Insurance Chapter 7

How is the loss ratio calculated?

(Incurred Losses + Loss Adjustment Expenses) / Premiums Earned = Loss Ratio

What is a "binder" as it relates to property and liability agents?

-A property and casualty agent has the power to bind the insurer immediately with respect to certain types of coverage -This relationship can be created by a binder, which is temporary insurance until the policy is actually written

What is the judgment rating method of rate making in property and liability insurance? What type of insurance is it usually used with?

-Each exposure is evaluated and the rate is determined by the underwriter's judgment -Ocean and Inland Marine

What is the class rating method of rate making in property and liability insurance? What type of insurance is it usually used with?

-Exposures with similar characteristics are placed in the same underwriting class, and each is charged with the same underwriting rate -->Ex: Home, auto, life, and health

Define gross premium as it relates to property and liability insurance

-Gross rate times the number of exposure units -This is the amount the insured pays for coverage

What are the two possible conclusions that can be drawn from the combined ratio?

-If the combined ratio exceeds 100% (or 1), it indicates an underwriting loss has occurred -If the combined ratio is less than 100% (or 1), it indicates an underwriting profit

What are loss reserves and why are they relevant to a company's financial operations?

-The estimated cost of settling claims -They are a major liability on a company's balance sheet

Define an exposure unit as it relates to property and liability insurance. Give examples

-The unit of measurement used in insurance pricing -Varies depending on the line of insurance -->Ex: For fire insurance, the exposure unit is $100 of coverage -->Ex: For product liability insurance, the exposure unit is $1,000 of sales -->Ex: For auto-collision insurance, the exposure unit is one car year (which is one car insured for a year)

What are the three regulatory rate making objectives for insurance companies?

1: Adequate 2: Not excessive 3: Not unfairly discriminatory

What are the three methods of rate making in property and liability insurance?

1: Judgment rating method 2: Class rating method 3: Merit rating method

What are the three key assumptions that are associated with the net single premium method?

1: Premiums are paid at the beginning of the year 2: Claims are paid at the end of the year 3: Death rate is uniform throughout the year

What are the three types of expenses associated with the gross premium on a life insurance policy? Give examples

1: Production (printing, underwriting, medical exams) 2: Distribution (selling, commissions, advertising) 3: Maintenance (renewal commissions, billings)

What are the two techniques associated with the class rating method?

1: Pure premium method 2: Loss ratio method

What are the two forms of rate making objectives for insurers?

1: Regulatory rate making objectives 2: Business rate making objectives

What are the three types of merit rating method of rate making for property and liability insurance?

1: Schedule Rating (Commercial) 2: Experience Rating (Group Health) 3: Retrospective Rating (Worker's Compensation)

What are the four business rate-making objectives for insurance companies?

1: Simplicity 2: Stability 3: Responsiveness 4: Encourage loss control

What are the three types of reserves?

1: Terminal Reserve 2: Initial Reserve 3: Mean Reserve

What are the two purposes of reserves?

1: To allow insurance companies to fulfill their obligations 2: So the insurance company can remain solvent

What is the net annual level premium?

Amount of premium due each year to fully fund a policy OR

What is the merit rating method of rate making in property and liability insurance?

Class rates are adjusted based on individual loss experience

What is the schedule rating method of merit rating?

Each exposure is assigned a base rate and adjustments are made for physical features

How is the expense ratio calculated?

Expense Ratio = Underwriting Expenses / Premiums Written

Define mean reserve

In life insurance, the average of the term reserve and the initial reserve at the end of any given policy year

Define terminal reserve

In life insurance, the reserve at the end of any given policy year

Define initial reserve

In life insurance, the reserve at the start of any given policy year

Define pure premium as it relates to property and liability insurance

It covers expenses and losses

What is the formula to determine the net annual level premium?

Net annual level premium = Net single premium / Present Value of a Life Annuity Due of $1 (PVLAD) for the premium paying period

Define gross premium as it relates to life insurance

Net annual level premium plus loading allowances (allowance covers expenses, contingency margins, and/or profit contributions)

Define loading as it relates to property and liability insurance

Premium added to cover other expenses, margin for dividends, profit and a margin for contingencies

How is the pure premium calculated?

Pure Premium = (incurred losses + loss adjustment expenses) / number of exposure units

Define gross rate as it relates to property and liability insurance

Pure premium + loading

What is the net single premium and what is it used for?

The present value of future death benefits on a life insurance policy

What is the retrospective rating method of merit rating?

The rate is adjusted based on the loss experience for the current policy period

What is the experience rating method of merit rating?

The rates are adjusted based on past loss experience

What is the combined ratio?

The sum of the loss and expense ratios