CS 665- Household Risk Management Exam #2 (Chapter 11-12)
What factors play a role in segmenting auto insurance rates?
Age Gender Type of car you drive Credit Score- it is an insurance based score Zip Code (where you are from) Usage- how many miles do you drive
Exclusive agents
Agents permitted to represent only their company or a company in an affiliated group of insurance companies
Salaried representatives
Employees of the company
What is Lloyd's of London?
Global insurance exchange which sells excess and surplus lines insurance
Insureds
Individual or entity who transfers risk to a third party
Policy owner's dividends
Profits shared by insurance policyholders
Loss Development
The calculation of how amounts paid for losses increases (mature) over time for the purpose of future projection
Underwriting
The process of evaluating risks, selecting which risks to accept, and identifying potential adverse selection
Mass Merchandising
The selling of insurance by mail, telephone, television, or email
True or False: Insurance is a transfer method of risk
True!
True or False: It is important that, with larger samples we feel more confident in our estimates of future losses.
True!
True or False: Our society has elected to provide certain levels of death, health, retirement, and unemployment insurance on an involuntary basis through governmental (federal & state) agencies
True!
True or False: There is very little profit to be made in a Term Life Insurance situation
True!
True or False: The mix of investments within any insurance company will be driven by the type of insurance company
True!- Certain types of insurance will have to be more conservative in terms of investments while they can also be less conservative and handle more risk
True or False: The concepts of mass and similarity are considered before an insurer accepts a loss exposure
True!- they want uncorrelated losses
Do underwriters have control on whether you will be renewed or not?
Yes! They will look into your circumstance and can either suggest that your premium goes up or that you are or are not renewed
Is a fire insurable?
Yes- large of similar exposure units Yes- accidental & uncontrollable No - potentially catastrophic Yes- definite losses Yes- Determinable probability distribution of losses Depends- economically feasible Insurable?- YES
What are ideal requisites for insurability?
1. Large number of exposure units 2. Losses are accidental or by chance (not poor maintenance) 3. Catastrophic loss cannot occur 4. Losses are definite in time & measurable in loss size 5. Probability distribution can be determined 6. The cost of coverage is economically feasible to provide and to buy
How do actuaries build rates for Term Life Insurance?
1. Look at mortality cost- looks different based on age, health, & gender 2. Minus investment income- how much will we make in investments 3. Then add back- expenses charged, taxes, risk change (used as buffer), profit = Gross Premium Charge Mortality data, offset for investment income, taxes, commission, risk
Insurance more specific
A change in risk ownership or responsibility
Risk retention group
A group that provides risk management and retention to a few players in the same industry who are too small to act on their own
Actuarial analysis
A highly specialized mathematical analysis that deals with the financial and risks aspect of insurance
Fortuitous
A matter of chance
Personal Producing General Agent
Agent who sells for one or more insurers, often with a higher-than-normal agent's commission and seldom hires other agents
Independent Agent
Agent who usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates
Gross Premium Charge
All gross premiums charged are going to be minus the investment income
Producer
Another name for both agents and brokers
Why do insurers rely on the law of large numbers?
As the sample size increases the standard deviation is getting smaller and insurers want to predict losses correctly
Discriminate
Classify exposures according to expected losses
Direct writers
Companies that market insurance through exclusive agents
Excess & Surplus lines insurance
Companies that provide coverages that are not available from licensed insurers
Mortality Curve
Curve that illustrates the relationship between age and the probability of death
Actuaries
Design & price insurance policies Performs analysis of past losses & projects them into the future to determine the reserves needed & the rates to charge Determines proper rates & reserves, certifies financial statements, participates in product development and assists in overall management planning
Incurred but not reported (IBNR)
Estimated losses that insureds did not claim yet but are expected to materialize in the future
Reserves
Expected losses that have been reported and ones that have not been as well
True or False: An insurance company can insuer everything
False!- not everything can be insured
What does "Owns the x-date" mean?
Has the right to contact the customer when a policy is due for renewal
Underwriter
Individual who decides whether or not to insure exposures on which applications for insurance are submitted
Group insurance
Insurance provided by the employer for the benefit of employees
Life/health insurance
Insurance that covers exposures to perils of death, medical expenses, disability and old age
Property/casualty insurance
Insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, & theft
Personal insurance
Insurance that is purchased by individuals and families for their risk needs Such insurance includes life, health, disability, auto, homeowner, and long-term care
Stock insurers
Insurers created for the purpose of making a profit and maximizing the value of the organization for the benefit of the owners
When we are certain that the future will be similar to the past, a _______ can be used to predict future loss
Loss distribution
Adverse Selection
Mispriced insurance Selecting an insurer that charges lower rates for higher risk exposure Situation in which a buyer knows information that the seller does not In insurance, adverse selection occurs when insurance purchased more often by people and/or organizations with higher-than-average expected losses and the premiums charged do not reflect that these higher-risk people are in the pool
What is the mix of investments for Home & Auto insurance?
More conservative More invested in bonds bc they are stable
Online-Direct Insurance company
New company with the goal of utilizes AI and algorithms and the internet to provide consumers with insurance needs Ex: Lemonade- They use a chunk of their money to give back
Do underwriters create policies?
No- they only apply underwriting rules
What is an example of a general agency?
Northwestern Mutual
Coefficient of Variation
Relative standard deviation Standard deviation/sample mean bigger the sample size the larger variation
Investment Income
Returns from all assets held by the insurers from both capital investment and from premiums
Identify the element of insurance that uses the law of large numbers to reduce the possibility of missing future loss predictions
Risk pooling
Why do we need coefficient of variation?
Scale
Risk pooling
Sharing of losses by a large number of exposure units
Mortality tables
Tables that indicate the percentage of expected deaths for each age group
Premium elements
The adjustments for various factors in life insurance premiums
Ceding Insurer
The company transferring risk in a reinsurance arrangement
Rate calculations
The computation of how much to charge for insurance coverage once the ultimate level of loss is estimated plus factors for taxes, expenses, and returns on investments
Capital & Surplus
The equivalent of equity on the balance sheet of any firm The net worth of the firm Assets minus liabilities
Similarity
The exposures to be insured and those observed for calculating the probability distributions must have similarities The exposures assumed by insurers are not identical, no matter how carefully they may be selected The units in the group must be reasonably similar in characteristics if predictions about losses are to be accurate
Insurer assumes risk
The insurer promises to pay whatever loss may occur as long as it fits the description given in the policy and is not larger than the amount of insurance sold
Insurer
The third party that accepts the risks transferred by insureds
Catastrophe (Cat) Modeling
The use of computer technology to synthesize loss data, assess historical disaster statistics, incorporate risk features, and run event simulations as an aid in predicting future losses
Which of the following does not characterize insurance?
guarantees wealth above the loss
Catastrophic loss
loss that could imperil the insurer's solvency
How does insurance works?
1. Risk transferred via contract - if it is not clear what the coverage is, then it will be paid - people give insurance companies money and the insurance company gives the individual a contract 2. Insurer pools all similar exposures to estimate future losses - similar risks are pooled together based on similar characteristics - credit scores will factor into this 3. Societal risk reduced -stable premiums 4. Insurers compute their own risk of missing predictions -surplus 5. Insurers segment the pool according to risk for pricing and underwriting
Branch Manager
A company employee who is compensated by a combination of salary, bonus, and commissions related to the productivity of the office to which he or she is assigned
Captive insurance company
A company that provides insurance coverage to its parent company and other affiliated organizations
Mass
A major requirement of insurability is mass; that is, there must be large numbers of exposure units involved For automobile insurance, there must be a large number of automobiles to insure For life insurance, there must be a large number of persons to be insured
Insurance
A social device in which a group of individuals transfer risk to another party in such a way that the third party combines or pools all the risk exposures together
What is the difference between agents and brokers?
Agents represent insurance companies Brokers represent their customers
Reinsurance
An arrangement by which an insurance company transfers all or a portion of its risk under a contract (or contracts) of insurance to another company Insurance for an insurance company
Managing General Agent (MGA)
An independent agent or broker who has the underwriting authority granted by an insurer, and can handle many insurance functions considered legally binding agreements
A general agent
An independent businessperson rather than an employee of the insurance company who is authorized by contract with the insurer to sell insurance in a specified territory
Wholesale Agent
An insurance agent who acts as an intermediary between a retail agent and an insurance company
Retail Agent
An insurance agent who acts as an intermediary between an insured and the insurance marketplace
What is Policy Genius?
An online broker to go and compare rates of insurance
Wholesale Broker
An specialized insurance broker who acts as an intermediary between a retail agent and an insurer
Treaty arrangement
Arrangement in which the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance
The law of large numbers
As a sample of observations is increased in size, the relative variation about the mean declines As the number of observations increases our predictions become more accurate EX:
Financial Planner
Individual who facilitates some insurance sales by serving as a consultant on financial matters, primarily to high-income clients
Broker
Individual who solicits business from the insured and also acts as the insured's legal agent when the business is placed with an insurer
Mutual insurers
Insurers owned and controlled, in theory if not in practice, by their policy owners Owned and controlled by policy owners People become policy-owners by purchasing an insurance policy from these insurers and profits are shared with policy owners
Equal Credit Opportunity Act (ECOA)
Law requiring that the creditor give you a notice that tells you the specific reasons your application was rejected or the fact that you have the right to learn the reasons if you ask within sixty days
Engineering & Loss Control
Methods of prevention and reduction of loss whenever the efforts required are economically feasible
Incurred losses
Paid losses plus known, but not yet paid losses
Premium
Payment the insurer receives in exchange for transferring a risk from the insured
Governmental risk pools
Pools formed for governmental entities to provide group self-insurance coverage
Commercial insurance
Property/casualty insurance for business and other organizations
What is an example of a Direct Writer aka Exclusive or Captive Agent?
State Farm
Service
The ultimate indicator upon which the quality of the product provided by insurance depends
How can reinsurance be divided?
Treaty, facultative, & a combination of both
True or False: some types of insurance is required based on the type of loan that is used to buy the property
True!- in most states the purchase of a third party automobile liability insurance is mandatory to register a motor vehicle
Why do we pool together risk?
We want to be able to use the law of large numbers to be able to increase the predictability of losses therefore the stability of premiums
Redlining
When an insurer designates a geographical area in which it chooses not to provide insurance, or to provide it only at substantially higher prices *this is prohibited in most states, because it is considered unfair to stop people from getting coverage solely on where they live
Dependent Loss
When loss to one exposure unit affects the probability of loss to another
Economically feasible
When the size of the possible loss must be significant to the insured and the cost of insurance must be small compared with the potential loss
Is terrorism insurable?
Yes- large of similar exposure units No- accidental & uncontrollable (Man-made though not by insured) Yes- potentially catastrophic Yes- definite losses No- Determinable probability distribution of losses No- economically feasible Insurable?- NO
Is disability insurable?
Yes- large of similar exposure units Yes- accidental & uncontrollable No- potentially catastrophic Yes- definite losses Yes- Determinable probability distribution of losses Depends- economically feasible Insurable?- YES
Is a flood insurable?
Yes- large of similar exposure units Yes- accidental & uncontrollable Yes- potentially catastrophic Yes- definite losses Yes- Determinable probability distribution of losses Depends- economically feasible Insurable- NO