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