Online Course 1
market conduct exam
analysis of insurer's practices in sales and advertising, underwriting, ratemaking, claim handling
independent agency
business operated for the benefit of its owner that sells insurance, usually as a rep of unrelated insurers - owns expiration lists & has the right to sell it
extra expense coverage
coverage that pays for extra expenses for operations when things are being repaired - PML - period of interruption - seasonality - bottleneck - production process
aggregate excess of loss reinsurance
covers aggregated losses that exceed the attachment point
on-level earned premium
for ratemaking purposes calculation of the earned premium that would result if current rates had been in place for the entire experience period
statistical plan
formal set of directions for recording a reporting insurance premiums, exposures, losses, and sometimes loss expenses - is supposed to provide uniform instruction that helps aggregate historical insurance statistics
proprietary insurers
formed for the purpose of earning a profit for its owners
appraisal clause
found in property insurance policies - used to settle disputes of the value of the property or the amount of loss
underwriting guidelines
identify major elements that underwriters should look at for each type of insurance (boundaries, max coverage limits) - provide structured decisions - ensure uniformity and consistency - synthesize insights, experience - distinguish routine/nonroutine decisions - avoid duplication of effects - ensure adherence to reinsurance treaties - support policy prep, compliance - provide basis for predictive models
constructive total loss
if cost to repair vehicle + salvage value >= pre-loss value
UIM damages trigger
if the negligent driver doesn't have enough coverage then it triggers the insured's coverage
excess liability insurance
increases limits of liability but does not generally broaden coverage - usually written on layered basis - loss severity is biggest concern
voluntary report (policyholder's report)
insured completes and returns to premium audit department
agreed-amount basis
insurer agrees to restore property usually for fine arts and valuable papers
personal auto underwriting characteristics
- age of operator - type of auto - vehicle use - driving record - territory - gender/marital status - occupation - personal characteristics (credit score) - physical condition of driver - safety equipment (ex. GPS)
C in COPE
- construction class - interior construction materials (think: insulation can be problematic) - building age - building height - fire divisions - building openings - building codes
hold-harmless agreement
- contractual provision that obligates one party to assume the legal liability of another party - used to assign responsibility of losses out of a particular relationship or activity ex. manufacturing of one item
fraternal organization
- cooperative insurer - resembles mutual companies - writes primarily life and health insurance
reciprocal insurance exchange
- corporate insurer - series of private contracts where members agree to insure each other - each member is an insured and insurer - manager (attorney-in-fact) handles duties to manage reciprocal
vertical integration
- corporate level strategy - backward: producing in house - forward: selling directly to clients - helps to decrease expenses or increase efficiency
unrelated vs related diversification strategy
- corporate level strategy - unrelated: aquire companies that have no relation to the existing operations - related: helps companies gain economies of scope by sharing resources
single business strategy
- corporate level strategy by concentrating on a single business, they can gain a competitive advantage but also miss opportunities
turnaround strategy
- corporate level strategy in decline - company rebuilds organizational resources to return to profitable levels
harvest strategy
- corporate level strategy in decline mode - company wants to gain short-term profits while phasing out product line, exiting a market
auto BI claim concerns
- coverage determination - accident constructions experts can help determine vehicle speeds, etc
subrogation
insurer can recover amount paid from any party who was legally liable for the loss - must pay attorney fees and expenses, reimburse the insured for any of the loss not covered, then the insurer receives remaining recovery amount
demand for insurance
- elastic in the sense of price - inelastic because buyers must buy, and contracts have a fixed life -insurance profit cycles do not usually coincide with general business cycles
crime coverages
- employee dishonesty - crimes committed by others
employers liability
- employee must prove negligence - for employees who are excluded from WC laws by employment exemptions
strategy evaluation
- establish standards - create an apply measurements - compare actual results to standards - implement corrective actions
underwriting process steps
- evaluate submission - develop alternatives - select underwriting alternative - figure out appropriate premiums - implement decision - monitor decision
financial consequences of risk
- expected costs of losses & gains (overall effect of losses > direct losses) - expenditures on risk management (things like buying insurance) - cost of residual uncertainty
factors that influence underwriting cycles
- investment income - capacity - return on equity (sometimes have to increase prices if ROE too low) - cash flow (needs to be positive)
mutual insurers
- largest # of cooperative insurers - does not issue common stock - policyholders have voting rights, and can get dividends
hard market
- less competition - prices are higher - insurers restrict coverage - tighten underwriting standards - reevaluate existing reserves
umbrella policy
- liability policy that provides excess coverage above underlying policies - for large, low frequency losses - provides coverage when aggregate limits have been exhausted, gaps in policies, excess liability
general liability rating elements
- location of risk - coverage - type of risk - policy limit (captured by limit codes) - deductible - coverage trigger (claims made or occurrence basis) - rating basis (exposure data element)
homeowners rating elements
- location of risk - policy form - construction - public protection class - policy limits (captured in exposure data element) - deductible
personal auto rating elements
- location of risk - standard/nonstandard policy - drivers (classification code) - policy form - coverages - policy limit (policy code) - deductible - vehicle info (VIN) - discounts
strategic alliance
- low risk - two companies work together to achieve common goal
claim info users
- marketing (for new coverage ideas) - underwriting (helps effectively evaluate loss exposures) - actuarial (help build reserves)
3 core functions of insurance
- marketing and distribution - underwriting - claims
functions of marketing
- marketing research (research & segmentation) - market development - marketing info - create market plan - develop product - advertise, promote - customers & PR - sales fulfillment
stock insurers
- most prevalent form of proprietary insurers - owned by stockholders - stockholders supply capital and expect return on investment - can elect board of directors
operational level strategy
involves the day to day, implemented at department level
variable exposure base
it is an indefinite known quantity at the inception of the policy, like payroll
personal loss exposure
loss caused by financial loss by sickness, death, injury, unemployment
liability loss exposure
loss caused by legal responsibility of a person or damage suffered by another party
personnel loss exposure
loss caused by person's death, disability, retirement, deprives an org of the person's special skill
net income loss exposure
loss caused by reduction in net income
prospective loss costs
loss data modified by loss development but does not consider profit or expenses
normal loss expectancy
loss expected under normal operating conditions with everything working
personal and advertising injury liability
- added in COV B in the ISO CGL - includes insured's legal liability from libel, slander - intended for businesses that purchase advertising for their own products
premises med pay liability
- added in COV C in the ISO CGL - applies to medical expenses of person other than insured who is injured on insured's premises
nonphysical loss
loss of value
hit ratio
policies written / # of quotes - high hit ratio: less competition, criteria might be deteriorating - low hit ratio: competition increasing
special form coverage
property insurance coverage covering all causes of loss not specifically excluded
tangible property
property that has a physical form
pro rata reinsurance
proportional reinsurance - good for if a primary insurer needs surplus relief
actual cash value
standard approach in commercial property replacement cost - depreciation
kendall's tau
statistic that evaluates association of 2 measured quantities
professional liability claims
claims for professional malpractice - usually handled by specialists
negligence
failure to exercise degree of care that a reasonable person in a similar situation would exercise
% of value settlement
for merchandise claims - merchant keeps merchandise, reimbursed for decreased value
disaster recovery plan
plan for emergency response, post-disaster recovery during an emergency situation
FERMA
- consists of different risk management associations - adopted Risk Management Standard - standard recognizes risk has upside and downside
residential personal property claims concerns
- inventory - depreciation - sublimits - scheduled property
merchandise claims concerns
for merchandise that an insured holds for sale - merchandise valuation - salvage - reporting form losses - negotiation
diversification
risk control technique spreads loss exposures over numerous areas
access security
security that controls user ability to review, enter, change info in claims information system
scheduled property coverage
usually for valuable property - usually identifies the property precisely
Solvency II
"Basel II for insurers: - regulatory requirements for insurance firms in the EU
lapse ratio
# of policies that lapse during a period / total # of policies written at the beginning of the period - measures customer satisfaction
insurer retention ratio
% of expiring insurance policies that an insurer renews - measures customer satisfaction
pools
- a group of organizations that insure each other's loss exposures - each member contributes premiums based on loss exposures - good for organizations that are too small to use a captive - helps reduce risk to society - best when loss exposures are not correlated - considered a risk- sharing mechanism
treaty reinsurance
- all losses within the term of the treaty are reinsured - helps the reinsurer not be exposed to adverse selection
large deductible plan
- an insurance policy with per occurrence/accident of $100k or more - insurer pays all claims even below deductible level, then gets reimbursed for claims that fall below the deductible
data quality principles
- appropriateness - reasonableness and comprehensiveness - material limitations, alternatives, sampling methods
commercial structure claim concerns
- architects/contractors - property actual cash value - problems with mortgageholders - contamination/pollution cleanup - arson investigation
6 categories of risk management techniques
- avoidance - loss prevention - loss reduction - separation - duplication - diversification (more commonly applied to business risks)
focus
- business level strategy - concentrating on group of customers - focused cost or focused differentiation strategies
premise liability claims
- businesses that have people on their premises - determine standard care for property owners - determine if there was negligence
pure risk
- chance of loss/no loss, no chance of gain - insurance deals primary with pure risks
2 primary goals of claim function
- complying with contractual promise - support insurer's financial goals
loss exposure
- condition or situation and presents probability of a loss - has 3 elements: asset exposed to loss, cause of loss, financial consequences
risk control services
- conduct physical surveys (helps collect underwriting info on exposures) - perform risk analysis, improvement - develop safety management program visit are done at the beginning of a policy period
risk control
- conscious act/decision that reduces the frequency and severity of losses, or makes them more predictable - helps to comply with legal requirements, promote life safety, ensure business continuity
strategic formulation
- create a mission and vision statement - analyze external and internal environment - develop long term strategies and organizational goals - determine strategy at different organizational levels
ASOP 23
- determine what data to use - figure out the reliance on data supplied by others - if other info is supplied is used, state that in the actuarial communications - review the data - understand limitations of actuary's responsibility - document properly - disclose
how to integrate ERM
- develop ERM goals - identify risks - analyze and prioritize risks - treat risks - monitor critical risks
business continuity management (6 steps)
- developed beyond initial IT focus - ID critical functions - ID risks to critical functions - evaluate effects of those risks - develop business continuity strategy - develop BCP - monitor and revise
reasonability checks
- distributional edit (broad overview that is compared to prior data) - consistency check (compares volumes to prior periods) - statistical tests - graphical tests - industry comparison
major goals of an insurer
- earn a profit - meet customer needs - comply with legal requirements - diversify risk - fulfill duty to society
goals of risk control
- earn a profit (by improving underwriting, improve premium volume, providing additional revenue, reducing insured's loss, encouraging improvement of risk control) - meet customer needs - comply with legal requirements - fulfill duty to society
business income claims concerns
- figure out best loss settlement approach (prospective vs retrospective) - determine business income loss - determine period of restoration - determine extra expense amounts - consult accountants for amounts
capital market solutions
- financial market where bonds and other financial assets are bought and sold - most common are catastrophe bonds - takes a long time and is expensive to implement, rarely used
private fire protection suppression
- fire extinquishers - standpipe and hose systems - automatic sprinkler systems
COPE model
- for property loss exposures - construction, occupation, protection, external exposure
self-insurance
- form of retention where an org records its own losses and maintains a formal system to pay for them - usually used for high-frequency loss exposures
determining structure of organization
- functional structure suitable for single-business company - multidivisional structure is good for diversified company
private fire protection detection
- guard service - smoke detector - heat detector
subsidiary
- has highest risk of all approaches company owned or controlled by another company
government insurer
- helps insure for things that are hard to do with private insurance - NFIP (national flood insurance program) - all states implemented auto insurance through a residual market
merger
- high risk - two or more business entities are combined into one - helps to reduce overhead expenses, but a lot of regulation difficulties
risk management process (6 steps)
- identify loss exposures - analyze loss exposures - examine feasibility of RM techniques - selected appropriate technique - implement - monitor results
SWOT Analyis
- identify strengths and weaknesses figure out opportunities and threats
reinsurance functions
- increase large-line capacity - provide catastrophe protection - stabilize loss experience - provide surplus relief - facilitate withdrawal from market segment - provide underwriting guidance
summary based statistical plans
- individual policy info can be deleted - doesn't give enough info for rate studies - premiums and loss data can be collected on a summarized basis to save $$ for the regulators
license
- insurance regulated at state level - license shows that the insurer has met state's minimum standards for financial strength, competence, integrity
residential dwelling claim concerns
- insured's concerns - additional living expense - contractors - restoration/cleaning services
transaction-based statistical plans
- insurer generates transaction records everytime it makes a loss payment ISO usually does their reports quarterly
soft market
- intense competition - cheaper premiums - expand coverage - underwriting standards relaxed
professional reinsurers
- interact with other insurers directly or through intermediaries
distribution channels
- internet - call centers - direct response - group marketing - financial institutions - mixed marketing (using multiple distribution systems)
O in COPE
- occupancy categories: habitational, office, institutional, merchantile, service, manufactuerer - examine contents ignition sources, combustibility, susceptibility - exame occupancy hazards (common hazzards, special hazards, special hazards of the risk)
claim handling activities
- once loss notice has been received, tell insured it has been received and provide contact info for their claims rep - identify the policy (make sure the loss is covered) then set reserves - contact insured - make sure insured knows how to properly document and knows what the rep is doing - investigate & document the claim - determine loss cause, liability, loss amount - conclude claim
steps of product development
- opportunity assessment - development of contract, underwriting, pricing - business forecast - regulatory requirements - distribution requirements - introduction
common risk financing goals
- pay for losses - manage the cost of risk - manage cash flow variability - maintain appropriate level of liquidity - comply with legal requirements
benefits of insurance
- pays (indemnifies) losses - manages cash flow uncertainty - helps meet legal requirements - promotes risk control - enables efficient use of resources - provides support for credit - provides source of investment funds - reduces social burdens
premium auditing process
- planning - reviewing operations - determining employment relationships - evaluate books/records - audit books/records (make sure proper classification and correct loss exposures) - analyze/verify premium-related data - report the findings
systemic risk
- potential for major disruption of an entire market - generally nondiversifiable
risk management
- process of making and implementing decisions that minimize adverse effects of accidental losses - helps lower society's expected losses - should promote overall goals (pre and post loss goals)
documentation in ASOP 23/41
- process used to evaluate the data - consideration of prior data - description of material defects - description of adjustments or modifications - necessary documentation
implied warranty
- product is reasonably fit for intended purpose - applies when buyer relies on seller knowledge
insurance exchanges
- proprietary insurer, acts as a marketplace - members can underwrite and belong to syndicates - member syndicates operate as separate businesses
producer functions
- prospecting - review risk management - sales - issue policies - some can collect premiums - customer service - claim handling - consulting
P in COPE
- public fire protection - private fire protection detections - private fire protection suppression - private fire brigades
6 characteristics of an ideally insurable loss exposure
- pure risk - fortuitous - definite & measurable - large # of similar exposure units - independent, not catastrophic - economically feasible premium
factors that change supply of insurance
- reinsurance - ease of entry - difficulty of exit (increases supply) - regulatory environment (decreases) - dedicated capital - underreserving (first increases, then decreases) - profit expectations
national & regional brokers
- represents commercial insurance accounts - receive negotiated fees
staff underwriters
- research market - create underwriting policy - revise underwriting guidelines - evaluate loss experience - work w/ actuarial and legal departments to develop coverage forms - review, revise pricing - ARRANGE TREATY REINSURANCE - conduct underwriting audits
strategic reasons for global expansion
- revenue growth - financial stability (greater stability during economic downturn. diversification of risk) - global competitiveness
supporting functions of insurance
- risk control - premium auditing - actuarial - reinsurance - information technology
finite risk plan
- risk financing plan that transfers a limited amount of risk to insurer - large part of insured's premiums creates an experience fund for the insured's own losses - remaining transfers limited portion of risk to the insurer - insurer usually gives large part of its profit to the insured - used for really hazardous loss exposures
retrospective rating plan
- risk financing plan where an org buys insurance subject to a rating plan that adjusts the premium after the end of the policy period based on a portion of the insured's actual losses during that policy period - adjusted premium subject to a max and min - good for financing low/med severity losses
ERM
- risk management integrated with entire organization's strategy - process is iterative and recursive - helps with strategic decision making - improves risk communication on all levels
line underwriters
- select insured - classify & price accounts - recommend, provide coverage - manage book of business - support producers & customers - coordinate w/ marketing
American Lloyd's
- smaller than Lloyd's of London, most are in Teas - members not liable beyond investment in association
disclose in ASOP 23
- source of the data - if the actuary reviewed the data - limitations of the product - extent of the actuary's reliance on data - material judgemental adjustments/assumptions - unresolved concerns - existence of highly uncertain results - conflicts with the law
captive insurer
- subsidiary formed to insure loss exposures of its parent company and parent affiliates - obtains capital investment from parents - collects premiums, issues policies, pays losses - cooperative insurer
probability
- the likelihood that an outcome will occur - is measurable - possibility does not indicate the likelihood of occurring
Five Forces Mode
- threat of new entrants - threat of substitute products or services - bargaining power of buyers (customers put pressure on insurers) - bargaining power of suppliers (think: reinsurance) - rivalry among existing firms
traditional risk management vs enterprise wide RM
- traditional focuses on loss exposures related to hazard risk - ERM encompasses hazard and business risk = goal is to maximize organization's value
8 special industry classifications
- truckers - food delivery - specialized delivery - waste disposal - farmers - dump trucks - contractors - not otherwise specified
Lloyd's of London
- type of proprietary insurer - gives a place for their members to write insurance - it's a marketplace - provides coverage for unusual or difficult loss exposures - trend is less underwriting by individuals, more by corporations
commercial auto underwriting characteristics
- vehicle type/weight - use - radius of operation
cost leadership
-business level strategy - enables company to charge a lower price for its products - most products should be fairly standardized
differentiation
-business level strategy - requires product that customers perceive as distinctive and that are hard for rivals to imitate
where to get reinsurance
-professional reinsurers - reinsurance departments of primary insurers - reinsurance pools, syndicates, associations
Public protection class
1-8 protected 9 - too far from water supply 10 - no public fire protection available
Basel II
2004, goal was to provide recommendations on banking laws
ISO 31000:2009
2009 publication by ISO provides international standard for risk management with generic approach - principles, framework, processes for managing risk
AAIS Protected class
5 tiers depending on how far a building is from a fire department
box and whisker plots
5-point summary of the distribution can show intentionally introduced error
BS 31100
BSI published in 2008 - establishes principles and terminology for risk management - intended to be scalable standard
AAIS Partially protected
building >1,000 from a fire hydrant, within 5 miles of fire department
AAIS Unprotected
building is not protected or partially protected
COSO II
COSO published 2004 - defines ERM: process driven from organization's board of directors to establish org-wide strategy - good for senior executives
homeowners exposures
HO-3: homes HO-4: tenants Ho-6: own condos
quality data
ISo defines this as data fit for the intended use
premiums-to-surplus ratio
NAIC (which helps to regulate state insurance departments) ratio for financial capacity too high if net premiums / policholder's surplus is greater than 3/1
high-rise
NFPA says 75 ft tall
insurance data life cycle
Step 0: determine intended use of data Step 1: data managers collect data and satisfy reporting requirements Step 2: data managers make data available to users in appropriate format Step 3: actuaries extract useful info Step 4: actuaries help make good decision Step 5: management makes decisions
excess layer
a level of coverage above the primary layer
economies of scale
a proportionate savings in cost gained by an increased level in production
data cube
a summary of key statistics for the variables ex. cross-tabulations, pivot tables
retrospective rating
adjusts insured premium for current policy period based on loss experience during the CURRENT period
nondiversifiable risk
affects large segment of society at same time
diversifiable risk
affects only some individuals, businesses, small groups
supply
aggregate willingness of all insurers to assume risk at a given time
contingent capital agreement
agreement entered before any losses occur that helps an org raise cash by selling stock/issuing debt after a loss (which exceeds a certain threshold) occurs
structured settlement
agreement in settlement of claim involving specific payments over a period of time
ALAE
allocated loss adjustment expense amount amount expected to pay for legal and other related costs can find related info in Insurance Expense Exhibit
wet pipe sprinklers
always contains water under pressure in a closed head
guaranteed cost insurance
an insurance policy in which the premium and limits are specified in advance
coinsurance
an insurance-to-value provision that states if the property is underinsured the amount the insurer will pay is reduced
liability per policy excess of loss reinsurance
applies attachment point and reinsurance limit separately to the losses occurring on each policy
liability per occurrence excess of loss reinsurance
applies attachment point/reinsurance limit to the TOTAL losses from a single event
functional-level strategy
at the functions: like actuarial, risk control, premium audit etc
property per risk excess of loss
attachment point and reinsurance limit apply separately to each loss occurring to each risk
test audit
audit conducted by advisory organization to check accuracy of premium audits
line of credit
banks loan primary insurers
released bill of lading
bill of lading that limits carrier's liability for cargo loss in return or charging a lower freight rate
joint venture
business association formed by agreement between 2 or more people to accomplish a particular project, shares responsibilities
comparative negligence
both parties share the financial burden of the loss
non-parametric rank tests
can help detect inconsistent or divergent patterns - graphs help visuals
personal auto exposures
car-years or car-months based on term of the policy
bill of lading
carriers have this, a receipt for the goods and a contract for transportation
speculative risk
chance of loss, no loss, gain
coinsurance clause
clause requires insured to carry insurance equal to specified percentage of property value
contributory negligence
common-law principle that prevents person who has been harmed from recovering damages if their own negligence played in a role in any way
consistency test
compares volumes for premiums, exposures, losses, claim counts by the highest order data variables to prior periods
distributional edit
comparison of summary data by key field to a profile of that data based on prior experience
general damages
compensates for things like pain and suffering
expert systems
computer software programs that supplement underwriting decision-making process
hazard
condition that increases freq/severity of a loss
underwriting cycle
consists of soft and hard markets - individual insurers cannot change the cycle
ISO Class 6
construction class - fire-resistive construction - fire resistance rating is 2+
ISO Class 1
construction class - frame construction - weight-bearing supports are combustible
ISO Class 2
construction class - joisted masonry construction - exterior has fire-resistance rating of 1+ hour - mill construction is a type of joisted masonry construction
ISO Class 4
construction class - masonry noncombustible construction - exterior made of masonry, floors made of a non-combustable material
ISO Class 5
construction class - modified fire-resistive construction - same as 4 but fire resistance rating is 1-2
ISO Class 3
construction class - noncombustible construction - not fire resistive
completed operations liability
construction, service, repair activities - look at how work is performed
warranty
contractual promise about the product that accompanies the sale
protected cell company (PCC)
corporate entity separated into cells so that each participating company owns an entire cell, but only a portion of the overall company
divestiture strategy
corporate level strategy in decline - company sells off part of an operation that isn't performing up to par
broad evidence rule
courts require adjusters to consider ALL pertinent factors
premises liability
coverage for accidents that happen on the insured's premises
business income coverage factors
coverage for lost business income resulting from a damage - PML - period of interruption - seasonality - bottleneck - production process
operations liability
coverage from accidents that happen in business operations
drop-down coverage
coverage from umbrella liability policies for 1. claims not covered by underlying policy 2. claims not covered only because aggregate limits have been depleted
direct bill process
customer bypasses producer and sends premium payments to insurer
direct loss
damage to property caused by a covered cause of loss with no intervening cause
exposure
data element that measures the extent of risk
metadata
data that describes data - should say when and how a data element has been processed - helps to make info as transparent as possible
transaction expiration date
date on which the coverage ends - used to calculate term of the policy
premium audits
done at the end of a policy period to determine correct premium for the period - gives insurer current and accurate info - helps by collecting ratemaking data - usually required for WC regulations - deter and detect fraud - obtain additional information
net underwriting gain/loss
earned premium - [incurred losses + underwriting expenses]
firestop
element of fire-resistant construction, inserted in concealed spaces, prevents passage of flame from one point to another
United states longshore and harbor WC act (LHWCA)
eliminates rights for maritime workers to sue their employees requires employers to provide WC benefits for maritime workers
field audit
exams of the insured's books and records on the premises
express warranty
explicit statement about product
E in COPE
external exposure - single-occupancy loss exposure - multiple-occupany loss exposure
experience modification factor
factor tailors manual rates to an insured's experience based on payroll and loss record
Jones Act
federal statue, permits injured workers in a vessel crew to sue employers due to negligence
primary layer
first level of insurance coverage about any deductible
quota share reinsurance
fixed % in sharing amounts of reinsurance specified with max dollar limit
flat vs tall organization
flat org has fewer levels from top to bottom, can low costs - tall organizations have many levels between functional and executive positions
operations liability claims
focuses on unsafe act
amount-of-insurance years
generated from coverage A ( for HO-3) or generated from Coverage C (Ho-4, Ho-6)
house-years
generated from unit transaction records based on term of policy
risk retention group
group captive formed under requirements of Liability Risk Retention Act of 1986 to insure parent orgs - cooperative insurer
book of business
group of policies with a common characteristic
morale hazard (attitudinal)
hazard of carelessness, indifference
legal hazard
hazard of the legal environment
moral hazard
hazard that person will intentionally cause or exaggerate a loss
4 quadrants of risk
hazard, operational, financial, strategic
physical hazard
hazards of tangible characteristics (property, persons, operations)
deluge sprinkler systems
heads are always open
policy limits
help give value to the insured - amount that the insurer would potentially pay in a loss
GIRO Data Quality Working Party report
helps examine the need for devoting more resources to data quality
underwriting audits
helps to achieve uniformity and consistency - a review of underwriting files
loss ratio
incurred losses / earned premiums - most commonly used measures to evaluate insurer financial well-being - higher loss ratio could mean claims function is not as efficient
expense ratio
incurred underwriting expenses / written premium
independent agent networks
independent agencies and brokerages that join together
insurance broker
independent business owner that sells insurance by representing customers rather than insurers
independent adjuster
independent claims rep who handles claims for insurers for a fee - good for strategic locations - good when insurer's claim reps are all busy
nonwaiver agreement
indicated that during the course of the claims investigation, neither the insurer nor insured waives rights under the policy
industry loss warranty
industry-linked security when the industry experiences losses as a whole
producer
insurance personnel who places insurance and business with insurers - sometimes have authority to pay claims - sometimes can issue claim payments (drafts)
Fair Access to Insurance Requirements plan
insurance pool where private insurers address an unmet need for property insurance
strict liability for products
its about the nature of the product as the issue
fixed exposure base
known quantity at inception of policy ex. square feet
buffer layer
layer between primary layer and umbrella policy
reservation of rights letter
letter from insurer, says that insurer could deny claim later if the facts warrant it
loss limit
level at which loss occurrence is limited to calculate a retrospectively rated premium
products liability
liability for sale, manufacture, distribution of products consider: -breach of warranty -negligence -strict liability in tort
strict liability
liability imposed by a court in absence of fault
combined ratio
loss ratio + expense ratio - if = 100% , every premium dollar is used to pay claims - if >100%, underwriting loss - if <100%, underwriting gain
overall operation ratio
loss ratio + expense ratio - investment income ratio
working cover
lower attachment point for high volumes of losses retained
walk-away settlement
lump sum payment to settle claim, doesn't need release from claimaint good for press
retrospective settlements
made after the property has been repaired and the insured resumed operations - the more common option
prospective settlements
made before property has been repaired - good when insured does not intend to repair the property
internal accounting system
marketing info activity - provides report and analysis capability based on transactions associated with sales
objective risk
measurable variation in uncertain outcomes based on facts
roundtable method
method of setting reserves using the consensus of 2 + claim personnel
expert system method
method of setting reserves with a software program
individual case method
method to set reserves based on claim rep's experience and claim circumstances
fire doors
must be automatically self-closing and unobstructed
UIM limits trigger
negligent driver policy limit isn't enough to cover the UIM damage, so the other person's insurance kicks in
return on equity
net income / owner's equity net income / avg policyholder's surplus
investment income ratio
net investment income / earned premiums
overall gain/loss
net underwriting gain/loss + investment gain/loss (insurers can lose $$ on underwriting activities but still generate profit from investments)
spearman's rho
non-parametric test that show statistical independence between 2 data elements
finite risk reinsurance
nontraditional type of reinsurance reinsurer's liability is limited goal is to improve primary insurer's financial result good for high-severity losses
ISO Commercial use
not retail or service use
vicarious liability
one party is held liable for actions of a subordinate (example: company is liable for employee actions)
building opening
openings can increase fire los potential
rent-a-captive
organization rents capital from a captive and pays premiums and receives reimbursement for its losses - cooperative insurer
statistical agent
organization that helps insurers satisfy legal requirements for reporting data to regulators
third-party administrator
organization that provides admin services associated with risk financing and insurance - usually associated with large independent adjusting firms
public adjuster
outside org hired by an insured to represent the insured in a claim
cooperative insurers
owned by policyholders, provides insurance protection to its policyholders for minimum cost
transportation claims
owner entrusts transportation company with their goods common carriers are liable for damage to owner's goods due to the law
bailment claims
owners entrust property to bailees (ex. cleaners) policies for carriers and bailees usually protect interests of both parties
loss aount
paid + outstanding it is reported on a direct basis, net of salvage and subrogation - salvage and subro is put on a separate transaction record
products liability claims
party that manufactures/sells a product that harms another - can be based on breach of warranty or strict liability in tort
advance payment
payment to claimant following loss to cover immediate expenses
subjective risk
perceived amount of risk based on person's opinion
surplus lines broker
person that places business with insurers not licensed in the state but is permitted to write insurance because coverage is not available through the standard market - customers usually need high limits or usually broad/specific insurance
special hazards of the class
physical hazards (ex. explosives) that only occur in certain types of businesses
common hazard
physical hazards common to premises ex. slips and falls
special hazards of the risk
physical hazards that aren't typical to the class that the business belongs in
policyholder's surplus
policyholder assets - liabilities - usually helps determine the capacity (amount of business an insurer is able to write)
life safety
portion of fire safety that focuses on minimum building design to assure safe exit from a burning building
property loss exposure
possibility that a loss resulting from damage to property to which a person has financial interest
Statutory accounting principles (SAP)
practices prescribed by the insurer's domicilary state that they must follow
catastrophe claims concerns
pre & post loss planning
general liability exposures
premium is usually multiplied by rate of exposure
catastrophe risk exchange
primary insurer can exchange a portion of its insurance risk for another insurer's risk
contingent surplus note
primary insurer can immediately obtain funds by issuing notes at a pre-agreed rate of interest increase assets without increasing liabilities
catastrophe option
primary insurer gets right to cash payment from investors catastrophe losses reach a specific level
auditing data
proactive technique that influences data collection top down approach: reconciliation bottom up: uses sample inputs and follows them through
agency bill
producers deduct commission and send net premium to insurer - item basis: premium is forwarded when it is due - statement: insurer sends statement to producer - account current: prepares statement due to insurer
catastrophe excess of loss
protects primary insurer from retained losses from one event
marketing monitoring system
provides intelligence about external environment
AS/NZS 4360
published 2004 - designed for directors, senior executives - broad overview of risk management
punitive damages
punish wrongdoer for reckless/malicious acts
underwriting
purpose is the develop & maintain profitable book of business for insurer - guard against adverse selection - ensure adequate policyholder's surplus - enforces underwriting guidelines
schedule rating
rate plan awards debits and credits based on specific categories, modifies final premium to reflect factors that class rate doesn't have
experience rating
rate plan that adjusts premiums for the current policy period to recognize loss experience during PAST policy periods
activity log
record of all activities that occur when handling a claim, should be objective
"best practices"
refers to system of identified internal practices that produce superior performance
compensatory damages
reimburse or compensate claimants for BI or PD
excess of loss reinsurance
reinsurer responds to a loss only when the loss exceeds the primary insurer's retention (attachment point) - premiums negotiated based on likelihood that losses exceed attachment point - good for loss ratio stability or large line capacity
retrocessionaire
reinsurer that assumes all.part of the reinsurance risk accepted by another insurer
retrocedent
reinsurer that transfers all/part of the insurance risk it has assumed to another reinsurer
countersignature laws
requires all policies covering subjects of insurance within a state to be signed by a resident producer who is licensed there
loss ratio method
reserving method establishing aggregate reserves for all claims
average value method
reserving method that establishes predetermined dollar amount
formula method
reserving method using a mathematical formula
fire wall
restricts spread of fire by serving as fire resistive barrier - must be free standing
cross-sectional risk transfer
risk control measure achieved through pooling, takes advantage of large law of numbers
intertemporal risk transfer
risk control measure of spreading risk through time
avoidance
risk control technique involving not undertaking an activity
separation
risk control technique isolates loss exposures from each other, minimizes adverse effect of a single loss
loss prevention
risk control technique reducing frequency
loss reduction
risk control technique reducing severity
duplication
risk control technique uses backups, spares and keeps them in reserves
transfer
risk financing technique - financial responsibility is shifted to another party reduces variability of cash flow and exposure to large losses
retention
risk financing technique - losses retained by generating funds within the org advantages: more control over claims, most economical form, helps with timing of cash flows
liquidity risk
risk that an asset can't be sold on short notice
credit risk
risk that customers fail to make promised payments when they are due
facultative reinsurance
separate reinsurance agreement for each loss exposures - aka nonobligatory reinsurance - helps provide large-line capacity (helps limits for loss exposures that might be too large for treaty) - can reduce primary insurer's exposure in a geographic area - can insure things that aren't insurable on treaty reinsurance
managing general agents
serves as intermediaries between insurers and agents who sell directly - insurers get a low fixed cost they work for independent agencies and brokers
rating plan
set of directions that specifies criteria of the exposure base, exposure unit, and rate per exposure unit to determine premiums
sublimit
smaller limits on certain lines of insurance
sidecar
special purpose vehicle that gives primary insurer capacity to write property catastrophe business through a quota share agreement with private insurers
strategic management process
strategic formulation -> implementation -> evaluation
diary (suspense)
system to remind claims personnel to perform particular task on a claim
real property
tangible property consisting of land and structures attached to land
personal property
tangible/intangible property that isn't real property
exploratory data analyses
techniques that use graphs and descriptive statistics to explore the structure of a dataset -after the fact, back end process
claim guidelines
tell how certain claim handling tasks should be performed with policies and procedures
adverse selection
tendency for people with greater probability of loss to be the ones most likely to purchase insurance
date of loss
the day on which the loss occurred -its useful for the accident-year method of reserving
written premium
the direct premium charged for the coverage - ISO uses this on Statutory Page 14 data
"code-as-rated"
there is a correlation between rating manuals and the statistical coding that is required to gather the data for a homogeneous database
descriptive statistics
things like mean, median, minimum, max, std dev to help find anomalies in data
catastrophe bond
transfers insurable catastrophe risk to investors if there is a loss, the obligation to pay interest/repay principle is forgiven interest not paid to bondholders is used to pay losses
special damages
type of compensatory damage that is for an injured person's loss (ex. lost wages)
market risk
uncertainty about investment's future value due to market changes
probable max loss
underwriter estimate of largest loss likely to occur
replacement cost
underwriters regard as the most appropriate - reimburse full losses, doesn't deduct for depreciation
exposure unit
unit of measure used to determine an insurance policy premium
ISO GLM Retail use
use for deliveries and pickups from households
claim audit
used to make sure best practices are happening and to get statistical info on claims - internal: for technical details - external: review claim handling processes
pre-action sprinkler systems
used where property is highly susceptible to water damage
exclusive agency marketing system
uses independent contractors (exclusive agents) who aren't employees of insurers - usually don't own expirations
direct writer marketing system
uses sales agents who are employees of the insurers they represent
stated amount
usually for personal articles - review a sales report to determine amount
reinsurance intermediary
usually represents primary insurer
ISO GLM Service use
vehicles used to transport personnel or material to job sites
transaction effective date
when the coverage begins or changes - for new coverages, it is the first day of coverage
inception date
when the record representing the transaction was coded
accounting date
when the transaction was entered on the insurer's financial books
surplus share reinsurance
when underlying policy exceeds a certain amount, reinsurer assumes surplus share - referred to with "lines" - still a proportional amount
maximum foreseeable loss
worst outcome possible
fleet safety programs
written policy and procedures for management of drivers and vehicles