FIL 250 Final Exam Ch 6

What benefits do catastrophe bonds provide for insurers?

• Catastrophic bonds are growing in importance and are now considered by many to be a standard supplement to traditional reinsurance • Are designed to provide funds for catastrophic natural disaster losses

Explain Surplus-Share Treaty

The reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit, up to some maximum amount. The retention limit is referred to as a line and is stated as a dollar amount

What is an actuary?

A highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research.

What is Reinsurance?

An arrangement by which the primary insurer that initially writes the insurance TRANSFERS to another insurer (called the insurer) part or all of the potential losses associated with such insurance.

What is a catastrophe bond?

Corporate bonds that permit the issuer of the bond to skip or reduce scheduled interest payments if a catastrophic loss occurs

What does an actuary do?

Determines rates and premiums

What can an insurance agent do when adjusting claims?

Insurance agents often have the authority to settle small first-party claims up to some maximum limit.

What is the ceding company?

Insurer that writes the policy initially and later transfers part or all of the coverage to a reinsurer.

What is an Public Adjustor?

Represents the insured rather than the insurance company and is paid a fee based on the amount of the claim settled.

The ____ is the amount of insurance retained by the ceding company.

Retention Limit

What does a Company Adjustor do when adjusting claims?

- Can settle a claim - The adjustor is usually salaried based employee - After notice of loss is received, the company adjustor will investigate the claim, determine the amount for the loss, and arrange for payment

Explain Excess-of-Loss Reinsurance

- Designed largely for protection against a catastrophic loss - Can be written to cover: 1) Single exposure 2) Single occurrence, such as a catastrophic loss from a tornado 3) Excess losses when the primary insurer's cumulative losses exceed a certain amount during some stated period, such as a year

Explain Quota-Share Treaty

- The ceding company's retention is stated as a percentage rather than as a dollar amount - The ceding company and reinsurer agree to share premiums and losses based on some proportion - Premiums are also shared based on the same agreed-on-percentage - THE MAJOR ADVANTAGE is that the primary insurer's unearned premium reserve is reduced

Why do insurance companies use reinsurance?

1) Increase underwriting capacity 2) Stabilize profits 3) Reduce the unearned premium reserve 4) Provide protection against a catastrophic loss 5) Retire from business or from a line of insurance or territory 6) Obtain underwriting advice on a line for which the insurer has little experience

4 Types of Claims Adjustors

Agent Company Adjustor Independent Adjustor Public Adjustor

What is Facultative Reinsurance?

An optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit ***Often used when the primary insurer has an application for a large amount of insurance***

What are the basic goals/principles of underwriting?

Attain an underwriting profit Select prospective insureds according to the company's underwriting standards Provide equity among the policyholders

What is the largest investment category for property/casualty insurers?

Bonds 66.40%

What is the Statement of Underwriting Policy?

Establishes policies that are consistent with the company's objectives

What is a Treaty Reinsurance?

Means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business.

Explain Reinsurance Pools

Organization of insurers that underwrites insurance on a joint basis Formed because a single insurer alone may not have the financial capacity to write large amounts of insurance, but the insurers as a group can combine their financial resources to obtain the necessary capacity.

What is an Independent Adjustor?

Organization or individual that adjusts claims for a fee.

What are the various methods of sharing losses?

Quota-share treaty, Surplus-share treaty, Excess-of-Loss reinsurance, and Reinsurance pool

The insurer that accepts the insurance from the ceding company is the _____?

Re-insurer

What is Underwriting?

Refers to the process of selecting, classifying, and pricing applicants for insurance

What is included in the Statement of Underwriting Policy?

Statement of Underwriting Policy: Acceptable, borderline, and prohibited classes of business Amounts of insurance that can be written Territories to be developed Forms and rating plans to be used Business that requires approval by a senior underwriter

Describe the importance of investment decisions for insurers?

The investment function is extremely important in the overall operations of insurance companies. Because premiums are paid in advance, they can be invested until needed to pay claims and expenses

What is a Claims Adjustor?

The person who adjust the claims

True or False? In reinsurance, the primary insurer is the ceding company?

True

In general, how do the investments decisions differ between the general account and separate account of a life insurer?

o The assets in the GENERAL ACCOUNT support the contractual obligations for guaranteed fixed dollar benefits, such as life insurance death benefits o The assets in the SEPARATE ACCOUNT support the liabilities for investment-risk products, such as variable annuities, variable life insurance, and private pension benefits.

Steps in the Underwriting Process

1. Underwriting starts with the agent Agent may be told not to solicit applicants from certain type of individuals such as drunk drivers, bad driving records, and etc. 2. Fill out an application The underwriter requires certain information in deciding whether to accept or reject an applicant for insurance. Sometimes can indicate things like age, gender, weight, occupation, and etc. 3. Agent's Report Many insurers require the agent or broker to give an evaluation of the prospective insured. 4. Inspection Report May provide information on the applicant's financial condition, marital status, outstanding debts or delinquent bills, felony convictions, any drinking or drug problems, whether the applicant has ever declared bankruptcy and additional information as well. 5. Physical Inspection In property insurance and casualty insurance, the underwriter may require a physical inspection before the application is approved. 6. Physical Examination In life insurance, a physical examination may be required to determine if the applicant is overweight; has high blood pressure; or has any abnormalities in the heart, respiratory system, urinary system, or other parts of the body

What potential risks and rewards do catastrophe bond buyers face?

If a catastrophic loss occurs, the investors could forfeit the interest and even the principal, depending on how the bonds are structured