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