Insurer Ops & Captive Management - Midterm (SPRING 2022)

What is it called when they are bought by another company & switch the market that they are in with fresh capital (to expand or because they are in trouble)

Demutualization

What is the goal of the NAIC

model legislation & solvency surveillance

Paul vs Virginia

transact of ins across state lines was not interstate commerce and therefore should be regulated by local law -The purpose of the case was to challenge the states' ability to regulate insurance sales.

Who are the owners of a mutual insurance company

the insurers (mutually owned) Ex: homeowners

Gramm-Leach-Bliley Act (GLBA)

"companies that offer consumers financial products or services like loans, financial or investment advice, or insurance - to explain their information-sharing practices to their customers and to safeguard sensitive data.

How to calculate Loss Ratio

(Losses Incurred in Claims + Adjustment Expenses) / Premiums Earned for Period.

How to calculate UPR

(the total annual premium - the amount earned)

The 2 Rating Bureaus

1. ISO (Insurance Services Office) 2. NCCI

The 4 Insurer Groups that use financial statements

1. Insurer management 2. Investors 3. Regulators 4. Policyholders

The 5 Insurance Regulatory Activities

1. Licensing Insurers & Insurance Personnel 2. Monitoring Insurer Solvency 3. Regulating Insurance Rates 4. Regulating Insurance Policies 5. Market Conduct and Consumer Protection

The 2 Causes of Underwriting Risk

1. Random nature of claim payments 2. Fixed premium payments in advance

The 4 Goals of Regulation

1. Rates 2. Fair Practices 3. Access/ availability 4. Solvency (guaranty funds)

The 4 Legal Types of Insurers

1. Stock Companies 2. Mutual Companies 3. Reciprocal Exchanges 4. Llyod's of London

Large of Large Numbers ONLY WORKS if...

1. The exposures are not subject to 1 catastrophic loss (hurricane) 2. Similar exposures were insuring, if not we run into adverse selection problems 3. Large enough risk pool (data set) 4. Need a stable business environment

Law of Large Numbers

A principle stating that the larger the number of similar exposure units considered, the more closely the losses reported will equal the underlying probability of loss.

Lloyd's of London

An association of individuals and companies that underwrite insurance on their own accounts and provide specialized coverages.

Insurance Services Office (ISO) and the Attorneys General Lawsuit

Lawsuit alleged that insurers and the industry association conspired to draft restrictive policy language that created a liability crisis -Result of the settlement of lawsuit was to restrict insurer collaboration in the development of insurance rates

What does an Underwriter do

Look at the likelihood of the loss occuring, the amount that the loss will cost, and how much they need to charge to cover the loss

U.S. vs SEUA

Made insurance subject to federal regulation -Eliminated the role of state insurance - prohibited collaborative activities that states had previous approved

Lloyd's Associations

Organizations that provide support facilities for underwriters or groups of individuals that accept insurance risk.

Risk Pooling: Essay Answer

Risk pooling is combining multiple risks together to get enough premium based on the likelihood of loss. Risk Pooling is necessary to make money because that's what an underwriter will evaluate when determining how much they'll charge

Who are the owners of a stock insurance company

Shareholders

Risk Pooling

The spreading of financial risk evenly among a large number of contributors to the program

What is a Mutual Company

a corporation owned exclusively by the policyholders who are "contractual creditors" with a right to vote on the board of directors -often formed to fill an unfilled or unique need for insurance

Insolvency

a financial state that occurs if liabilities are greater than assets -situation in which a firm or individual is unable to meet financial obligations to creditors as debts become due

Statutory accounting principles (SAP)

a set of accounting principles set forth by the NAIC

Loss Reserves

an estimate of an insurer's liability from future claims it will have to pay out on. -they allow an insurer to cover claims made against insurance policies that it underwrites

What is a Stock Insurance Company

corporation owned by its stockholders or shareholders, and its objective is to make a profit for them

GAAP

designed to uphold best standards for the accurate portrayal of a firm's operations for the benefit of investors, creditors

New Hampshire Insurance Department

established in 1851, the first insurance regulatory agency in the United States.

McCarran-Ferguson Act

gives states the authority to regulate the "business of insurance" without interference from federal regulation (unless federal law specifically provides otherwise)

How is UPR shown in accounting?

it's the portion of premiums written that has not yet been recognized as revenue

Combined Ratio

measures the incurred losses and expenses in relation to the total collected premiums

Loss Ratio

measures the total incurred losses in relation to the total collected insurance premiums

Dodd-Frank Wall Street Reform and Consumer Protection Act

passed in 2010 in order to protect consumers from the unfair and deceptive practices and products that led to the 2008 crisis -create transparency

Soft Market

profitability is improving, standards are loosened, premiums decline, and insurance become easier to obtain

What is the purpose of SAP

recording and maintaining solvency measures

Financial Services Commission of Ontario (FSCO)

regulates the insurance sector; pension plans; loan and trust companies; credit unions and caisses populaires; the mortgage brokering sector; co-operative corporations

Kenney Ratio

sets a 2-to-1 target ratio of gross premiums written to policyholder surplus prevention of insolvency applies to insurers that write strictly property insurance.

NAIC

state insurance regulators establish standards and best practices, conduct peer review, and coordinate their regulatory oversight

Unearned Premium Reserve (UPR)

the amount of unexpired premiums on policies or contracts as of a certain date

Central Limit Theorem

the distribution of sample averages tends to be normal regardless of the shape of the process distribution

Hard Market

tight standards, high premiums, unfavorable insurance terms, more retention -harder to find coverage

Hard & Soft Markets

time periods where it is above & below the fundamental price

Federal Insurance Office (FIO)

was established by the Dodd-Frank Wall Street Reform and Consumer Protection Act. This office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by underserved communities

Demutualization

when a mutual company owned by its members (private company) converts into a company owned by shareholders (becomes publicly traded)