Insurance test 1

Captive insurance company

A company that provides insurance coverage to its parent company and other affiliated organizations. The captive is controlled by its policyholder-parent; forming a captive insurer is an expensive undertaking

Risk retention group

A group that provides risk management and retention to a few players in the same industry who are too small to act on their own

The number of similar exposure units is large

A major requirement for insurability is mass. The loss exposures to be insured and those observed for calculating the probability distributions must have similarities.

Insurance

A social device in which a group of individuals transfer risk to another party such that the third party combines or pools all the risk exposures together.

Options Also known as "cap" and "floor" defenses

Agreements that give the right (but not the obligation) to buy or sell an underlying asset at a specified price at a specified time in the future.

Swaps Also known as "switch out of it" defense

Agreements to exchange or transfer expected future variable-price purchases of a commodity or foreign exchange contract for a fixed contractual price today.

Independent adjuster

An employee of an adjusting firm that works for several different insurers and receives a fee for each claim handled

Company adjuster

An employee of the insurer who handles claims.

Law of large numbers

As a sample of observations is increased in size, the relative variation about the mean declines.

counterparty risk

Capital market solutions also allow the industry (insurers and reinsurers) to reduce credit risk exposure

Securitization instruments are also called insurance-linked securities (ISLs) and include

Catastrophe bonds Catastrophe risk exchange swaps Insurance-related derivatives/options Catastrophe equity puts (Cat-EPuts) Contingent surplus notes Collateralized debt obligations (CDOs) Weather derivatives

Direct writers

Companies that market insurance through exclusive agents.

Futures

Financial securities that trade on an exchange and that have standardized contract specifications.

Forwards

Financial securities traded in the over-the-counter market whose characteristics can be tailored to meet specific customer needs.

Benefits of Reinsurance

Increases the financial stability of insurers by spreading risk. Facilitates placing large or unusual exposures with one company, thus reducing the time spent seeking insurance and eliminating the need for numerous policies to cover one exposure. Helps small insurance companies stay in business, thus increasing competition in the industry.

Financial Planners

Individuals who facilitate some insurance sales by serving as a consultant on financial matters, primarily to high-income clients.

Insureds

Individuals who transfer risk to a third-party.

Group insurance

Insurance provided by the employer for the benefit of employees

Life/health insurance

Insurance that covers exposures to the perils of death, medical expenses, disability, and old age.

Property/casualty insurance

Insurance that covers property exposures such as direct and indirect losses of property caused by perils such as fire, windstorm, and theft.

Personal insurance

Insurance that is purchased by individuals and families for their risk needs; such insurance includes life, health, disability, auto, homeowner, and long-term care

Stock Insurers

Insurers created for the purpose of making a profit and maximizing the value of the organization for the benefit of the owners

Mutual Insurers

Insurers owned and controlled, in theory if not in practice, by their policyowners. Profits are shared with owners as policyowners' dividends.

claims adjuster's job includes

Investigating the circumstances surrounding a loss. Determining whether the loss is covered or excluded under the terms of the contract. Deciding how much should be paid if the loss is covered. Paying valid claims promptly. Resisting invalid claims

Investments

Investment income is a significant part of total income in most insurance companies.

Actuarial Analysis

Is a highly specialized mathematic analysis that deals with the financial and risk aspects of insurance

Risk Pooling (Loss Sharing)

Loss sharing is accomplished through premiums collected by the insurer from all insureds. It allows a more accurate prediction of future losses because there are more risk exposures

Securitization

Packaging and transferring the insurance risks to the capital markets through the issuance of a financial security. Securitized catastrophe instruments can help a firm or an individual to diversify risk exposures when reinsurance is limited or not available.

Governmental risk pools

Pools formed for governmental entities to provide group self-insurance coverage.

Commercial insurance

Property/casualty insurance for businesses and other organizations.

premium elements

The adjustments for various factors in life insurance premiums

assuming reinsurer

The company taking over the risk in a reinsurance arrangement

ceding insurer

The company transferring risk in a reinsurance arrangement

adverse selection

The phenomenon of selecting an insurer that charges lower rates for a specific risk exposure

Mass Merchandising

The selling of insurance by mail, telephone, television, or e-mail

Insurer

The third party that accepts the risks transferred by insureds

Catastrophe (Cat) Modeling

The use of computer technology to synthesize loss data, assess historical disaster statistics, incorporate risk features, and run event simulations as an aid in predicting future losses.

general agent

an independent businessperson rather than an employee of the insurance company and is authorized by contract with the insurer to sell insurance in a specified territory.

Broker

an individual who solicits business from the insured and also acts as the insured's legal agent when the business is placed with an insurer

Incurred losses

are both paid losses plus known but not yet paid losses

Exclusive agents

are permitted to represent only their company or a company in an affiliated group of insurance companies.

facultative arrangement

both the primary insurer and the reinsurer retain full decision-making powers with respect to each insurance contract

insurer assumes risk

by promising to pay whatever loss may occur as long as it fits the description given in the policy and is not larger than the amount of insurance sold.

Loss development

calculation of how amounts paid for losses increase (or mature) over time for the purpose of future projection.

branch manager

company employee who is compensated by a combination of salary, bonus, and commissions related to the productivity of the office to which he or she is assigned.

actuary

determines proper rates and reserves, certifies financial statements, participates in product development, and assists in overall management planning.

Due diligence

examines every action and items in the financial statement of companies to ensure the data reflect true value.

Ceding commission

fee paid by the reinsurer to the original insurer.

Finite risk programs

financial methods that can be construed as financing risk assumptions.

The rates or premiums for insurance are based

first and foremost on the past experience of losses.

Mortality curve

illustrates the relationship between age and the probability of death

Mortality curve

illustrates the relationship between age and the probability of death.

A few broad risk categories

interest rate risk, market risk, credit risk, and operational risk.

Catastrophic loss

is loss that could imperil the insurer's solvency; may occur in two circumstances

Incurred but not reported (IBNR

losses are estimated losses that insureds did not claim yet, but they are expected to materialize in the future.

Nonproportional reinsurance

obligates the reinsurer to pay losses when they exceed a designated threshold

Insurers need to discriminate

or classify exposures according to expected loss; the rates reflect each insured's expected loss.

Investment income

refers to returns from all the assets held by the insurers from both capital investment and from premiums.

independent agent

represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis, and makes all decisions concerning how the agency operates.

Excess-loss reinsurance

requires the reinsurer to accept amounts of insurance that exceed the ceding insurer's retention limit.

For the life insurance industry, the largest component of liabilities is

reserves for pensions

The essence of insurance is

risk transfer and risk pooling.

personal producing general agent

sells for one or more insurers, often with a higher-than-normal agent's commission and seldom hires other agents.

owns the x-date

that is, he or she has the right to contact the customer when a policy is due for renewal.

Rate calculations

the computations of how much to charge for insurance coverage once the ultimate level of loss is estimated, plus factors for taxes, expenses, and returns on investments.

treaty arrangement

the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance.

claims adjuster

the person who represents the insurer when the policyholder presents a claim for payment.

Underwriting

the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate.

Claims adjusting

the process of paying insureds after they sustain losses.

proportional (pro rata) reinsurance

the reinsurer assumes a prespecified percentage of both premiums and losses.

economically feasible

the size of the possible loss must be significant to the insured, and the cost of insurance must be small compared to the potential loss.

Reinsurance may be divided into three types

treaty, facultative, and a combination of these two.

The use of futures and forwards can create

value or losses, depending upon the timing of its implementation.

dependent loss

when loss to one exposure unit affects the probability of loss to another.

An underwriter decides

whether or not to insure exposures on which applications for insurance are submitted.

For life insurance, actuaries use mortality tables

which predict the percentage of people in each age group who are expected to die each year.