RMIN 4000 Test 3

Example of Earned Premiums

$1,200.00 Insurance Contract. 1 Year Long. On April 1st, only 25% ($300.00) can be considered an earned premium. Unearned premiums are a liability on the balance sheet.

Loss Ratio

(Incurred Losses + Loss Adjustment Expense (LAE)) / (Premiums Earned) Tells us how much earned premium goes to paying losses. We want an LR of <0.7, but it depends on the type of insurance or line of business.

General Agent

- Brokerage Clearing House - This differes from previous examples - They are used to obtain coverage for unique or high risk clients - Ex. High claims frequency, high value homes, coastal risks, etc. - Risk Placement Services (RPS) for high value homes. They give us access to ACE, Chubb, Fireman's Fund, AIG, Ironshore - NorthPoint Underwriters for unique risks or hard to place risks. Ex. High claims frequency, surplus liability, poorly maintained rentals, etc.

Term Life Insurance - Overview

- Expires at the end of a stated policy period (you have life insurance from x date to x date) - It provides temporary protection - If you don't renew it, its gone. - Premiums Increase at renewal (substantially) - Insurers typically have an age limit at which general is not allowed - Often can be converted to a cash-value policy without new underwriting

Costs of Premature Death:

- Future Earnings lost forever - Additional Expenses: Funeral, estate settlement cost - Possible reduction in standard of living - Noneconomic costs (grief)

Cash-Value Life Insurance: Variable Life Insurance

- Level Premiums over the entire life - Death Benefit in cash values vary based on investment returns - Cash surrender value is not guaranteed

Broker

- Represents the individual or company seeking insurance - Receives a commission from the insurer, splits with agent. - Takes applications to insurer/underwriter, does not have authority to bind coverage. - Example: Risk Placement Services, NorthPoint

Agent

- Represents the insurance company and has authority to act on the insurer's behalf. - Insurer is legally responsible for the acts of the agent. - Agent has the authority to "Bind" coverage Ex: - Ben, State Farm, Geico, Call Center Person

Term Life Insurance Specifics

1, 5, 10, 20, 30 Year Term. - You can lock in at an annual rate for a stated period of time. - You can renew at the end of the term but the rate will increase. - You overpay in the early years and underpay in the later years (true for all life insurance.)

Exclusions to Named Perils

1.) Earth Movement A. Earthquakes, landslides, mudslides, sinkholes B. Ensuing loss by fire, theft, etc. is covered 2.) Water damage by flood, tidal water, storm surge, etc. 3.) Power failure unless caused by a covered peril 4.) Intentional Loss 5.) Neglect 6.) Government Action 7.) War & Nuclear Hazard 8.) Concurrent causation exclusion *Items 4-7 are non-fortuitous * If a single loss is caused by 2T perils and at least 1 peril is excluded, then the entire loss is excluded. This is a big deal when it comes to hurricanes.

Important Exclusions from Liability Coverage

1.) Motor Vehicle Liability 2.) Watercraft Liability 3.) Aircraft Liability 4.) Busines Activities. This one and the 4 above need other forms of coverage. 5.) Expected or Intentional Injury (Unless its self defense) 6.) Communicable diseases 7.) Controlled Substances 8.) Contractual Liability

Educate Consumers

A policy is a complex legal document that is difficult to understand and compare value.

Advantages and Disadvantages of a Universal Life Policy

Advantages: - Cash withdrawals permitted - Policies receive favorable tax treatments Disadvantages: - More expensive than term - Advertised rate of return does not include deductions for their expenses - Insurer may increase expense charges over time - No real commitment by the Insured

Advantages and Disadvantages of Whole Life Insurance

Advantages: - Maintain coverage over entire life - Accumulates savings Disadvantages: - Do you need life insurance if you are 80? - Premiums are significantly higher than term

Advantages and Disadvantages of Term Life Insurance

Advantages: - Term Premiums are much lower than cash value premiums Disadvantages: - Can be expensive if bought at older ages - Does not accumulate any cash value

Cash-Value Life Insurance: Universal Life

After the first premium, the policy-holder decides on the amount and frequency of payments. Insurer recommends a "target premium." - Cash value accumulates on premiums, minus mortality charges (life insurance component) and expense charges (overhead and admin)

Incurred Losses

All Claims experienced by their policyholders (paid and unpaid.) The paid losses are expenses only. Unpaid losses are considered as an expense and a liability on the balance sheet. This includes adjustments to prior year loss reserves. (For example, in if the insurance company underestimates how much they need to pay a claim, they will add another expense to balance it out.)

Loss Reserves: Part 2

Also, includes losses that are incurred by policyholders, but not reported to the insurer yet. This is known has IBNR - Incurred but not reported. Actuaries are essential in estimating reserves but ultimately, management sets the reserves. Higher loss reserves today means higher profit down the road. Lower loss reserves today means higher profits today and fewer profits tomorrow. It is a relatively squishy number.

Insure Reasonable Rates

An economically feasible premium is needed for coverage (health insurance, earthquake insurance, hurricane, etc.) They need to watch out for price gouging, and may institute a "premium freeze" and prevent insurance companies from raising rates at all until situation "blows over." They also need to make sure that premiums are sufficient to cover losses and prevent insolvency.

No Fault Auto Insurance

Applies to certain states (no Georgia) After an accident involving bodily injury, each party collects from their own insurer, regardless of fault Only applies to bodily injury, not property damage

Balance Sheet

Assets = Liabilities + Policy Holder Surplus (traditionally would be stockholder equity but it isn't because it belongs to the policyholder. They can make a claim on it. Stays this way until dividends are paid out.

Typical Advice from a Financial Planner:

Buy Term and Invest the Rest

Needs Approach

Calculate Financial needs that must be met if the person should die. Includes: - Estate clearance fund: burial, med expenses, attorney fees, taxes, etc. - One or two year adjustment period - same or slightly higher income than before. - Dependency period for children, until the youngest child is 18. - Income for surviving spouse (if needed) - Special Needs: funds for education, pay off mortgage, etc. Disadvantages: - Difficult to estimate future needs - Fundamental needs may change

No Fault Auto Insurance: Modified No Fault

Can sue if bodily injury exceeds a certain dollar amount or meets a certain "verbal" threshold ("death", "dismemberment", etc.)

No Fault Auto Insurance: Pure No Fault

Cannot sue at all no matter how bad it is. This is very rare.

Everything Else:

Commissions, Premium Taxes, Overhead, Marketing, etc... All the other expenses that are not directly related to the claim

Homeowners Insurance

Covers liability (3rd party) to property damage (1st party)

Collision and Comp.

Covers the auto named on to a policy and to a car you use with permission. You probably don't need to buy rental car insurance if you have collision and comp. Also, the credit card used to book a rental may provide coverage.

Damage Coverage: Comprehensive

Damage that is out of your control. Ex. Rock hitting windshield, hail damage. - Full glass is available to some - Comp claims do not raise premiums unless there is a lot of comp activity.

Named Perils: Windstorm or Hail

Damage to the interior must have resulted from an opening caused by wind or hail

Premature Death

Death while human capital or financial contributions remain.

Arguments for Federal Regulation

Decrease in compliance costs Increased competition (these two are the best arguments) Increase in innovation, simpler international negotiations Easier to monitor and address systematic risk

Duties in Event of Loss

Determine if anyone is hurt Trade personal insurance information with the other driver(s) Do not admit fault Notify insurer or agent ASAP Notify police if there is a hit & run (uninsured motorists) **Insurer can deny a claim for not following the above duties only if action is prejudicial (harmful) to insurer

Income Statement Revenues: 2 Major Components:

Earned Premiums & Investment Income

Independent

Ex. Ben, Brown & Brown. - Can write with multiple carriers - Offers more options to clients both on a carrier level and a coverage level - Can work in any state they are licensed in - Agent responsible for all resources - Production goals are dictated solely by the agent - Individual carriers offer bonuses and sales incentives, varies by carrier - Owns business

Named Perils: Smoke

Except for smoke from industrial operations or agricultural smudging

Named Perils: Theft

Exclusions: I. Theft by the insured II. Theft from a dwelling under construction III. Theft from part of premises rented to someone other than insured

Decreasing Term Policy

Face value gradually declines over time.

Life Insurance

Final big topic for Exam 3

Named Perils - Fire and Lightning

Fire: Rapid oxidation associated with a flame or glow Friendly fire: fire that happens where it is supposed to happen (fireplace, bonfire, gas stove) Hostile Fire: Fire that goes outside the normal confines of where you want it to go. Named Perils only covers hostile fires, Open Perils does not exclude friendly fires

How do we estimate the amount of life insurance needed?

Human Life Value Approach or the Needs Approach

Out of State Coverage

If you drive into a state with higher minimum liability limits, your policy automatically match those limits. If two policies apply to an "Owned" vehicle, then they share payment based on the proportion of total liability limits. If insurance applies to a "non-owned" vehicle, then it is excess over any other collectible insurance.

Cash-Value Life Insurance - Overview

Includes savings component in addition to the life insurance. Policy period is lifetime of insured (does not expire)

Income Statement Expenses: 3 Major Components

Incurred Losses, Loss Adjustment Expense (LAE), Everything Else

Regulation

Insurers are regulated by the states. Some states are more consumer friendly, while other states are more insurer-friendly. Regulations may make it difficult for insurance companies. For example, if you want to expand, you may have a whole new list of rules to follow.

Auto Insurance Liability - Important Exclusions

Intentional injury or damage Property rented and in the insured's care (Uhaul Trailer for example) Property being transported Vehicles with less than four wheels Vehicles made available for the named insured's regular use Use as a public livery or conveyance

Ben Ragin Power Point

Intro to Risk Management

Auto Policies Components

Liability: Required by law to be legal to drive in Georgia - Minimum State Requirements: 25,000 PP/50,000PA/25,000 in PD - No deductible for liability coverage - Cost of liability coverage will be about 1/3 of overall auto insurance cost

HO-4 Contents Dorm (Renters)

Liability: Yes Real Property: --- Personal Property: NP

HO-2 Broad Form

Liability: Yes Real Property: NP Personal Property: NP

HO-3 Special Form

Liability: Yes Real Property: OP Personal Property: NP

HO-5 Comprehensive Form

Liability: Yes Real Property: OP Personal Property: OP

Combined Ratio

Loss Ratio + Expense Ratio Gives us an idea of our overall measure of underwriting performance. We prefer to have them less than 100 (or 1 depending on how you measure.) The Combined ratio is very directly related to loss ratio size as the expense ratio remains farily constant.

Key Ratios (3)

Loss Ration, Expense Ratio, Combined Ratio

Liabilities: 2 Major Components

Loss Reserves & Unearned Premium Reserve

Regulation Goals (4)

Maintain insurer solvency, Educate Consumers, Insure Reasonable Rates, Make Insurance Available

Important Regulations: 3

McCarran-Ferguson Act (1945) Gramm-Leach-Bliley Act (1999) Dodd-Frank Act (2010)

Standard forms drafter by Insurance Service Office (ISO)

Named Perils (NP) - Narrow coverage Open Perils (OP) - Broad coverage

Auto Insurance Liability - Who is Covered?

Named insured and resident family members. Anyone using the covered auto if permitted

Named Perils: Freezing of plumbing, HVAC, fire sprinklers, or appliances

Not too typical in Georgia, but up north you have to do certain things to your when these conditions exist. Freezing is covered as long as you use reasonable care to prevent it from happening. Must use reasonable care to either maintain heat or drain the system.

Named Perils: Vandalism

Nothing here in Notes

Named Perils: Aircraft

Nothing here in notes

Named Perils: Explosion

Nothing here in notes

Named Perils: Sudden and accidental damage from electrical current (power surge)

Nothing here in notes

Named Perils: Vehicles

Nothing here in notes

Named Perils: Volcanic Eruption

Nothing here in notes

Named Perils: Accidental Discharge or Overflow of Water

Nothing in Notes Here

Named Perils: Cracking, burning, bulging of AC system, fire sprinkler, water heater

Nothing in notes here

Liability Coverage under HO Policies

Personal Liability covers insured when lawsuit (or threat of lawsuit) is brought because of Bodily Injury or property damage allegedly caused by the insured's negligence. This applies on your property and off (except when other coverage should apply, like auto.) Insurer provides legal defense on insured's behalf.

Term to Age 65

Policy expires at age 65

Unearned Premium Reserve

Premiums that have not been earned by the insurer. Needed if the insured cancles the policy early.

Assets on the Balance Sheet

Primarily Investments and Cash

Whole Life Insurance: Ordinary Life Insurnace

Primary Type. - You pay the same premiums your entire life (until 121 years old.) - Beneficiaries receive the stated amount at insured's death. - Accumulates "cash surrender value" if you surrender (cancel) policy, you can get your "savings" back - Can also borrow the cash value

Cash-Value Life Insurance: Whole Life Insurance

Protection for your entire life (no end of term.)

Personal Umbrella Policy (PuP)

Provides Liability Protection against a catastrophic lawsuit Sits above HO and Auto Policies For example: If someone is killed in a car accident, auto policy will respond first and the PuP contributes coverage/defense once the limits are exhausted. 85% of Pup Claims are auto May require auto or homeowners limits to be a certain level (~250K) Broader coverage than underlying policies For example: Libel, slander, invasion of privacy, etc. subject to a small deductible. Fairly Inexpensive, maybe $300 per year per 1M of Coverage Available with Limits, 1M - 10M Essential if you have a pool or trampoline

2 Types of Property

Real Property: Land and the things attached to it Personal Property: Things that can be moved

Investment Income

Reoccurring money earned on interest from bonds, dividends on stocks, rental income on real estate. Single time payments on capital gains from securities sold.

Income Statement

Revenues - Expenses = Net Income OR Earned Premiums + Investment Income - Incurred Losses - LAE - Everything else = Net Income

Named Perils: Riot or Civil Commotion

Riot: 3 or more people who act in a tumultuous manner to the terror or disturbance of others

Other Important Conditions:

Straight deductibles (per claim basis) Rule of Thumb: Always pick the largest deductible you can afford. - This was proven in a study by Justin Syndor (2010). It said that the average additional premium to go from a $1,000 dollar deductible to a $500 deductible was 100 dollars. Low deductibles are very profitable for the insurer. Losses for personal property are paid at ACV, losses to real property are paid at replacement cost

Two General Types of Life Insurance

Term Life Insurance and Cash Value Life Insurance

Human Life Value Approach

The Present value of the family's share of deceased breadwinners future earnings. Steps: 1. )Estimate the individual's average annual earnings over the remaining productive lifetime. 2.) Deduct taxes and self-maintenance costs. 3.) Calculate present value using some reasonable discount rate. Disadvantages: - Overestimates actual needs - Sensitive to assumptions

Policy Holder Surplus:

The difference between an insurer's assets & liabilities. This is the "cushion" that can help pay losses if liabilities are higher than expected.

Loss Reserves: Part 1

The estimated cost of settling claims for losses that have occurred but have not been paid. This includes losses reported to the insurer but not yet paid.

Why are the denominators between LR and ER different?

The loss ratio paid a person a premium and had a certain claim. It is directly related to the contract. Expense Ratios are not tied to any contract or time period (marketing for example.) Any non-loss expense will be put over total revenue (premiums written) rather than what we have only earned for the year.

Arguments for State Regulation

The needs of each state are vastly different (Earthquake risk on California vs. Georgia for example.) State regulators can more easily prioritize and address problems quickly. Federal regulation is historically inefficient and bureaucratic A transition would be costly due to dual regulation. The National Association of Insurance Commissioners (NAIC) already advocates for uniformity. Insurers can innovate by experimenting in different states. Devil you know vs. devil you don't

Earned Premiums

The only part of the premium that has been "earned" by the insurer. This is the portion of the year where the policy has been in force.

Loss Adjustment Expense (LAE)

These are costs to investing claims and admin costs for paying claims. For example, if the company finds out that a claim is frodulent, they have to sue. This expense is directly related to the claim and will be added to the loss adjustment expense. Also implies if the insurance company gets sued for bad faith.

Captive

These are exclusive agents (state farm, allstate, nationwide, american family) - Can only write with respective company - Limited by company coverage options - Can only write in their respective state - Are employees of the respective company - Company provides resources to agents (marketing, accounting support, IT support, HR, etc) - Production goals are dictated by the company (Annual production goals, bonuses, sales incentives) - Sometimes owns business, sometimes not

Make Insurance Available

They need to make sure that people can buy the coverage they need. The insurer may exit a market to the detriment of the consumers and this is not good.

Gramm-Leach-Bliley Act (1999)

This act eliminated barriers between banks and insurers. The insurers can have banking operations & vice versa. This led to some mergers and acquisitions (e.g. Travelers + Citigroup.) It also created some confusion about who would regulate each division. It was cited as a contributor to the financial crisis as it allowed firms to get "too big to fail."

McCarran-Ferguson Act (1945)

This act established that insurers should be regulated and taxed by the states. Federal antitrust laws do not apply (with some exceptions.)

Dodd-Frank Act (2010)

This act helps to identify systematically important financial institutions (SIFI's). US-based SIFI insurers include AIG, Metlife, Prudential. It also established some general federal oversight of the insurance industry.

Maintain Insurer Solvency

This is the biggest goal arguably. Make sure insurer doesn't go bankrupt. Contracts are worthless if the insurer goes bankrupt. After Katrina in 2005, Poe Financial (4th Largest personal lines insurer in Florida) went bankrupt leaving 316,000 people without coverage.

Named Perils: Falling Objects

To cover damage to the interior, the exterior must be damaged first

Expense Ratio

Underwriting Expenses / Premiums Written

Important Exclusions to Collision and Comp.

Use as a public livery or convergence Wear and tear, freezing, mechanical breakdown Trailers, campers, motor homes Electronic equipment not permanently installed Custom furnishings and equipment.

Cash-Value Life Insurance Types

Whole Life Insurance, Variable Life Insurance, Universal Life Insurance

Home Inventory

You have to be able to tell the insurer what you lost! The easiest way to do that is to walk around your house and take a video. Keep receipts for big ticket items. Keep appriasals for valuable items (jewelry.)

Whole Life Insurance: Limited Payment Life Insurance

You pay the same premium every year, but you stop paying at some point. For example, you can pay for 10, 20, 30 years or pay until age 65. Policy is "paid up" when no additional premium payments are required.