B. RMIN Ch.6 and 7

What does an actuary do?

a person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums

Qualifications of an agent?

be a competent professional, have a high degree of technical knowledge in a particular area of insurance. place the needs of his/her client first

What is a first party claim?

claim submitted by the insured to the insurer. insurer makes claim payment to the insured. ex= fire theft hail etc

What is gross premium?

gross rate multiplied by number of exposure units

What are underwriting decisions?

+accepting the application and issuing the policy +accepting the application subject to restrictions or modifications +reject the policy

What are Loss Adjustment Expenses?

Expenses associated with adjusting claims

Types of Claims Adjustors; independent adjustors

individual or organization what adjusts the claim for a fee. very common after catastrophes

What is Facultative Reinsurance?

a ceding risks method where reinsurance is transacted on an individual risk (ex;large factory) where the primary insurer cedes the individual risk to the reinsurer. optional, used on a case by case basis

Types of claim adjustors; staff claims representative

salaried employee who investigates a claim, determines the amount of loss, and issues payment

What is an exposure unit?

unit of measurement used in pricing (car-years, per $100 in coverage, etc.) ex: insurance charges $0.80 per $1000 in coverage. In this situation, the $1000 is your exposure unit, the $0.80 is your rate. Rate x exposure unit = gross premium

What are the objectives of a claims settlement?

verification of a covered loss, fair and prompt payment of claims, provide personal assistance to the insured.

What is retrocession?

when a reinsurer insures part or all of its risk with another reinsurer

Surplus share examples with $100,000 retention, $500,000 risk

$500,000 risk= $100,000/$500,000= 20%. ceding company retains 20% of premium and cedes 80% of losses to reinsurer. $50,000 loss= $40,000 recovery from reinsurer

Other Insurance Company Operations

Information Systems (usually large). Accounting; responsible for financial statements. Legal Department; attorney, legal stuff. Loss Control Services

What are the major operations of insurance companies?

Ratemaking, Underwriting, Production, Claims Settlement, Reinsurance, Investments

What is surplus share (pro rata)?

The reinsurer agrees to accept insurance in excess of the ceding insurers retention limit. Losses and premium are shared in the same proportion that each party shares in the individual risk. proportion is determined by dividing the retention by individual risk size. has high admin costs.

What are Reinsurance pools?

an agreement between a number of companies where participants collectively reinsure a large group of risks. ceding companies cede risks into the pol and the participants share in a predetermined percentage of the premium and losses.

Things to consider for underwriting

are rates currently adequate? is reinsurance available? should existing business be cancelled or non renewed?

Type of claims adjustors; public adjustor

represent the insured and are paid a fee based on the amount of the claim settlement

What is the underwriting guide?

states the company's underwriting policy which includes: lines of business written, policy forms and rating plans used, acceptable, borderline, and prohibited business, amounts of insurance that can be written, geographic territories, business that requires approval from a senior underwriter

What is excess of loss?

the ceding company retains a predetermined dollar amount of a loss (retention). the reinsurer then pays losses that exceed the retention, up to the limit of the agreement. designed for protection from a catastrophic loss.

What is ratemaking?

the pricing of insurance and the calculation of insurance premiums

What is claim adjusting?

the process of determining coverage, legal liability and damages, and settling the claim

Surplus share examples with $100,00 0 retention, $200,000 risk

$200,000 risk= $100k / $200k = 50% Ceding company retains and cedes 50% of premium and losses to reinsurer. $50,000 loss= $25,000 recovery from reinsurer.

Methods actuary's use to make rates.

class (manual) method= pure premium, developed based on past experience, frequency x severity. Loss ratio method= modifies existing rates by comparing the actual loss ratio to the expected loss ratio Loss ration= (incurred losses + LAE) divided by earned premium Merit rating= rates are adjusted upward or downward based on experience. 3 types; schedule, experience, and retrospective. Judgement method= rates are determined by the judgement of the underwriter (when data is limited)

What are investments in insurance?

insurance premiums are invested for the time period between the receipt of the premium and the payment of a claim. extremely important in reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experiences.

Type of claims adjusters; insurance agent

may have authority to settle small claims

What is a reinsurer?

the company that accepts the insurance from the ceding company

What is the ceding company?

the primary insurer that initially wrote the insurance

What is production?

the sales and marketing activities of insurers. agents who sell insurance are called producers.

What is non proportional (excess of loss)?

a type of reinsurance agreement where the reinsurer only pays when covered losses exceed a pre determined dollar amount

What are the components of Gross Rate?

+Prospective loss costs (pure premium)=amount needed to pay future claims and loss adjustment expenses. +Expense provision(load)= amount needed to pay future expenses (acquisition, overhead, premium taxes) +Profit and contingencies(risk charge= amount needed to protect against the possibility that actual claims and expenses exceed projections.

What are the goals of Ratemaking?

+Regulatory goals; rates must be adequate. rates must not be excessive. rates should not be unfairly discriminatory. +Business goals; rates should; be stable. be responsive, provide for contingencies, promote loss control, be simple.

What are some sources of Underwriting information?

+application (apply of insurance,name birthday etc.) +agent ( agent may have some information) +physical inspection (property insurance, no railing on deck at home) +physical examination(life insurance) +Claim files(existing policies) +vendor reports; fire protection, motor vehicle record, credit based insurance score, comprehensive loss underwriting exchange or CLUE

What are underwriting principles?

+attain an underwriting profit (premiums you bring in are greater than the losses you pay out), +select prospective insureds according to the company's underwriting guidelines, +provide equity among the policyholders.

What is the claims process?

+notice of loss +claim investigation; did the loss take place during the policy period? was the damage caused by a covered peril? is the damaged property covered by the policy? are there policy exclusions that apply? does any other insurance apply? + proof of loss (very rare) +payment of loss or denial of claim

What types of insurance investments?

+state laws restrict the riskiness of the portfolio. +typically invested in "safe" investments mostly bonds. +life insurance is a long term exposure so premiums can be invested in long term assets including real estate +P&C is a short term exposure usually one year or less so premiums are invested in marketable securities such as high quality bonds and stocks

What is a Proportional (pro rata)?

a reinsurance agreement where the ceding company and reinsurer agree to share a predetermine percentage of losses and premium. 2 types; Quota share, surplus share

Average Joe insurance has entered into a quota share reinsurance agreement with Globo Re. The reinsurance treaty specifies that Average Joe retains 75% of premium and losses. Over the course of the one year treaty agreement, Average Joe has $10,000,000 in premium and $8,000,000 in losses. How much of the premium is owed to Globo Re? How much of the losses are owed by Globo Re?

1. 75% retention, $10 ,000,000 Premium, $8,000,000 losses. Premium = $7,500,000 average joe, $2,500,000 globo. Losses $6,000,000 average joes. $2,000,000 globo

Joe Chill is a new insurance agent for the Gotham insurance company. he is quoting a homeowners insurance policy for Thomas and Martha Wayne. The Wayne's want to insure their house for $750,000. Gotham charges a gross rate of $3.79 per $1000 in coverage (exposure units). What is the gross premium for the Wayne's homeowners policy?

Gross premium= gross rate x number of exposure units. $3.79 x 750 = $2,842.50 gross premium

Average Joe insurance has entered into a surplus share reinsurance agreement with Globo Re. The reinsurance treaty covers Average Joe's Commercial Property line of business and includes a $500,000 retention. Average Joe insurers a dodgeball manufacturing factory for $2,000,000. The owners of the factory pay Average Joe $20,000 in premium for the policy covering the factory.

How much of the premium is ceded to Globo Re? individual risk $2,000,000 retention $500,000 500,000/ 2,000,000= 25% premium= $20,000 20,000 x .75= 15,000 globo, 5,000 average joe. If the factory sustained a $400,000 loss, how much is Globo Re responsible for? 75% of 400,000= 300,000 globo re, 25% of 400,000 = 100,000 average joe.

Excess of loss example; $100,000 retention with $2,000,000 treaty limit.

Loss amount: $500,000, reinsurer pays $400,000, retained by ceding company $100,000. Reinsurer only pays if risk exceeds retention level. Loss: $50,000, reinsurer pays $0, retained by ceding company $50,000 Loss: $2,250,000. reinsurer pays $2,000,000. retained by ceding company $250,000. The ceding company retains the $100,000 retention and the $150,000 portion of the loss above the treaty limit.

What is Treaty reinsurance?

a ceding risks method where the primary insurer cedes all risks within one or more specific lines of business to the reinsurer. the primary insurer must cede and the reinsurer must accept all risks included within the terms of the reinsurance agreement

What is reinsurance?

an arrangement by which the primary insurer (that initially writes the insurance) transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance.

What is a third party claim?

claim submitted against a negligent insured for bodily injury, physical damage, personal injury, etc. insurer pays damages (caused by an insured) to an injured third party. somebody falls off my deck at my house, i am liable for my guests injury.

What are the functions of Reinsurance?

increase underwriting capacity, stabilize profits, reduce the unearned premium reserve, provide protections against a catastrophic loss, retire from a line of business, obtain underwriting advice on a line for which the insurer has little experience

Selina Kyle is an actuary for the Gotham Insurance company. She is using the pure premium method of ratemaking to determine the gross rate for the homeowners peril of fire. She has the following data for the fire peril: Incurred Losses = $43,750,000. Loss adjustment expenses = $1,750,000. Exposure units= 125,000. What is the pure premium for the peril of fire?

pure premium= incurred losses + adjusted loss expenses / # of exposure units. 43,750,000 + 1,750,000 / 125,000= $364 pure premium

What is cession?

the amount of insurance ceded to the reinsurer

What is a retention limit?

the amount of insurance retained by the ceding company

What is Quota Share (pro rata)?

the ceding company and the reinsurer share premiums and losses based on a fixed percentage. ex: with 60% retention; $1,000,000 in annual premium. $400,000 in annual losses. 60% x $1,000,000= $600,000 premium for primary. $400,000 goes to reinsurer. loss $240,000 primary. $160,000 reinsurer.

What is underwriting?

the process of selecting, classifying, and pricing applicants for insurance. the purpose is to develop and maintain a profitable book of business. An underwriter makes the decision to accept or reject an application for insurance.