RMIN 4000 Ch 6 & 7 Insurance Company Operations
reinsurance pools
- an agreement between a number of companies where participants collectively reinsure a large group of risks. - ceding companies cede risks into the pool and the participants share in a predetermined percentage of the premium and losses.
sources of underwriting information
- application - agent's report - physical inspection (property insurance) - physical examination (life insurance) -claim files (existing policies) -vendor reports
other underwriting considerations
- are rates currently adequate? (effects how restrictive you are when receiving applicants) - is reinsurance available? - should existing business be cancelled or non-renewed? (what has happened since they have been insured)
professional designations for insurance industry
- chartered life underwriter (CLU) - chartered property and casualty underwriter (CPCU) - chartered financial consultant (ChFC) - certified financial planner (CFP) - certified insurance counselor (CIC)
third party claims
- claim submitted against a negligent insured for bodily injury, physical damage, personal injury, etc. - insurer pays damages (caused by an insured) to an injured third party
first party claims
- claims submitted by the insured to the insurer - insurer makes claims payment to the insured - liability type claims (ex: fire, theft, hail, etc.)
questions asked during a claims investigation
- did the loss take place during the policy period? - was damage caused by a covered peril? - is the damaged property covered by the policy? - are there policy exclusions that apply? - does any other insurance apply?
schedule rating
- each individual exposure carries their own individual rates - modification of manual rates either upward (debits) or downward (credits) to reflect the individual risk characteristics of the subject of insurance.
functions of reinsurance
- increase underwriting capacity. - stabilize profits. - reduced the unearned premium reserve (premium to surplus ratio) - provide protections against a catastrophic loss. - retire from a line of business. - obtain underwriting advice on a line for which the insurer has little experience.
types of claims adjustors
- insurance agents, staff claims representatives/adjustors, independent adjustors, public adjustors
investments
- insurance premiums are invested for the time period between the receipt of the premium and the payment of a claim. - extremely important in reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experience.
facultative reinsurance
- reinsurance that is transacted on an individual risk (ex. large factory) where the primary insurer cedes the individual risk to the reinsurer. - optional, used on a case-by-case basis - covers an individual specific risk
what types of investments are made with insurance premiums?
- state laws restrict the riskiness of the portfolio. - typically invested in "safe" investments (mostly bonds) - life insurance is a long-term exposure so premiums can be invested in long-term assets including real estate. - P&C is a short-term exposure (usually one year or less) so premiums are invested in marketable securities such as high-quality bonds and stocks.
proportional (pro rata)
- the ceding company and reinsurer agree to share a predetermined percentage of losses and premium - two types: quota share and surplus share
quota share (pro rata)
- the ceding company and the reinsurer share premiums and losses based on a fixed percentage. *look @ slide 30 for math example
excess of loss
- the ceding company retains a predetermined dollar amount of a loss (retention). The reinsurer then pays losses that exceed the retention, up to the limit of the agreement - designed for protection from a catastrophic loss. -look @ slide 36 for example
experience rating
- the method in which the actual loss experience of the insured is compared to the loss experience that is normally expected by other risks in the insured's rating class - most commonly associated with workers' compensation insurance
claims process
- the notice of some type of loss reported to the insurance company - then claims investigation begins - proof of loss (very rare) - payment of loss or denial of claim
treaty reinsurance
- the primary insurer cedes all risks within one or more specific lines of business to the reinsurer. - the primary insurer must cede and the reinsurer must accept all risks included within the terms of the reinsurance agreement. - covers large group of risks (contract) and requires a lot of data
underwriting
- the process of selecting, classifying, and pricing applicants for insurance - the purpose is to develop and maintain a profitable book of business - an underwriter makes the decision to accept or reject an application for insurance
surplus share (pro rata)
- the reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit. Losses and premium are shared in the same proportion that each party shares in the individual risk. - a dollar amount - proportion is determined by dividing the retention by the individual risk size. -look @ slide 33
production
- the sales and marketing activities of insurers - responsible for brand recognition (ex: advertising)
underwriting decisions
-accept the application and issue the policy -accept the application subject to restrictions or modifications -reject the policy
producers
-agents who sell insurance
underwriting principles
-attain an underwriting profit -select prospective insureds according to the company's underwriting guidelines -provide equity among the policy holders
a producer (agent) should
-be a competent professional -have a high degree of technical knowledge in a particular area of insurance -place the needs of his/her client first
P&C ratemaking methods
-class (manual) rating: pure premium method and loss ratio method -merit rating -judgement method
vendor reports
-fire protection (property) -motor vehicle record (MVR) -credit-based insurance score -comprehensive loss underwriting exchange (CLUE)
loss ratio method
-modifies existing rates by comparing the actual loss ratio to the expected loss ratio ~ =(incurred losses + LAE)/earned premium
components of gross rate
-prospective loss costs (pure premium) -expense provision (load) -profit and contingencies (risk charge)
merit rating
-rates are adjusted upward or downward based on experience -3 types: schedule, experience, and retrospective
pure premium method
-rates developed based on past experience ~ (incurred losses + LAE)/# of Exposure Units
regulatory goals
-rates must be adequate -rates must not be excessive -rates should not be unfairly discriminatory
ratemaking
-the pricing of insurance and the calculation of insurance premiums -actuary
claims settlement objectives
-verification of a covered loss -fair and prompt payment of claims (pay what is owed) -personal assistance to the insured (ex: find hotel if house is damaged)
surplus formula
= assets - liabilities
actuary
a person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums
premium
a specific sum of money paid by the insured to the insurance company in exchange for financial protection against loss.
Who handles the ratemaking function within insurance companies
actuary
prospective loss costs (pure premium)
amount needed to pay future claims and loss adjustment expenses
expense provision (load)
amount needed to pay future expenses (acquisition, overhead, premium taxes)
profit and contingencies (risk charge)
amount needed to protect against the possibility that actual claims and expenses exceed projections
reinsurance
an arrangement by which the primary insurer (that initially writes the insurance) transfers to another insurer (called the reinsurer) part or all of the potential losses associated with such insurance - (ex: Munich re, everest, swiss re)
independent adjustors
an organization or individual that adjusts claims for a contracted fee (very common after catastrophes) -- not employees but the insurance company with hire them
retrospective rating
based on your estimate - adjusts the premium, subject to a certain minimum and maximum, to reflect the current loss experience of the insured - combines actual losses with graded expenses to produce a premium that more accurately reflects the current experience of the insured. - Adjustments are performed periodically, after the policy has expired.
reinsurance definitions
ceding company, reinsurer, retention limit, cession, retrocession
loss adjustment expenses (LAE)
expenses associated with investigating and adjusting claims
O'Houlihan Wrenches is a tool manufacturer. They have asked Average Joe Insurance to insure their new $40 million manufacturing facility. Because of the high amount of coverage needed, the Average Joe's underwriter has indicated that they'll need to check with their reinsurer, Globo Re, to determine if they can obtain a reinsurance policy to specifically cover the manufacturing facility. Which type of reinsurance does Average Joe Insurance need for the manufacturing facility?
facultative reinsurance
methods of ceding risks
facultative reinsurance and treaty reinsurance
different types of claims
first party and third party
other insurance company operations
information systems, accounting, legal department, and loss control services
ratemaking definitions
loss adjustment expenses (LAE), exposure unit, and gross premium
insurance agents
may have authority to settle small claims (ex: small losses no more than $5000)
premium to surplus ratio
net written premiums / policyholders' surplus ~ideally 1:1 ~good 2:1 ~bad 3:1
types of treaty reinsurance agreements
proportional (pro rata) and non-proportional (excess of loss)
major operations of insurance companies
ratemaking, underwriting, production, claims settlement, reinsurance, investments
judgment method
rates are determined by the judgment of the underwriter (when data is limited)
business goals
rates should: -be stable -be responsive -provide for contingencies -promote loss control -be simple
goals of ratemaking
regulatory goals and business goals
public adjustors
represent the insured and are paid a fee based on the amount of the claim settlement -- hired by the insured, NOT the insurance company
staff claims representatives/adjustors
salaried employee who investigates a claim, determines the amount of loss, and issues payment
underwriting guide
states the company's underwriting policy which includes: -lines of written business -policy forms and rating plan used -acceptable, borderline, and prohibited business -amounts of insurance that can be written -geographic territories -business that requires approval from a senior underwriter
cession
the amount of insurance ceded to the reinsurer
retention limit
the amount of insurance retained by the ceding company
reinsurer
the company that accepts the insurance from the ceding company
gross premium
the gross rate multiplied by the number of exposure units - equation: = gross rate x #exposure units
ceding company
the primary insurer that initially wrote the insurance
claim adjusting
the process of determining coverage, legal liability and damages, and settling the claim
non proportional (excess of loss)
the reinsurer only pays when covered losses exceed a pre-determined dollar amount.
Walter White is the owner of A1A Car Wash. Jesse Pinkman is a regular A1A customer. One day, while waiting for his car to be washed, Jesse slipped on a wet spot on the floor and injured his back. As a result of his injury, he threatens to file suit against Walt and A1A Car Wash. Walt quickly notifies his insurer to start the claim process. This is an example of a:
third party claim
Antonio is employed by an insurance company. He reviews applications to determine whether his company should insure the applicant. Antonio assigns the applicant to a rating category based on the applicant's degree of risk. Antonio is a(n):
underwriter
exposure unit
unit of measurement used in pricing (car-years, per $1000 in coverage, etc.)
retrocession
when a reinsurer insures part or all of its risk with another reinsurer