C16 The Business of Insurance

What did most insurance companies rely on to earn a profit between 1978 and 2003?

-2003 was the first year since 1978 that a collective underwriting profit was earned by the Canadian P&C industry -most insurers depend on investment income to produce an overall profit -achieving a profit permits the payment of dividends to shareholders and provides the capital needed to finance growth -dependence on investment earning makes insurers more vulnerable to the unpredictable securities market and fluctuating interest rates

What is a bull market?

-A bull market is a market on the rise. During this cycle there is strong demand for securities but a weak supply which causes prices to rise. -When a bull market exists, investors are optimists and have faith that the upturn in the market will continue. -the economy is also strong and the employment is high

What type of operational plan exists when a mutual insurers policyholder is required to sign a premium note identifying the limit he or she would be responsible to pay should the company suffer a financial loss?

-A mutual insurer is a form of cooperative enterprise owned by it's policyholders. -The association is formed for the purpose of insuring one another against the possibility of certain types of loss and operates on a premium note/assessment plan -If the company declares a loss, the policyholders will be assessed and a levy will be determined to make up the deficit, but only up to the agreed amount. -Profits are shared among the policyholders and are typically redistributed by reducing premiums rather than refunding to the policy holders.

What is the accrual basis of accounting?

-Allocates financial transactions recorded in the account period to which it belongs -revenue and expenses are matched to the appropriate account period

What does the span-of-control managerial principle assert?

-Asserts that limiting the number of employees who report to the same manager improves organizational performance -There is no agreement among most organizations as to what the optimal span of control should be -The manager's span of control will be affected by the nature and the style of the organization, the aptitude, and personality of the manager, and the type of work to be produced

What the supervisory functions of OFSI?

-Assessing the safety and soundness of the institutions under it's mandate -Evaluating a company's risk profile, financial condition, risk management practices and compliance with applicable laws and regulations

What did the CCIR develop as part of it's harmonization project?

-CCIR has been involved in: 1. Harmonizing and streamlining licensing approvals and financial and corporate sector filings 2. Fast-Tracking licence approvals from insurers who are licensed in one Canadian jurisdiction and seeking authorization in another 3. Further streamlining financial and corporate filings, such as one-point filing with the primary regulator -CCIR Facilitated and developed the adoption of the minimum capital test

What is the responsibility of the Canadian Council of Insurance Regulators (CCIR)

-CCIR is an association composed of regulators from each province and territory and the federal level -CCIR cannot enact legislation but members can make recommendations on their respective governments on related issues -CCIR is a means for insurance regulators to share information and find common solutions -The focus is on improving the efficiency and effectiveness of the Canadian regulatory framework

How does OSFI determine the amount of capital required for insurance companies?

-Capacity is a function of capital available and extent of exposure that insurers are prepared to accept -The level of capital and surplus must be sufficient to cover expenses, commissions, premium taxes and claims which are incurred prior to policy premiums becoming earned. GUIDELINE TO CAPACITY: -Ratio of net premiums to equity (capital and surplus is measured) -The maximum single exposure, max % of equity that can be put at risk on a single exposure is assessed

What is the difference between a common share and a preferred share?

-Common represents part ownership of a company WITH voting rights. Receives a portion of its profits after dividends are paid to preferred shareholders. -Preferred represents part ownership of the company WITH NO voting rights. Have priority over common shares concerning payment of dividends and repayment of capital. The rate of dividend is usually fixed.

What is the difference between a fiscal year and a calendar year?

-Companies prepare annual financial statements for a 12-month period that do not necessarily fall in line with the Calendar year (Jan-Dec)

What are some of the reasons that cause an insurance company to underestimate its reserves?

-Company's actuarial department or management is overly optimistic in setting up estimates -Technical related issue to court cases that may invoke social inflation for a specific type of claim -General economic inflation that caused the price of goods and services to rise -Inexperienced claims staff or lack of appropriate training may have also caused claims to be overpaid or led to errors that initiated lawsuits and larger settlements

How does an insurer's distribution method effect commissions?

-Direct writers tend to spend a higher percentage of revenue on expenses but lower proportion on commission than companies that use independent brokers. -This is because employees and captive agents are often paid a salary or a lower level of commission than independent brokers

What major issues are addressed by provincial insurance legislation?

-Due to federal and provincial mix of legislation, rules may impose conflicting requirements or overlapping requirements causing confusion and adding to costs. -Provinces have so many individual needs, the luxury of uniform legislation has not been feasible

How are brokers affected by market cycles?

-During a soft market cycle, brokers enjoy the abundance of capacity, premium rates decline and underwriters are less demanding. However a decline in rates means a decline in commission -During a hard market cycle, brokers must labour intensively to find capacity for their clients needs and must negotiate more diligently to obtain reasonable prices. Commission income rises when premium increases.

How are consumers affected by market cycles?

-During a soft market cycle, consumers are simply more neutral in their reaction to the insurance industry -During a hard market cycle, consumers become wary, distressed and often angry. They are faced with premiums that are suddenly not affordable, availability that is restrictive and coverage terms are limited. Consumers are in an awkward situation as they cannot afford to buy insurance that is mandated by law

For accounting purposes, how is earned premium calculated?

-Earned premium identifies that part of the premium allocated towards a policy period that has gone by. -Total of premiums written during the period + unearned premium reserve at the beginnings of the period - unearned premium reserve at the end of the period = premiums earned for the period

Why would a claims department assign claims to independent adjusters?

-Hired to handle claims in more rural areas or handle more complex claims. -Using an independent adjuster occasionally in a remote geographical area is more cost-effective than hiring a staff adjuster to cover a vast territory where only a few claims would occur

Identify a large loss that exhausted a significant amount of capital for the insurance industry in 2001?

-Hundreds of millions in shareholder capital was lost as a result of terrorist attacks on the twin towers in NYC and the scandalously improper accounting practices that occurred in corporate America thereafter -although insurers and reinsurers in the U.S. market were primarily affected by the severe claims filed, the Canadian market also felt it's effects because it tend to illicit reaction in the international market

List three ways that insurance benefits society.

-Insurance provides a certain freedom of action, encouraging activities to flourish in industries, commerce, organizations and families -Insurance industry facilitates growth but depends on growth of the economy -Insurance may facilitate borrowing towards the purchase of a home, car or cottage (an asset) -Insurance industry contributes to the economy by providing employment to thousands of Canadians -Insurance companies hold large investment holdings, such as investments to help finance governments and businesses. -Risk exposures are escalating. As the planet becomes more crowded, weather becomes more erratic, values become more concentrated, technologies become more advances and our societies become more litigious -Money paid to indemnify people and fix property and bodily injury boosts the economy

What is asset liability management?

-It is 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

What is the effect of mergers and acquisitions in the insurance marketplace?

-M&A tend to increase capacity as larger companies with surplus capital expand their geographic score and product offerings -larger companies have greater resources than smaller competitions to draw from and put to use to compete for market share

What does Minimum Capital Test (MCT) measure for OSFI?

-MCT is used to measure solvency -A single harmonized asset test applies to all Canadian insurers -Test is intended to give regulators early warning of an insurers potential solvency problems -MCT reacquires that insurers have assets worth at least a certain multiple of the amount of their liabilities as well as margin of additional assets

What is marketing?

-Marketing describes everything done to make a company, product or service known to people who could use it, make potential customers want what is offered and sell it to those people

An organization may choose to form multiple companies in order to provide flexibility in what main areas?

-Multiple companies with a single corporate structure will be required to provide flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria and rating plans. -Allows an organization to use independent distribution networks as well as direct sales force. -Allows for flexibility in the products that are offered as well as types of risks targeted

What is the Office of the Superintendent of Financial Institutions (OFSI)?

-OFSI is the primary regulator of federally chartered Canadian and foreign P&C companies -Its mission is to protect the interests of depositors, policyholders, pension plan members and creditors of financial institutions from undue loss -To advance and administer a regulatory framework that contributes to public confidence -OSFI supervises and regulates all banks, trust/loan companies, insurance companies and credit co-ops

List FOUR characteristics of an insurer that OSFI would review to measure an insurer's inherent risk.

-OSFI stresses profitability, adequacy and quality of capital earnings, adequacy of reserves for policy liabilities, adequacy of reinsurance protection, the quality of assets the quality of internal controls . 1. Issues advisories outlining its views of best practices or risk management measures. 2. Provides notice to inform public of items of interest 3. Publishes warnings for the financial sector 4. Presents internally and externally generated consultation papers of interest to its stakeholders 5. Continuously monitors insures financial conditions and operations performance 6. Verifies compliance with statutory and other regulatory requirements 7. Conducts periodic on-site examinations as required by statute

Theoretically what would an overcapitalised insurer want to accomplish in relation to its premium volume?

-Overcapitalised insurers have a business problem: they will want to increase their premium volume to take full advantage of their capital at their disposal -Uncapitalised insurers must restore and acceptable balance between their premium volume and the capital they have to support it. -Such insurers can do this by: 1. Reduce premium Volume 2. Take a different strategic direction on type of businesses 3. Use reinsurers 4. Reduce capacity on certain lines of business 5. Restructure their balance sheet to free up capital

What backlash can be expected when a mandatory insurance product becomes less accessible to consumers because of high rates?

-Politicians get involved by imposing measures they believe will make insurance more affordable -Governments can step in to establish backstops and protection plans such as caps on the amount of loss

What is a balanced investment portfolio?

-Primary concern of the insurer's investment portfolio is safety. -Achieved by diversifying investments over a number of different securities and types of securities by industry, geographical location or maturity (bonds) -Any sudden problem with the value of any one investment will not significantly affect a portfolio or the operations of the insurer

Define subscribed capital. How does it differ from paid-up capital?

-Private stock insurance companies are responsible for much of the insurance written in Canada and throughout the world. -Security to policyholders for assumed liability is represented by subscribed or paid-up capital and any surplus. SUBSCRIBED CAPITAL is the amount of stock sold by a corporation. Policyholders contribute to a communal fund by paying premium for their insurance if premium do not cover the liabilities, then the contributed capital of investors will fund the shortfall. PAID-UP CAPITAL represents that part of subscribed capital that has been paid in full by the shareholders.

What action might an insurer take when the effects of government imposed reforms are unknown?

-Projections for premium, loss ratio, and ROE made before the changes must be redeveloped. -Some insurers may shelve business strategies to achieve organic growth or not expand territory until the effects of the government actions are made clear -other insurers may consider withdrawing from their jurisdiction, adjusting marketing plans for the affected area, or reserving any financial decisions until the regulator's plans are announced -this in turn reduces automobile insurance capacity in the insurers jurisdiction

What government department or regulatory body is responsible for insurance in your province?

-Provincial insurance legislation is mainly concerned with market conduct issues, policy wordings, including statutory conditions, affordability and availability. -FSCO / Superintendent of Financial Services

What is branding?

-Reinforces the integrated approach of marketing by unifying all messages brought to the public -Refers to establishing overall consistency in the marketing function -All processes and materials used to lift and sustain a unique company image, product, or service to a high level of awareness and acceptance are coordinated

Why is there a need for residual market mechanisms?

-Residual market mechanisms are established by the auto mobile insurance industry to provide a last resort insurance facility for consumers. Not-for-profit Facility Association (FA) -Quebec operates it's residual independently -This ensures that insurance coverage is available even to those who are considered to be high risk and unattractive to mainstream insurers -Every insurer licensed to write auto liability insurance in FA industries is required to be a member of the organization and to follow rules set by the board of directors regarding scope of coverage, terms and standards of coverage provided -The FA does not issue insurance policies, instead it designates certain companies to provide specific services and this includes claim handling

Name three successive multi-layered goal setting levels.

-Senior management sets goals that filter down to its various departments and to the units within departments, and to each individual employee 1. Department goals. 2. Unit goals. 3. Individual goals

What does a statement of operations how?

-Shows how a company has performed (earning made or loss) during a specific accounting period -Underwriting revenue (premiums) - underwriting expenses (overhead, acquisitions costs, claims costs, taxes) = net income/loss -The statement also indicates the company's sources of revenue and also what it anticipates in its future -If the company has discontinued operations, withdrawn from unprofitable lines of business or opened new operations, the statement of operations will show all of these things

What effect can an insolvent insurance company have on the marketplace?

-Shrinks the market and its capacity due to the fewer market players. -Canada has created an association to deal with bankrupt P&C insurers, the effects of shrinkage are even more intense for other health companies in the industry -When a P&C company goes bankrupt, each insurer that is a member of the association is called upon to pay its share of claims, this could potentially have negative effects on profit levels

Name THREE strategies employed by underwriters that signify a hardening market.

-Soft market conditions arise when there is excess financial capacity in the marketplace and insurers demonstrate reasonable profitability and strong capital bases -Hard markets follow poor results because risks underwritten at artificially low prices must eventually be offset with high enough premiums. Companies tend to react slowly in a hardening market because they do not want to be the first to up prices an lose good accounts 1. Approach each risk very cautiously before offering to insure it. 2. Set more exacting underwriting standards. 3. Gives loss control and loss prevention measures significant consideration. 4. Tighten policy terms to limit exposures. 5. Mark substantial rate increases 6. Terminate relationship with brokers with unprofitable results or who only have a small volume of business 7. Withdraw from the jurisdiction, a class of business, or an individual risk when sufficient market share has not been gained or a portfolio or individual risk is not profitable 8. Withdraw from the market altogether by selling the company to another insurer or placing it into what is known as a run-off (cease to write new business and only service existing policies)

What is market research?

-System of gathering information about a market's size and tends -To identify the size and scope of the consumer markets that insurers may want to target -helps to plan a company's promotional agenda to ensure that identified target markets will find the company appealing Sources of market research include: -Government data on population and area spending levels -Local News Papers -Telephone and yellow pages

What are the main accounts receivable for an insurer?

-The largest receivables are usually premiums due from brokers or in the case of direct-billed policies, from the insured's -Insurers typically extend credit to brokers for the period of time between the day a policy is sold or bound and the deadline for premium deliver to the insurer

What does the theory of supply and demand do?

-The theory analyses the way pricing is regulated by balancing the amount of a product made available for purchase with the quantity required by consumers. -Economic influences on the market include increased demands for insurance and reinsurance that result from a healthy economy -such activity increases the need for insurance this contributes to organic growth in premium income as opposed to premium growth through mergers and acquisitions. On the downside it also causes growth in claims costs -the economy theory does not strictly apply to insurance and does not apply to all types of insurance. Insurance that is mandated by law is not fully governed by the laws of supply and demand because the products must be purchased even if the cost is high

What do investors generally expect bonds to yield?

-There is an inverse relationship between interest rates and market fixed income securities -Investors typically expect an overall yield to maturity that is roughly equivalent to the current interest rates

What does the combined ratio measure?

-Used by insurance companies to measure overall underwriting performance and shows profitability of the insurance operations -Indicator of management's efficiency -Ratio of less than 100 indicates profit, where as over 100 indicates a loss -Does not take investment income into account

How may regulatory intervention in the automobile insurance industry affect insurers?

-While regulatory intervention tend to please consumers, price regulation is an unnecessary and expensive administrative burden -The free market system anticipates a self-regulating market that will ensure that prices reflect the true cost of doing business; rating boards and commissions only create imbalances in the free market pricing system. -Higher staffing requirements or different software applications to rate and report date might be required -increased operating costs and politically-imposed premiums could reduce the insurer's profitability and return on equity

What is a bear market?

-a bear market is a market in decline. Share prices are dropping and investors believe the downward trend will continue. The fear perpetrates the downward trend -when a bear market exists, the economy is sluggish and unemployment rises

What does behavioural segmentation examine?

-breaks a large group of customers into smaller sections -a segment is a particular subgroup of customers -segmentation allows for concentrated marketing efforts

State a responsibility of federal insurance regulatory authorities.

-consumer protection is the heart of all government regulation -the focus of regulation is: 1. Solvency 2.Market Conduct 3. Affordability of insurance 4. Availability Affordability and availability are of most concern for mandated products.

When the investment market is performing badly on what must insurers rely in order to earn a profit?

-in the past when investment returns for insurance companies have been very high, companies found that they do not have to report on underwriting profit in order to record a profitable bottom line -stating in about mid-2000, a bear equity market took over that lasted close to three years thus insurers had no choice but to work towards earning underwriting profits -those that succeeded in doing so were beginning to record very healthy profits by 2003 and this was sustained through the 2006 underwriting year

What is the benefit of a flatter hierarchical management structure?

-it limits the layers of management that issues must pass through before a decision can be implemented. -flat or networked structures are more common in our changing economic environment that recognizes information and knowledge as well creating assets in addition to labour and capital -in flatter structures, distributed decision-making is used

What duties would on expect to be performed by a seasoned technical underwriter, operating out of a head office?

-may perform audits on the company's field units to ensure compliance with corporate directives and best practices -they may provide education and training to the field underwriting personnel

What is a drawback of a flatter hierarchical management structure?

-provides few opportunities for employees to advance -the degree of the hierarchy can vary from strong hierarchical (like a ladder) with lines of reporting going up and lined of command going down to slightly hierarchical (flat structure) in which employees have enough authority to discharge the majority of responsibilites without seeking approval from those in senior management positions.

What does the law of supply and demand show?

-shows the quantity of a product a supplier will provide is relative to the amount of payment per unit he/she will receive -the higher the price, the more the producer wants to supply

What does corporate governance mean?

-signifies how a corporation directs itself and how control of this process is managed. -encompasses the process, structure and information used to manage a company and the means by which the board of directors and senior management are held accountable for their actions

What does the law of demand state?

-states that if all the other factors remain equal, fewer people will demand the product as its price rises -conversely, the lower the price the more demand their will be for the product

What is the downside of choosing not to appoint an appraiser to view damages?

-the insurer may decide to assign appraiser on claims under certain threshold amount in order to save on appraiser fees. Consideration must be given to the effects of such a strategy on indemnity levels -a savings realized on appraisal fees may be lost because of higher indemnity payments

What is psychographics?

-the study and classification of people according to their attitudes and aspirations as they related to market research. This information evaluates what makes consumer buy certain product.

Explain the law of large numbers.

1. A mathematical premise which states that the degree of uncertainty is reduces as the number of events increase. 2. Insurance relies on the forecasts of loss certainty in a large group of similar risks. 3. Enough risks must be priced in such a way as to ensure that sufficient capital enters the pool of funds to accommodate what is being drawn out to pay for claims.

What is a risk pool?

1. A risk pool is a sharing and spreading of risk between insurers and re-insurers. 2. Formed risk pools are syndicates of insurance or reinsurance companies that have organized to underwrite a particular risk or group of similar risks.

What THREE funcation areas are unique to insurance operations?

1. Actuarial 2. Underwriting 3. Claims Common to all companies are administration, marketing and accounting/finance.

What are the main components of a balance sheet?

1. Assets: things of value the company owns. 2. Liabilities: debts owed to creditors. 3. Equity: company's net assets

What FOUR elements does an insurance company consider when setting up its outstanding claims reserve?

1. CLAIMS RESERVES: Unless an insured is immediately paid in full once their claim is calculated, an adjuster makes a record of the claim's estimated amount and then sets up an outstanding claims reserve. The reserve is adjusted periodically as the claim develops or as payments are made. The longer a file is open the more likely its reserve will change. 2. IBNR: A claim can go unreported for a variety of reasons and an insurer may not receive a notice of claim for all losses occurring within the accounting period. Actuaries calculate reserve amounts for such losses and add them as bulk adjustment to the claims reserve. 3. ADVERSE LOSS ADJUSTMENT ON OPEN FILES: represents the quantitative change in claims reserves from year to year and is usually an increase in the original claims reserves and is added as a bulk adjustment. Also captures closed files that are reopened to make a payment. 4. CLAIMS ADJUSTMENT COSTS: consists of external expenses such as independent adjusters fees, legal fees, and other claims services for which the company will be invoiced.

Why is undercutting a problem in the property and casualty insurance industry? What is an alternative solution to the undercutting in an oversaturated market?

1. Canada has a large number of insurers and seems ideal from a competition perspective for the consumers. However it appears that very few consumers really shop around in order to find the lowest premium possible. 2. Over 200 companies vie for a piece of the P&C market. 3. Undercutting to gain market share violates the second principle of insurance: the premium shall be commensurate with the risk. 4. Undercutting can take two forms, 1. decrease in prices 2. more liberal policy terms and conditions. 5. Insurers undercut in fear that market shares will shrink and never recover. 6. When many players are involved in the industry, more capital is available which means more capacity and more capacity means more competition. With abundant capital and fierce competition, companies feel pressure to make poor business decisions.

Describe ONE obstacle to deploying capital into Canada.

1. Canada is not the most capital-friendly jurisdiction in the world. 2. complex mark-to-market tax scheme for insurer's investment portfolios. Any security held at the end of the tax year is treated as if it were sold and reacquired at it's fair market value. The government benefits from accelerated tax revenues when gains in investments are made. 3. Extensive multi-tiered regulatory system required multiple licences and several labour-intensive filing to completed each year.

List FOUR perceived advantages of the direct response method.

1. Consumers remain in control of the sales process. 2. Professional advice with no commission costs or fees paid. 3. Technology-enabled sales and service (telephone, internet, etc.) 4. Extended hours of access for consumers

What are FOUR main categories of marketing information about consumers.

1. DEMOGRAPHICS: stats showing the characteristics of population such as age, gender, marital status, family size, income level, education level and occupation 2. BUYING BEHAVIOUR: info on how consumers behave and buying situations of companies 3. PSYCHOGRAPHICS: the study and classification of people according to their attitudes and aspirations as they relate to market research. This information evaluates what makes consumers buy a certain product. 4. LOCATION: differentiates consumer by where they live or work and business by whether they are local, regional, national or international in scope

Define adverse selection.

1. Describes the process by which potential policyholders use their private knowledge of their own high level of risk when deciding whether or not to buy insurance. 2. High-risk individuals will try to buy lots of insurance and pay a comparatively high rate of premium if they are allowed. 3. Low-risk clients might not buy any insurance because the price is too high.

Identify NINE areas of responsibility for the human resources department.

1. Employee Recruitment 2. Payroll and incentives 3. Labour regulation 4. Surveys 5. Benefits 6. Pension Plan 7. Counselling 8. Training

What FOUR actions might OSFI Take if it was concerned about an insurer's outsourced functions?

1. Evaluate the risk of outsourcing 2. Carry out a due diligence study 3. Create a business continuity plan in case a third party cannot perform their outsourced activities 4. Establish a process for monitoring and managing the outsourced activities

What are FOUR basic functions of reinsurance.

1. Financing - frees up capital that would otherwise be tied to obligations. 2. Stabilization - used to keep operational results within reasonable parameters without fluctuating dramatically. 3. Capacity - insurers may require the ability to insure business that are beyond their resources. For competitive reasons they may want to accept a large share of a risk and cater to big producers. 4. Resource protection against catastrophes - protects resources and investment position and limits problems with the regulatory authorities, shareholders and reinsurers.

Why did catastrophe reinsurance rates not increase as much as expected after the 1998 ice storm in Ontario and Quebec?

1. Firming rates often comes from the retrocession market (reinsurance for the reinsurers) and reinsurers must have to either hold on more risk or pay significantly more for retrocession protection. This has inflationary effects on reinsurance rates which tend to flow down to the primary level. 2. While Canada may have a catastrophe-free year and overall loss experience is good; reinsurers in the country may find their retrocession costs soaring due to high loss experience or extraordinary events in other parts of the world. 3. Catastrophe rates did not increase after the 1998 ice storm in Ontario and Quebec because several billion-dollar loss events occur around the world every year and the ice storm was just one of many in 1998.

Identify FOUR considerations of a company intending to acquire another company?

1. Fit with the purchaser: culture and expertise of the staff 2. Outstanding liabilities of the acquired company: purchaser may try to persuade the seller to retain its existing liabilities 3. Integration of companies: purchaser must consider overall situation to develop strategies for a smooth transition. Goals might include desire to retain the purchased company's book of business, staff and distribution network. 4. Computer system compatibility: must compare its existing system to any acquired system to determine their compatibility.

Identify FIVE new areas of challenge that the insurance industry faces.

1. Globalization 2. Rapid advances in technology 3. Public image issues 4. Volatile investment markets 5. Increasingly severe weather 6. Growing competition 7. Mounting shareholder and regulatory scrutiny 8. Downloading and offloading by the government

What are the FOUR main financial statements?

1. Income statement 2. Balance Sheet 3. Statement of retained earnings 4. Statement of comprehensive income

In property and casualty insurance, what are the two traditional methods of distribution and how do they differ?

1. Independent broker/agents: -Most insurance business written in Canada has been placed through brokers which has its roots in the British system -The size of the country and its sparse and dispersed population has made broker-based business a more practical option. Economical and efficient way for insurers to market their products 2. Direct response method: -hybrid of direct right of distributing insurance directly to consumers by using different types of media to encourage customers to respond to insurance marketing campaigns. Consumers call toll free to a centralized call centre for advice or to purchase insurance -certain traditional insurers have chosen to adopt this approach for at least some of the business they write

List FIVE possible results of government insurance reform legislation.

1. Informed and empowered consumers 2. Timely and fair claims management 3. Meaningful choice for insurance companys 4. Low system costs 5. Market stability

List THREE developments that resulted from the project established by OSFI, the Insurance Bureau of Canada (IBC) and regulators in 3 provinces to regulate the management of an insurer's earthquake exposures

1. Insurers must document procedures outlining to OSFI how they plan to manage their earthquake risk (including coverage limits) 2. They must advise how their financial resources would cover their calculated PML (Probably Maximum Loss) 3. The insurers are required by OSFI to reserve against potential liabilitiess arising from a major earthquake

What TWO areas of measure are used to gauge authority for members of the underwriting department?

1. Procedures for referrals: efficient and effective procedures should be developed to govern how questions and decisions travel from one level of authority to the next. These procedures may depend on the reason for a referral or the complexity of the issue, a higher level of authority may be required. 2. Limitation of control: could involve limits to the types of coverage the company writes, limits to the locations of risks and limits to both individual and aggregate coverage levels.

In insurance, what is a tail?

1. Refers to the amount of time between an incident and the determination of the claim. 2. Short-tail lines are those where the injury becomes known quite quickly. 3. Long-tail lines are those which a claim may be separated from the circumstances that caused it by as many as 10, 15, 20 years or more. Many product liability lines have long-tail exposures.

Why would an insurer spread risks over diverse geographic areas?

1. Risks spread over a larger geographic area soften the burden of localized disasters on insurers. 2. For example, a severe windstorm in one part of the country would have a devastating effect on an insurer who had concentrated its risks in this one area.

Name TWO concerns of Ontario automobile excess reinsurers that relate to the effects of long-tail liabilities.

1. Severe Injuries. 2. Long-tail trends for prior accident years. 3. Inadequate reserving at the primary insurance level -Primary insurance companies rely on reinsurers to back stop auto coverage particularly for catastrophic claims that end up costing over 1M. -As of recent times there have been relatively light catastrophic events which led to minor rate increase for reinsurance catastrophe treaties. -Claims from two to five million have reinsurance layers. There has been a general increase in the number of claims exceeding thresholds such as 2M-5M over the past 10 years. -Predicting long tail pricing because it is difficult to accurately predict the outcome of claims that have not yet occurred and will remain open for years before the final settlement is reached -Reinsurers have seen patterns of very late reporting of catastrophic injury claims by insurers and after being recognized and reported, they continue to develop adversely for years

When regulatory change is considered what THREE things may be affected?

1. Significant activities: like the lines of business written and the risks inherent to such business 2. Business function: such as underwriting and claims settlement is reviewed to determine whether the risks are mitigated 3. Business Processed: IT must be reviewed in the context of particular business

What are main TWO general categories of insurance company structure?

1. Stock Companies: for profit of their owners: privately held or public. 2. Cooperative enterprises: operate for the mutual benefit of their members include mutual companies, reciprocals and factory mutual companies.

What FIVE basic techniques are used to analyse financial statements?

1. TIME COMPARISON: compare figures reported in current report to that of previous accounting periods. Caution if the company has changed the manner it calculates statements 2. BUDGET COMPARISON: compare results to the budget/plan. 3. RELATIONSHIP COMPARISON: usage of ratios to compare results to the results of another area or of another time period 4. DETAILED BREAKDOWN: determine what has been included in each item of the financial statement 5. BENCHMARK COMPARISON: compare the results to external sources

List the two fundamental principles of insurance.

1. The premiums of the many are used to pay the losses of the few. 2. The premiums shall be commensurate with the risk. -Insurance fulfils a societal need -Provides consumers with financial security for particular types of accidental losses. Also underpins the economy facilitating economic growth and societal development -Insurance is the promise to indemnify another person against the possibility of a loss -Significant claim is paid based on a nominal premium

The chairperson and the board prepare rules and guidelines for the operation of the company. Identify FIVE areas likely to be involved.

1. Types of insurance and extent of the coverage to be sold. 2. Territory in which the company will operate. 3. Underwriting policy. 4. Agency Policy. 5. Investment Policy.

What THREE imprudent underwriting practices emerge in highly competitive environments in soft market cycles?

1. Undercutting Rates 2. Relaxing policy terms and conditions 3. Neglecting loss prevention and control measures

What are FOUR general strategies related to achieving growth for an organization.

1. increasing sales to existing customers 2. target new customers 3. diversify by market base 4. intensify sales effortsiko

What is capacity in an insurance context?

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

What are the regulatory functions of OFSI?

Developing and interpreting legislation and regulations, including guidelines and approving requests as required.

Name TWO board committees that are mandatory according to the Insurance Companies Act?

ICA stipulates that federally regulated insurance companies must have both an audit committee and a conduct review committee. 1. AUDIT COMMITTEE: Role is to improve the financial reporting process. They are generally responsible for reviewing the performance of investment portfolios to ensure that capital is managed effectively to earn an adequate return. Also responsible for the internal control procedures or documentation of the company, reporting on whether the design of the internal controls contain any material weakness. 2. CONDUCT REVIEW COMMITTEE: reviews compliance with legislation on issues such as self-dealing, reviewing procedures and evaluating effectiveness. Also reviews transaction affective stability or solvency.

What comprises the combined ratio?

It is the combined total of three key individual ratios: 1. Incurred claims to premiums earned. 2. Commissions and other acquisition costs to premiums earned. 3. Operating expenses to premiums earned.

What is market dislocation?

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

What is the formula to calculate incurred losses?

Outstanding loss reserve at the end of the period + Loss Payments (including loss expenses) - Salvage or Recovery =Incurred losses for the period

What is the solution to undercutting in a capital saturated market?

Price discipline determined by sound underwriting and actuarial practices.

How is ROE developed?

ROE measures how efficiently a company generates profits from it's net assets. It shows how well a company uses shareholder investment to generate earning growth. Net Income After Taxes / Equity x 100 = ROE Net Written Premium / Equity = Ratio of written premium to equity. (Determines capacity)

What is social inflation?

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

What are some disadvantages that may flow from an insurer exerting excessive internal cost-cutting?

The may find that the company's functional competence suffers, questionable risk selection occurs, succession plans cannot be developed and the company's financial results are negatively affected