CPCU 520 Assignment 1: Overview of Insurance Operations

Insurers perform a host of other functions or outsource them to external organizations including:

investments, accounting or finance, customer service, legal and compliance, human resources, special investigation units (SIU's)

Insurance operations generate substantial amount of investment funds from:

loss reserves, loss adjustment expense reserves, unearned premium reserves.

Formula for overall gain or loss from operations

overall gain or loss from operations= net underwriting gain or loss+ investment gain or loss

What is lapse ratio?

This is calculated by dividing the number of policies that lapse during a period by the total number of policies written at the beginning of that period.

What is a foreign insurer?

A domestic insurer that is licensed to do business in states other than it's domiciled state.

What is a surplus lines broker?

A person or firm that places business with insurers not licensed (non-admitted) in the state in which the transaction occurs but that is permitted to write insurance because coverage is not available through standard market insurers.

What is an insurance exchange?

A proprietary insurer similar to Lloyd's because it act as an insurance marketplace.

What is underwriting guidelines?

A written manual that communicates an insurers underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.

Domestic place of incorporation

An insurer is said to be operating in it's own domiciled state when it's doing business in the state in which it is incorporated or was formed.

What is a reciprocal insurance exchange?

An insurer owned by it's policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to it's members (subscribers) and managed by an attorney in fact. Members agree to mutually insure each other and share profits/losses in the same proportion as the amount of ins purchased from the exchange by that member.

What is a mutual insurer?

An insurer that is owned by it's policyholders and formed as a corporation for the purpose of providing insurance to them.

Insurance Distribution Channels include

Independent agency/brokerage marketing system, direct writer marketing system, exclusive agency marketing system

Cooperative insurers include:

Captive insurers, risk retention groups, and purchasing groups

Simplified Combined Ratio Formula

Combined Ratio (trade basis) = Loss ratio+ Expense Ratio

Combined Ration (Trade Basis) Formula

Combined Ration (Trade Basis)= Incurred Losses (including LAE)/ Earned Premiums + Incurred Underwriting Expenses/Written Premiums

Place of Incorporation Includes

Domestic, Foreign, Alien (FAD)

5 major goals of insurers

Earn a profit, meet customer needs, comply with legal requirements, diversify risk, fulfill their duty to society.

Expense Ratio Formula

Expense Ratio = Incurred underwriting expenses / Written Premiums

Other insurers includes

Government insurers and pools

What is adverse selection?

In general, the tendency for people with the greatest probability of loss to be the ones who most likely to purchase insurance.

What is an alien insurer?

Incorporated or formed in another country.

What is a cooperative insurer?

Insurance company owned by it's policyholders and is usually formed to provide insurance protection to it's policyholders at a minimum cost.

Definition of Proprietary Insurer

Insurer formed for the purpose of earning a profit for it's owners

What is a stock insurer?

Insurer where stockholders have the right to elect the board of directors, which have the authority to control the insurers activities.

Investment Income Ratio Formula

Investment income ratio= Net investment income/ Earned Premiums

What is a syndicate pool?

Issues a joint (or syndicate) policy to the insured listing all pool members and specifying the part of the ins for which each member is responsible.

Loss Ratio Formula

Loss ratio= Incurred Losses /Earned Premiums

Measuring insurer performance includes:

Meeting profitability goals, meeting customer needs, meeting legal requirements, meeting social responsibilities.

Cooperative ownership includes theses types of insurance companies

Mutual insurers, Reciprocal insurance exchanges, fraternal organizations, other cooperatives (Captive insurers, risk retention groups, purchasing groups)

Formula for calculating underwriting gain or loss

Net underwriting gain or loss= earned premiums- (incurred losses+ underwriting expenses)

What is a reinsurance pool?

One member of the pool issues the policy to the insured and the other pool members reinsure an agreed proportion of the policy's insured loss exposures.

Overall Operating Ratio Formula

Overall operating ratio= Combined ratio (trade basis) - Investment Income Ratio

What are the primary sources of revenue for an insurance company?

Premiums and investment income

What is a Fraternal Organization?

Resembles a mutual company but combine a social function- they primarily write life/health ins.

Return on Equity Formula

Return on Equity= Net Income / Owner's Equity

Supporting functions includes:

Risk control, premium auditing, actuarial functions, reinsurance, information technology

Proprietary ownership includes these types of insurance companies

Stock insurers, Lloyd's of London & American Lloyd's, Insurance Exhanges

What is a distribution channel?

The channel used by the producer of a product or service to transfer that product or service to the ultimate customer.

What is probable maximum loss (PML)?

The largest loss an insured is likely to sustain.

What is the retention ratio?

The percentage of expiring insurance policies that an insurer renews and can be measured by policy count, premium volume, or both

What is underwriting?

The process of selecting insured, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.

What is residual market?

The term referring collectively to insurers and other organizations that make insurance available through a shared risk mechanism to those who cannot obtain coverage in the admitted market.

Licensing status can be either

admitted and nonadmitted

Internal constraints that could prohibit an insurer from meeting goals can include:

efficiency, expertise, size, financial resources, other internal constraints

To ensure profitability, an insurer should consider whether growth resulted from:

competitive advantage, relaxed underwriting, inadequate insurance rates, a combination of these factors

Other ownership includes these types of insurance companies

pools, government insurers

External constraints that could prohibit an insurer from meeting goals can include:

regulation, rating agencies, public opinion, competition, economic conditions, insurance marketing and distribution, other external constraints