CPCU 520- Meeting Challenges Across Insurance Operations
underwriting evaluation tools
- telematics - predictive analytics- An insurer's marketing department is working with the underwriting department to determine what characteristics of middle market businesses result in the most profitable commercial insurance accounts. Which one of the following methods would be most effective in identifying these characteristics? - predictive modeling - catastrophe (CAT) modeling - Internet of Things and Connected Devices (IoT)
Prior claims should be reviewed with two questions in mind:
1) Could the loss have been prevented? 2) Has the insured done anything to prevent a recurrence of the loss?
Steps in the Commercial Underwriting Process
1) Evaluate the application 2) Develop Underwriting Alternatives 3) Select an Underwriting Alternative 4) Determine an appropriate premium 5) Implement the Underwriting decision 6) Monitor the Underwriting decision
Claims and the Insurer's Primary Goals
1) Keeping the insurers promise 2) Supporting the insurers profit goal
Possible Corrective Actions
1) Product Changes- EXAMPLE: Insurance Company management noticed a downward trend in both its new and renewal homeowners premiums. They conclude that it is most likely due to its homeowners products not meeting customer needs, with many customers being attracted to competitors' products. Based on this, which one of the following corrective actions is most appropriate for Insurance Company? 2) Underwriting Changes 3) Service Changes- EXAMPLE: Policy implementation and maintenance
Financial Solvency Core Principles
1) Regulatory reporting, disclosure, and transparency 2) Off-site monitoring and analysis 3) On-site, risk-focused examinations 4) Reserves, capital adequacy, and solvency 5) Regulatory control of significant, broad-based, risk-related transactions/activities 6) Preventive and corrective measures, including enforcement 7) Exiting the market and receivership
Support Activities
1) Risk control- can help marketing and sales by proving to applicants and insureds that the insurer understands their business operations and associated hazards and is prepared to help them protect their interests 2) Premium auditing 3) Actuarial 4) Reinsurance- Factors affecting a primary insurer's reinsurance limit selection are most accurately listed as Maximum policy limit, extracontractual obligations, and loss adjustment expenses 5) IT- a rapidly growing value chain support function that provides the backbone that supports an insurer's communications, operations, marketing, underwriting, investing, and claims handling 6) Investments- Insurers' operations frequently depend on investment earnings because premiums are held competitively low to attract customers. As a result, investment earnings are frequently relied on to off set high losses and rising costs. 7) Accounting and finance 8) Customer service 9) Legal and compliance 10) Human resources (HR) 11) SIU
Two areas affected the most by technology's march through underwriting are
1) residential insurance - Traditionally, home insurers have used past claims data to assess risk and set prices for most customers. Today, however, most insurers have shifted to using a proactive risk management model due to the use of the Internet of Things (IoT) and smart devices in insureds' homes. 2) automotive insurance - IoT devices, such as in-car sensors, telematics instruments, smart phones, and global positioning systems (GPS), allow driving behavior data to be monitored and transmitted to insurers and third parties. In addition to tracking driving behavior, in-car sensors and radar systems can facilitate the use of driver-assistance and semiautonomous systems that can perform a variety of functions to help prevent accidents
Product Development Steps
1. Assessing opportunities: Monitor market Identify opportunity Relate opportunity to business strategy Develop specifications Secure senior management approval to proceed 2. Defining the product, underlying support, and pricing: Specify the new product (or service) Identify what's needed to support the new offering Develop coverage and forms (for new policies) Develop underwriting and claims guidelines (for new policies) Develop pricing structure Obtain approval from functional area managers to proceed 3. Creating a business forecast: Identify performance metrics Set performance expectations expected premium volume expected investment income level of producer involvement Develop a forecast Obtain senior management approval to proceed/Senior management has SIGNED - OFF. SIGNED-OFF EXAMPLE of Creating a Business Forecast- James is leading a multi-departmental team in the development of a new insurance policy for transportation network companies. The team is currently working on establishing benchmarks such as the expected premium volume, the expected investment income, and the level of producer involvement required in the sales process. Which one of the following steps of the product development process are they involved in? 4. Complying with regulatory requirements: File with regulators (for new insurance products) Develop statistical information systems Communicate regulatory approval 5. Selecting distribution systems and channels: Select a distribution system Find appropriate producers Select distribution channels Develop advertising and sales prom
Claims Handling Process
1. acknowledge and assign claim 2. identify policy and set reserves 3. contact insured or insured rep 4. investigate claim 5. document claim 6. determine cause of loss, liability, and loss amount 7. conclude claim Q) Work on a new claim begins for the claim representative upon receipt of the notice of loss. The representative obtains initial information and verifies coverage. Next, the representative should A) Set a loss reserve Q) Despite the unique challenges and variations from case to case, the last step in the claim handling process is usually A) Negotiating and settling
Cost leadership
A business-level strategy through which a company seeks cost efficiencies in all operational areas.
Comprehensive Loss Underwriting Exchange (CLUE)
A claims history database generated by LexisNexis, CLUE provides consumer claims information. This database can be used to verify information provided by an applicant or find losses that have not been declared on the application. The information is retained for seven years and contains dates of loss, claims amounts paid, and descriptions of property.
Hazard
A condition that increases the frequency or severity of a loss.
Credit scoring
A decision-making tool that uses credit report information to develop a predictive score on the creditworthiness of an applicant for additional credit. Some risk models attempt to predict the probability of an insured making a claim. A significant variable that correlates with this behavior is the insured's credit score. 2. Insurers may determine that applicants have a higher-than average loss potential and decline to provide insurance coverage for them, based on their credit scores. 3. Credit-based insurance scores are also used to determine rating classifications that result in a higher premium for customers who have higher loss potentials. Q) Which one of the following statements is correct regarding the use of credit-based insurance scores to select personal lines insureds and/or price a personal lines policy? A) Underwriting decisions cannot be made based solely on an individual's credit-based insurance score Q) Which one of the following statements is correct with respect to the use of credit reports in personal lines underwriting? A) A homeowner with financial problems may be unable to make repairs or perform maintenance, increasing the possibility of a loss.
Model law
A document drafted by the NAIC, in a style similar to a state statute, that reflects the NAIC's proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry. Any state may choose to adopt the model bill or adopt it with modifications.
Model regulation
A draft regulation that may be implemented by a state insurance department if the model law is passed.
Common-Size Balance Sheet
A financial statement in which amounts are reported as a percentage of a base figure.
Statement of Cash Flows
A financial statement that provides financial information about the cash receipts and cash payments of a business for a specific period of time. This statement is used to determine an organization's need for additional financing and ability to generate positive future cash flows and meet financial obligations. It can also illuminate reasons for any differences between net income and associated cash receipts and disbursements, such as those resulting from loan proceeds or repayments, increases or decreases in accounts receivable, or depreciation expense. It is used to assess an organization's need for additional financing. It is used to assess the ability to generate positive future cash flows Q) John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis? A) A review of the financial statements helps John to determine XYZ's insurance needs Q) Which one of the following describes a section of the statement of cash flows? A) Cash flows from financing activities, Cash flows from investing activities, and Cash flows from operating activities
Book of business
A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency. A group of policies with a common characteristic, such as a territory or type of coverage, or all policies written by a particular insurer, producer, or agency
Loss history
A listing of past claims, including the date of occurrence, the line of business, the type or description of the claim, the date of the claim, the amount paid, the amount reserved, and the claim's current status.
What are the differences between a market segment, target market, and niche market?
A market segment of small businesses, for example, can include a target market of retailers with a niche market of jewelry stores.
Appraisal
A method of resolving disputes between insurers and insureds over the amount owed on a covered loss.
Internet of Things (IoT)
A network of objects that transmit data to each other and to central hubs through the internet. One potential drawback is that the data collected from them exposes homeowners and insurers to data breaches. In addition, these devices provide access points through which criminals can conduct cyberattacks. As a result, insurers who have access to these devices and the data they produce need to have safeguards in place to help ensure customers' security and data privacy. In addition, insurers must abide by any data security regulations to which they are subject.
Claims representative
A person responsible for investigating, evaluating, and settling claims.
Predictive modeling
A process in which historical data based on behaviors and events is blended with multiple variables and used to construct models of anticipated future outcomes. Q) An insurer's marketing department is working with the underwriting department to determine what characteristics of middle market businesses result in the most profitable commercial insurance accounts. Which one of the following methods would be most effective in identifying these characteristics? A) Predictive analytics
Loss ratio
A ratio that measures losses and loss adjustment expenses against earned premiums and that reflects the percentage of premiums being consumed by losses.
Activity log
A record of all the activities and analyses that occur while handling a claim.
Risk Profile Analysis
A risk profile analysis examines the three key policy indicators at specific times or during specific time periods. It aims to uncover relationships between policy characteristics or factors that may affect portfolio performance. Insurers develop statistical models to analyze risk profiles over a period of time, revealing changes in the portfolio. These basic techniques form the foundation of risk profile analysis: Classification Regression analysis Association rule learning
Wearable sensor tag
A sensor attached to or embedded in clothing and accessories.
Nonwaiver agreement
A signed agreement indicating that during the course of investigation, neither the insurer nor the insured waives rights under the policy.
Insolvency
A situation in which an entity's current liabilities (as opposed to its total liabilities) exceed its current assets.
Generalized linear model (GLM)
A statistical technique that increases the flexibility of a linear model by linking it with a nonlinear function.
Diary, or suspense
A system to remind claim personnel to perform a particular task on a claim
Usage-based insurance
A type of auto insurance in which the premium is based on the policyholder's driving behavior.
Catastrophe model
A type of computer program that estimates losses from future potential catastrophic events. Q) Which one of the following is true regarding catastrophe models? A) Specific data on building construction (such as number of stories) is part of the engineering model component
Underwriting guidelines (underwriting guide)
A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.
Securities and Exchange Commission Filings
All publicly traded companies are required to file quarterly and annual financial information with the Securities and Exchange Commission (SEC). They are also required to file a notice of any potential material events that might affect their financial condition.
Mediation
An alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a mutually agreeable settlement. The main distinction between the Mediation and Arbitration is who makes the final decision. With mediation, the final decision is a reached agreement between the two conflicting parties, while arbitration calls on an arbitrator to analyze the case details and reach a verdict. Q) Which one of the following is a negotiation process in which a neutral outside party helps participants examine the issues and develop a mutually agreeable settlement? A) Mediation
Arbitration
An alternative dispute resolution (ADR) method by which disputing parties use a neutral outside party to examine the issues and develop a settlement, which can be final and binding. The main distinction between the Mediation and Arbitration is who makes the final decision. With mediation, the final decision is a reached agreement between the two conflicting parties, while arbitration calls on an arbitrator to analyze the case details and reach a verdict. Q) After a claim was denied, Stable Insurance became involved in a reinsurance agreement dispute with the reinsurance intermediary. Reinsurance agreement disputes involving litigation are generally resolved A) Through arbitration between the parties
Mini-trial
An alternative dispute resolution method by which a case undergoes an abbreviated version of a trial before a panel or an adviser who poses questions and offers opinions on the outcome of a trial, based on the evidence presented.
Summary jury trial
An alternative dispute resolution method by which disputing parties participate in an abbreviated trial, presenting the evidence of a few witnesses to a panel of mock jurors who decide the case.
Company Annual Reports
An annual report presents the company's performance for the stated year. Its audience is the company's shareholders and other interested parties, such as customers, vendors, and investors. Underwriters find it a valuable source of information about the company's business purpose and philosophy, financial results, and directions for the future. This information helps provide a general background for making specific underwriting decisions.
National Association of Insurance Commissioners (NAIC)
An association of insurance commissioners from the 50 U.S. states, the District of Columbia, and the five U.S. territories and possessions, whose purpose is to coordinate insurance regulation activities among the various state insurance departments. it has no direct regulatory authority of its own In addition to developing model laws, the NAIC's Financial Regulation Standards and Accreditation Program increases the uniformity of insurer solvency regulation across the states. To become accredited, a state insurance department must meet certain criteria: The state's insurance laws and regulations must meet the basic standards of NAIC models. The state's regulatory methods must be acceptable to the NAIC. The state's Insurance Department practices must be adequate as defined by the NAIC.
Domestic Insurer
An insurance company that conducts business in the state of incorporation.
Foreign Insurer
An insurance company that is incorporated in another state.
Alien Insurer
An insurance company that is incorporated outside the United States.
Manuscript policy or manuscript endorsement
An insurance policy or endorsement that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer.
Reservation of rights letter
An insurer's letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.
Third-party administrator (TPA)
An organization that provides administrative services associated with risk financing and insurance. Third Party administrators handle claims, keep claims records, and perform statistical analyses
Public adjuster
An outside organization or person hired by an insured to represent the insured in a claim in exchange for a fee. Q) In which one of the following scenarios is a public adjuster most likely to become involved? A) An insured's negotiations with the insurer on a complex claim are not going well
Producer
Any of several kinds of insurance personnel who place insurance and surety business with insurers and who represent either insurers or insureds, or both. Claims handling by qualified producers offers two major advantages: quicker service to policyholders and lower loss adjustment expenses to the insurer.
Machine learning
Artificial intelligence in which computers continually teach themselves to make better decisions based on previous results and new data.
Noncurrent assets
Assets that will be used over a period greater than one year; they are grouped into tangible assets (such as land, buildings, and equipment) and intangible assets, such as leaseholds, patents, copyrights, and trademarks (often categorized as intellectual property). Depreciation is an accounting term used to describe allocation of a noncurrent tangible asset's value over its useful life.
Marketing Planning
Before introducing a new insurance product or service, the insurer completes a comprehensive marketing plan. A marketing plan provides the roadmap to success by identifying the product or service to be promoted and the customers to be targeted. It also details the resources and strategies that will be used to create, price, promote, and sell the product or service. A marketing plan for a typical insurance product or service might include, but is not limited to, these items: a. Product proposal and sales goals b. Strengths, weaknesses, opportunities, and threats (SWOT) analysis c. Marketing goals d. Marketing strategies e. Projected outcome A marketing plan for a typical insurance product includes A situational (SWOT) analysis of the current marketplace A marketing plan identifies the product or service to be promoted and the customers to be targeted Q) The development of sales goals and projected outcomes is part of which one of the following marketing activities? A) Marketing Plan
Current liabilities
Can include accounts payable, short-term debt, or the current position of a long-term debt.
Current assets
Can include cash, marketable securities, receivables (accounts and notes), inventories, and prepaid expenses.
Catastrophe Models
Catastrophe models are used to simulate events, such as hurricanes or earthquakes, to measure expected future losses based on the insurer's book of business. Catastrophe models for a personal lines book of business incorporate these elements: Geographic location Type of catastrophe Exposure information Replacement cost estimates
Marketing is an insurer's information portal to customers. Through this portal, which includes marketing research and communication, insurers:
Gather information about customers Make decisions about segments of customers whose needs they can address and what products to sell them Disseminate information to existing and prospective customers What are six of the methods that producers use to locate prospective clients: 1) Referrals from present clients 2) Referrals from strategic partners, such as financial institutions and real estate brokers 3) Advertising 4) Interactive websites, social media, and mobile marketing 5) Telephone solicitations 6) Cold canvassing
Automobile-Property Loss Underwriting Service (A-PLUS)
Insurance Services Office, Inc. (ISO) provides subscribers access to this database, which provides property and automobile claims data. Reports that provide information regarding an applicant's or insured's previous claims can be requested.
Segmentation
Insurers use market segmentation, target marketing, and niche marketing to promote their ability to meet the needs of specific customer groups and differentiate themselves from other insurance providers. Prominent examples of market segmentation include: Behavioristic segmentation- The division of a total consumer market by purchase behavior Geographic segmentation- The division of markets by geographic units Demographic segmentation- The division of markets based on demographic variables, such as age, gender, education, occupation, ethnicity, income, family size, and family life cycle Psychographic segmentation- The division of markets by individuals' values, personalities, attitudes, and lifestyles
Key Policy Indicators
Key policy indicators include: 1) policies in force (PIF)- PIF is the number of policies that are effective at any given point. During the year, the actual PIF counts are often compared with annual PIF goals to assess the growth or decrease in portfolio size. 2) new policy count- new policy count (also known as the new business count), is the number of new policies written during a period of time, such as one quarter or one year. Comparisons of portfolios or segments within portfolios can reveal where growth is occurring. 3) policy retention- is the percentage of policies that are renewed, usually on an annual basis. Q) Which one of the following is true in analyzing key policy indicators? A) Comparing company retention rates with industry retention rates may uncover problems
MD&A
Management Discussion and Analysis; A section of a company's annual report in which management discusses numerous aspects of the company, both past and present MD&A Requirements: Liquidity and Capital Resources Certain trading activities Relationships and transactions
Market Research
Market research is the systematic gathering and analyzing of data to assist in making marketing decisions. It cannot guarantee success, but it can improve an insurer's chances of making correct decisions.
Premium audit
Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided. Robin works for Taunton Insurance Company. She works directly with insureds and understands their operations. Her responsibilities include accurately classifying an insured's loss exposures and determining the exposure units on which the premium is based. Robin works as A premium auditor
Sensors in the home
Motion/ lighting detectors Wi-Fi Cameras Water Sensors Smoke and Carbon monoxide Sensors Heat Sensors Smart Speakers/ microphones Connected appliances/ heating and cooling systems
What is the difference between first-party and third-party insurance?
Property insurance is considered first-party insurance because the insurer, or second party, makes payment for covered losses directly to the policyholder, or first party. Liability insurance is considered third-party insurance because the insurer makes payments on behalf of the policyholder to a claimant (third party) who is injured or whose property is damaged by the policyholder.
Quantitative and Qualitative Audit Factors
Quantitative factors: Timelessness of reports, reserving, payments, Number of files opened each month, percentage of cases going to trial, Accuracy of data entry. Qualitative factors: Realistic reserving, follow up on subrogation opportunities, Proper releases taken, Thorough investigations
What additional questions do you think the insurer may wish to investigate to better understand the retention of this portfolio?
Questions could include these: Is the industry's average retention for the homeowners policies the same as the average for the six states in this portfolio? What is the insurer's retention rate for each state in the portfolio, and how does that compare with the state averages for the industry? Should the company monitor any other retention rates, such as retention by Coverage A limit? This data would indicate whether the company is losing homeowners policies for higher- or lower-valued homes.
What Do Corporate Underwriters Do?
Research the market Which one of the following will draft a manuscript policy or endorsement that is worded to address the specific needs of the insured? Formulate underwriting policy- While developing goals for its book of business, an insurer's corporate underwriter decides to increase its market share of workers compensation insurance in the construction industry. Revise underwriting guidelines Research and develop coverage forms Review rates Educate and train Arrange reinsurance Assist others with complex accounts Conduct underwriting audits Q) Corporate underwriters share research of the market responsibilities with actuarial and marketing departments. Research includes an ongoing evaluation of which one of the following? A) Optimal product mix in the book of business
What Do Field Underwriters Do? (sometimes referred to as line underwriters)
Select insureds Ensure accurate classification and pricing Recommend or provide coverage Manage a book of business Support producers and insureds Support marketing objectives
Big data
Sets of data that are too large to be gathered and analyzed by traditional methods. Q) The development of new sources of big data is leading to which one of the following changes in the pricing of personal auto insurance? A) More pricing of individuals rather than groups
Independent Adjusters
Some insurers may find it economically impractical to establish claims offices in every state in which insureds reside. In such instances, insurers may contract with independent adjusters to handle claims in strategic locations. Some insurers employ claims personnel in their home or branch offices to monitor claims progress and settle claims, but use independent adjusters to handle all field work. Insurers may also use independent adjusters when specialized skills are needed and when staff claims representatives are too busy to handle all claims themselves. For example, if a disaster strikes, staff claims representatives may need assistance to handle the large number of claims quickly enough to satisfy the insurer and its insureds. While staff claims representatives may have a variety of titles, the role is typically defined by two things: having a primary focus on claims and being an employee of the insurer.
Credit-Related Underwriting and Pricing
Some risk models attempt to predict the probability of an insured making a claim. A significant variable that correlates with this behavior is the insured's credit score. Insurers may determine that applicants have a higher-than-average loss potential and decline to provide insurance coverage for them, based on their credit scores. Credit-based insurance scores are also used to determine rating classifications that result in a higher premium for customers who have higher loss potentials. And insurers can use credit scores to make adjustments in existing rate classifications to more appropriately reflect the expected loss potential of their customers. Q) What are two primary applications of risk modeling for insurers? A) 1. Insurers can apply risk modeling to the portfolio to detect various exposures, both catastrophe and noncatastrophe. 2. Insurers can also use risk modeling when making product and marketing decisions.
Who Regulates Insurers
State insurance departments, led by state insurance commissioners, are the primary source of industry regulation. However, as businesses, insurers are also subject to certain federal regulations, such as those dealing with employment and worker safety. While the day-to-day regulation of insurance performed by state insurance departments falls under the executive branches of most state governments, the laws these departments enforce are usually enacted by legislatures. The bulk of funding for department activities generally comes from state premium taxes, audit fees, filing fees, and insurer and producer licensing fees. An insurance commissioner, superintendent, or director appointed by the governor or elected by the voting public heads every state insurance department. Q) Which one of the following would be considered a duty of the state insurance commissioner, rather than an activity performed by the state insurance department? A) Holding hearings on insurance issues
Advertising and Promotion
The advertising function is responsible for managing the company's mass media communications to prospective and existing customers. Effective advertising is aligned with the overall company strategy, marketing plans, and insurance distribution system. It also builds and reinforces a positive company image for target customers.
Capacity
The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.
Customer and Public Relations
The customer relations function manages communications with individual customers from the home office. This functional area ensures that all written communication seen by customers is understandable and consistent in quality and tone.
Loss adjustment expense (LAE)
The expense that an insurer incurs to investigate, defend, and settle claims according to the terms specified in the insurance policy.
Statement of Changes in Shareholders' Equity
The financial statement that explains any changes that have occurred in the organization's capital accounts during a specific period.
An insurer typically employs two distinct types of commercial underwriters. field and corporate underwriters
The first group works primarily in the field by interacting directly with producers and applicants. The second group is typically located in the corporate office and helps establish and maintain the insurer's overarching underwriting policy. Underwriters in the field evaluate individual insurance applications and policy renewals and manage their own books of business. They are responsible for much of the day-to-day operation of the insurer's underwriting process and are, in many ways, the public face of the Underwriting Department. Meanwhile, underwriters at the corporate level make large-scale decisions about coverage, pricing, lines of business, and the overall risk selection process. They typically work with underwriters in the field and other departments to manage the insurance product.
What are the four types of hazards in personal lines insurance?
The four types of hazards in personal lines insurance are: physical- Underwriter Joe is reviewing a homeowners application. A picture of the house was submitted along with the application. The photo shows a large decayed tree next to the house. Joe is concerned that the tree could fall and cause damage to the house during a windstorm. moral- What type of hazard exists when an insured might intentionally cause a loss in order to gain financially morale- Having single car accidents OR An insured who continually fails to lock a parked car in a public place or who leaves the keys in his or her car when it is in the driveway is exhibiting a. EXAMPLE- Having single car accidents legal- In some states, the courts have ruled that injuries sustained as a result of drive-by shootings are covered under the victim's personal auto policy. This is an example of a
What do you think are the key success indicators on which an insurer's modeling focuses?
The key indicators of an insurer's success are its ability to attract and retain policyholders and to increase the overall size of its portfolio. A portfolio of sufficient size can be priced and managed to achieve the insurer's profitability goals. Q) Which one of the following best identifies key indicators of an insurer's success? A) The insurer's ability to attract and retain policyholders and to increase the overall size of its portfolio
Subrogation
The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.
Reunderwriting
The process of analyzing the characteristics of policies within a book of business and the trends of those characteristics The purpose of reunderwriting is to Correct results in a book of business that are not achieving profitability goals Reunderwriting is used to correct results in a book of business that isn't achieving established profitability goals. Common loss exposures are analyzed to identify any that generate unanticipated loss experience, which allows underwriting staff, sometimes working with marketing staff, to develop and implement a possible activity or combination of activities to correct the identified problems. The process is circular and begins and ends with monitoring activities Policy Level Examples: Nonrenewal coverage changes changes to policy terms classification corrections Organization Level Examples: Changes to underwriting guidelines for new business Changes to underwriting guidelines for existing business
Underwriting
The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made. For underwriting to achieve its purpose, Insurers must minimize the effects of adverse selection on the book of business
Telematics
The use of technological devices to transmit data via wireless communication and GPS tracking. Vehicle telematics can function as an ongoing driver education tool. For example, parents can obtain data reports illustrating their teenagers' driving behaviors, potentially leading the teenagers to drive better because they know they're being monitored. One drawback is that, in the United States, personal auto UBI is voluntary for customers, so most insureds who agree to participate in UBI are likely already safe drivers looking to obtain lower premiums. Another drawback is that many drivers don't want their movements tracked and may have privacy concerns around their personal information being transmitted and who owns such information. Reluctance to participate in telematics or UBI programs brought on by these factors could prevent telematics data from being predictive about the driving population as a whole. Q) Which one of the following best describes how underwriters evaluate personal insurance submissions? A) They concentrate on identifying any hazards that may exist Q)Which one of the following statements is correct with respect to a personal lines underwriter's sources of information? A) The underwriter's initial source of information about a customer is the written or electronically recorded application
How do effective underwriters and algorithms gather underwriting information?
They gather desirable information in addition to essential information if it can be obtained at an acceptable cost and without delay. Q) Which one of the following best describes underwriting information that would be categorized as desirable? A) Details that would be helpful if available quickly and at reasonable cost
Noncurrent liabilities
Those that will be paid or satisfied more than one year after the balance sheet date, such as long-term notes payable.
Primary Reasons for Insurance Industry Regulation
To Protect Consumers To Maintain Solvency To Prevent Destructive Competition
Indemnify
To restore a party who has sustained a loss to the same financial position that party held before the loss occurred.
Policyholders' surplus
Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities. An insurance company must have adequate policyholders' surplus if it wishes to Increase its written premium volume
Product Development
Using the results from market research, an insurer's management team must decide which insurance products and services will be sold to which markets. The team must make many product development decisions—ranging from what product lines to offer, to what coverages, limits, and deductibles to include in the policies offered.
vertical analysis
Vertical analysis looks for any unusual percentages in the common-size statements that identify items as having an excessively large (or small) value when compared with those of competitors or another benchmark, such as an average for an industry. reporting an amount on a financial statement as a percentage of another item on the same financial statement type of analysis that helps an underwriter identify abnormal values reported by an organization Q) Common size statements are frequently used during vertical analysis. Which one of the following is true regarding common size statements? A) Common size statements are good for inter-company comparisons because they correct for differences in company size
supply chain
a network of connections between each of the entities (namely organizations) that are used throughout the process of bringing a product or service to market—from suppliers to end users. A supply chain model is used for identifying how reliant a business is on any point in the supply chain and any potential weak links that could disrupt business.
Two important financial statements used by underwriters are
balance sheets- A balance sheet lists everything an organization owns and owes at a particular moment in time, providing a snapshot of the company's financial position as of that date. Assets listed on the left side and liabilities listed on the right Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets. On a balance sheet, all of the term refers to the value of assets minus liabilities: Shareholders', or owners', equity Book value Surplus income statements- An income statement compares revenue generated with expenses incurred over a defined period. Then it adds any other gains and subtracts any other losses. The "bottom line" of an income statement shows the organization's Net Income income statement's components: Revenue Expenses Cost of goods sold Gross profit= sales - cost of goods sold Operating income Capital expenditures Net income Comprehensive income- includes Unrealized gains and losses on securities A balance sheet lists the organization's assets and liabilities at a given point in time, while an income statement shows this information over an extended period of time. Q) Bob's Manufacturing has been in business for one year. Which one of the following is true regarding Bob's year-end financial statements? A) The beginning balance on the statement of changes in shareholders' equity will show as $0
Three frequently used tools provide quality measures of a Claims Department's performance: 3 frequently used tools provide quality measures of a Claims Department's performance:
best practices- generally refers to a system of identified internal practices that are shared with claims reps and produce superior performance. An insurer can identify best practices by studying its own performance or the performance of successful insurers. BEST PRACTICES ARE OFTEN BASED ON LEGAL REQUIREMENTS claims audits- Insurers use claims audits to ensure compliance with best practices and to gather statistical information on claims. customer satisfaction data-
The Marketing Department's primary goal
is to effectively develop and promote products that meet customer needs and mesh with the insurer's overall strategies and objectives.
value chain model
is used for analyzing the input activities a single company performs to create marketable outputs for customers and for identifying ways to maximize its competitive advantage. Primary activities- Inbound Logistics, Operations, Outbound Logistics, Marketing and Sales, and Service Support activities- Infrastructure, Human Resources, Technology, and Procurement
three primary functions exist within the structure of a typical insurer
marketing and distribution- Marketing and distribution involves determining what products customers want and need, advertising those products (communicating their value to customers), and delivering them to customers. underwriting- The goal of the underwriting function is to help the insurer write and maintain profitable business. This requires selecting insureds whose covered losses are not likely to exceed the amount of losses the insurer anticipated when it priced the insureds' coverage. claims- An insurance policy is a promise by the insurer to make a payment to, or on behalf of, the insured if an event covered under the policy occurs. The purpose of the claims function is to fulfill this promise.
