back 29

In 1998 a couple hosted a NYE party at their home, Desormeaux attended, along with girlfriend and another friend. It was a BYOB party. The three arrived together and left together at 130 am, desormeaux as the driver. The vehicle was involved in an accident with another vehicle and it left the occupants seriously injured. One of the occupants, Zoe Childs was left a paraplegic. Desormeaux blood registered at more then double the legal limit.

Child's and her family sued both Desormeaux and the hosts of the party they attended.

It was concluded that private hosts do not owe a duty of care to monitor intoxicated guests and prevent them from engaging in potentially harmful actions

Front 30

Define accrual basis of accounting

Back 30

records every business transaction in the accounting period (or periods) to which it belongs. Revenue and expenses are matched to the appropriate accounting period.

Front 31

Define Adverse selection

Back 31

a term originally coined by the insurance industry to describe the process by which potential policyholders use private knowledge of their own high level of risk when deciding whether or not to buy insurance. You can anticipate that high-risk individuals, if allowed, will buy lots of insurance and pay a comparatively high rate of premium. On the other hand, low risk clients might not buy any insurance because the price is too high.Adverse selection could also refer to the situation when a broker places its poorer risks with one insurer and its better risks with another.

Front 32

Define Altruism

Back 32

the act of an individual placing the needs of others before their own, and helping others before themselves

Front 33

What is Asset liability management

Back 33

the management of assets in relation to liabilities in order to optimize the balance between risk and return. Measures to assess risks assumed and constraints or boundaries on such measures form part of the management process.

Front 34

Define Assets

Back 34

things of value that a company owns: cash, furniture, equipment, vehicles, investment securities, land, buildings, or money owed to the company by debtors

Front 35

What is a Bear market

Back 35

a market in decline.

Front 36

What is a Board of directors

Back 36

a group of individuals chosen by the stockholders of a company to oversee the management of that company.

Front 37

Define Bond

Back 37

a written promise by a borrower to pay back, on a stated future date, money loaned, and to, in the meantime, pay interest to the holder (lender). A schedule is established for the regular payment of interest. The term of a bond is the amount of time required for its maturity; when the bond is mature, its principal will be repaid. Bonds are known as fixed income securities because they have a guaranteed and set rate of interest.

Front 38

Define Bordereau

Back 38

a collection of data organized into a standardized format. It may represent a list or summary of information about an account or portfolio of insurance business. Traditionally, bordereaux used for insurance purposes summarizes premium or claims activity for an insurer or reinsurer on accounts, portfolios, or reinsurance treaties.

Front 39

What is a Bull market

Back 39

a market on the rise.

Front 40

Define Capacity

Back 40

the amount of capital that individual insurers or entire markets make available for insuring risk

Front 41

Explain Change in unearned premium

Back 41

consists of unearned premium at the beginning of the period, less unearned premium at the end of the period.

Front 42

What is Code of conduct

Back 42

a formally adopted statement of applied ethics, or a statement of what is expected in practice from the members of a company, organization, or association that has formally declared its operating values and principles. Most codes of conduct begin with a description of the principles and values to which the organization aspires. The code may also prohibit specific behaviours or actions by those it covers.

Front 43

Explain Common share

Back 43

a security that represents part ownership of a company. Common shareholders have voting rights that give them a voice in running the company and receive a proportion of its profits after dividends are paid to preferred shareholders.

Front 44

What is a Computer virus

Back 44

a computer program that can copy itself and infect or corrupt files on a targeted computer without the user’s permission or knowledge. A virus spreads from one computer to another when a user sends it over a network like the Web, by e-mail, through file sharing, or by carrying it on a removable medium such as a disk. Additionally, viruses can spread to other computers by infecting files on a network file system.

Front 45

Define Conflict of interest

Back 45

a person’s own interests could potentially benefit from their corporate role and could therefore influence their approach to that role. For example, a board member’s corporate role includes an obligation to uphold the interests of the corporation; but a board member who is also a supplier to that corporation could be torn, in board decisions, between upholding the interests of the corporation and acting in the interests of the suppliers.

Front 46

Define Cybercrime

Back 46

a criminal offence involving a computer as the object of the crime, or the tool used to commit a material component of the offence.

Front 47

Explain Demand

Back 47

The concept of demand and the demand relationship concerns how much of a product buyers will purchase. The law of demand states that if all other factors remain equal, fewer people will demand the product as its price rises. Conversely, the lower the price, the more demand there will be for the product. Therefore, sales volume is influenced by how much people are willing to pay for the product.

Front 48

Define Dividend

Back 48

a payment made to shareholders from the profits earned by a company. Dividends are not paid automatically like interest but are paid only when declared by a board of directors. Although companies in a solid financial position tend to pay dividends regularly, there is no legal requirement to do so.

Front 49

Explain Earned premium

Back 49

identifies that part of a premium allocated towards a policy period that has gone by (expired part).Insurance premiums are payable in advance, but the insurance company does not fully earn them until the policy period expires.

Front 50

Define Economic inflation

Back 50

a general increase in the prices of all consumer goods and services.

Front 51

What is an Endemic

Back 51

refers to the presence of an infectious disease in a certain region at all times for a significant percentage of the population. Malaria, for example, is endemic in parts of Africa and Latin America.

Front 52

What is an Epidemic

Back 52

an above-average but limited incidence of an infectious disease such as influenza, cholera, and severe acute respiratory syndrome (SARS). Any disorder in which infectious viruses or bacteria are easily transmitted can cause an epidemic.

Front 53

Define Equity

Back 53

a company’s net assets; it is the difference between assets and liabilities. In theory, if a company sold every asset it had and paid off all of its liabilities, this is how much would be left. Equity is the share capital that investors have put into a company and the company’s retained earnings—the total of the profits made by the company since it was formed, less any dividends paid to shareholders.

Front 54

Define Fiduciary

Back 54

a person who is entrusted with managing something for the good of another.

Front 55

Define Internal control

Back 55

a process put into effect by a company's board of directors, management, and other personnel that is designed to reasonably assure stakeholders that corporate objectives are being met.

Front 56

What is the Law of Large Numbers

Back 56

a mathematical premise which states that the degree of certainty in probabilities increases as the number of events increases.

Front 57

Define Liabilities

Back 57

are debts owed to creditors: reserves for unearned premium, outstanding claims reserves, accounts payable, and bank loans.

Front 58

What is Mark-to-market taxation

Back 58

This method applies to securities held in connection with a trading business. Any security held at the end of the tax year is treated as if it were sold and reacquired at its fair market value. Thus valuation gains and losses are recorded on a timely basis. The government benefits from accelerated tax revenues when valuation gains in investments are made.

Front 59

When does Market dislocation occur

Back 59

is said to occur when consumers are forced to find a new insurer when their current insurer decides to withdraw from the market after such consumers have come to rely on that insurer for the product.

Front 60

What is Market research

Back 60

the systematic gathering of information about a market’s size and trends. Statistics gathered in this way identify the size and scope of the consumer markets that insurers might want to target. Also, this research helps to plan a company’s promotional agenda to ensure that identified target markets will find the company appealing.

Front 61

What is Minimum capital test

Back 61

requires that insurers have assets worth at least a certain multiple of the amount of their liabilities as well as a margin of additional assets.

Front 62

What is a Niche market

Back 62

an identifiable sub group of consumer market.

Front 63

What is Paid-up capital

Back 63

represents that part of subscribed capital that has been paid in full by shareholders.

Front 64

What is a Pandemic

Back 64

the spread of a highly infectious disease over a wide geographical area, such as a large part of a continent. It may even signify global transmission that affects an exceptionally high proportion of the population. Flu pandemics typically come in waves of multiple outbreaks, often consisting of two or three periods that last six to eight weeks, but at intervals of six to nine months apart. An influenza pandemic could last for a year or more, infecting up to one-third of the population in Canada.

Front 65

Define Par value

Back 65

the face value or stated value of a bond.

Front 66

Define Preferred share

Back 66

a security that represents part ownership of a company. Preferred shareholders have no voting rights (unless their dividends are in arrears) but normally have priority over common shareholders concerning payment of dividends and repayment of principal. The rate of dividend is usually fixed.

Front 67

Define Retrocessionaire

Back 67

provides reinsurance to a reinsurer

Front 68

What is Run-off

Back 68

A company is in run-off when it ceases to write new business and only services existing policies.

Front 69

Define Securities

Back 69

are certificates representing either indebtedness (in the case of bonds) or ownership (in common and preferred stocks).

Front 70

Define Segment

Back 70

a particular subgroup of customers.

Front 71

What is Self-dealing

Back 71

refers to the conduct of board members or other persons of power who take advantage of their position to use their influence or knowledge illegally to gain a personal advantage.

Front 72

What is a Shell company

Back 72

has the licences needed to operate but not much else

Front 73

What is Social inflation

Back 73

refers to the increase in claim costs resulting from generous jury awards, legislated benefit increases, and changing legal concepts of tort and negligence that benefit plaintiffs.

Front 74

Explain Span of control

Back 74

The span-of-control managerial principle asserts that limiting the number of employees who report to the same manager or supervisor improves organizational performance.

Front 75

Define Subscribed capital

Back 75

the amount of stock sold by a corporation.

Front 76

What is Supply

Back 76

represents how much of a product producers are willing to provide at a certain price. The law of supply shows that the quantity of a product a supplier will provide is relative to the amount of payment per unit he or she will receive. The higher the price, the more the producer wants to supply. The correlation between price and the amount of product supplied is the supply relationship.

Front 77

Define Supply and demand

Back 77

The theory of supply and demand analyzes the way pricing is regulated by balancing the amount of a product made available for purchase with the quantity required by consumers.

Front 78

Define Trending

Back 78

encompasses the methods of estimating future costs of providing insurance by reviewing past trends in claims costs.

Front 79

Define Trojan horse

Back 79

a legitimate program into which an unauthorized code is inserted causing it to change its functions to the legitimate user or system owner. Intruders use Trojan horses to create undocumented “back doors” into network systems that permit the perpetrators to gain control of a victim’s system, enabling perpetrators to execute unauthorized functions secretly. Trojan horses appear to be harmless programs until they are executed.

Front 80

Define Unearned premium

Back 80

the portion of premiums collected by the insurer but allocated to the part of a policy’s term still left to run (unexpired portion of policy's term). It is the portion of the written premium that has not yet been exposed to loss.

Front 81

Define Utmost good faith

Back 81

The principle of utmost good faith refers to a superior standard of conduct required of all participants to insurance contractual obligations. It exacts a high level of honesty and disclosure relating to the risks of insurance.

Front 82

Define Working layer

Back 82

the first level of reinsurance above the insurer’s retention where losses are likely to occur.

Front 83

Define Worm

Back 83

The computer worm is a self-replicating computer program that uses a network to send copies of itself to other computer terminals on a network. It may do this without any user intervention. Unlike a virus, it does not need to attach itself to an existing program—it does not need to be transferred as part of a host. Worms always harm the network (if only by consuming bandwidth).

Front 84

What is Written premium

Back 84

the total of all premiums for policies written in an identified accounting period.

Front 85

Define Yield

Back 85

refers to the net rate of return derived from an investment.