Fnbslw 446 - Insurance Exam 2

Front 1

Indemnity

Back 1

Restoration of pre-loss financial position

Front 2

Insurable Interest

Back 2

If a loss takes place, the insured must lose financially/incur some harm

3 Purposes

-To prevent gambling

-To reduce moral hazard

-To measure the amount of loss in property insurance.

Front 3

Subrogation

Back 3

When a loss payment is made as a
result of a third party’s fault,
insurer can claim for indemnity.

Front 4

Utmost good faith

Back 4

Higher degree of honesty required from
parties to an insurance contract than
from parties to other contracts

Front 5

4 requirements of an insurance contract

Back 5

-Offer and Acceptance
-Consideration
-Competent Parties
-Legal Purpose

Front 6

Unique Legal Characteristics of
the Insurance Contract

Back 6

-Aleatory Contract.
-Unilateral Contract.
-Conditional Contract.
-Personal Contract.
-Contract of Adhesion.
-Principles of reasonable expectations

Front 7

Parts of an Insurance policy

Back 7

-Declarations & Definitions

-Insuring Agreement (3 areas)

Life Insurance

Property Insurance

-->Named Peril approach (covers certain risks lower premiums)

-->All-risks approach (cover all risks higher premiums)

Liability Insurance

-->Duty to defend

-->Pay on behalf of insured

-Conditions

-Exclusions

Reasons for exclusions

-->Lower the cost

-->Moral Hazard Problems

-->Coverage provided by other contracts

-->Coverage not needed by typical insured

-->Presence of extraordinary hazards

Excluded property, excluded perils, excluded losses

-Endorsements/Riders

Front 8

Bill’s house is valued $200,000. He purchased a
HO insurance policy which contains an 80%
coinsurance clause. His house was damaged in
a windstorm and he filed a $10,000 claim. How much will his insurance company pay if he purchased $160,000 coverage? $120,000?

Back 8

Amt.of Recovery= Amt.Purchased/Amt.Required
×Loss

$160,000 coverage: (160,000/(0.8*200,000))*10,000=

$10,000

$120,000 coverage:

(120,000/(0.8*200,000))*10,000=

$7,500

Front 9

Loss Sharing Provisions

Back 9

(Prevent profiting from insurance and violation of the principle of indemnity)

Deductible

Coinsurance

Policy Limits

Other provisions

-Pro Rata

-Equal Shares

-Primary/Excess

Front 10

Coinsurance

Back 10

-The insurer pays only a stated percentage of losses.

-Insurer pays the lesser of:
1) amount of recovery calculated above,
2) amount of insurance coverage purchased
3) the actual loss

Front 11

Major Types of Private Insurers

Back 11

• Stock Insurers
• Mutual Insurers
• Lloyd’s Associations
• Fraternal Insurers
• Reciprocal Exchanges
• Blue Cross/ Blue Shield Plans
• Health Maintenance Organizations (HMOs)

Front 12

Stock insurers

Back 12

A corporation owned by stockholders, with an objective to earn profits for the stockholders.

Advantages

-Specialization

-Access to/monitored by capital market

-Managerial discretion

-greater risk taking, flexibility, limited liability.

Disadvantages

-Principal agent problem

Front 13

Mutual Insurers

Back 13

A corporation owned by the policyowners, that may pay dividends to the policyowners or give a rate reduction in advance.

Advantages

Dividends

Customer owner-conflict is controlled

Limited Liability

Disadvantages

Non-transferable ownership rights

-Less managerial discretion

No capital market monitoring

Front 14

Lloyd's Insurers

Back 14

Is the world's leading insurance market that provides services and physical facilities for its members to write specialized lines of insurance.

Front 15

Holding Company

Back 15

a company that directly or indirectly controls an authorized insurer. A mutual insurer is reorganized as a ______ ______ that owns or acquires control of stock insurance companies that can issue common stock.

Front 16

Insurers Operations

Back 16

􀂒 Underwriting
􀂒 Rate making
􀂒 Production (marketing)
􀂒 Claim settlement
􀂒 Reinsurance
􀂒 Investment
􀂒 Others

Front 17

Types of Insurance lines

Back 17

Single lines

Multiple lines

Front 18

Paul v. Virginia 1868

Back 18

Established the right of state to regulate insurance.

Front 19

U.S. v. South-Eastern Underwriter Association in 1944.

Back 19

Court held that insurance could be regulated by the United States Congressunder the Commerce Clause, overturningPaul v. Virginia. Congress responded by enacting the McCarran-Ferguson Act of 1945 which limited antitrust laws' applicability to the business and assured state authority would continue over insurance.

Front 20

McCarren-Furgeson Act 1945

Back 20

Continued regulation and taxation of the insurance industry by state are in the public interest.

Front 21

Gramm-Leach-Bliley Act 1999

Back 21

Insurers, banks, security firms, and other financial institutions are allowed to affiliate with each other and do business across sectors.

Front 22

Issues with State Regulations

Back 22

-Lack of uniformity in state regulation

-The quality of regulation varies by state
-Insolvency externality (costs of insolvency
are borne in other states)
-Regulators captured by local industry
-Licensing issues

Front 23

Issues with Federal Regulations

Back 23

-States have local needs (Imposition of
Uniform rules not desirable)
-No regulatory competition

-Potential increase of systematic risk if government fails to regulate properly

Front 24

Methods of Insurance Solvency Detection

Back 24

-IRIS

-FAST

-Risk Based Capital

Front 25

IRIS

Back 25

Insurance Regulatory Information System (1973)

If a company fails four or more ratios a more in depth review is conducted, then various degrees of intervention are called for.

-Explanation by company

-Company Proposes Solutions

-Regulator imposes solutions

-More investigation followed by regulatory action

-Formal regulatory action

Front 26

Fast

Back 26

More involved than IRIS.

Higher score, higher likelihood of trouble/more risk

Determines risk based on a scoring system.

Front 27

Risk Based Capital Rules (RBC)

Back 27

Originated from Banking

An insurer must increase reserves if more risk is taken on.

4 Categories: Asset, Interest Rate, Insurance/Underwriting, General Business.

Very few companies actually fail.

Front 28

Rate Regulation Problems: Availability problem

Back 28

Price ceiling below the competitive market price results in insurers offering less insurance than consumers will want to buy.

In the long-run insurers will be forced to leave the market if they are unable to charge a premium that covers costs.

Front 29

Rate Regulation Problems: Quality of Service

Back 29

-Tighter claims on policy

-Delaying claim payments

-Delaying dividends to policyholders

Front 30

Taxation of Insurers

Back 30

-Federal Income tax

-State premium tax on gross premiums

-State retaliatory tax laws

Front 31

Underwriting

Back 31

The process of selecting, classifying, and pricing applicants for insurance.

-Risk Selection

Target market determines standards

Front 32

Rate Making

Back 32

refers to the pricing of insurance and the calculation of insurance premiums.

Front 33

Unearned premium reserve

Back 33

a liability item on the insurer's balance sheet that represents an unearned portion of gross premiums on all outstanding policies at the time of valuation.

Front 34

Reinsurance

Back 34

an arrangement by which the primary insurer that initially writes the insurance and tranfers to another insurer part or all of the potential losses associated with such insurance

Front 35

Ceding company

Back 35

the primary insurer that initially writes the business (above reinsurers)

Front 36

Benefits of reinsurance

Back 36

Increased underwriting capacity

Stabilize profits

Reduce the unearned premium reserve

Provide protection against catastrophic loss

Front 37

Production

Back 37

the sales and marketing activities of insurers.

Front 38

Actuary

Back 38

the person who determines rates and premiums, a highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research

Front 39

Producers

Back 39

Agents who sell insurance are frequently referred to as _____?

Front 40

Objectives in claims settlement

Back 40

Verification of a covered loss

Fair and prompt payment of a claim

Personal assistance to the insured

Front 41

Treaty Reinsurance

Back 41

the primary insurer has agreed to cede insurance to the reinsurance, and the reinsurance has agreed to accept the business. All business that falls within the scope of the agreement is automatically reinsured.

Front 42

Methods for sharing losses

Back 42

-Pro rata

-Excess of loss.

Front 43

Pro Rata

Back 43

(loss sharing method)

The ceding company and the reinsurer agree to share losses and premiums based on some proportion.

Front 44

Excess of loss

Back 44

(loss sharing method)

the reinsurer pays only when covered losses exceed a certain level.

Front 45

Reinsurance Pool

Back 45

An organization of insurers that underwrites insurance on a joint basis. __________ _____ have been formed because a single insurer may not have the financial capacity to write large amounts of insurance, but the insurers as a group can combine financial resources as a group to obtain the necessary capacity.

Front 46

Insurance Capacity

Back 46

An insurance company's underwriting capacity to write new business. AKA the maximum amount of risk an insurance company can underwrite based on its financial condition.

Front 47

Stabilize Profits

Back 47

Something an insurer does if they wish to avoid large fluctuations in annual financial results, generally through the use of reinsurance.

Front 48

Catastrophic loss protection

Back 48

An insurance companies can reduce risk of hurricanes, natural disasters, industrial explosions, commercial airline disasters and similar event through the use of reinsurance this benefit is known as ______ ______ ________.

Front 49

Facultative reinsurance

Back 49

an optional case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit. A form of reinsurance whereby each exposure the ceding company wishes to reinsure is offered to the reinsurer and is contained in a single transaction.

Front 50

Quota-Share Treaty

Back 50

the ceding company and reinsurer agree to share premiums and losses based on some proportion. The ceding company's retention is stated as a percentage rather than a dollar amount.

Ex. Alpha Insurance and Beta Insurance enter this arrangement. Losses and premiums are shared 50% & 50%. A $100,000 dollar loss occurs and is paid by Alpha. Beta then pays Alpha $50,000 or 50% of the loss

Front 51

Surplus-Share Treaty

Back 51

The reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit, also referred to as a line and is stated as a dollar amount. If the amount of insurance on a policy exceeds the retention limit, the excess insurance is ceded to the reinsurer up to some maximum amount.

$50,000 policy issued $20,000 Alpha $30,000 Beta $5,000 loss occurs Alpha pays 2/5 or $2000 Beta pays 3/5 $3000

Front 52

Investments

Back 52

An extremely important function in the overall operations of insurance companies that can aid in loss control. The funds available for this function are derived from premiums.

Front 53

Life insurance investments

Back 53

A ____ ______ divides its assets into 2 accounts, the assets in the general account support contractual obligations for guaranteed fixed dollar benefits such as death benefits. The assets in the separate account support the liabilities for investment risk products such as variable annuities, variable life insurance, and private pension benefits.

Front 54

Securitization of Risk

Back 54

When an insurable risk is transferred to the capital markets through creating of a financial instrument such as catastrophe bonds, futures contract, options contracts or other financial instruments.

Front 55

Catastophe Bonds

Back 55

corporate bonds that permit the issuer of the bond to skip or reduce coupon/interest payments if a catastrophic loss occurs.

Front 56

Property and Casualty Invesments

Back 56

These types of contracts are short term in nature (one year or less). Income from this function is extremely important in offsetting unfavorable underwriting experience.

Front 57

Accounting

Back 57

The function that creates and prepares an insurance companies financial statements, develop budgets, analyze the company's financial operations and keep track of the millions of dollars that flow in and out of a typical company each year.

Front 58

Information systems

Back 58

Systems that depend heavily on computers and new technology and have revolutionized the insurance industry by speeding up the processing and storage of information and by eliminating many routine tasks.

Front 59

Legal Function

Back 59

The functions within an insurance company where attorneys draft legal language and policy provisions in insurance policies and review all new policies before they are marketed to the public. Other activities include providing legal assistance to actuarial personnel who testify at rate hearings; reviewing advertising and other published materials; providing general legal advice concerning taxation, marketing, investments, and insurance laws; and lobbying for legislation favorable to the insurance industry.

Front 60

Loss Control

Back 60

An important part of risk managements, and a typical property and casualty insurer provides numerous ____-______ services. These services include advice on alarm systems, automatic sprinkler systems, fire prevention, occupational safety and health, prevention of boiler explosions and other ___-______ activities.

Front 61

Principle of Utmost Good Faith

Back 61

A higher degree of honesty is imposed on both parties to an insurance contract than is imposed on parties to other contracts.

Front 62

Concealment

Back 62

intentional failure of the applicant for insurance to reveal a material fact to the insurer

Front 63

Misrepresentation

Back 63

A false or misleading statement that, if intentional and material, can allow the insurer to void the insurance contract.

Front 64

Warranty

Back 64

A statement that becomes part of the insurance contract and is guaranteed by the maker to be true in all respects.

Front 65

Waiver

Back 65

The voluntary relinquishment of a known legal right.

Front 66

Estoppel

Back 66

When a representation of fact made by one person to another person is reasonably relied on by that person to such an extent that it would be inequitable to allow the first person to deny the truth of the representation.

Front 67

Declarations

Back 67

Statements that provide information about the particular property or activity to be insured.

Front 68

Insuring agreement

Back 68

Summarizes the major promises of the insurer.

Property insurance

-Named perils policy

-All-risks policy

Liability insurance

-Duty to defend

-Pay on behalf of insured

Front 69

Conditions

Back 69

Are provisions in the policy that qualify or place limitations on the insurer's promise to perform.

Front 70

Property and Liability Insurance Marketing Systems

Back 70

Independent agency system

Exclusive agency system

Direct Writer

Direct response system

Multiple distribution systems

Front 71

Life Insurance Marketing systems

Back 71

Agency Building systems

Nonbuilding agency system

Direct Response system

Front 72

Agency building system

Back 72

When an insurer builds its own agency force by recruiting, financing, training, and supervising new agents.

Front 73

Nonbuilding agency system

Back 73

When an insurer sells its products through established agents who are already engaged in selling life insurance.

Front 74

Direct response system (health & life)

Back 74

When life an health insurance is sold directly to customers without the services of an agent through tv, radio, mail, newspapers, and other media.

Front 75

Independent agency system

Back 75

A business firm that usually represents several unrelated insurers, the agents work on a

commission basis for insurers they have contracted with to sell or provide service on

insurance policies.

Front 76

Exclusive agency system

Back 76

When an agent represents only on insurer or group of insurers under common ownership.

Front 77

Direct writer

Back 77

An insurer in which the sales person is an employee of the insurer, not an independent contractor

Front 78

Direct Response system (property casualty)

Back 78

When property and Liability insurance is sold through the use of tv, telephone, mail, newspapers, and other media.

Front 79

Multiple Distribution Systems

Back 79

When insurance companies seek to increase profits through the use of a combination of marketing systems

Front 80

Insurance broker

Back 80

someone who legally represents the insured but does not have the authority to bind the insurer.

Front 81

Fraternal Insurer

Back 81

A mutual insurer that provides life and health insurance to members of a social of religious organization

Front 82

Reciprocal exchange

Back 82

An unincorporated mutual where insurance is exchanged among the members, each member of the reciprocal insures the other members and in turn is insured by them.

Front 83

Health maintenance organizations

Back 83

Organized plans of health care that provide comprehensive health-care services to their members.

Front 84

Blue Cross Blue Shield

Back 84

Nonprofit organizations that receive favorable tax treatment and are regulated under special legislation.