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Compensation for independent agents typically comes in two forms

1. A flat percentage of commission on all new or renewal business submitted 2. A contingent or profit-sharing commission based on volume or loss ratio goals

Nonfinancial measures of success for underwriting success

1. Adhering to selection standards 2. product or line of business mix 3. adhering to pricing standards 4. evaluating the amount and results of underwriting accomodations (accepted business that is sub-standard) 5. retention ratio (could indicate poor customer or claim service or noncompetitive pricing) 6. hit ratio 7. service to producers (requires setting standards of service beforehand) 8. premium to underwriter

Six broad categories of Risk Control Techniques

1. Avoidance (eliminates and possibility of the loss) 2. Loss Prevention (reduces frequency) 3. Loss Reduction (reduces severity) 4. Separation (reduce severity of an individual loss at a single location. Usually just the byproduct of another management decision) 5. Duplication 6. Diversification

Strategies for a company in decline mode

1. Bankruptcy or liquidation 2. Harvest Strategy (phasing out a product line or market) 3. Turnaround Strategy 4. Divestiture Strategy

Four bases of market segmentation

1. Behavioristic segmentation 2. Geographic segmentation 3. Demographic Segmentation 4. Psychographic segmentation

Insurers perform three types of risk control services

1. Conducting physical surveys 2. Performing risk analysis and improvement 3. Developing safety management programs

Advantages of Retention

1. Cost Savings 2. Control of Claims process 3. Timing of cash flows 4. Incentives for Risk Control

For a particular asset or activity, the cost of risk can be broken down in this way:

1. Cost of losses not reimbursed by insurance 2. Cost of insurance Premiums 3. Cost of external sources of funds 4. Cost of measures to prevent or reduce the size of potential losses 5. The cost of administering and implementing risk management

P&C insurer marketing differentiations

1. Customer Focus 2. Products and services 3. Size 4. Geographic area 5. Distribution system

Factors that insurers should evaluate when selecting a distribution system

1. Customers needs and characteristics (products they require, price, response time they require) 2. Insurer's profile (strategies and goals, strengths, target market, location, and degree of control required)

Three steps of estimating probable maximum loss for business income coverage

1. Determining the most serious direct loss that is likely to occur (as in not bus income related loss) 2. Calculate the longest period of restoration that this loss is likely to cause 3. Calculate the largest loss of business income that the insured is likely to sustain during a period of this length

To integrate ERM, an organizations board and executives can follow this process

1. Develop ERM Goals (Establish the internal and external contexts) 2. Identify risks (risk assessment) 3.analyze, evaluate, and prioritize potential risks (risk assessment) 4.Treat critical risks considering priority (risk treatment)

Five major goals of insurers

1. Earn a profit 2. Meet customer needs 3. Comply with legal requirements 4. Diversify risk 5. Fulfill their duty to society

Internal constraints to meeting goals of an insurance company

1. Efficiency 2. Expertise 3. Size 4. Financial resources 5. Other (name recognition or bad reputation)

Commercial crime loss exposures fall within two broad categories:

1. Employee dishonesty 2. Crimes committed by others

Primary goals of BS 31100

1. Ensuring that an organization achieve its goals 2.Ensuring that risks are managed in specific areas or activities 3. Overseeing risk management in an organization 4.providing reasonable assurance on an organizations risk management

Four Steps of monitoring and revising a risk management program

1. Establishing standards of acceptable performance 2. Comparing actual results with these standards 3. Correcting substandard performance or correcting standards that prove to be unrealistic 4. Evaluating standards that have been substantially exceeded

Steps in the underwriting process

1. Evaluate the submission 2. develop underwriting alternatives 3. select an underwriting alternative 4. determining an appropriate premium 5. implement the underwriting decision 6. Monitor underwriting decisions

Three levels at which the government can participate in insurance:

1. Exclusive insurer 2. Partner with private insurers 3. Competitor to private insurers

Three components of financial consequences of risk

1. Expected cost of losses or gains 2. Expenditures of Risk Management 3. Cost of Residual Uncertainty

Reasons Subjective and Objective Risk can differ

1. Familiarity and Control - (Air travel vs car travel. Lack of control in air causes high perceived risk) 2. Consequences over likelihood - ("it can't happen to me" view OR overstating probability of something rare happening to you) 3. Risk Awareness - (May just be unaware that a risk exists)

Six ISO construction classes

1. Frame 2. Joisted Masonry 3. Noncombustible 4. Masonry Non-combustible 5. Modified Fire Resistive 6. Fire Resistive

Six steps of a business continuity process

1. Identify the organizations critical functions 2. Identify the risks to the critical functions 3. Identify the effect of those risks 4. Develop a business continuity strategy 5. Develop a business continuity plan 6. Monitor and revise the business continuity process

Steps of a Risk Management Process

1. Identifying Loss Exposures 2. Analyzing Loss Exposures 3. Examining the feasibility of risk management techniques 4. Selecting the appropriate risk management techniques 5. Implementing the selected risk management techniques 6. Monitoring results and revising the risk management program

Types of Risk Control Goals

1. Implement effective and efficient risk control measures 2. Comply with legal requirements 3. Promote life safety 4. Ensure business continuity

The claim representative must prove these three things to establish arson of an insured structure and can engage an origin-and-cause expert and a special investigative unit (SIU) to assist:

1. Incendiary 2. Motive 3. Oppurtunity

Types of insurance distribution systems and Channels

1. Independent agency and brokerage marketing system 2. Direct writer marketing system 3.Exclusive agency marketing system 4. The internet and call centers 5. Direct response (no idea what this means) 6. Group Marketing 7. Financial institutions

Framework for coverage analysis

1. Is the person involved covered? 2. Did the loss occur during the policy period? 3. Is the cause of loss covered? 4. Is the damaged property covered? 5. Is the type of loss covered? 6. Are the amounts of loss or damages covered? 7. Is the location of loss covered? 8. Do any exclusions apply? 9. Does any other insurance apply?

Loss exposures are analyzed along these four dimensions

1. Loss Frequency 2. Loss Severity 3. Total Dollar Losses 4. Timing

Advantages of operating through an MGA

1. Low fixed cost 2. Specialty expertise 3. Assumption of insurer activities (although insurers must supervise the MGAs that serve them)

Considerations when using a mixed marketing system (combining insurance distribution systems)

1. Maintaining consistent customer communication 2. providing a consistent customer experience 3. Matching the type of insurance to the type of distribution

Three Core functions of a typical insurer

1. Marketing and distribution 2. Underwriting 3. Claims

measuring the performance of an insurer involves determining how successful the insurer is at meeting established goals including these:

1. Meeting profitability goals 2. Meeting customer needs 3. Meeting legal requirements 4. Meeting social responsibilities

Steps of oppurtunity assessment in product development

1. Monitor the market 2. Identify oppurtunity 3. Relate oppurtunities to business strategies 4. Develop Specifications 5. Secure senior management approval to proceed

Four classifications of hazard

1. Moral Hazard 2. Morale Hazard 3. Physical Hazard 4. Legal Hazard

Steps of product development

1. Opportunity assessment 2. Development of contract underwriting and pricing 3. Business Forecast 4. Regulatory Requirements 5. Distribution Requirements 6. Introduction

Differences between pooling and insurance

1. Pooling is a risk-sharing mechanism, whereas insurance is primarily a risk transfer mechanism 2. If premiums are not adequate to cover insureds losses in a given year, the insurer cannot collect more from the insureds, as would happen in a pooling arrangement 3.With insurance, the risk sharing occurs between the insurer and the insured, not between the insured and other insureds

Two categories of risk management program goals

1. Pre-Loss Goals 2. Post-Loss Goals

The key benefits of risk management for society

1. Prevents, minimizes, or compensates for losses 2. Reduces Uncertainty

Layers of guaranteed cost insurance

1. Primary layer 2. excess layer 3. Excess Coverage 4. Umbrella policy

Underwriters use various sources of information to evaluate a submission

1. Producers 2. Applications 3. Inspection reports 4. Government records 5. financial rating services 6. loss data 7. premium audit reports 8. claim files

Four basic types of old exposures

1. Property loss exposures 2. Liability loss exposures 3. Personal loss exposures 4. Net income loss exposures

Public fire protection classifications

1. Protected (split into 5 different tiers based on how close property is to a fire department) 2. Partially protected (building is more than 1000 feet from a fire hydrant and more than 5 road miles from a fire department) 3. Unprotected

Most umbrella policies are designed for three functions

1. Provide excess liability limits above all specified underlying policies 2.Provide coverage when the aggregate limits of the underlying policies have been exhausted 3.Provide coverage for gaps in the underlying policies

Purposes of underwriting guidelines

1. Provide for structured decisions 2. Ensure uniformity and consistency 3. Synthesize insights and experience 4. Distinguish between routine and nonroutine decision (which decisions fall outside the underwriters authority?) 5. Avoid duplication of effort 6. Ensure adherence to reinsurance treaties and planned rate levels 7. Support policy preparation and compliance

Facultative reinsurance serves four functions:

1. Provide large line capacity for exposures that exceed the limits of treaty reinsurance 2. Reduce exposure in a given geographic area 3. insure atypical or high-hazard exposures 4. Insure classes that are excluded under traty reinsurance

six characteristics of an ideally insurable loss exposure

1. Pure Risk 2. Fortuitous (accidental and unexpected) 3. Definite and measurable (definite in time cause and location) 4. Large number of similar exposure units 5. Independent and not catastrophe 6. Economically Feasible Premium

Most common classifications of risk

1. Pure and speculative risk 2. Subjective and Objective risk 3. Diversifiable and Non-Diversifiable Risk 4. Quadrants of Risk (hazard, operational, financial and strategic)

Advantages of Transfer

1. Reducing exposure to large losses 2. Reducing cash flow variability 3. Providing Ancillary Services 4. Avoiding adverse employee and public relations

External constraints to meeting goals of an insurance company

1. Regulation 2. Rating Agencies 3. Public opinion 4. Competition 5. Economic conditions 6. Insurance marketing and distribution 7. Other external constraints (natural or man-made catastrophe losses, which increased dramatically in the mid-2000s; disregard for law and order, particularly in some larger cities; and legal changes that affect liability claims.)

In developing underwriting alternatives The underwriter typically makes a counteroffer to accept a submission from among these major types of modifications:

1. Require risk control measures 2. Change rates, plans, or limits 3. amend policy terms and conditions 4. use facultative reinsurance (transfer a portion of the liability for the applicant's loss exposures to a facultative reinsurer)

Staff underwriting activities

1. Research the market 2. Formulate underwriting policy 3. Revise underwriting guidelines 4. Evaluate loss experience 5. Research and develop coverage forms 6. Review and Revise pricing plans 7. Arrange treaty reinsurance 8. Participate in industry associations 9. Conduct underwriting audits 10. Conduct education and training

Four major differences between RM and ERM

1. Risk Categories 2. Strategic integration 3. Performance Measures 4. Organizational Structure

Supporting functions of a typical insurer

1. Risk Control 2. Premium Auditing 3. Actuarial functions 4. Reinsurance 5. Information technology

Common special types of group captives

1. Risk Retention Group 2. Rent-a-captive 3. Protected Cell Company

Most line underwriters are responsible for these major activities

1. Select insureds (a continuous process) 2. Classify and price accounts 3. Recommend or provide coverage 4. manage a book of business (achieve goals of product mix, loss ratio, and written premium) 5. Support producers and customers 6. Coordinate with marketing efforts

Insurers use these activities to maximize return on equity while seeking to write lines of business or accounts

1. Setting return thresholds 2. redirecting focus on target business classes 3. adjusting underwriting policy based on jurisdiciton

Three generic corporate level strategies for companies in growth mode

1. Single business (Focusing on one industry to gain competencies as a comp advantage) 2. Vertical Integration 3. Diversification

Commercial property exhibits some of the characteristics of ideally insurable loss exposures based on the cause of loss

1. Some commercial properties are unique and might not be part of a large number of similar exposure units 2. Multiple locations may be subject to the same catastrophic loss. 3. In areas subject to catastrophic losses, economical premiums might not be possible.

Underwriters analyzing crimes committed by others loss exposures consider six factors:

1. Susceptibility and marketability (stealibility) 2. Property location 3. Nature of the occupancy (e.g. presence of cash) 4. Moral and Morale hazards 5. Public Protection 6. Coverage and price modificaitons

Three costs of the overall financial consequences of risk

1. The cost of the value lost because of actual events that caused a loss 2. The cost of resources devoted to risk management for that asset or activity 3. The cost of residual uncertainty

Elements of The FERMA Risk Managment Standard

1. The establishment of a current terminology 2.A process by which risk management can be executed 3.An organized risk management structure 4.Risk management goals

Before underwriting employee dishonesty exposures, underwriters should be sure that:

1. There is no evidence of moral hazard 2. Robbery risk control systems are in place a maintained 3. Amounts of insurance should fall within range prescribed in underwriting guidelines 4. The organization should be managed soundly

For premises liability, unless the accident was caused by a hidden hazard, claimants usually provide one of three reasons for the accident

1. They had no idea what caused their accident. (This amounts to no negligence on the insured's part) 2. They knew of the causes but failed to observe and avoid them (comparative negligence on the claimant's part) 3. They were aware of and observed the causes before the accidents but encountered them anyway. (Assumption of risk by the claimant.)

Rationale for Government Involvement

1. To fill insurance needs unmet by private insurers 2. To help people to buy a mandatory type of insurance 3. To obtain greater efficiency and/or provide convenience to insurance buyers 4. To achieve collateral social purposes (reduce risk to society)

The two elements within the definition of a risk are:

1. Uncertainty of outcome 2. Possibility of a negative outcome

Claim representatives must answer these general questions as part of the property claim handling process

1. Who has insurable interest? and Who is an insured? 2. What Property Is Insured? Where Is It Insured? When Is It Insured? 3. What Are the Covered Causes of Loss? 4. What Is the Dollar Amount of Loss? 5. What Are the Insured's Duties After a Loss? 6. What Procedures Are Used to Conclude a Claim?

Three risk control techniques that can be used to control liability losses

1. avoidance 2. loss prevention 3. loss reduction

Quality measures of a claims department

1. best practices (rules set up by the department) 2. claims audits (ensure compliance with best practices) 3. Customer satisfaction

occupancy categories

1. habitational (apartments, hotels) 2. Office 3. institutional (schools, churches) 4. mercantile (busin. that buy and sell merch) 5. service (busin that perform a service) 6. manufacturing

How insurance benefits individuals, organizations, and society.

1. helps pay for losses 2. helps manage cash flow uncertainty 3. helps them meet legal requirements 4. helps promote risk control 5.Enabling Efficient Use of Resources 6.Providing Support for Insured's Credit (facilitates loans to individuals and organizations by guaranteeing that the lender will be paid if house is destroyed) 7.Providing Source of Investment Funds (for insurers and insureds) 8.Reducing Social Burdens (provides coverage to victims so that gov doesnt have to)

Different types of occupancies present different types of underwriting concerns based on the characteristics of the contents at the insured location

1. ignition sources provide the means for a fire to start 2. combustibility determines how quickly the material ignites 3. susceptibility measures the extent to which fire damages personal property

Common risk financing goals

1. pay for losses 2. manage the cost of risk 3. manage cash flow variability 4. maintain an appropriate level of liquidity 5. Comply with legal requirements

Factors affecting the period of restoration for business income coverage

1. rebuilding time 2. Seasonality of the business's income 3. damages to bottlenecks of the business operations (by bottlenecks they mean anything essential) 4. damage to computer systems 5. Long production processes 6. Availability of substitute property 7. Presence of a disaster recovery plan

for underwriters monitoring of existing policies usually occurs in response to one or more of these triggering events that may indicate a change in the account:

1. substantive policy change requests 2. significant and unique loss occurences 3. risk control and safety inspection reports 4. premium audit results 5. renewal

Once contact is made, the claim representative normally takes these actions:

1. tell the insured what the insured must do and provide deadlines. 2.Tell the insured what additional investigation is needed to resolve potential coverage issues 3.explain the amount of time it will take to process and conclude the claim

In which ways is underwriting authority granted?

1. underwriters gain authority with experience and positive results 2. producers may gain underwriting authority based on experience, profitability and contractual arrangements 3. MGA's when appointed assume decentralized underwriting authority

Retention funding measures

1.Current Expensing of Losses (least expensive) 2.Unfunded Loss Reserve 3.Funded Loss Reserve 4.Borrowed Funds

The major factors influencing the ability of a risk financing measure to meet an individuals or an organizations risk financing goals are:

1.The mix of retention and transfer 2.Loss exposure characteristics 3.Individual or organization specific characteristics

Implementing underwriting decisions requires three tasks

1.communicate the decision to the producer 2. issuance of any required documents 3. record data about the applicant and the policy

Fraud accounts for what percentage of property casualty loss

10%

Duplication

A Risk Control Technique that uses backups, copies, or spares of critical property or information. Differs from separation in that duplicates are not part of an organizations daily working resources.

Sliding Scale Commision

A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.

Profit Sharing Commission

A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures

Pure Risk

A chance of loss or no loss but no chance of gain

Claimant investigation

A claimant investigation, usually conducted by taking the claimant's statement, can help determine the value of the injury or damage, how it was caused, and who is responsible

Noncombustible construction

A class of construction in which the exterior walls, floor, and roof of a building are constructed of, and supported by, metal, gypsum, or other noncombustible materials

Fire Resistive

A class of construction that has exterior walls, floors, and roofs of masonry or other fire-resistive material with a fire-resistance rating of at least two hours

Modified fire-resistive construction

A class of construction that has exterior walls, floors, and roofs of masonry or other fire-resistive materials with a fire-resistance rating of one to two hours.

Frame Construction

A class of construction that has load-bearing components made of wood or other combustible materials such as brick or stone veneer

Joisted Masonry

A class of construction that has load-bearing exterior walls made of brick, adobe, concrete, gypsum, stone, tile, or similar materials; that has floors and roofs of combustible materials; and that has a fire-resistance rating of at least one hour

Morale hazard (attitudinal hazard)

A condition of carelessness or indifference that increases the frequency or severity of loss.

Legal Hazard

A condition of the legal environment that increases loss frequency or severity

Moral Hazard

A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss

Personnel Loss Exposure (not personal)

A condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace

Net income loss exposure

A condition that presents the possibility of loss caused by a reduction in net income

Property Loss Exposure

A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest

hold-harmless agreement (Non-insurance risk transfer measure)

A contractual provision that obligates one of the parties to assume the legal liability of another party.

Protected cell company

A corporate entity separated into cells so that each participating company owns an entire cell but only a portion of the overall company.

Self Insurance

A form of retention under which an organization records its losses and maintains a formal system to pay for them

Voluntary report

A form that the insured completes and returns to the insurers premium audit department. The insurer can then choose to accept the report or initiate a field premium audit to confirm the report.

Terrorism Risk Insurance Act

A government "backstop" insurance program ensures that commercial property owners can obtain reasonable and predictably priced terrorism coverage by specifying that the federal government will share the risk of loss from foreign terrorist acts.

Risk Retention Group

A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations.

Independent agent networks (aka agent groups, agent clusters, agent alliances)

A group of independent agencies that join together to gain advantages normally only available to large national and regional brokers.

pool

A group of organizations that band together to insure each other's loss exposures.

Underwriting policy

A guide to individual and aggregate policy selection that supports an insurer's mission statement.

Diversifying risk is an emerging goal for property-casualty insurers because of the increased catastrophe losses that have occurred over the past decade

A high concentration of losses in a geographic area highlights individual insurers' need to spread risk over a wider geographic area and over multiple types of insurance business, such as property-casualty insurance.

Today, a declining proportion of Lloyd's accounts are underwritten and secured by individuals.

A larger portion of Lloyd's members today are corporations, and the liability of each of these members is limited to the amount that the member agrees to write

An insurer's state license authorizes it to sell insurance in the state.

A license indicates that the insurer has met the state's minimum standards for financial strength, competence, and integrity.

Actual cash value of property valuation methods

A method in valuing property that is calculated as the cost to replace or repair property minus depreciation, the fair market value, or a valuation determined by the broad evidence rule.

Five Forces Model

A method of evaluating the external environment in which a company operates. Involves assessing five forces that drive competition: threat of new entrants, threat of substitute products or services, bargaining power of buyers, bargaining power of suppliers, and rivalry among existing firms.

Finite risk reinsurance

A nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component. Not intended to cover cat risk.

Surplus lines broker

A person or firm that places business with insurers not licensed (nonadmitted) in the state in which the transaction occurs but that is permitted to write insurance because coverage is not available through standard market insurers. (customers with unusual or unique requirements like really high limits)

Prior claim investigation

A prior claim investigation is conducted on most claims using industry databases to avoid paying for property damage or bodily injury that has previously been paid through prior claims by the same insurer or by other insurers.

Variable quota share treaty

A quota share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed.

Retrospective rating plan

A rating plan that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience

Reciprocal insurance exchanges

A reciprocal insurance exchange, also simply called a reciprocal, consists of a series of private contracts in which subscribers, or members of the group, agree to insure each other

Activity log

A record of all the activities and analyses that occur regarding a particular claim

Treaty Reinsurance

A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured

Retrocession

A reinsurance agreement whereby one reinsurer (the retrocedent) transfers all or part of the reinsurance risk it has assumed or will assume to another reinsurer (the retrocessionaire).

Effective risk control measures

A risk control measure is effective if it enables an organization to achieve a desired risk management goals.

Efficient Risk Control Measures

A risk control measure is efficient if it is the least expensive of all effective risk control measures

Retention

A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses. Can be both planned and unplanned.

fire division

A section of a structure so well protected that fire cannot spread from that section to another, or vice versa

Advance Payment

A settlement technique used to discourage claimants from hiring attorneys

The majority of work-related bodily injury claims are covered under Part One of the Workers Compensation and Employers Liability Insurance Policy, which theoretically provides the exclusive remedy for bodily injury claims caused or aggravated by conditions of employment regardless of fault and usually without judicial intervention.

A small percentage of bodily injury claims fall under Part Two, the Employers Liability coverage part. Employers liability is a liability-based third-party coverage under which the employee must prove negligence.

Stated value method of valuing property

A stated amount is typically determined by appraising the insured's property or by reviewing a sales receipt for the property in question.

Captive insurer, or captive

A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates.

diary or suspense

A system to remind claims personnel to perform a particular task on a claim

Physical Hazard

A tangible characteristic of property, persons, or operations that tends to increase the frequency or severity of loss

the COPE model

A tool underwriters use to evaluate exposures and other causes of loss. COPE stands for construction, occupancy, protection, external exposures

Per occurence excess of loss reinsurance

A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies.

Per policy excess of loss reinsurance

A type of excess of loss reinsurance that applies the attachment point and the reinsurance limit separately to each insurance policy issued by the primary insurer regardless of the number of losses occurring under each policy

Aggregate excess of loss reinsurance

A type of excess of loss reinsurance that covers aggregated losses that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year.

Per risk excess of loss reinsurance

A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk. The primary insurer usually decides what constitutes a risk.

Catastrophe excess of loss reinsurance

A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event.

Clash cover

A type of per occurrence excess of loss reinsurance for liability loss exposures that protects the primary insurer against aggregations of losses from one occurrence that affects several insureds or several types of insurance.

Surplus share reinsurance

A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line.

Quota share reinsurance

A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage.

pro rata reinsurance

A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses).

Excess of loss reinsurance

A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount (attachment point)

Surplus Note

A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet.

Insurance Securitization

A unique form of securitization. The cash flows that arise from the transfer of insurable risks are similar to premium and loss policies under an insurance policy

Advantage and disadvantage of cash flow analysis

Advantage: it provides the same basis of comparison for all value maximizing decisions. Disadvantage: assumptions must be made to conduct the analysis and future cash flows are difficult to estimate.

A rare antique French desk in the foyer of a commercial office building is destroyed when the automatic sprinkler system deploys during a minor fire. Under a commercial property policy, which one of the following property valuations was best suited for this antique?

Agreed Amount

A foreign insurer is a domestic insurer that is licensed to do business in states other than its domiciled state.

Alien insurers are incorporated or formed in another country

Personal Property

All tangible or intangible property that is not real property

Choice of body shop for auto repairs

Although the claim representative should try to agree on a repair price, the choice of a body shop should be left to the claimant.

Premium auditing

Although the premium for many types of insurance is known and guaranteed in advance, the premium is variable for some lines of insurance and cannot be precisely calculated until after the end of the policy period.

Premiums developed by audit positively impact state premiums.

Although this is a statement of fact the CAS believes that it is something that one can offer as a solution to address the issue of increasing premiums in several states

item basis bill process

An agency bill process in which the producer is usually not required to pay the insurer until the premium is collected from the policyholder

Contingent Capital Arrangement

An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold.

Market conduct examination

An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.

Rent-a-captive

An arrangement under which an organization rents capital from a captive, to which it pays premiums and receives reimbursement for its losses

three elements of a loss exposure

An asset exposed to loss, cause of a loss, financial consequences of that loss

Managing general agent (MGA)

An authorized agent of the primary insurer that manages all or part of the primary insurer's insurance activities, usually in a specific geographic area

Loss of consortium

An element of damages that generally belongs to the injured party's spouse. Consists of sex, society and services

Working cover

An excess of loss reinsurance agreement with a low attachment point

Express warranty

An explicit statement about a product by the seller that the buyer or other user may rely on and that provides a remedy in the event the product does not perform as claimed.

Advisory Organization

An independent organization that works with and on behalf of insurers that purchase or subscribe to its services

Industry loss warranty

An industry loss warranty is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold.

Direct response distribution channel

An insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone, or the Internet

Direct writer marketing system

An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer

Accident scene investigation

An investigation of the accident scene may offer crucial clues about the loss and may help determine whether accounts of the loss are plausible or questionable.

A licensed insurer (admitted insurer) is an insurer that has been granted a license to operate in a particular state

An unlicensed insurer (nonadmitted insurer) has not been granted a license to operate in a given state

Liability Loss Exposure

Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party

Personal Loss Exposure

Any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment

In complying with ASOP 41, what should the Actuary disclose

Any material judgment adjustments that the actuary applied to the data to allow the actuary to perform the analysis. And A description of material defects the actuary believes are in the data.

When working to prevent underwriting losses, it is preferable to insure to value with rates that reflect the loss exposure than to under-insure property at inflated rates.

At policy renewal, the underwriter should reassess the values exposed to loss and adjust limits accordingly.

All corporations are obligated to promote the well-being of society

At the minimum, this obligation demands that the insurer should not cause any public harm

The ceding commision of a reinsurance policy can cover the expenses and include a profit provision if the ceded business is profitable.

Because of this, ceding commission replenishes part of the policy holder surplus (equity) providing surplus relief

Why are both objective and subjective risk analysis needed

Both risk management and insurance depend on the ability to objectively identify and analyze risks. However, subjectivity is also necessary because facts are often not available to objectively assess risk.

An insurer that targets large middle-market and national accounts would most likely use which of the distribution systems?

Broker. Not exclusive agent.

BOPs

Business owners policies usually include business income coverage on an actual loss sustained basis.

How does ERM improve Management Consensus

By creating a corporate culture that embraces risk as an additional component in each decision

How does ERM improve risk communication

By encouraging an organization to widely communicate its risk management approach across all layers of the organization

How can risk control representatives improve underwriting decisions

By inspecting the premises and operations of insurance applicants, they can improve the information on which the underwriting department bases its decisions.

How do risk control efforts complement marketing and sales?

By making marginal accounts acceptable, they can help marketing reach sales goals. Through direct contact with insureds, risk control reps can learn the coverages or services the insured's need or want.

How do risk control efforts complement underwriting?

By providing underwriters with information and enabling them to make better decisions. They can help underwriters modify a new applicants loss exposures to meet eligibility requirements.

Functional-level strategy

Carried out by individual departments performing specific organizational functions such as marketing or underwriting

First step in underwriting for an underwriter

Check to see if you have the underwriting authority to make a decision

Claims audits

Claims audits are a review of claim files, both paper and electronic, to ensure that claims are being handled properly. Can be conducted by an insurers internal personnel or others

Claim guidelines

Claims guidelines specify how certain claims handling tasks should be performed by setting policies and procedures for claims handling.

Operating ratio

Combined ratio minus investment income ratio

States are more likely to require insurers to provide risk control services to:

Commercial insureds for workers comp coverage

Two main claim function goals

Complying with the contractual promise and supporting the insurer's financial goals

Solvency II

Consists of regulatory requirements for insurance firms that operate in the EU

Who investigates consumer complaints about claims adjusters?

Consumer complaints are investigated by the state insurance departments.

In the claim function, supporting the insurers profit goal is accomplished through

Controlling expenses

Drop-down coverage

Coverage provided by many umbrella liability policies for (1) claims not covered at all by the underlying policies and (2) claims that are not covered by an underlying policy only because the underlying policy's aggregate limits have been depleted.

Occupancy hazards: Special hazards of the risk

Created when businesses engage in activities that are not typical of other businesses in their class

Clash cover

Damages awarded to the insured as a result of the insurer's improperly handling a claim

The primary purpose of premium auditing

Determining the correct premium for a policy period

Three crucial parts of claim documentation

Diary systems, activity logs, file reports

Which premium collection methods is used in the majority of personal insurance sales?

Direct Bill process

American Lloyds

Domiciled in texas. Members are not liable beyond their investment in the organization

What is an essential element of a fleet safety program?

Driver selection

The federal commercial motor vehicle safety act of 1986 requires that:

Drivers of specific large vehicles hold a commercial driver's license (CDL).

Making arrangements with a second supplier to provide a material in case the first supplier is unable to do so is an example of which risk control technique.

Duplication.

Traditional risk management is concerned with pure and hazard risk

ERM considers all risk

Traditional risk management focuses on preventing or reducing potential losses and on compensation for losses that do occur

ERM emphasizes the interrelationships between pure and speculative risk.

The chief risk officer in an ERM structure typically reports to the CEO

ERM is integrated with the entire organization's strategy

Traditional risk management is normally involved only in the elements of the organization's strategy that deal with pure risk and hazard risks

ERM is integrated with the entire organization's strategy

Operational Goals of a risk management program (typically pre-loss)

Economy of Operations, tolerable uncertainty, legality, social responsibility

Basel II

Establishes Risk and Capital Management Rules designed to ensure that a bank holds capital reserves appropriate to the risk the bank assumes through lending and investment

Hazard and Operational risks are seen as pure risks

Financial and Strategic risks are seen as speculative

COSO II (Or COSO ERM)

Focuses on threats to an organization and application of controls. Mostly related to ERM. Its intended audience is an organization large enough to require examination of risk appetite and board direction of ERM strategies.

direct bill process agency bill process

For small commercial accounts and the vast majority of personal insurance, the customer is usually directed to sendpremium payments to the insurer, bypassing the producer

Fraternal organizations

Fraternal organizations resemble mutual companies, but they combine a lodge or social function with their insurance function. They write primarily life and health insurance.

Housekeeping to commercial underwriters

From an underwriting standpoint, housekeeping refers to a workplace's physical layout, its cleanliness, and its operating efficiency.

In a single business company which organization structure works best?

Functional structure

Damages that courts award in order to compensate claimants for such things as pain and suffering that do not involve specific measurable expenses are referred to as

General Damages

Maximum foreseeable loss

Generally applied to fire losses, maximum foreseeable loss (MFL) is an estimate of the financial cost of the loss that would occur if all protection measures (automatic and manual) were to fail and no effective fire department response occurred.

public adjusters

If a claim is complex, or if settlement negotiations are not progressing satisfactorily with the insurer, the insured may hire a public adjuster to protect his or her interests. public adjuster prepares the insured's claim and negotiates the settlement with the staff claims representative or independent adjuster. The insured, in turn, pays the public adjuster's fee, which is usually a percentage of the settlement.

Workers comp claims that involve only medical expenses are usually processed with no investigation

If an accident involves lost time from work, the claim representative is likely to conduct an investigation.

What happens if an insurer stops doing business with an independent agent?

If the insurer ceases to do business with an agency, the agency has the right to continue doing business with its existing customers by selling them insurance with another insurer

Important benefits of ERM

Improved decision making and improved risk communication

BS 31100

In 2008 the British Standards Institution published BS 31100 as a code of practice for risk management. Intended to be a scalable standard that can be used by individuals responsible for risk management

Extreme Consequences of lack of Efficiency

In extreme cases, inefficiency can lead to insolvency and a consequent failure to meet legal and regulatory goals.

To make liability insurance available to almost all licensed drivers, all states have implemented automobile insurance plans through a residual market

In most states, Fair Access to Insurance Requirements (FAIR) plans make property insurance more readily available to property owners who have exposures to loss over which they have no control.

In states that apply a limits trigger, the UIM endorsement applies when the negligent driver carries liability insurance limits that are lower than the limits provided by the injured party's UIM coverage.

In states that apply a damages trigger, the UIM endorsement applies when the negligent driver carries liability insurance limits that are lower than the injured party's damages

Transfer

In the context of risk management, a risk financing technique by which the financial responsibility for losses and variability in cash flows is shifted to another party.

Completed operations loss exposures

Include construction, service, repair, and maintenance activities.

Personal injury loss exposures covered under personal and advertising injury liability

Include the insured's legal liability arising out of libel; slander; false arrest; wrongful eviction; invasion of the right of private occupancy; and infringement of copyright, trade dress, or slogan.

ISO 31000:2009

Includes guidelines and principles for risk management. It provides an international standard.

Advantages of improved decision making due to ERM

Increased profitability and reduced volatility

Excess liability insurance

Increases the limits of liability on one or more underlying policies but generally does not broaden coverage. (Umbrella policies, in contrast, provide coverage in some situations when underlying coverage does not exist)

Given the complexity of commercial insurance, which system is best suited for its distribution?

Independent Agents

Most insurers give some producers the authority to issue claim payments, up to a certain amount, directly to insureds. In this role, producers function much like a(n)

Inside claims representative

Market segmentation

Insurers use market segmentation to differentiate themselves from other insurance providers to meet the needs of customer groups

AS/NZS 4360

Intended to provide only a broad overview of risk management. Organizations are expected to interpret this guide in the context of their own environments and to develop their own specific ERM approaches.

Speculative Risk

Involves the possibility of a gain

Diverisification is more commonly applied to business risks, no hazard risks

It can reduce loss severity but increase loss frequency. Also makes loss more predictable.

Lloyd's of London

It is a marketplace, similar to a stock exchange. The members are investors who hope to earn a profit from the insurance operations

ASOP 23 does not provide guidance to the actuary with regards to auditing data

It provides guidance with regards to pretty much everything else about data

Profit and voting with a mutal insurer

Its policyholders have voting rights similar to those of a stock company's stockholders. Some profit is retained to increase surplus, and excess profit is usually returned to policyholders as dividends.

When two or more individuals who are not spouses have a complete, indivisible interest in property, that type of ownership is referred to as

Joint ownership

Middle markets

Larger organizations with insurance needs that vary significantly according to the products or services they provide.

Countersignature laws

Laws that require all policies covering subjects of insurance within a state to be signed by a resident producer licensed in that state.

Generally the largest liability on the insurers balance sheet

Loss Reserves

What is the type of data included in loss transaction records submitted by insurers to transaction-based Statistical Plans

Loss payments (full or partial) and loss reserve transactions

Why does marketing need claim information?

Marketing needs info about customer satisfaction, timeliness of settlements, and other variables that assist in marketing the insurance product

Masonry noncombustible construction

Masonry construction or construction that includes exterior walls of fire-resistive construction with a fire-resistance rating of not less than one hour.

Business-level strategy

May be implemented by a single operation or, in the case of a diversified corporation, a strategic business unit. Managers develop strategies at this level to support the corporate-level strategy to be competitive and to respond to changes in the external environment

Amount subject

Measures the exposure to a single loss. For fire insurance this is almost always the value of all property exposed within a single fire division.

Premises medical payments liability

Medical expenses of persons other than the insured who are injured on the insured's premises or because of the insured's operations.

Members of an insurance exhange belong to syndicates and delegate day-to-day operations to the syndicate manager

Member syndicates operate as separate businesses that focus on a particular group of loss exposures.

Gender and marital status and loss experience

Men tend to have more losses (this gap is diminishing though) Married insureds tend to have lower losses

Many pools are required by law

Most states have pooling arrangements to provide auto liability insurance and workers compensation coverage

subcontractors and workers comp

Most workers compensation laws hold a contractor responsible for workers compensation benefits to employees of its uninsured subcontractors.

Mutual insurers

Mutual insurers constitute the largest number of cooperative insurers and provide low-cost insurance to their policyholders, who are the owners of the insurer

Examples of property-liability federal insurance programs

National Flood Insurance Program, the Terrorism Risk Insurance Program, and Federal Crop Insurance.

Diversifiable risk

Not highly correlated and can be managed through diversification or spread of a risk.

What is the main cause of depreciation?

Obsolescence

With regard to liability claim adjusting, which one of the following is the most important aspect of any liability claim investigation?

Obtaining all of the relevant evidence

Agreed amount method of valuing property

On an agreed-amount basis, the insurer agrees to restore the property to its condition before the loss or to pay the agreed amount.

Acknowledging and assigning the claim

Once a loss notice has been received and the information has been entered into the insurer's claim information system, the insurer acknowledges the claim and assigns it to one or more claim representatives. The purpose of the acknowledgment is to advise the insured that the claim has been received and to provide the claim number and contact information of the assigned claim representative

Advantage of small size of insurance company

One advantage for a small insurer is that it can be more nimble, allowing it to respond quickly to an emerging trend or a change in the external insurance environment.

reinsurance pool

One member of the pool issues the policy to the insured, and the other pool members reinsure an agreed proportion of the policy's insured loss exposures

National Flood Insurance Program

One of the largest property insurance programs the federal government offers which is administered by the Federal Insurance Administration under the Federal Emergency Management Agency (FEMA).

Which one has a greater potential to cause property damage loss, operations or premises liability.

Operations liability

A form of ownership in which two or more owners each have an identifiable fractional interest in property is known as

Ownership in common

Compensatory damages normally covered by the policy include

Pain and suffering and out-of-pocket expenses claimed up to the policy limit.

Reinstatement clause

Payments from the reinsurer to the primary insurer in the event of cat losses reduce the reinsurance coverage limits available for future loss. A reinstatement clause requires that the primary insurer pays an additional premium to reinstate the limits of the agreement after a loss.

which commercial liability coverages are automatically included in the CGL coverage form?

Personal and advertising injury liability (Coverage B) and Premises Medical Payments liability (Coverage C)

What is used where property is highly susceptible to water damage from damaged sprinklers or piping and consists of a sprinkler system with closed valves until smoke or heat detectors open them in response to a fire

Pre-action sprinkler system

Three major parts of ISO 31000:2009

Principles, a framework, and processes for managing risk

What powerful adjustment tool is written, signed, and sworn to by the insured, yet not often used by property adjusters?

Proof of loss

The key benefits of risk management for organizations

Protection for financial resources, Increased supplier and customer confidence, Reduced adverse impact of risk.

Public Protection Classification (PPC)

Rates the quality of public fire service on a scale of 1 to 10 with 10 being the worst. The ISO develops the PPC using the Fire Suppression Rating Schedule (FSRS)

Insurance is regulated at the state level. Therefore, a domestic insurer is incorporated within a specific state or, if not incorporated, is formed under the laws of that state.

Reciprocal insurance exchanges are the only unincorporated insurers permitted in most states. Insurance exchanges and Lloyds organizations are permitted under law in only a few states

Authority levels (claims)

Refer to the reserve amounts and payment amounts that claims personnel are allowed to set and make

Summary based statistical plans are primarily used for

Regulatory Reporting

Facultative reinsurance

Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.

claims reports

Reports can help insurer personnel monitor claims practices by indicating possible errors.

What does a statistical agent do?

Reports data submitted by insurers to state insurance departments.

Risk Control Techniques and Risk Financing Techniques

Risk Control Techniques minimize the frequency or severity of losses or make losses more predictable. Risk Financing Techniques generate funds to finance losses that risk control techniques cant entirely prevent or reduce.

Which one of the departments of an insurance company provides information to the underwriting department to assist in selecting and rating risks?

Risk Control. Not actuarial.

A commercial insurer has historically targeted small businesses. It is considering expanding its market to middle market organizations. To succeed, the insurer will need to develop a level of expertise in which one business area?

Risk financing alternatives.

Insurance exchanges

Similar to LLoyds. Exchange members underwrite any insurance or reinsurance purchased on the exchange.

Although many types of water damage are not covered, water damage resulting from fire-fighting activity is covered

Smoke and water damage to property can cause little or no damage if they are removed quickly. Professional cleaning and restoration services exist for these situations. The claims rep must quickly become involved in hiring a professional cleaning and restoration service.

Hard cycles are characterized by periods of decreased competition and rising rates leading to increased profitability

Soft cycles are when prices decline as competition increases and eventually profitability diminishes

For bodily injury liability claims, damages can be classified as either special damages or general damages.

Special damages are established for losses that can be quantified. General damages are for intangible losses.

Insurance that covers every cause of direct physical loss or damage that is not specifically excluded is referred to as

Special form coverage

Intertemporal risk transfer

Spreading of risk through time.This function does not require a large number of similar exposure units

Legal obligations of a risk management program are typically based on:

Standard of care that is owed to others, contracts entered into by the organization, Federal/state/local laws and regulation

Which method of valuing property is typically used for jewelry or furs, when a sales receipt or appraisal is available for the property in question?

Stated Value

When the policy does not define a cause of loss or another term, what can the claim representative use to determine the meaning?

Statutory provisions

Which approach to global expansion is the simplest with the lowest degree of risk?

Strategic Alliance (Subsidiaries present the greatest risk)

The most common basis for product liability suits

Strict liability in court - it imposes liability on any person who produces an unreasonably dangerous product.

An actuary should review the data for reasonableness and consistency, unless, in the actuary's professional judgment

Such review is not necessary or practical

Post Loss Goals examples

Survival, Continuity of operations, Profitability, Earning Stability, Social Responsibility, Growth

Real Property

Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land

What term is used to identify the property ownership of a husband and wife?

Tenancy by entirety

To determine if a person is a named "insured" under a policy, the claims representative would generally need to review

The Declarations section and Definitions section.

What happens to an umbrella insurer if underlying insurance fails to defend a claim?

The Umbrella insurer has to do it

A retail clothing store experiences a fire in September, when all bathing suits are being sold at 50 percent of the original price. In valuing the inventory at actual cash value,

The adjuster should take the reduced listed retail price into consideration.

financial 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

Policy amount as a figure for determining loss severity

The amount of insurance the policy provides is the easiest to calculate and is the only measure of potential severity on which underwriters tend to agree. Also the least useful.

Without knowing the facts, how can a claim representative determine coverage for a liability claim?

The claimants allegations determine coverage, even if those allegations are disputed or eventually proven untrue

How do risk control efforts complement claims?

The claims department relies on risk control for loss exposure data and background information that can support the loss adjusting process. They can also emphasize the importance of thorough loss documentation and proper claim reporting procedures to the insureds.

Claims reps cannot deny coverage for all claims simply due to a breach of insurance contract.

The consequences of a breach of contract might be covered even if the breach itself is not

In underwriting auto insurance the most important underwriting factor is:

The driver that will be operating the vehicle.

Fuel Load

The expected maximum amount of combustible material in a given area of a building, including both structural elements and contents, commonly expressed in terms of weight of combustibles per square foot

How pooling reduces risk

The expected value remains the same, but the uncertainty around that expected value (as measured by the standard deviation) has decreased.

Corporate-level strategy

The highest strategy level for a diversified organization. It determines the types an potential profitability of businesses or activities the organization will undertake.

cost level of complying with legal requirements

The insurance industry is highly regulated, and the expenses associated with compliance can be substantial

Underwriting subcontractors is nearly impossible

The insured might not know at the outset of the policy with the contractor exactly which subcontractors will be used and must rely on the contractors reputation in hiring good subcontractors.

Statement basis agency bill process

The insurer sends a statement to the producer showing the premiums that are due. The producer is obligated to pay the premiums indicated as due or to show that the statement is in error.

National accounts

The largest organizations seeking insurance coverage. They have the most complex insurance needs, the most comprehensive knowledge of the insurance market, and the widest variety of risk financing alternatives

Residual Uncertainty

The level of risk that remains after risk management plans have been implemented

line

The maximum amount of insurance or limit of liability that an insurer will accept on a single loss exposure.

Objective Risk

The measurable variation in uncertain outcomes based on facts and data.

What is a factor in determining the types of investments that an insurer acquires?

The nature of the risks that it assumes

An insurers success or failure at meeting legal requirements is measure by:

The number of criminal civil or regulatory actions taken against the insurer

Elements of an off-premises workers comp hazard

The off-premises hazard has three elements: the duration of travel, the mode of transportation, and the hazards at remote job sites.

One of the main distinguishing features between independent agents and brokers and other distribution systems is the ownership of the agency expiration list

The ownership of expiration lists is an agency's most valuable asset. An independent agency has the right to sell its expiration lists to another independent agent.

Subjective Risk

The perceived amount of risk based on an individual's or organization's opinion.

Life Safety

The portion of fire safety that focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of the building.

Systemic Risk

The potential for a major disruption in the function of an entire market or financial system. Seen as non-diversifiable.

The term "profit cycle" as measured by the operating ratio is a better way to describe the phenomenon of the underwriting cycle

The process is driven by profit expectations not underwriting execution

Securitization

The process of creating a marketable investment security based on a financial transaction's expected cash flows

Account current basis agency bill process

The producer periodically prepares a statement showing the premiums due to the insurer, after deducting appropriate commissions, and transmits that amount to the insurer. The producer must pay the insurer when the premium is due, even if the policyholders have not paid the producer

What controls the coverage provided by a workers compensation policy?

The state's compensation laws

Net income losses are often a result of property, liability, or personnel loss

Therefore net income losses are considered to be indirect losses

Risk retention groups and purchasing groups

These cooperatives can be stock companies, mutuals, or reciprocal exchanges. They are usually organized so that a limited group or type of insured is eligible to purchase insurance from them.

Proprietary insurers

These include stock insurers, Lloyd's of London and American Lloyds, and insurance exchanges.

Personal liability loss exposures can generate from premises or automobile liability

These loss exposures meet all six of the ideally insurable loss exposure characteristics.

Under certain circumstances, a cooperative insurer can obtain additional capital by borrowing funds using surplus notes.

These notes can usually be repaid only from profits

Negotiating power of middle markets

These organizations typically have some negotiating power with insurers because they have a more credible loss history, generate more premium income for the insurer, and have broker representation that can assist in their presentations to insurers

Special investigation units (SIUs)

These units are established to combat insurance fraud

Ways that national or regional brokers are compensated

They can receive negotiated fees for the services they provide or they can recieve fees in addition to commissions. Varies by state regulations.

How can risk control representatives use information from a claim representatives report of an accident?

They can use it to target loss exposures for additional attention, provide technical advice to the claim rep, or identify an area of research.

How do staff underwriters create the final rate in policy pricing

They combine prospective loss costs with an insurer developed expense and profit loading to create the final rate

Net income loss exposures associated with property losses exhibit almost all the characteristics of ideally insurable risks

They may be catastrophic though

Net income loss exposures associated with liability losses can exhibit almost all the characteristics of ideally insurable risks

They may not be definite in time

Conducting physical surveys as a risk control service

This consists mainly of collecting underwriting information on a customer's loss exposures and evaluating management's commitment to risk control and employee attitudes about safety-conscious behavior

Side Car

This is a limited-existence special purpose vehicle (SPV) that provides a primary insurer additional capacity to write property catastrophe business or other short-tail lines through a quota share agreement with private investors. a. Investors in the spv earn a portion of the profit b. The primary insurer charges a ceding commision and may charge a profit commision if the book of business is profitable

In a reciprocal the subscribers are not experts in running an insurance operation, so they contract with an individual or organization to operate the reciprocal.

This manager is called an attorney-in-fact. The subscribers empower the attorney-in-fact to handle all the duties necessary to manage the reciprocal.

Cooperative insurers

This type of insurer is owned by its policyholders and is usually formed to provide insurance protection to its policyholders at minimum cost.

How insurance uses pooling

Through reinsurance, primary insurers pool or transfer risks.

The major reason for a commercial organization to exercise sound risk control during a hard market

To make their account more attractive to underwriters

What is the goal of ERM

To maximize the Organization's value

Whats the purpose of statistical plans?

To provide uniform instructions that facilitate the aggregation of historical insurance statistics into a database of homogeneous experience

Negligence is the usual basis of tort liability

Torts can also be based on strict liability which is liability that exists regardless of whether the insured was negligent

ERM seeks to optimize risk taking in relation to strategic goals

Traditional risk making seeks to prevent or reduce risks related only to losses

Policyholders' surplus

Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities. If uw practices generate policy premiums that exceed losses and expenses, policyholder surplus will increase thereby increasing capacity.

line underwriter

Underwriter who is primarily responsible for implementing the steps in the underwriting process. The focus of line underwriters is evaluating new submissions and renewal underwriting.

Staff underwriter

Underwriter who is usually located in the home office and who assists underwriting management with making and implementing underwriting policy

Premium auditing contributes most directly to which insurer function?

Underwriting

The principal federal laws covering on-the-job injuries for maritime occupations

United States Longshore and Harbor Workers' (USL&HW) Compensation Act and the Merchant Marine Act (Jones Act)

Taunton General Contractor (TGC) is covered by a workers compensation insurance policy. As the general contractor for a construction project, TGC hires Cintriell Plumbing (CP) as a subcontractor. Which statement about this relationship is true?

Unless CP has workers compensation insurance, TGC's workers compensation premium should include a charge for CP's employees because TGC's policy will automatically provide coverage for them.

Test Audit programs

Used by state workers comp programs to substantiate the ratemaking process

Considerations in deciding how a captive will operate

What types of loss exposures the captive will insure, where the captive will be domiciled, whether the captive will accept unaffiliated business

captive insurer, or captive.

When a business organization or a group of affiliated organizations forms a subsidiary company to provide all or part of its insurance

Backward integration (Vertical integration)

When a company produces inputs for processing

Forward integration (Vertical integration)

When an organization sells its product directly to the customer rather than through a wholesaler

when is premiums to surplus ratio considered too high?

When it exceeds 300%.

flat commision (reinsurance)

When the ceding commision is a fixed percentage of the ceded premium with no adjustment for the primary insurer loss experience

When the cost to repair a vehicle plus its remaining salvage value equals or exceeds the vehicle's pre-loss value, the vehicle is a constructive total loss

When the cost to repair a vehicle plus its remaining salvage value equals or exceeds the vehicle's pre-loss value, the vehicle is a constructive total loss

Return on equity influences the underwriting cycle because

When the majority of insurers raise rates to generate higher returns, the cycle turns.

Replacement cost versus actual cash value property valuation methods

While actual cash value is the standard valuation approach in many commercial property forms, most underwriters regard replacement cost as the valuation most appropriate.

The first questions that a claims rep must answer about a property claim

Who has insurable interest? and Who is an insured?

States are most likely to request premium audits for what type of insurance?

Workers comp

Employee concentration for workers comp

Workers compensation underwriters have placed more emphasis on the concentration hazard since the terrorist attacks 9/11, which demonstrated that an employer with a large number of employees at a single location faces the possibility that a single incident could result in many injuries or deaths.

Risk control reports

a first hand evaluation of an account by an insurer's risk control representative. These confirm and supplement information in the insured's application.

Finite risk insurance plan

a large part of the insureds premium under a fria creates a fund for the insured's own losses. The remaining amount of the premium is used to transfer a limited portion of risk of loss to the insurer.

A cause of action in negligence requires:

a legal duty owed to the claimant, a breach of that duty that causes harm, a causal connection between the breach and the harm, and actual bodily injury or damage on the claimant's part.

Individual case method of handling claims

a loss reserving method that bases reserves on the circumstances of the claim and the claims reps experience in handling similar claims

indirect loss

a loss that results from, but is not directly caused by a particular cause of loss

information silos

a situation in which access to critical knowledge about risks, corporate strategies, and the organizational framework is limited to a number of key personell

Access security refers to an individual's ability to review, enter, and change information in a claims information system

a. The first method of access security requires a person attempting to access claims information to enter a password maintained by the information systems department. b. The second method of access security restricts access to certain data in the claims information system to managers only. c. The third method of access security prevents unauthorized individuals from changing crucial information in the claims information system, such as reserve amounts or claim codes, and can prevent them from requesting payments.

Expenses that make up the cost of risk

administrative expenses, risk control expenses, risk financing expenses

Important construction characteristics for underwriting

age, building height, fire divisions building openings, and building codes

Underwriters often use the expression "within four walls" to explain the concept of ...

amount subject

Ceding Commision

an amount paid by the reinsurer to the primary insurer to cover part or all of the primary insurer's policy acquisition expenses

Performing risk analysis and improvement as a risk control service

analyzing the customer's loss history (risk analysis) and submitting written recommendations (improvements) to the business owner or manager

A new computer chip that could position a company for explosive growth is an example of strategic risk

apparently

Cumulative trauma disorders, sometimes referred to as repetitive strain injuries (RSI),

arise from a series of minor stresses over a period of time.

Hazard risks

arise from property, liability, or personal loss exposures and are generally the subject of insurance.

Financial risk

arise from the effect of market forces on financial assets or liabilities

Strategic risk

arises from trends in the economy and society including changes in the political, economic, and competitive environments as well as demographic shifts.

Capacity decreases when roe decreases

but apparently that is not why the return on equity influences the underwriting cycle

How does ERM improve decision making?

by giving all decision makers in the organization access to its the total risk picture

Claims information tracking systems

capture details of changes made to prevent fraud and help identify claims personel training needs

Specialty insurers such as those offering surety bonds, aviation insurance, and livestock mortality insurance usually do what with regard to underwriting authority

centralize underwriting authority

premises liability loss exposures

commercial liability exposures that arise from the insured's ownership or possession of real property

operations liability loss exposures

commercial liability loss exposures that arise from an insured's business operations conducted away from its own premises and from uncompleted work

The amount subject for a location, as estimated by any two underwriters with a common employer, should be...

consistent

Normal Loss Expectancy (NLE)

defined as the loss expected under normal operating conditions with all fire protection services working.

Two main categories of crime private protection devices

detection devices and barriers to criminal access

If insureds are manufacturers of specialty products that place a high value on producer expertise, responsiveness, and confidentiality you should use what distribution system?

direct writer system

insurers have complete control in which distribution system

direst response system

net underwriting gain or loss

earned premiums - (incurred losses + underwriting expenses)

Depending on the type of insurance, insurers use automated underwriting systems to...

encode underwriting guidelines

Operational risk

fall outside the hazard risk category and arise from people or a failure in risk processes, systems, or controls including those involving information technology.

Major constraining factors considered when establishing an underwriting policy

financial capacity, regulation, personnel, and reinsurance

National and regional brokers

generally represent commercial insurance accounts that often require sophisticated knowledge and service. May also provide other insurance related services that large business need other than sales.

Purposes of the underwriting function

guarding against adverse selection, ensuring adequate policyholder surplus, enforcing underwriting guidelines

Occupancy hazards: Special hazards of the class

hazards that increase the probable frequency or severity of loss but are typical for the type of occupancy

Insurers only control the results that are produced but not the methods by which results are produced in which systems

independent and exclusive agencies as well as brokers

Risk control representatives

inspect the exposures of insurance applicants and sometimes recommend risk control measures to decrease expected losses

guaranteed cost insurance

insurance policies in which the premium and limits are specified in advance. They dont depend on the losses incurred during the period of coverage.

Driving for pleasure

involves driving for work fewer than 3 miles one way

Prospecting

involves locating persons, businesses and other entities that may be interested in purchasing the insurance products and services offered by the producer's principals

syndicate pool

issues a joint policy to the insured, listing all pool members and specifying the part of the insurance for which each member is responsible

A commercial structure is more likely than a personal residence to significantly depreciate due to factors other than wear and tear.

jsyk

A diversified company is more likely to use a multidivisional structure to organize its operations and segregate each division into separate profit centers

jsyk

A purpose of Basel II is to ensure that capital allocation is more risk sensitive.

jsyk

Adjusters often rely on published guides to determine depreciation and individual insurers create such guides based on their experience

jsyk

An audit error not in classification but in determining the exposure units also distorts the rate structure. Either underreporting or overreporting the units affects the rate for that class.

jsyk

An insured's residence doesn't need to be uninhabitable to trigger an additional living expense loss

jsyk

An underwriter can discover USL&HW Act (maritime) in many typical construction and erection operation.

jsyk

Any measure that controls property, liability, or personnel loss exposures also indirectly controls net income loss exposures

jsyk

Auditing is a proactive technique that influences data collection.

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Because retirement is usually planned, most resulting personnel losses can be handled with proper planning.

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Business that self-inure their risk contract with TPA's to handle their claim functions

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Claims for property damage to another's property that has been damaged while in the insured's care, custody, or control or while the insured was working on it are clearly excluded from coverage by the typical liability insurance policy

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Claims reps can quickly reduce LAE in the short term by quickly offering the settlement demanded rather than the settlement deserved

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Comparative or contributory negligence exists whenever a claimant's own fault contributes to causing his or her bodily injury

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Damages in property damage claims are proved with repair estimates or with actual bills for repairs and rentals.

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Employees might be reluctant to prosecute employees who steal and are often reluctant to believe that employees may steal from them.

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Facultative reinsurance cannot be cancelled by either party unless contractual obligation are not met

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Generally, reinsurers do not pay ceding commisions under excess of loss reinsurance agreements

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If an ERM question asks what best demonstrates an ERM approach, avoid answers that just focus on reducing the effect of losses

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In predictive modeling, The ranking or score developed from the data variables is a predictive measure of future profit potential based upon the account's characteristics.

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In the context of the ISO general liability statistical plan, square footage of a retail store is an example of a fixed exposure based rating element.

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Insurance policies limit the payment on any claim to the extent of the insured's interest

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Insurers benefit from insurance to value because it promotes higher limits of property insurance.

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Insurers may give some producers the authority to pay claims up to a certain amount, such as $2,500. Those producers can issue claim payments, called drafts.

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Intentionally set fires are arson whether committed by the insured or not

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It's often difficult to determine that the property existed and was lost for residential personal property claims

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No standards exist for evaluation and insurers performance in meeting social responsibilities

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Part of a risk control consultant's role in developing a safety management program is assisting the insured in establishing risk control goals.

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Policy limits are captured in the exposure data element of the ISO homeowners statistical plan

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Pre-loss goals describe an organization's need to meet responsibilities as an ongoing operation

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Premises and operations liability losses are definite in time, cause, and location, and are measurable.

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Premium that has been developed by audit is fully earned and, consequently, has an immediate effect on profit and policyholders' surplus.

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Risk control can assist marketing by providing advice on improving safety

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Risk management make those who own or run an organization more willing to undertake risky activities

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Self-insurance is often used to cover worker's comp and other loss exposures that have claim payments that extend over time.

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Settling a bodily injury liability claim is not concluded until treatment is provided or a clear prognosis and a course for future treatment are known.

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Social reponsibility goals are both pre-loss and post-loss goals

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Some insurers sell risk control services to self-insured businesses

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State insurance regulators might conduct a claims audit to determine whether an insurer is violating any unfair claim settlement practices acts or laws and whether the insurer routinely engages in any illegal claims handling practices

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States have various regulations regarding cancellations and non-renewals of personal and commercial auto policies

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The accounting date in an Insurance Services Office (ISO) statistical plan provides assurance that the intended premium and loss data were reported, and reported once only.

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The assumption of risk defense applies whenever a claimant knows of a risk and voluntarily assumes it anyway.

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The cost of appointing an independent agent or using the direct response system is generally lower than the cost of appointing an exclusive or direct-writer agent.

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The first step in integrating enterprise-wide risk management (ERM) with strategic planning is to consider goals for ERM as part of the organization's business model

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The insurance cycle does not coincide with the general business cycle of most industries

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The premium in a finite risk insurance plan is a very high percentage of policy limits

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The rating basis element is recorded in the exposure data element of the ISO general liability statistical plan

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Transaction-based Statistical plans better support the business need for data.

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Umbrella policies require that liability insurance with agreed upon limits be maintained on the underlying policy

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Under ISO's personal automobile statistical plan, the coverage being reported is recorded in the subline code data element

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Violations of certain laws, such as traffic laws, are deemed negligence per se.

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When a policy is written subject to audit, the actual premium can be calculated only after the end of the policy period when the exact exposure units or premium bases during the policy period are known.

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When the value of a claim approaches or exceeds the insured's liability policy limits, settlement becomes a legal obligation.

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every loss exposure has financial consequences of loss

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professional malpractice claims are likely to be litigated to verdict rather than settled.

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temporary and seasonal workers have a greater risk of being injured for workers comp

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Vicarious liability

liability imposed on a party because of their relationship to a wrongdoer. Most claims against commercial insureds involve vicarious liability

Causes of net income losses

loss of goodwill, failure to perform, missed oppurtunities

Three risk control techniques that can be used to control personnel losses

loss prevention and loss reduction

Ratios used to measure an insurers operating performance

loss ratio, expense ratio, combined ratio

Fair Access to Insurance Requirements (FAIR) plans

makes basic property insurance available to property owners who can't get it otherwise.

Financial measures of success for underwriting activities

many insurers use the combined ratio, although the results that it produces are often subject to an additional analysis of its components. Cat losses, changes in premium volume, the underwriting cycle, and delays in loss reporting can distort the combined ratio

The three primary recipients of claim information

marketing, underwriting , and actuarial

Co-participation provision

most aggregate excess of loss reinsurance policies come with a co-participation provision of 5-10 percent to incentivize the primary insurer to efficiently handle claims that exceed the attachment point.

importance of relative premium size for workers comp policies

otherwise acceptable applicants may be rejected if the workers compensation premium is too high relative to other coverages.

the underwriting cycle

periods of underwriting profit followed by periods of underwriting loss

Typical functions of insurance producers that represent one or more insurance companies

prospecting (all producers do this) risk management review sales policy issuance premium collection customer service claim handling consulting

alternate risk transfer (ART)

refers to risk financing measures other than guaranteed cost insurance

Operational-level strategy

relates to a departments narrowly defined day-to-day business activities. Operational strategies include workflows and production processes

One of the most telling measurements of customer satisfaction is

retention ratio

Three risk control techniques that can be used to control net income losses

separation and duplication

Experience modification factor

serves as an accounts desirability within a specified class

The six steps of the insurance data life cycle

step 0: Determine Data requirements (also determining the intended use of data) step 1: Data collection (Errors are most common at this step) step 2:Transformation Aggregation (make data useful in appropriate format) step 3:Analysis Step 4:Presentation of results Step 5: Decision

An insurer can exercise the greatest control over producers in what distribution system

the direct writer system

Researching the market for a staff underwriter involves ongoing evaluation of...

the optimal product mix in the book of business

risk management review

the principal method of determining a prospects insurance needs

Compensatory damages

the specific type of damages that reimburses claimants for their bodily injury as well as property damage

underwriting authority guidelines are typically communicated to an unnderwriter through what?

the underwriting guidelines

products liability and completed operations liability

these address exposures to accidents or damage caused by a defect in finished work that is away from the insured's premises and over which the insured has relinquished control.

The first function of reinsurance is to increase large-line capacity

this allows an insurer to assume more significant risks than its financial conditions and regulations would otherwise permit

Mixed marketing system

this refers to an insurers use of more than one distribution system or channel to attract a wider range of customers

paying for losses also involves paying for transfer costs

transfer costs are the costs of paid in order to transfer risk to another party. transfer costs are part of the managing cost of risk goal while paying for losses is its own risk financing goal.

Replacement cost option of property valuation methods

typically reimburses the insured fully for any losses sustained, eliminates uncertainty in loss adjustment and creates a contract that fulfills a reasonable customer's expectations

Underwriting guidelines reflect the levels of

underwriting authority

Accident reconstruction experts are most helpful in determining...

vehicle speed and what a driver should have been able to do at the time of an accident

Classification factors for commercial trailors, trucks, tractors and truckers

vehicle weight and type, vehicle use, radius of operation (how far you drive), special industry classifications (what industry the vehicle is used for)

Examples of property liability insurance offered by state governments

workers compensation insurance, beach and windstorm plans, and residual auto plans

Property-casualty insurers can be classified in these four ways:

• Legal form of ownership • Place of incorporation • Licensing status • Insurance distribution systems and channels

Common law and the Uniform Commercial Code recognize two implied warranties in any contract of sale:

• The implied warranty of merchantability represents that the product is reasonably fit for the ordinary purpose for which it was intended. • The implied warranty of fitness for a particular purpose applies when the buyer relies on the seller's knowledge in selecting a particular product for a particular purpose.