All OC1
UW Guidelines: Provide for Structured Decisions
identify major considerations underwriters should evaluate for each type of insurance. Identify principal hazards to ensure underwriters consider this.
Choosing Distribution: Existing Book
if agents or brokers own expirations, insurance company will lose business by switching. Disrupts communication. But may get benefits if the current distribution channel isn't meeting customer needs.
Senior Management's Risk Tolerance and Reinsurance
lower risk tolerance, greater need for reinsurance. Other stakeholders must be satisfied as well.
Interest Rate Risk
speculative risk of investing. Risk associated with a security's future value because of changes in interest rates.
Ability to Administer the Retention Plan: Retain or Transfer
orgs that are suited to claim administration, risk management consulting and retention fund accounting are better suited to retention.
Distortions Created by Underwriting Cycle
out of the control of individual insurers. Must periodically revise underwriting guidelines.
Possibility
outcome may or may not occur. Verifies that risk is present
Liquidity Risk
speculative risk of investing. Risk of not being able to liquidate an investment easily/at a reasonable price.
Overall Operating Ratio
overall measure of insurer's financial performance for a specific period. = combined ratio (trade basis) - investment income ratio.
Maritime Loss Exposures
those related to occupations involving work on vessels while at sea or in close proximity to water. Docks, piers, terminals.
NFIP
participating private insurers write and service flood insurance policies in their own names. They receive an expense allowance for policies written and claims processed, and the federal government reinsures all coverage.
Benefits of Independent Agent Network
- More insurers - Countersignature law requirements - Premium requirements for profit-sharing - Additional sales income - Preferred agency contracts - Expertise - Resource sharing/expense reduction - Increased market share
Sharing metadata across an org
- Intranet - Hyperlinks - Wikis
Four Risk Control Goals
1. Implement effective and efficient risk control measures 2. Comply with legal requirements 3. Promote life safety 4. Ensure business continuity
How are property-casualty insurers classified?
1. Legal Form of Ownership 2. Place of Incorporation 3. Licensing Status 4. Insurance Distribution Systems and Channels
Trending
A statistical technique for analyzing environmental changes and projecting such changes into the future.
Responsive
actions taken by the insurer should produce satisfactory results in the market segment.
Manage the Cost of Risk
- admin expenses (internal + claim administration + risk management consulting) - risk control expenses - risk financing expenses
Benefits of Physical Surveys
- better underwriting - better understanding of loss exposures from the insured - more confidence on part of insured
Claim Department Contacts
- the public - Lawyers -State Regulators
Which risk control techniques are used on net income loss exposures?
-Anything that controls property, liability or personnel loss exposures - Separation - Duplication - Diversification
Nuances of Commercial Structure Claims
-Architects and Contractors - Property's Actual Cash Value (depreciation/appreciation) - Problems with mortgage holders (mortgage due at destruction) - Contamination and pollution cleanup (limited coverage) - Arson investigation
Economic Forces
-Inflation increases cost of losses and operations, reinsurance - Low investment earnings
Underwriting Risk Control Services
-Risk Control Reports -Fleet Safety Programs
What are the ideal characteristics of a marketing segment?
1. Accessible 2. Substantial 3. Responsive
Major Underwriting Factors in Personal Auto Underwriting
1. Age of operator 2. Age and type of auto 3. Vehicle use 4. Driving record 5. Territory 6. Gender and marital status 7. Occupation 8. Personal characteristics 9. Physical condition of driver 10. Safety Equipment
Fire Divisions
A section of a structure so well protected that fire cannot spread from that section to another, or vice versa
Rating Plan
A set of directions that specify criteria of the exposure base, the exposure unit, and rate per exposure unit to determine premiums for a particular line of insurance.
Insurance Expense Exhibit
A supplement to the statutory Annual Statement that allocates revenues and expenses by line of business and provides calculations of operating returns for the purpose of assessing profitability by line.
Private Fire Suppression System
A system that consists of equipment and personnel that the insured uses to suppress a fire before the municipal fire service arrives
Unfunded Loss Reserve
Accounting entry denoting potential liability to pay for a loss. Unsupported by specific assets. Ex: uncollectable accounts.
Alien Insurer
An insurance company that is incorporated outside the United States.
Market Segment Selection Considerations: Distribution Channels
Are our distribution channels appropriate to the characteristics of this market segment?
Asset Exposed to Loss
Anything of value an individual or organization has that is exposed to a loss. Property, investments, money owed to them, cash, intangible assets like patents, copyrights, trademarks, unique skills/experiences.
Premiums and Demand
At lower premiums, buyers may purchase higher limits, add coverage, or purchase more policies. Increasing premiums, buyers may reduce coverage, increase deductibles, or use alternate risk financing
Underwriting Completed Operations Loss Exposures
Construction, service, repair, and maintenance. Common for orgs with operations loss exposures. How work is performed, if it's careless or faulty, the business of the applicant.
Cold canvass
Contacting a prospect without an appointment
Drop Down Coverage
Coverage provided by many umbrella liability policies for (1) claims not covered at all by the underlying policies and (2) claims that are not covered by an underlying policy only because the underlying policy's aggregate limits have been depleted.
Market Equilibrium
Demand = Supply, influenced by competition
Pool: Manage the Cost of Risk
Economies of Scale in Administration
Producers as a source of UW info
Field-underwrite applicants and have first hand knowledge of the insured's business.
Expertise
Insurance business is complex, especially important in niche/specialty markets. Lack of expertise could prevent an insurer from making a profit/meeting customer needs.
Tenancy by Entirety
Joint ownership by husband and wife.
ISO Class 2
Joisted masonry construction. Exterior walls must be: (a) masonry construction, (b) fire resistive for at least 1 hour. Ex: mill construction. Load bearing exterior walls made of brick, adobe, concrete, gypsum, stone, tile, but has floors and roofs of combustible materials.
Vicarious Liability
Legal doctrine under which a party can be held liable for the wrongful actions of another party with which it has a relationship. Ex: employer responsible for actions of employees within the scope of their employment.
How can an org maximize value using SWOT?
Leverage strengths while reducing weaknesses
Limits trigger
Liability Limits < Injured persons UIM coverage
Causes of Property Loss
Lightning/Hail Tornadoes Water Theft Snow/Ice Fire Mold
Minimum Metadata
Listing of all data elements in a database, along with a description of what is contained in each data element.
Advantage of MGA: Assumption of Insurer Activities
MGAs can provide claim administration, info mgmt, risk control, underwriting/marketing, policy issuance, premium collections.
Advantage of MGA: Specialty Expertise
MGAs have expertise in specific markets and help insurers design programs. Ex: petroleum, fire depts, horse farms, officers liability
Marketing/Sales and Risk Control
Marginal accounts accepted, reach sales goals. Prove to insured that the insurer understands their hazards. Provide retention, and learn what coverages insureds need/want.
Finite Risk Plan: Maintain Appropriate Level of Liquidity
No. Premium Payments are upfront.
Reinsurance Association of America (RAA)
Not for profit trade association of professional reinsurers and intermediaries. Domestic US branches. Member advocacy/lobbying, data aggregation, seminars.
Supply v Price
Opposite of demand. Higher price, greater quantity sellers are willing to offer.
National Association of Insurance Commissioners Annual Statement
P&C has 33 lines of business. Fire, workers comp, etc. Must report premiums, losses and expenses by these lines of business, but insurers combine them to create products.
Manage the cost of risk: retention/transfer?
Primary benefit of retaining. Rarely cost-effecitve to transfer.
Comply with Legal Requirements
Promote's good reputation, ability to attract customers/capital, avoid fees and penalties. Can conflict with profit and customer needs goals (increase cost of insurance).
Special Form Coverage
Property insurance coverage covering all causes of loss not specifically excluded.
What do insurers do in a hard market?
Raise prices Restrict coverage Tighten underwriting Reevaluate existing reserves
Financial Rating Services as a source of UW info
S&P, Exerpian- overall picture of financial status
How do underwriters minimize effects of adverse selection?
Select loss exposures they're willing to insure, charging adequate premiums for the loss exposures, and monitoring books of business for unusual growth or loss.
Real Property
Tangible property consisting of land, all structures permanently attached to the land, and whatever is growing on the land.
Capital
The accumulated assets of a business or a owners equity in a business
Adverse Selection
The decision to reinsure those loss exposures that have an increased probability of loss because the retention of those loss exposures is undesirable.
Allocated Loss Adjustment Expense
The expense an insurer has incurred or expects to incur to investigate, defend, and settle costs that are associated with a specific claim.
Negligence in Production
The failure to exercise the degree of care that a reasonable person in a similar situation wold exercise to avoid harming others. Can occur in design, manufacture, inspection, instructions and warnings. Result in a defect in the product.
Life Safety
The portion of fire safety that focuses on the minimum building design, construction, operation, and maintenance requirements necessary to assure occupants of a safe exit from the burning portion of the building.
Statistical Data
The premium transactions or records that flow from the issuance of insurance policies, including mid-term changes to those policies, and the loss transactions, representing the individual payment of claims or the amount of case-based reserves.
Strike Price
The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period
Market Segmentation
The process of identifying and dividing the groups within a market that share needs and characteristics and that will respond similarly to a marketing action. Insurers do this to differentiate themselves from other insurance providers.
Market Segment Selection Considerations: Social Environment
What behaviors or beliefs in the population of this market segment will increase or decrease our chances of success in offering our products and services.
Insurance: Reducing Social Burdens
ability to provide relief in times of natural disaster, payment to accident victims who could not otherwise afford medical care. Limits burden to society (welfare).
Excess Layer of Insurance
above the primary layer. For more coverage, purchase 1 or more excess layers.
Reliance on Data Supplied by Others
actuary may rely on this data, subject to a review of data for reasonableness and consistency. Disclose reliance on data provided by others.
Vision/Value Statement
additional info about company values or principles important to the organization
Wholly Owned Subsidiary
allows for direct ownership and control of assets in a foreign country. Greatest degree of business, political, and economic risk.
Lost Earnings
any amount that a claimant would have earned during a disability period.
Actuarial Function
calculate rates, develop rating plans, estimate loss reserves, predictive modeling, meet regulatory requirements1
Corollary to Coded-As-Rated
coding and rating should be simultaneous
Personal Characteristics
credit score to evaluate stability
Operational Level Strategy
daily business processes and workflows implemented at the department level to support the strategies of the functional, business, and corporate levels.
Traditional Risk Management
focused on loss exposures related to pure risks. Manage safety, purchase insurance, and financially recover from losses generated by hazard risk
Determine Correct Premiums
goal of premium audit. Actual premium is calculated at the end of the policy period when the exposure units are known. Provide a renewal estimate based on exposures.
Contingent Capital Arrangement: Comply with Legal Requirements
if correctly structured
Extracontractual Obligations
if reinsurance is to provide protections against damages and excess of policy limit losses, the reinsurance treaty limit should be substantially higher than the primary insurer's highest policy limit. Several multiples of the highest coverage limit offered
Building Openings
if they pierce fire walls/ fire stops, they increase loss potential. May compromise the integrity of a fire division.
Underwriting Profit
income an insurer earns from premiums paid by policyholders minus incurred losses and underwriting expenses
Risk Control: Improve Underwriting Decisions
inspecting premises and operations of insurance applicants. Improve info on which underwriting decision is made.
Financial Resources
insufficient funds are a huge threat to an insurer. Ineffective training, investments, expansion.
Private
insurance organizations not owned or operated by federal or state governments. Sell products in the private insurance market. (can be publicly traded, open to all consumers).
Hazard Risk Transfer Costs
insurance premiums.
Custodians Interest in property
interest in property to the extend of the fees and legal liability for the property's safe return to its owner.
ISO 31000:2009 Brief
international risk management framework, includes guidelines regarding the risk management process.
Efficient
least expensive of all possible effective measures.
When does pooling work best?
loss exposures being pooled are independent of each other. Works anytime loss exposures are not perfectly positively correlated.
Retention Ratio
measure of customer satisfaction. Percentage of expiring policies that an insurer renews, measured by policy count, premium volume, or both.
Loss Amount
money paid or expected to be paid by the insurer to the insured or claimant for a claim under the coverage indicated by the statistical codes on the transaction record. Direct loss - salvage - subrogation.
Ability to Diversify: Retain or Transfer
more diverse --> more predictable losses --> better able to retain
National Accounts: Insurance Needs
most complex
Stock Insurer
most prevalent type of proprietary insurer in the US. Owned by stockholders, who supply capital in exchange for stock dividends, increased stock value or both.
Negotiating/Settling Claims
most valuable service. Usually doesn't get to litigation, and if it does doesn't go to trial. Insurers don't have a duty to settle. Have to settle when costs reach the policy limit.
Property Damage in Operations-Oriented Accounts
much more likely to cause property damage: heavy equipment, water damage, fire, collapse, pollution.
Compounding Effect of Hazards
multiple hazards being present at the same time increase the frequency/severity of a loss even more.
Underwriting the Insurer: Umbrella/Excess
must assume defense of a claim if the underwriting insurer cannot (drop-down) should consider the underlying insurer's financial condition/solvency through rating like S&P
Concluding the Claim
negotiate an amount, or deny with a formal denial letter, or litigate. Complete a closing or final report detailing recommendations on subrogation, advice to underwriters, and other info.
Dump and Transit Mix Trucks and Trailers
no other appropriate classification but have an incidental dumping operation
Forward Integration
occurs when a firm owns or controls the customers or distribution channels for its main products
Backward Integration
occurs when a firm owns or controls the inputs it uses
Unplanned Retention
occurs when either losses cannot be insured or otherwise transferred or an individual or organization fails to correctly identify or assess a loss exposure.
Planned Retention
occurs when risks have been adequately identified and analyzed.
Accident Scene Investigation
offers critical clues about the loss and determine whether accounts of the loss are plausible or questionable
Producers in Claims
often have authority to pay claims up to a certain amount, such as $2,500. The claim payments they issue are called drafts.
Problem with Maritime Loss Exposures
often overlooked when employees conduct occasional tasks outside their regular duties. Must review certificates of insurance, types of equipment owned, a list of jobs in progress, and previous loss experiences.
Reinsurance Pool
one member of the pool issues the policy to the insured, and the other pool members reinsure an agreed proportion of the policy's insured loss exposures. The insured has a contractual relationship only with the member that issued the policy.
Sales by Insurance Producer
one of their most important activities. Commission on business sold is the principal source of income for producers, ownership of expirations is the principal asset of an agency. Must contact the prospect, determine their needs, propose a product, and close the sale.
Liquid Asset
one that can easily be converted to cash.
Hard Cycle
periods of decreased competition and rising rates leading to increased profitability and high rates of return
Types of Insurance Sold and Reinsurance
personal insurance needs less reinsurance than commercial. Some types need more policyholders surplus to comply with regulations. If they aren't diversified, they are more likely to need loss ratio stabilization.
Social Responsibility
pre-loss and post loss goal, includes acting ethically and fulfilling obligations to the community/society as a whole. Post-loss interruptions affect customers, suppliers, employees, taxpayers, and the public. Ex: cancelling a sponsored charity event looks BAD
Tolerable Uncertainty
pre-loss goal of aligning risks with the organization's risk appetite. Assure management whatever happens is within the bounds of what was anticipated and will be effectively addressed.
Legality
pre-loss goal. Standard of care, contracts, all level laws and organizations.
Nine-Line Surplus Share Treaty
primary insurer has the capacity to insure loss exposures with amounts of insurance that exceed its retention by a multiple of 9.
Revenue Growth
primary reason for financial expansion, because the US market is mature and global markets offer growth
Market Development
provide leadership when an insurer enters a new market (territory, customer type, product). Ensure the success of the venture.
Meet Customer Needs
provide products and services the customers seek at competitive prices. Can conflict with the profit goal.
Insurance: Supporting Insureds Credit
purchase property on loan, bank wants to be able to repossess if not paid. Insurance guarantees the bank will still be paid in case of loss
Repair or Replace Option
rare. Claims most often settled with money. Only chosen when significantly cheaper.
Select an Underwriting Alternative
rejections produce neither premium nor commission, only expense. Weigh a submissions positive and negative features.
Financial Capacity
relationship between premiums written and the size of policyholders' surplus.
Duplication
relying on backups, spares or duplicates. Used only if primary assets suffer loss.
Cumulative Trauma Injuries
repetitive strain injuries. Series of minor stresses over time. Accumulate until they require medical treatment and can result in disability
Select Insureds
role of line underwriters. Select new and renewal accounts that meet the criteria in the underwriting guidelines. Avoid adverse selection, charge adequate premiums, select preferable accounts, spread business by location, class, size, and LOB. Ongoing monitoring.
Substantial
size and purchasing power of a segment should suggest potential for profit
How can insurers decrease loss expenses?
streamline claims adjusting, managing litigation, implementing cost containment (negotiation of repair/med reimbursement rate with vendors)
SWOT Analysis
strengths, weaknesses, opportunities, threats. General and task environment.
Demands for Technology
tech connects both insurers to producers and insurers to customers. Demand is ease of use, requiring engineering.
HO6
used for insureds who own a condominium
Loss Development
the increase or decrease in incurred losses over time.
Third Party
the insured is not making the claim, a party that the insurer has no contract with is.
Statement Based Agency Billing
the insurer sends a statement to the producer showing premiums due. The producer has to pay the premiums or prove they are wrong.
If the major concern is loss ratio stability/large line capacity:
the insurer should choose excess of loss reinsurance
If the major concern is surplus relief:
the insurer should choose pro rata reinsurance.
Probable Maximum Loss
the largest loss an insured in likely to sustain.
Retention Ratio
the percentage of expiring policies that an insurer renews (policy count, premium volume, or both).
Item Based Agency Billing
the premium is forwarded to the insurer when collected/due.
Premium by Layer
the premium per $100 of coverage decreases for each layer of coverage because there is a decrease in the probability losses will be high enough to use excess layers
Risk Management Review
the principal method of determining a prospect's insurance needs
Strategy Implementation
the process of making strategies work. Design the structure of the organization (region, type of product, flat, tall, centralized), and the reporting relationships/vertical differentiation. Sold to employees by top level management
Single-Occupancy Loss Exposures
the property being underwritten consists of a single building, fire division, or group of buildings, all owned or controlled by the insured.
Exposure Unit
the unit of measurement (area, gross receipts, payroll) used to determine an insurance policy premium
Premium to Underwriter
the volume of premium an underwriter can handle is a performance measure.
Definite
time, cause, and location. Insurer must be able to determine the series of events leading to a loss, when the event occurred, and where it occurred. Necessary to ensure the loss occurred under the coverage.
Reconciliation
top down approach to data auditing. Checking that totals from one source match totals from another source. Auditors often review an organization's reconciliation procedures.
Ownership in Common
two or more owners own an identifiable fractional part of a company. Typical of partners
Staff Underwriters
underwriter who is usually in the home office who assists management with making and implementing underwriting policy. Manage the risk selection process and coordinate with other depts.
Buffer Layer
used when the umbrella policy requires underlying coverage limits that are higher than those provided by the primary layer. A level of excess coverage between primary layer and umbrella policy
Box and Whisker Plots
visualization of the distribution of a single variable. Modifies the box plot by displaying lines from the box to a specified distance from the box and individually displaying observations outside these lines. The top and bottom of the box are defined by the 75th and 25th percentiles. A line through the center denotes the median.
External Protection
what fire departments do to safeguard the general public from fire/other loss. Prevention/reduction can occur through security systems/security guard services.
Identifying Policy
what policy was in force on the date of the loss and what coverage does it provide barring terms and conditions.
Planning Premium Auditing
which premiums should we audit? determined by legal requirements, premium size, operations, prior audit experience, nature of the policy, cost of audit, geographic factors and staffing requirements. Can also be chosen using predictive modeling.
How do claim reps document the cause and amount of loss?
while gathering info determining amount of settlement, they should document EVERYTHING.
Govt in Insurance: Compel Insurance Purchase
workers compensation insurance efficiently manages workplace injuries, and is thus required by law. There are residual markets where drivers who could not otherwise obtain mandatory auto insurance can get insurance.
How are captives encouraged to domicile in a certain location?
- Favorable regulations and low/no taxes - Boosts economies with employment and annual registration fees
How are independent agents and brokers compensated?
- Flat percent commission on all business - Contingent or profit-sharing commission based on volume or loss ratio goals
How does underwriting help achieve profitability?
- Guarding against adverse selection - Ensuring adequate policyholders' surplus - Enforcing underwriting guidelines
Loss Run
A report detailing an insured's history of claims that have occurred over a specific period, valued as of a specific date. Helps the producer with risk management and projecting costs.
Data Management
Process to pursue improved data quality. Dictate accuracy, validity and completeness are fundamental. Consistency, flexibility, precision and granularity support those objectives.
Tangible Property
Property that has a physical form
American Association of Insurance Services fire protection classifications
Protected (1, 2, 3, 4, 5) based on how far the building is from the fire department. Partially protected, located more than 1,000 feet from a fire hydrant and within 5 road miles of a fire department. Unprotected, all others.
Step 5: Implementing the Selected Risk Management Techniques
Purchase Contract Fund
Underwriting Submissions
Underwriting information for an initial application, or a substantive policy midterm or renewal change.
Documenting Reasonability Checks
any reasonability check performed should be documented. Highlight known or suspected data deficiencies
Loss Exposure
any situation or circumstance in which a loss is possible, regardless of whether a loss occurs
Operations Liability
created by conducting operations either on or away from an organization's premises
Fair Market Value
if replacement is not possible, look at the price it is selling for in the market. Doesn't work for items like used clothing where no substantial secondary market exists.
Why is setting accurate reserves important?
important to an insurer's continued solvency and capacity.
Siblimits
impose smaller limits for certain kinds of property or lines of insurance (valuable jewelry).
Bargaining Power of Buyers
increase competition in an industry and demand lower prices. The reason many govt sponsored residual markets were created. Greater in a soft market.
Major Cat Losses
insurance rates may not be adequate for 100 year floods. Likely to cause underwriting losses, but doesn't indicate inadequate underwriting.
Brokered Business
insurance sold by an agent placing insurance for a customer through another agent
Deter and Detect Fraud
insureds are less likely to submit false info when they know the info will be verified by a premium auditor
What are the benefits of risk management?
- Lower expected losses - Less residual uncertainty
Salvage Value
insurer pays insured, can take the property and resell it. Usually pay full value to the insured and handle salvage themselves.
Hit Ratio Info
insurer's competitiveness in the current insurance market
Nuances of Business Income Claims
- Prospective or retrospective? - Determining business income loss - Determining period of restoration - Determining extra expense amounts - Consulting Accountants to determine Amounts
Profit Sharing Commission
A ceding commission that is contingent on the reinsurer realizing a predetermined percentage of excess profit on ceded loss exposures
Pure Risk
A chance of loss or no loss, but no chance of gain. Ex: the risk a building will catch on fire
Speculative Risk
A chance of loss, no loss, or gain. Every business venture involves speculative risks.
Special Hazards of the Risk
A condition that can cause a loss but that is not typical of an occupancy. An example is the use of a welding torch in an auto repair shop.
Hazard
A condition that increases the frequency or severity of a loss.
Net Income Loss Exposure
A condition that presents the possibility of loss caused by a reduction in net income. Considered indirect loss.
PD Loss Amount
limited to physical damage to, destruction of, or loss of use to tangible property. Based on the cost to repair or replace it with property of like kind and quality
External Constraints
- Regulation - Rating Agencies - Public Opinion - Competition - Economic Conditions - Insurance Marketing and Distribution - Other External Constraints
Maximum Amount the Primary Insurer can Retain
- Regulatory requirements like policyholder's surplus:premium not to exceed 3 -Primary insurer's financial strength (don't threaten solvency).
Policy Provision for Valuing Losses
- Replacement Cost, reimburses the insured fully for losses, eliminates uncertainty in loss adjustment, and fulfills a customer's expectations - Actual Cash Value
Complaints and Praise
measures of meeting customer needs.
Functional Level Strategy
plans for managing a specific market area: finance, marketing, underwriting, actuarial, risk control, premium audit, claims. How can they advance business level strategies.
Application
A legal document that provides information obtained directly from an applicant requesting insurance and that an insurer can use for underwriting and claim handling purposes.
Treaty Reinsurance
A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured.
Retrocession
A reinsurer, the retrocedent, transfers all or part of the reinsurance risk it has assumed to another reinsurer, the retrocessionaire
Surplus relief
A replenishment of policyholders' surplus provided by the ceding commission paid to the primary insurer by the reinsurer.
Why are premiums audits conducted?
- Determine Correct Premiums - Collect Ratemaking Data - Meet Regulatory Requirements - Deter and Detect Fraud - Reinforce Confidence of Insureds - Obtain Additional Info
Nuances of Professional Liability Claims
- Determining Standard of Care - Determining Damages - Defending Malpractice Claims
Scope of Business Continuity Management
- IT - Terrorism - Corporate Scandals - Economic Development - Property Losses
Nuances of Merchandise Claims
- Merchandise Valuation - Salvage - Reporting Form Losses (regular report of value) - Importance of Negotiation (insured keeps merch and insurer pays for decreased value).
Obtain Additional Info
goal of premium audit. Incorrect classification, new loss exposure, marketing opportunities/new claims adjustment procedures, feedback on insurer's image and effectiveness.
Reinforce Confidence of Insureds
goal of premium audit. Policyholder trusts that the premium calculated is based on facts. Leads to retention, record keeping, and the insured being receptive to risk control advice
Choosing Distribution: Expertise/Reputation of Producers
good- strength. bad- weakness. Specialty target markets require expert producers.
Nonstandard Market
higher-risk applicants who are charged a higher-than-average premium
Individual Property v. Commercial Property
individual homes are easier to group than commercial exposures because they all serve the same function.
Individuals: Insurance Knowledge
individuals have the least knowledge of the insurance mechanism. Rely on producers to decide which coverage, policy limits, and deductible levels
Choosing Distribution: Financial Resources
initial fixed cost of exclusive agency/direct writing is higher than independent agency. Internet requires IT implementation. Insurers without $ are limited in the markets they enter.
Market Monitoring
provides intelligence about the external environment to senior management. Current, unfiltered, unbiased info about customers, producers, and competitors. Measure performance using customer feedback and competitive benchmarking.
Hedging
purchase or sale of one asset to offset the risks associated with another asset. Well suited to business risks created by price change (commodities, foreign exchange rates, interest rates).
Consequences over likelihood
reason subjective risk and objective risk are different. 1. It can't happen to me (the probability of a low likelihood event like a murder, fire, etc. is 0). 2. Likelihood of death resulting from a hurricane or earthquake is thought to be much higher than it is with extensive media coverage
Familiarity/Control
reason subjective risk and objective risk are different. Ex: people perceive airplanes as riskier even though cars are
Unincorporated Insurers
reciprocal insurance exchanges are the only unincorporated insurers permitted in most states. A few states allow insurance exchanges and Lloyd's.
Risk Control: Reducing Errors and Omissions Claims
reduce possibility of errors and omissions claims by insureds or others alleging injury because of the insured's negligence
Importance for the Insurer of Accurate Premium Audits
-Financial Position - Customer Retention - Goodwill - Efficiency - Collections
Pros of Transfer
-Reduced exposure to large losses -Reduced cash flow variability, better investment -Providing ancillary services (risk control, claims admin, litigation are efficient) -Avoiding adverse pr from bad claims handling
Factors to Consider When Selecting a Underwriting Alternative
-Underwriting Authority - Supporting Business - Mix of Business - Producer relationships (recommendations/opinions) - Regulatory restrictions (time frames for refusal)
Commercial Auto Underwriting
-Vehicle Weight/Type -Vehicle Use -Radius of Operation - Special Industry Classifications
Combustible Interior Finishes
-Wood -Fiber ceiling tiles -Plastic wall coverings
Meeting Customer Needs
-complaints and praise - customer satisfaction data - retention ratio and lapse ratio - insurer-producer relationships - state insurance department stats -consumer reports
Private Protection System Purposes
1. Prevent crime losses 2. Reduce losses that do occur
Customer needs/characteristics that drive selection of distribution channels/systems
1. Products and services (minimum coverage auto- online, complex commercial - agent) 2. Price - how sensitive are they 3. Response time
Personal Liability: is automobile liability ideally insurable?
1. Pure Risk 2. Fortuitous 3. Definite and measurable 4. Large number of similar exposure units 5. Independent and not catastrophic 6. Feasible premiums
Personal Liability: is premises liability ideally insurable?
1. Pure Risk 2. Fortuitous 3. Definite and measurable 4. Large number of similar exposure units 5. Independent and not catastrophic 6. Feasible premiums
Personal Life: Ideally Insurable?
1. Pure risk 2. Fortuitous except suicide 3. Definite/measurable 4. Large number of similar units 5. Independent and not catastrophic 6. Usually feasible premiums, barring health conditions/hazardous occupations
How is large line capacity limited?
A single loss exposure cannot make up 10% of policyholder's surplus.
Kendall's Tau
A statistic that evaluates the association of two measured quantities.
Comparative Negligence
A theory in tort law under which the liability for injuries resulting from negligent acts is shared by all parties who were negligent (including the injured party), on the basis of each person's proportionate negligence.
Sponsorship Marketing
A trade group sponsors an insurer in approaching a customer group. The sponsor participates in the profitability of the program. Ex: wholesale club sponsors an insurer to market to club members for a fee based on the success of the program.
Catastrophe Model
A type of computer program that estimates losses from future potential catastrophic events.
Per Occurrence Excess of Loss Reinsurance
A type of excess of loss reinsurance that applies the attachment point and reinsurance limit to the total losses arising from a single event affecting one or more of the primary insurer's policies.Usually liability.
Catastrophe Excess of Loss
A type of excess of loss reinsurance that protects the primary insurer from an accumulation of retained losses that arise from a single catastrophic event. Set high enough only if losses could affect policyholders surplus.
Niche Marketing
A type of marketing that focuses on specific types of buyers who are a subset of a larger market
Maintain an Appropriate Level of Liquidity
required to pay for retained losses. > retention requires > liquidity. Liquidity can be internal (assets, cash flows) or external (issuing debt/stocks). Don't want it to be too high because liquid assets offer poor returns.
Surplus Share Reinsurance
A type of pro rata reinsurance in which the policies covered are those whose amount of insurance exceeds a stipulated dollar amount, or line. Share policy premiums and losses proportionately. Maximum limit expressed in multiples of the primary insurer's line.
Implied Warranty of Merchantability
An implied warranty that a product is fit for the ordinary purpose for which it is used.
Formulate Underwriting Policy
role of staff underwriter. translate insurer's mission/goals into specific strategies that determine the composition of an insurer's book of business.
Participate in Industry Associations
role of staff underwriters. Address industry concerns, residual market, policy forms.
Self-Insurance: Manage the Cost of Risk
saves expenses, profits, and risk charges
Group Marketing
sells insurance products and services to individuals or business that are all members of the same organization
Prospective settlements
settlements made before property has been repaired
Pool
several insurers, not otherwise related, that join together to insure loss exposures that individual insurers are unwilling to insure. Useful for catastrophic losses like a major airline crash or nuclear power plant.
Construction
simple frame construction (least fire resistive) to fire resistive construction (most fire resistive). Can help with loss prevention and reduction.
Individual/Family Risk Management Review
simple. Requires an interview or questionnaire to identify loss exposures. Producer uses results to suggest risk control, retention, or insurance.
Pure Captive
single parent captive. Usually a formalized retention plan, providing insurance coverage only for parent and affiliated business.
American Lloyds Associations
smaller than Lloyd's of London, mostly domiciled in Texas. Mostly formed or have been acquired by insurers. Only liable to the amount of business they write.
Risk Control and Premium Audit
source of info for risk control. Unsafe procedures/working conditions, observations about vehicles, hazards that provide opportunities for further risk control investigation/recommendations.
Gas Extinguishing Sprinkler System
specialized system that uses gas like halon, carbon dioxide or Inergen to put out fires. Used when water damage to property is a large concern.
Why is accurate calculation of PML and amount subject important?
statutes generally prohibit an insurance company from exposing more than 10% of policyholders' surplus to a single loss net of reinsurance.
Distribution Channels
the channel used by the producer of a product or service to transfer that product or service to the ultimate consumer
Distribution Channel
the channel used by the producer of a product or service to transfer that product/service to the ultimate consumer.
Risk
uncertainty about outcomes, with the possibility that some of the outcomes can be negative.
Insurance Risk
uncertainty about the adequacy of insurance premiums to pay losses.
Efficiency
unless premium audits are complete and correct, additional work is generated
Avoid
use alternative approaches that eliminate the cause of risk or its consequences
Evaluation Tools: Telematics
use of GPS tacking to collect and analyze data regarding driver behavior/vehicle use.
Acceptable Return on Equity
used by insurance regulators to survey solvency. An acceptable value is 5-15%
Overhead
used to estimate replacement cost. contractor's fixed cost of doing business. 10-15% of job cost.
Profits
used to estimate replacement cost. contractors need to earn a profit.
Insurance profit cycle
the recurring rise and fall of profitability that results from contractions and expansions of the supply of insurance in competitive markets
Depreciation
the reduction in value caused by the physical wear and tear or technological or economic obsolescence of a product
Retrocessionaire
the reinsurer that assumes all or part of the reinsurance risk accepted by another reinsurer
Retrocedent
the reinsurer that transfers or cedes all or part of the insurance risk it has assumed to another reinsurer
Underwriting Authority
the scope of decisions that an underwriter can make without receiving approval from someone at a higher level
Competition
there are many insurers in the market, which makes competition great. There are highly regularized products that are the same across insurers. Soft cycles can conflict with profit goals/societal goals/legal regulatory goals.
Licensing Status
third classification of insurers. A license indicates that the insurer has met the state's minimum standards for financial strength, competence and integrity.
ISO and Written Premium
used to reconcile statistical data reported to ISO with Page 14 data.
Compliance Measures
various guidelines that insurers ask personnel to use to ensure legal/regulatory regulations are met and to promote good-faith claims handling
Farmers
vehicles owned by farmers and used in farming operations
Other
vehicles that cannot be classified into any other group
Food Delivery
vehicles that wholesale food distributors and food manufacturers use to transport raw and finished products.
Waste Disposal
vehicles transporting waste material for disposal or resale
Truckers
vehicles used to transport goods or materials of others (not including household goods, office furniture, or other fixtures)
Internal Protection
what the org does to protect it's own real property. Loss reduction can occur with fire detection and suppression.
Independent Agency and Brokerage Marketing System
An insurance marketing system under which producers (agents or brokers), who are independent contractors, sell insurance, usually as representatives of several unrelated insurers.
Coinsurance
An insurance-to-value provision in many property insurance policies providing that if the property is underinsured, the amount that an insurer will pay for a covered loss is reduced.
Why does the primary insurer evaluate the reinsurer?
Claim paying ability, reputation, management competence
Common Distribution Channels
internet, call center, group marketing, financial institution
ERM v. Traditional Risk Mgmt in Strategic Integration
ERM decouples risks from individual operational silos and addresses them within the strategy as a whole.
How can an org gain competitive advantage?
Each department in an org creates value for the customer
Dedicated Capital
Increases supply. Insurers have to support their written premiums with capital. Surplus cannot be moved from insurance to other business areas.
Beach and Windstorm Plans
make property insurance against the windstorm cause of loss available to property owners who are otherwise unable to obtain insurance because of their property's location. Some states provide through insurance pools of private insurers, others use taxpayer funds.
Injunctive Relief
a court order to refrain from performing a particular act
Absence of Negligence
many accidents occur through no one's fault.
Tall Organizations
many levels between functional level positions and executive level positions.
Public Opinion
may be negative about the insurance industry as a whole. Ex: bad claims handling after hurricanes regarding wind or flood led to horrible publicity. Huge focus on ethical decision making, conflicts with profit but helps customer needs goal.
Descriptive Statistics
mean, median, minimum, maximum, standard deviation. Can be used to identify anomalies in the data.
Lapse Ratio
measure of customer satisfaction. Divide the total number of policies that lapse during a period by the total number of policies written at the beginning of the period
Five Forces Model
a method of analyzing the five forces in the external environment affecting customers, competitors and suppliers.
Surplus Lines Brokers
a person or firm that places business with insurers not licensed in the state in which the transaction occurs but that is permitted to write insurance because coverage is not available through standard market insurers
Transfer
a risk financing technique by which the financial responsibility for losses and variability of cash flows is shifted to another party.
Chief Risk Officer
a senior risk professional who has oversight over an organizations risk management function
Focus Groups
a small group of customers or potential customers brought together to provide opinions about a certain product, service, need, or other issue.
Chi-Square Goodness of Fit
a statistical test on the frequency distribution of events found in a sample compared to a particular theoretical distribution
Joint Venture
a strategic alliance with shared ownership, shared responsibilities and joint management in the foreign venture. Brings two separate companies together to form a legally separate and distinct org.
Risk Management Program
a system for planning, organizing, leading, and controlling the resources and activities that an organization needs to protect itself from the adverse effects of accidental losses
Best Practices for Claim Adjusting
a system of identified internal practices that produce superior performance. Insurer should develop best practices by studying its own performance/competitors
Diary (Suspense)
a system to remind claims personnel to perform a particular task on a claim
Intentional Torts
assault, battery, false arrest, false imprisonment, conversion, defamation, trespass and fraud. Personal injury coverage.
Documentation on Quality of Data
metadata can suggest criteria for edits or restricting input. Documents the process, version changes.
Service to Producers as a Nonfinancial Measure
minimum acceptable standards for service to producers. Ex: how quickly we need to get back to a producer at each step of the process
Meeting Social Responsibilities
most difficult insurer goal to evaluate. Many insurers use their website to indicate participation in workplace safety, community projects, etc. Employee benefits are also an important indicator. Expenditures on loss control indicate an insurer's level of humanitarian concern (contribute to research/programs)
Typical Requirement for Surplus Lines Brokers
must certify that 2-3 licensed insurers have refused to provide the coverage. They may even need to provide letters from insurers rejecting the coverage. Some states have a list of coverages that are eligible for surplus lines treatment, and some maintain a list of eligible surplus lines insurers.
Supervisor and Manager Reviews
check claim codes, reserves, and payments against police reports, physician reports, and damage estimates. Error detection and coaching associates.
Physical Surveys
collecting underwriting information on a customer's loss exposures, attitudes toward safety/risk control. Followed by written recommendations that can eliminate or control risk exposures.
Special Investigations Units (SIUs)
combat insurance fraud (any deliberate deception committed against an insurer for unwarranted financial gain). Fraud can be committed by applicants, insureds, claimants, medical/service providers, producers/insurers staff.
Combined Ratio (Trade Basis)
combines the loss ratio and the expense ratio to compare inflows and outflows from insurance underwriting. = Incurred Losses + LAE / Earned Premiums + Incurred Underwriting Expenses / Written Premiums = Loss ratio + expense ratio
Occupancy hazards
common hazards, special classes of the class, special hazards of the risk
Legal Hazard
condition of the legal environment that increases the frequency and or severity of loss. Ex: a court in an area is more likely to grant large settlements, increasing number of decisions against tobacco manufacturers.
Transfer Costs
costs paid in order to transfer responsibility for losses to another party
Umbrella liability insurance
designed to cover large, low frequency losses. Have a deductible or self-insured retention the policyholder must pay. Not standardized. (1) Provide excess liability limits above all specified underlying policies (2) provide coverage when the aggregate limits of the underlying policies have been exhausted (3) provide coverage for gaps in underlying policies
Product/Line Business Mix as a Nonfinancial Measure
desired product/line of business mix for new/renewal business and underwriters support this
Determining Employment Relationships
determine which employees are covered by types of insurance for which premiums are based on payroll. Determine if they were employees, subject to coverage, under the correct classification
What is the dollar amount of loss?
determined by claims representative. Can use replacement cost or actual cash value.
Production Underwriting
performing underwriting functions in an insurer's office as well as traveling to visit and maintain rapport with agents and sometimes clients. Underwriters responsible for meeting new business sales goals.
Risk Control: Line of Insurance
personal lines, less likely to provide risk control services. More likely the higher the value of the property.
Multiple-Occupancy Loss Exposures
persons other than the insured own or control portions of the fire division that contains the insureds property. Must consider occupancy class of other occupants.
Physical Condition of Driver
physical impairments are a problem if allowances have not been made.
HO3
policy form to provide coverage to an insured who owns a home.
Transaction Effective/Expiration Date
policy term, calculate earned premium, allocate earned premium to AY.
Pooling v. Insurance
pooling is risk-sharing. Insurance is risk transfer. Insurers have additional financial resources that guarantee sufficient funds, further reducing risk.
Profitability
post-loss goal, set a minimum amount of profit that no loss can be allowed to reduce. Usually involves risk transfer so they know the range of financial results. Spends more on risk financing.
Systemic Risks
potential for major disruption ti an entire market/financial system.
Availability of New Tools
power data analysis packages and technologies are now available, issue of data quality.
File reports
prepared by claims reps for others in the org to serve as a status report.
Soft Cycle
prices moderate or decline as competition increases and profitability diminishes
Competition in Data Quality Issues
pricing techniques need to be increasingly precise to be competitive. Data needs to be quality.
Rivalry Among Existing Firms
pricing wars, aggressive advertising, increased emphasis on customer service. High competition due to many companies, little product differentiation and high exit costs
Line Underwriters
primarily responsible for implementing the steps in the underwriting process. Evaluate new submissions and renewal underwriting
Premium Collection by Producers
producers can deduct their commissions and send the net premiums to insurers.
Jones Act
aka Merchant Marine Act. A federal statute that permits injured members of a vessel's crew to sue their employer for damages due to the employer's negligence.
Independent Agent Networks
aka agent groups, clusters, or alliances. Independent agencies/brokers join together to gain advantages like national/regional brokers.
Licensed Insurer
aka an admitted insurer. Insurer that has been granted a license to operate in a particular state.
Producers and Risk Control
producers often encourage insured's risk control. Can have their own risk control departments. Coordinate with insurer to benefit the customer.
Field Underwrite
producers often know type of accounts insurer wants and submits those of quality. Aka front-line underwriters that save time/$
Graphs
provide a quick visual aid to ascertain unusual relationships
Unlicensed Insurer
aka non-admitted insurer. Has not been granted a license to operate in a given state.
Inspection Reports as a source of UW info
aka risk control reports. Physical condition, safety record, management.
Contractors
all vehicles used by contractors, other than dump trucks
Business Continuity Plan (BCP)
allows an org to anticipate response to potential disruption and determine critical functions to survival, recovery, and growth. Disaster recovery plan tells how to restore production in the case of destruction.
Policy Amount
amount of insurance the policy provides or its limit of liability. Measure of potential severity. Most agreed upon measure, least useful because doesn't provide info about the actual likely size of the loss.
Structured Settlement
an agreement in settlement of a claim involving specific payments made over a period of time. Useful in loss of income, ongoing medical expenses.
Implied Warranty of Fitness for a Particular Purpose
an implied warranty that a product is fit for a particular purpose, applies if the seller knows abut the buyer's purpose for the product.
AM Best's Capital Adequacy Ratio
an important financial benchmark that helps indicate whether an insurer has adequate capital to address its insurance and other risk exposures.
Direct Response Distribution Channel
an insurance distribution channel that markets directly to the customer through such distribution channels as mail, telephone, or the internet. No agent is involved, so it relies on advertising and affiliated marketing.
Manuscript Policy
an insurance policy that is specifically drafted according to terms negotiated between a specific insured (or group of insureds) and an insurer. Written by a line underwriter to cover complex/unique accounts.
Arson-for-profit
an org who owns an obsolete run-down building in a prime location whose land is worth more than the property may deliberately burn the building to claim insurance and increase value of the land.
Treat Critical Risks, Considering Priority (Risk Treatment)
answer the "what if" questions. -Avoid -Accept -Transfer -Mitigate -Optimize/exploit
Unsafe Acts
failing to use proper protective equipment. Hiring policy, safety program, enforcement of safety rules. Premises inspections can illustrate the extent to which the insured tolerates unsafe actions.
Flat Organizations
few levels from the top of the org to the bottom, which can eliminate costs
How can risk control comply with legal requirements?
follow laws and regulations, for example environmental responsibilities.
Captive Insurer
formed as a subsidiary company for an org or group of orgs, to reduce costs of insurance or cover special losses.
Insurance Distribution Systems and Channels
fourth classification of insurers, the method used to deliver insurance products to the marketplace. Independent agency and brokerage, direct writer, exclusive agency.
Applications as a source of UW info
general info, specific info about loss exposures, can have supplemental questionnaires
Insurance: Paying for Losses
indemnify individuals/orgs for covered losses.
Ex of Market Segment
small businesses
Hold-Harmless Agreement: Manage Cash Flow Variability
Can meet this goal subject to the extent of the agreement
Nuances of Operations Liability Claims
- Basis of Liability (5 ws) - Contractual assumption of liability - Preservation of the accident scene
6 Underwriting Factors in Crimes Committed by Others
1. Susceptibility/Marketability (size, weight, portability, visibility, accessibility/ number of customers, difficulty to trace) 2. Property Location (crime rate) 3. Nature of Occupancy (jewelry store, isolated location) 4. Moral and Morale Hazards 5. Public Protection 6. Coverage and price modifications (coverage, limits, pricing, deductibles, endorsements)
What are the five forces?
1. threat of new entrants 2. power of suppliers 3. power of buyers 4. threat of substitutes 5. rivalry among existing competitors
How much of losses is fraud?
10%
When are premiums usually due to insurers?
30-45 days after the policy effective date. The producer can invest premiums until they become due.
Independent Agency
A business, operated for the benefit of its owner (or owners) that sells insurance, usually as a representative of several unrelated insurers. Usually have binding authority.
Bill of Lading
A document acknowledging receipt of goods from the shipper, given by the carrier which includes the terms of the contract of carriage for the goods. Specifies dollar amount of liability
Underwriting Risk
A measure of the loss volatility of the types of insurance sold by an insurer
Medical Management
A medical expense control measure that involves directing and coordinating efforts of healthcare providers to meet patient and insurer needs
Cash Flow Analysis
A method for determining the estimated annual costs and benefits for two different risk control techniques to determine which is more efficient
Accident-Year Method
A method of organizing ratemaking statistics that uses incurred losses for an accident year, which consist of all losses related to claims arising from accidents that occur during the year, and that estimates earned premiums by formulas from accounting records.
Experience Modification
A rate multiplier derived from the experience rating computation.
Quota Share Reinsurance
A type of pro rata reinsurance in which the primary insurer and the reinsurer share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses) using a fixed percentage. Even policies with low limits that the insurer could safely retain are reinsured. Specify the coverage limits of each policy subject to the treaty. Can also have a per occurrence limit.
Pro Rata Reinsurance
A type of reinsurance in which the primary insurer and reinsurer proportionately share the amounts of insurance, policy premiums, and losses (including loss adjustment expenses)
Excess of Loss Reinsurance
A type of reinsurance in which the primary insurer is indemnified for losses that exceed a specified dollar amount (attachment point). Premiums are negotiated based on the probability the losses will exceed the attachment point.
How do underwriters ensure adequate policyholder surplus?
Adhere to underwriting guidelines- only accepting certain loss exposures and charging adequate premiums.
Public Adjusters
Adjusters who represent policyholders to negotiate a settlement with the insurer in exchange for a fee or a percentage of the settlement
Negligence Per Se
An action or failure to act in violation of a statutory requirement. Like violating a traffic law!
Preferred Provider Organization
An administrative organization that meets the common needs of healthcare providers and clients and that identifies networks of providers and contracts for their medical services at discounted rates.
Contingent Capital Arrangement
An agreement, entered into before any losses occur, that enables an organization to raise cash by selling stock or issuing debt at prearranged terms after a loss occurs that exceeds a certain threshold. The org pays a capital commitment fee to the party that agrees to purchase.
Market Conduct Examination
An analysis of an insurer's practices in four operational areas: sales and advertising, underwriting, ratemaking, and claim handling.
Analyzing and Verifying Premium Related Data
Are the data reasonable, complete, detailed, consistent? Reconcile with the general accounting records. Identify and notify the underwriter of any misclassified risks.
Market Segment Selection Considerations: Regulatory Environment
Are the products and services we are proposing for this marketing segment permitted under applicable laws/regulations.
Market Segment Selection Considerations: Economic Environment
Are there issues in the current economic environment (inflation, investment, customer spending habits, cost of employees) that affect our chances of success in this market segment?
Enhanced Decision Making
Benefit of ERM. Leads to: - Increased Profitability - Reduced Volatility - Improved ability to meet strategic goals - Increased management accountability
Wet Pipe Sprinkler System
Automatic fire sprinkler systems with pipes that always contain water under pressure, which is released immediately when a sprinkler head opens
Pool: Maintain Appropriate Level of Liquidity
Can be met with adequate funding/management, reducing an orgs necessary level of liquidity
Medical Investigation
BI claims- determine cost of medical treatment, expected duration of medical treatment/disability, need for rehab, suitability of medical care for the injuries sustained.
Financial Consequences of Personnel Loss
Can be partial/total as well as temporary/permanent.
Increased Profitability (Economic Efficiency)
Benefit of enhanced decision making from ERM. Orgs can engage in additional business opportunities by allocating resources through rational decision making at the local level. Unexpected occurrences or variations cause much less disruption because an organization has already incorporated the possibility of such occurrences into its decision making process. Ex: don't produce a product w. high profits but many potential liability claims.
Reduced Volatility
Benefit of enhanced decision making from ERM. Stable earnings projections to fund future projects. Consider possible hits to cash flows and manage them.
Expense Ratio
Compares an insurer's underwriting expenses with its written premiums for a given period. = Incurred underwriting expenses/ written premiums
Soft Market
Competition is intense
Novation
Completely eliminates liabilities of a primary insurer and transfers them to another insurer.
Cause of Personnel Loss
Death Disability Retirement Resignation Layoff/Firing
Market Segment Selection Considerations: Product Mix
Do the products we will sell to this market segment help us achieve our optimum product mix?
Market Segment Selection Considerations: Corporate Ownership
Does our ownership affect our ability to obtain the sources of funds necessary for growth, expansion, or financial stability to market successfully to this market segment.
Advantage of MGA: Low Fixed Cost
Don't need staff to support a branch office. MGAs make enough commission to cover expenses and profit.
What do insurers do in a soft market?
Decrease premiums Expand coverage Relax underwriting
Maximum amount (line) of insurance an underwriter will write
Depends on regulations, policyholders surplus, characteristics of a loss exposure, and available reinsurance
6 steps of business continuity process
FTESPMR- 1. Identify organization's critical Functions 2. Identity Threats to critical functions 3. Evaluate Effects of risks on critical functions 4. Develop business continuity Strategy 5. Develop business continuity Plan 6. Monitor and Revise business continuity process
Market Planning
Fact-based road maps - assists in development/updating of a company's strategic plans. Plan identifies the product or service to be promoted, the customers to be targeted, and the strategies used to create, price, promote and sell the product/service.
Major Private Detection Systems
Guard service with a clock system Private patrol service Smoke detectors Heat detectors Must be connected to an alarm
Why is retention called the default risk financing technique?
If you do nothing/cannot do anything, you are retaining losses.
Premium Audit
Methodical examination of a policyholder's operations, records, and books of account to determine the actual exposure units and premium for insurance coverages already provided.
Normal Loss Expectancy (NLE)
Loss expected under normal operating conditions with all fire protection services working. Considers (a) construction, (b) protection, (c) business interruption contingency plans, (d) fire divisions, (e) susceptibility of contents to damage and combustibility, (f) operational hazards
ISO Class 4
Masonry noncombustible construction. Exterior walls are made of self-supporting masonry materials, and the floors and roof are made of metal or some other noncombustible/slow-burning material. The fire resistance rating cannot be less than 1 hour.
Govt in Insurance: Obtain Efficiency and Provide Convenience
May be easier to establish government insurance plans than to allow and analyze and regulate private bids. Avoids marketing and sales commissions expenses.
Ability to Control Losses: Retain or Transfer
More risk control = able to retain more exposures
Overall Operating Performance
Overall picture of insurer's profitability. Net underwriting gain/loss + net investment gain/loss. Need to look at over multiple years because one bad year could be offset by a pattern of profitability.
Reinsurance Premium
Paid to reinsurer for protection provided
EN ISO 17776:2000
Petroleum and Gas Industries-Offshore Production Installations, provides guidelines on tools and techniques for hazard identification and risk assessment
Exploratory Data Analysis
Preliminary screening to detect data quality problems. Set of techniques using graphs and descriptive statistics to explore the structure of a dataset and identify outliers.
Premiums and Investment Income
Premiums + investment income must exceed or equal the amount needed to pay for losses and cover costs of doing business. Investment income depends on premium volume, so premium growth is important (competitive advantage, relaxed underwriting, or inadequate insurance rates).
Why are insurers willing to underwrite higher limits in a finite risk plan?
Premiums and limits are combined over several years under a single plan.
Internal Constraints
Prevent an insurer from meeting all of its goals. - Efficiency - Expertise - Size - Financial Resources - Other internal constraints
Intangible Property
Property that has no physical form, such as a patent or copyright.
Does insurance deal with pure or speculative risk?
Pure
How can insurers decrease acquisition costs?
Reduce producers' commissions, use a direct writer system, use alternative distribution channels.
Financial consequences of net income loss
Reduction of revenues, increase in expenses. Worst case scenario is revenues are 0 and expenses are high.
What is an insurer constraint in cost leadership?
Regulatory controls limit price cutting. (loss payments, expenses, profit)
Facultative Reinsurance
Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted.
Retention in Reinsurance
Reinsurer often makes primary insurer retain a percent or dollar amount of loss exposures
Insurance Demand v Other Industrys
Relatively inelastic because buyers must buy and insurance contracts must be consistently renewed
Brokers and Reinsurance Markets Association (BRMA)
Represents intermediaries and reinsurers engages in US treaty reinsurance obtained through reinsurance brokers. Identify and address industry wide problems like contract wording.
Setting return thresholds
Response to limited capacity. If the insurer wants a 10% return on equity and a product is expected to generate 12% return, the insurer should expand into this venture if no better opportunity is available.
Changes in premium volume
Restrictive underwriting reduces premium volume, but still has losses outstanding from a prior period. Expense ratio increases, and loss ratio increases. Relaxing underwriting can make an insurer appear profitable in the short term
Performance Metrics for Traditional Risk Management
Result and Activity based. Result: reduce injuries Activity: more worker safety meetings
Loss Exposure Characteristics: Retain or Transfer?
Retain all low severity exposures, whether high or low frequency. Transfer low frequency high severity exposures. Avoid high frequency/high severity exposures or retain as a last resort.
Step 3: Examining the Feasibility of Risk Management Techniques
Risk control - minimize frequency/severity of losses Risk financing - generate funds to finance losses that risk control couldn't prevent Usually apply at least one of each
Post Loss Goals
Risk management program goals that should be in place in the event of a significant loss. Survival, continuity of operations, profitability, earnings stability, social responsibility, growth.
Pool: Manage Cash Flow Variability
Risk sharing with other members. Law of large numbers
Strategic Planning
The process by which an org's board and executives develop, refresh, and refine its strategies in line with its view of the future. Recognition that the org's current business model will not survive forever.
Size
Small insurers have more challenges in terms of resources, no economies of scale, update technology/reaching additional markets. Small insurers can be more nimble in reacting to an emerging trend.
ISO 17666:2003
Space Systems Risk Management, proposes an integrated approach to managing risks associated with space projection and compatible with best practices for managing such projects
Reinsurance agreement
Specified the terms under which reinsurance is provided
Diversification
Spreading out investments to reduce risk. In insurance- choosing financial products unaffected by weather.
Cross-Sectional Risk Transfer
Spreading risk across a large number of similar exposure units within the same period. Most common mechanism of insurance.
How is insurance demand different than other industry's?
Stable. Insurance is required and cannot be stored for the future like other products
Product Development: Business Forecast
Step 3: review the product plan with profit center, identify requirements for stats, develop business forecast, secure sr mgmt approval
Development of long-term strategies and organizational goals
Support the mission statement within the SWOT from the prior step. Reflect understanding of identity, customers, and purpose. Developed by the CEO and other officers.
Replacement Cost
The cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation.
Insurance Securitization
The process of creating a marketable insurance-linked security based on the cash flows that arise from the transfer of insurable risks
Securitization
The process of creating a marketable investment security based on a financial transaction's expected cash flows.
Indemnification
The process of restoring an individual or organization to a pre-loss financial condition.
Underwriting
The process of selecting insureds, pricing coverage, determining insurance policy terms and conditions, and then monitoring the underwriting decisions made.
Catastrophe Bonds
The investor pays the principal to buy the bond. At the end of the bond term, if no covered catastrophe has occurred, the investor receives principal and interest from the SPV, which insurers have already paid a premium to. If a catastrophe did occur, the investor receives less. Expected return is higher than a corporate bond for assuming the risk that a catastrophe may occur. Allows the investor to diversify and the insurance company to spread it's risk.
Hit Ratio
The ratio of insurance policies written to those that have been quoted to applicants for insurance
Agency Expiration List
The record of an insurance agency's present policyholders and the dates their policies expire. If an insurer ceases business with an agency, the agency can continue doing business and selling other insurance to those customers.
What is finite risk reinsurance designed for?
To cover high severity losses. The reinsurer often shares profits with the primary insurer when it has favorable loss experience.
Special Industry Classifications
Truckers Food Delivery Specialized Delivery Waste Disposal Farmers Dump and transit mix trucks and trailers Contractors Other
Step 1: Identifying Loss Exposures
What could interfere with the achievement of an organizations goals? Document Analysis: -Risk assessment checklist -Financial statements -Contracts -Insurance policies -Loss histories Compliance Reviews Inspections Expertise
Guaranteed Cost Insurance: Maintain an Appropriate Level of Liquidity
Yes! Org requires less liquidity with gci
Guaranteed Cost Insurance: Manage Cash Flow Variability
Yes! Uncertainty about future losses is largely transferred to the insurer.
Captive: Manage the Cost of Risk
Yes! can reduce an orgs costs over time, despite large start-up costs
Released Bill of Lading
a bill of lading that limits the carrier's liability for cargo loss in return for charging a lower freight rate than would be charged for carrying the cargo subject to full valuation
Certificates of Insurance
a brief description of insurance coverage prepared by the insurer/agent and used by the policyholder to provide proof of insurance.
Construction
a buildings construction characteristics relate directly to its ability to withstand damage by fire and other causes of loss and to protect its contents. Classes, materials, building age, building height, fire divisions, building openings, building codes.
Decline Mode
a company is operating in a market in which demand for its products or services are decreasing
Maximum Dollar Limit
above which responsibility for additional coverage reverts back to the primary insurer.
Accommodated Accounts as a Nonfinancial Measure
accepting substandard exposures in return for more profitable accounts too often
Examples of Separate Insurance Policies on the Same Insurable Interest
bailors and bailees, landlords and tenants, mortgagors and mortgagees. Payment to one may reduce payments to another.
Summary Based Statistical Plans
balance regulatory need for aggregated info with the cost of compiling detailed info on millions of policies. Individual insurer premium/loss transaction records with the same combination of statistical characteristics are combined into a single record. Eliminate individual claims/policy info. May not provide actual needed info for rate studies.
HB 158-2004
based on AS/NZS 4360 helps auditors fulfill their obligation to audit risk management according to the standard
BI Loss Amount
based on the extent of injury, residual/lasting effects, pain and suffering.
Production Underwriter
blend roles of special agents or field representatives with line underwriters. Confer with producers and assist them with developing accounts the insurer wants.
Monitor Underwriting Decisions
both individual policies and books of business. Alert to changes in loss exposures triggered by an event or at renewal. Make sure premium volume covers expenses on a book basis. Identify aggregate problems.
Insurance: Investment Funds
both insureds and insurers. Insureds don't have to set aside retention funds to pay covered losses. Premiums are invested until needed (construction, research, technology advancements). Provides jobs.
Middle Markets: Risk Financing Alternatives
captive insurers or risk retention groups
Captive: Maintain Appropriate Level of Liquidity
can be met if properly capitalized
Underwriting Authority Cutoffs
can be types of business or policy limits.
Occupation
can be used to make underwriting decisions. Vehicles used in some occupations are rated as personal with a surcharge for additional exposures.
Range Comparison Tests, Non-Parametric Rank Tests, Graphical Data View
can be used to supplement the reviewer's judgement.
Risk Control: Improving Premium Volume
can change a marginal account to an acceptable account. Can also win new business by demonstrating value add.
Function
distinct type of work or an aspect of operations or management requiring special technical knowledge.
Psychographic Segmentation
division of markets by an individuals' values, personalities, attitudes, and lifestyles.
Risk Control: Potential Legal Liability
don't offer risk control services at all to avoid being named in a lawsuit for negligence. Some states have laws preventing this. Insurers should put risk control conditions for coverage in the quote and agreement.
Govt: Exclusive Insurer
due to law or lack of private interest. Collect premiums, provide coverage, pays claims/expenses. Ex: state run workers comp
Global Competitiveness
economies of scale/efficiencies that allow it to be more effective. Technology/strategic resources to quickly expand to new markets/offer additional products when an opportunity arises.
How do companies build competitive advantage?
efficiency, quality, customer responsiveness, innovation
Board of Directors
elected by stockholders. Creates/oversees corporate goals and objectives and appoints a CEO
Firestop
element of fire-resistant construction, inserted in concealed spaces or between structural elements of a building (floor, wall, roof) that prevents the passage of a flame from one point to another
Vertical Opening
elevator/stairwell. Protected only when it is completely segregated into a separate fire division.
Contact the Insured/Representative
ensure them the claim is being investigated, and tell them what will happen during the claims process. Schedule a time to meet with them to get the facts.
Legal and Compliance
ensures that statutory and administrative requirements are met. Oversee litigation, manage legal requirements, legislate, audit.
Finding and Evaluating Books/Records
evaluate accounting system to determine accuracy and corroborate sources.
Job of Line Underwriters
evaluate individual accounts for acceptability and execute underwriting policy by following procedures outlined by staff underwriters.
Complying with Legal Requirements
ex: most states require drivers to purchase auto liability insurance. Workers comp is also required by employers. Leases on cars may require insurance.
Products and Services
ex: personal or commercial, property or liability, package, specialty products. Often sell a range of insurance products to meet customers needs.
Field Audits
examinations of the insured's books and records at the premises. What records, where they are located, who to contact, what to ask. Determine premium base and necessary allocations.
Minimum/Maximum Premium
in a retrospective rating plan, the premium is limited to a maximum and minimum amount.
Primary insurer
in reinsurance, the insurer that transfers or cedes all or part of the insurance risk it has assumed to another insurer in a contractual arrangement
Insurance: Promoting Risk Control
incentive to use risk control through deductibles, premium credit incentives, contractual requirements. Benefits society as a whole.
Cost of Losses/Gains
includes both direct costs (paying an injured employee), as well as indirect costs (time lost, damage to the machine, interference with production, loss of profit from idle machines)
Bargaining Power of Suppliers
increase prices, restrict supply, or vary product quality. Access to reinsurance is important in the insurance market.
Excess liability insurance
increases limits of liability on underlying policies but does not generally broaden coverage. Frequently written on a layered basis, with several policies providing successively higher limits.
Private Fire Brigades
only used in the largest industrial complexes like petrochemical plants, and rural areas where public fire protection is unavailable/inadequate.
Industry Wide Data Comparison
only useful if the distributions in a company's book of business and the industry average are expected to be similar.
Protected Cell Company
organization pays premiums to the PCC and receives reimbursement for its losses while also receiving credit for underwriting profit and investment income. Assured that other members cannot access its assets in the event of insolvency.
Small Business
organizations with few employees and limited revenue. Generally do not have any employees with full time risk management duties.
Risk Retention Groups/Purchasing Groups
organized so a limited group or type of insured is eligible to purchase insurance from them
Problem with Guaranteed Cost Insurance
orgs with large loss exposures can often not find a single insurer willing to sell them adequate guaranteed cost insurance, may need to buy more
Delays in Loss Reporting/Development
reserved losses are included in the combined ratio and may be too high/low and may not include unreported claims. Can overstate losses one year and understate the next.
Coverages likely to be pooled
residual auto insurance pool, fair access to insurance requirements plans, windstorm coverage. Underwritten by private insurers.
Self-Insured Retention
risk financing measure in which the insured org adjusts and pays its own losses up to the self-insured retention level
Analysis
step 3 of the insurance data life cycle. Actuaries extract useful info from raw data. Errors may be wrong model, overfitting, calculation.
Presentation of Results
step 4 of the insurance data life cycle. Actuaries help mgmt make correct decisions. Errors include inconsistencies, mislabeling, inadequate labeling.
Line
the maximum amount of insurance or limit of liability that an insurer will accept on a singe loss exposure
Strict Liability in Tort for Products Liability
the nature of the product is the issue, not the defendant's behavior.
Forms of Data Quality Problems
-Missing data/null values - Data errors -Default values - Duplicate Transaction
Finding Missing Data Problems
-tabulate # of missing values using data cubes - use statistical software to produce a report displaying the number of valid, invalid, and missing records for each variable. - Watch out for blanks that aren't seen as missing!
Box Plot
A diagram that shows the five number summary of a distribution (minimum, 25th percentile, median, 75th percentile, maximum) A box is placed around the edges encompassing the 25th through 75th percentile, and a line extends from the box to the minimum and maximum values.
Why is recording deductible amounts of insurance policies important?
Can be matched to claims to compare the cost of claims at each deductible level for future pricing.
Coded-As-Rated
Code elements that are variables in rating the coverage. Relationship between rating manuals of an insurance company and the statistical coding required to gather the data into a homogenous database.
Optional Metadata
Define data formats Explain how/when a data element is processed
Written Premium
direct premium charged for coverage. Reported on transaction record, regardless of if it has been billed or paid.
Metadata
information about data. Includes data about business rules and data processing. Help determine if data are appropriate for an analysis and ensure they are used properly. Can help identify invalid entries, facilitate transferring data among systems, improve the interpretation of analysis, can prevent mistakes due to misinterpretation.
Unprecedented Level of Detail
issue of data quality. Great amounts of data leads to increasing number of errors and inconsistencies.
Workers' Compensation Boards of Canada
leading statistical agent in workers comp in Canada.
Transaction-Based Statistical Plans
more detailed info to support business need for data. Transaction level data is submitted to the statistical agent. Snapshot of case reserves at the close of a reporting period, no regard for policy/accident year.
ISO Statistical Plans Data Reporting
premium and loss data are usually reported quarterly, but can also be reported monthly.
Primary Purpose of Statistical Plans
provide uniform instructions that facilitate the aggregation of historical insurance stats into a database of homogenous experience.
Documentation per ASOP No. 41
standard of practice for preparation and retention of documentation.
Data Collection
step one of the insurance data life cycle. Data managers at primary sources (insurers, TPAs, MGAs, statistical agents) have the responsibility to collect data and satisfy statistical reporting requirements. Input errors most common.
ISO and Loss Amount Field
used to reconcile statistical data reported to the ISO to the insurer's annual statement.
Profit cycle
A recurring increase and decrease in profits, usually regarding a single organization or industry
Prospective Loss Costs
Loss data that are modified by loss development, trending, and credibility processes, but without considerations for profit and expenses.
What increases extent of public exposure?
higher level of customer traffic, location
Combined Ratio
measure underwriting success = loss + lae/ earned premiums + UW expense/ written premiums
Policy Issuance by Producers
producers issue policies on behalf of insurers. Some can generate computer issued policies on site.
Framework of ISO 31000:2009
program design, implementation, and monitoring
Maximum the Primary Insurer Want to Retain
usually less than the amount it is possible for them to retain. Due to uncertainty and conservatism.
Personal Property
All property not classified as real property.
Structure of Org: Single Business Company
Functional structure. Departments are defined by the operation they perform.
Paid Losses
The amounts already paid to claimants.
What auto policy covers a driver driving another's vehicle?
Their vehicle policy usually
Equilibrium Price
Total supply in the market equals total demand. Includes not only estimated costs but also profit.
Asset Exposed to Personnel Loss
Value the key person adds to an org
Class Rate
a type of insurance rate that applies to all insureds in the same rating category or rating class
Target Marketing
application of predictive analytics. Focusing marketing efforts on a specific group of customers.
Premium Taxes
avoided by retention
Sole Owner
complete interest in the property
Vehicle Use: Commercial
continually to haul goods v. only to travel to and from job sites
Actual Cash Value
usually replacement cost - depreciation. Could also be fair market value or broad evidence rule
Relatively Noncombustible Internal Finishing Materials
- Plaster - Gypsum - Wallboard
Meeting Profitability Goals
- Premiums and investment income - Underwriting performance - Overall operating performance - Estimation of loss reserves
New Loss Exposures: Premiums Auditor Duties
- Proper classifications - Experience of management - Financing - Marketing - Income - Unusual hazards
Functions Performed by Producers
- Prospecting - Risk management review - Sales - Policy issuance - Premium collection - Customer service - Claim handling - Consulting
Regulatory Need for Data
-Financial Solvency - Market Conduct - Rate Regulation
Metadata about Compilation/Extraction Processes
Fiscal period definition, determinations of evaluation dates, any formulas used.
On-Level Earned Premium
For ratemaking purposes, a calculation of the earned premium that would result if current rates had been in place for the entire experience period.
Asset exposed to net income loss
Future stream of net income cash flows of an individual/organization
Fuel Load
aka fire load. The expected maximum amount of combustible material in a given area of a building, including both structural elements and contents, expressed in terms of weight of combustibles per square foot.
Mill Construction
aka heavy timber construction. Type of joisted masonry construction in which no concealed areas exist under the roof/floors that might permit a fire to go undetected.
Managing General Agents
aka management general underwriters. An authorized agent of the primary insurer that manages all or part of the primary insurer's insurance activities, usually in a specific geographic area. Intermediary between the insurer and agent and broker. Usually represent multiple insurers
Cross-Tabulations
aka two way tabulations. Show frequencies for two variables and are widely used in statistics.
Relative Premium Size
an acceptable applicant may be rejected if the workers comp premium is too high relative to other coverages.
National Association of Insurance Commissioners (NAIC)
an assc of insurance commissioners from the US and its territories who coordinate insurance regulation among states. Determine whether an insurer can meet its obligations to policyholders
Hold-Harmless Agreement: Pay for Losses
can meet as long as the loss exposures are covered by the agreement and the other party has the financial ability to pay losses.
Hold-Harmless Agreement: Maintain Appropriate Level of Liquidity
can meet this goal bc org requires less liquidity compared to retention or other ART methods.
Group Captive
captive owned by multiple parents. Operates as a formalized pool where several orgs group together to share financial consequences associated with their collective loss exposures. Similar to transfer.
Claim files as a source of UW info
claims representatives document lotsa info in their investigations
Distribution Channels
conduits for contacting and establishing communication with customers and prospective customers. Often use multiple to meet consumer needs (speed and efficiency of competitively priced and customized products)
Do many commercial insureds purchase employee dishonesty coverage?
no, a very small percentage of mercantile establishments
Alternative Dispute Resolution
reduces but does not eliminate the chance that a claimant will sue and take a case to trial.
External Exposure
refers only to fires that originate outside the insured premises.
Reasonability Review
role of actuary. Start with experience based good judgement and supplement it with objective measures.
Loss Exposures
situations or conditions that expose assets to losses. Three parts: 1. Asset exposed to loss 2. Cause of loss (peril) 3. Financial consequences o that loss
Standard Deviation with Uncorrelated v. Slightly Correlated Exposures
slightly correlated- reduced standard deviation than no pooling uncorrelated - lowest standard deviation possible
Insurer Size and Reinsurance
small insurers need more reinsurance to stabilize loss ratios. Actual losses approach expected losses as the number of loss exposures increases
Government Insurance
some government insurance programs can serve the public in a unique way, by leveraging taxes to insure large loss exposures
Premium Auditing
some lines of insurance have variable premiums that are not calculated until the end of the policy period. Ex: workers comp depends on wages paid during the period.
Risk Control: Comply with Legal Requirements
some states require insurers to provide a minimum level of risk control service to commercial insureds.
UW Guidelines: Ensure Uniformity and Consistency
submissions that are identical should elicit the same response from different underwriters.
Data Cube
summary of key statistics for the variables. Ex: cross tabulations and pivot tables. Summaries can be compared to the documentation defining valid values.
Funded Loss Reserve
supported with cash, securities, and other liquid assets to meet the obligations that the reserve represents. Ex: taxes payable. Can be informal (here are the assets we would sell) or formal (captive)
Marketing Research
systematic gathering and analyzing of data to assist in making decisions. Usually done on a project basis with an objective, research design, data collection, analysis and formal report detailing conclusions/recommendations. Implement programs on a cost/benefit basis.
HO4
tenant form, used for insureds who rent
Underwriting Policy Contents
- Composition of book of business - Lines/classes of business - Amount of business - Rating philosophy/forms - Territories
Importance for Insurance Rates of Premium Audits
- Consistency and accuracy of premium classes - Measurement of exposure unit base
Benefits of Predictive Modeling
- Consistent - Can improve profitability of a book - Can help manage a large book where individual, in-depth reviews are costly
Mixed Marketing System Issues
- Consistent customer communication (same message about product and services, data management) - Consistent customer experience - Matching type of insurance to distribution system/channel
Auto PD Claim Nuances
- Constructive Total Losses - Agreed Repair Prices
Risk Control: Meet Customer Needs
- Control premiums - Make marginal accounts acceptable - Reduce operation disruption - Remain socially responsible - Comply with health and safety standards and local, federal laws
Nuances of Auto BI Claims
- Coverage Determination (Vehicle and Insured) - Accident Reconstruction - Coordination with No- Fault/Workers Comp -UM/UIM
P&C Insurers
- Customer Focus - Products and Services - Size - Geographic Coverage - Distribution System
How can property-casualty insurers differentiate themselves through marketing?
- Customer Focus - Products and Services - Size - Geographic Location - Distribution System
ISO Precise Statistical Plan
- Data elements - Coding Instructions - Computer record layouts - Both premium and loss activity
Premises Liability Claims Nuances
- Determining the Cause of the Accident (was the standard of care met) - Determining comparative negligence
Litigation Process
- Long, expensive, unpredictable - Incentive to negotiate - Adverse psychological affects - Insurers have duty to defend insured against lawsuits - Insurers often settle frivolous lawsuits because they are cheaper than court
Hit Ratio too High
- Low competition - Inadequate rates - Broader coverage - Skilled underwriter - Loosened underwriting - Good insurer/producer relationship
Benefits of Risk Management to Society
- Lowers expected losses, and reduces residual uncertainty - Economic resources must be devoted to risk management - Allocation of productive resources to risky activities that maximize profits, wages, and standards of living
Global Market Considerations
- Market Analysis - Economic Considerations - Political Risks
Cons of Internet as a Distribution Channel
- May not meet regulatory requirements (no agent) - Consumers expect internet products to be cheaper - Competitors are easy to access - If quoting is too complicated, users choose a different site - No agent to help make decisions/answer questions - Customers care more about price than service - Security concerns - Website content must be interesting and current
Strategy Formulation
- Mission/vision statements - Strategy formulation steps
Why is knowing how audits are conducted important?
- More informed basis to assess the reliance on audited data - Procedures and concepts of auditing can be used to resolve issues without doing a full scale audit
How has business continuity management changed since it's 1990s inception?
- More outsourcing - Less duplication in production - Greater reliance on just-in-time delivery - More interdependence with suppliers and buyers
Controlling Employee Dishonesty Losses
- New hires screened - Seasoned employees screened before promotion - Substance abuse screening - Appropriate turnover - Well defined termination - Management is sensitive to drastic changes in employee behavior - Periodic audits - Bank reconciliations - Division of authority - Annual vacations of a minimum length of time - Duties are rotated - Two person systems in place on vault, cash, etc
Develop ERM Goals (Establish the Internal and External Contexts)
- Org's risk appetite - Reason for establishing ERM program - Scope of ERM - How ERM will help meet strategic goals - How ERM is defined - Department or collaborative structure
Building Age
- Outdated building code - Complying with current building code could increase repair costs - Obsolete heating, cooling, electrical, fire protection - not suitable for current use - Conversion/remodeling might have made covered spaces that can conceal fire - Alterations/repairs may have left unprotected openings in firestops - Deterioration - Difficult to determine value
Importance for the Insured of Accurate Premium Audits
- Pay wrong premium - Current premium based on exposure units and past experience, inaccurate future premiums
ISO Statistical Plans
- Personal Auto Statistical Plan - Personal Lines Statistical Plan - Commercial Statistical Plan
How do claim representatives determine the amount of loss?
- Personally - Trust the insured + spot check
Role of Actuaries in Metadata
- Persuade partners to provide metadata - Actuarial project metadata can be shared with data managers to ensure data is being properly used - Update users when there are changes to metadata
How can effectiveness of marketing be measured?
- Pilot test - Focus Group
Premium Auditing Process Stages
- Planning - Reviewing Operations - Determining Employment Relationships - Finding and Evaluating Books or records - Auditing the books or records - Analyzing/Verifying Premium Data - Reporting Findings
Factors Affecting the Period of Interruption
- Rebuilding Time (specialized structures, permits, climate, congested urban location = longer) - Seasonality (loss in the winter for a ski resort is huge) - Bottlenecks (machine, process, or building that is essential to the continued operation of an entire facility or manufacturing plant). - Computer Systems - Long Production Processes (aged/seasoned products) - Availability of Substitutes - Business Continuity and disaster recovery planning
How are prospects located?
- Referrals from current clients - Referrals from partners, like financial institutions/real estate brokers - Advertising - Interactive websites - Telephone solicitations - Cold canvass
Specific Actions Taken by Claims Rep with Initial Contact
- Requirements for protecting damaged property - How to document the claim - Describe the investigation - Explain coverage questions - Obtain medical/wage loss authorizations - Estimate the amount of time to conclude the claim - Give them a blank proof of loss form to document the loss
Strategic Reasons for Global Expansion
- Revenue growth and financial stability - Global competitiveness
Individual/Organization Specific Characteristics: Retain or Transfer?
- Risk Tolerance - Financial Condition - Core operations -Ability to diversify, control losses, and administer a retention plan
Controlling Crimes Committed by Others Loss Exposure
- Safes/vaults - Special rooms/limited access areas - Indoor and outdoor lighting -Fences and walls - Protection of openings - Guard services - Alarm systems - Electronic Surveillance - Inventory control
What are the concerns of a business continuity plan?
- Should we outsource to a consultant - Where should the backup site be - How detailed should the plan be - Cost
3 Corporate Level Strategies
- Single Business - Vertical Integration - Diversification
Determining Damages in BI claims
- Special or General - Related? - Necessary? - Reasonable amount and cost? - Lost earnings - Pain and suffering - Into the future
Economic Considerations in Global Expansion
- Stable? - Monetary Policy - Attitude toward foreign investors - Exchange rate volatility - GDP/Income - Regulation/Taxation - Disposable Income, Wages, Growth Risk
Organizational Level Data Quality Dimensions
- Stewardship - Sharing - Timeliness - Interpretation
Highly Combustible Materials
- Thin plywood, shavings, paper, cotton, fibers - Dusts - Liquids - Gasses - Spontaneous combustion - Explosive materials
Underwriting Umbrella/Excess Liability According to the Underlying Policies
- Type of insurance - Insurer - Applicable limits/deductibles - Premium for BI - Premium for PD - Details of extensions of coverage beyond standard policy provisions
Personal Auto Rating Elements
-Location -Standard/Non -Drivers -Policy Form -Coverage -Policy Limit -Deductible -Vehicle Info -Discounts
Categories of On-Premises Hazards
-Machinery and Equipment -Material Handling -Electrical -Occupational -Fire/explosion -Slips/falls -Dangerous processes, burns from heat/chemicals -Flying/falling material -Miscellaneous hazards
Strengths and Weaknesses
-Managerial experience -Available product lines -Skill level of staff -Current strategies -Growth -Customer loyalty -Org structure -Distribution channels
Insurer's Core Functions
-Marketing and Distribution (getting business) - Underwriting (pricing business) - Claims (administering the business)
Factors Affecting Reinsurance Limit Selection
-Maximum policy limit -Extra-contractual obligations -loss adjustment expenses -clash cover -catastrophe exposure
What are the 5 goals of risk financing?
-Pay for losses -Manage the cost of risk -Manage cash flow variability -Maintain appropriate liquidity -Legal compliance
Nuances of Catastrophe Claims
-Pre loss planning -Post loss planning
Counteroffers
-Require risk control measures - Change rates, rating plans, or policy limits -Amend terms/conditions (exclusions, deductible, coverage changes) -Facultative Reinsurance
Selection of Data
-Scope of assignment -Intended use of analysis - Desired data elements and possible alternatives - Appropriateness
Examples of Market Development Activities
-Training programs - Problem resolution - Process documentation - Funding assistance - Technical assistance -Public relations campaigns
Opportunities and Threats
-Trend analysis: identifies patterns related to specific past factors and projects those patterns into the future - Opportunities: new markets, acquisition targets, less competition - Threats: new competitors, increased competition, economic downturns, changes in customer preferences
How is underwriting authority granted?
-Underwriting experience/Positive Results - Producer experience, results, contracts -MGAs familiar with local conditions
Cons of Captive
-high start up expenses
Insurer strategies in a hard market
-increase premiums and restrict the business they write/producers who rep them -re underwriting and imposing surcharges, deductibles or non renewals based on a policyholders claim history
ISO 31000:2009
-issued by International Organization for Standardization. -Guidelines & principles for implementing risk management - International -Applicable to any industry -Emphasizes the integral nature of risk management - Must be supplemented with guidelines for a specific industry
Cons of Retention
-large cash flow variability -can be unplanned
Insurer strategies in a soft market
-lower prices to avoid losing market share -others are willing to lose market share to avoid charging inadequate rates
How are reinsurance programs different when reinsurance intermediaries are used?
-more than one reinsurer -high limits and catastrophe coverage -domestic and international -favorable terms/competitive price
What are the benefits of a finite risk reinsurance agreement?
-multiyear term, which allows risk and losses to be spread over several years. Primary insurer can rely on long term protection and reinsurer can rely on continuous premium.
Benefits of Risk Management to Individuals
-preserve financial resources - able to drive even though they couldn't afford the consequences of killing/injuring someone in an auto accident - reduce residual uncertainty, good for risk aversion
Criteria of Law of Large Numbers
1. Events have occurred in the past under substantially identical conditions and have resulted from unchanging, basic causal forces. 2. The events can be expected to occur in the future under the same unchanging conditions 3. The events have been and will continue to be independent and sufficiently numerous
Three Financial Analysis of Risk Management
1. Forecast the dimensions of expected losses [frequency, severity, timing of payment, total dollar losses] 2. Forecast for each feasible combination of risk management techniques of the effect on frequency, severity and timing of loss 3. Forecast on the after-tax costs of the risk management techniques
Occupancy categories
1. Habitational (apartment, hotel, nursing home) 2. Office (low hazard) 3. Institutional (schools, churches, hospitals, government buildings) 4. Mercantile (buy/sell goods and merchandise) 5. Service (dry cleaners, auto service, barbers, car washes) 6. Manufacturers (hazards vary widely by product being manufactured.)
Risk Management Program: 6 steps
1. Identifying Loss Exposures 2. Analyzing Loss Exposures 3. Examining the feasibility of risk management techniques 4. Selecting the appropriate risk management techniques 5. Implementing selected risk management techniques 6. Monitoring results and revising the risk management program
Four Categories of Private Fire Suppression Methods
1. Portable Fire Extinguishers 2. Standpipe and hose systems (inside buildings with fire department connections) 3. Automatic sprinkler system 4. Private fire brigades
Commercial Property: Is flood ideally insurable?
1. Pure Risk 2. Fortuitous 3. Definite and measurable 4. Large number of similar exposure units depending on location, type, and use 5. Can be catastrophic 6. Premiums may not be economically feasible in some locations
Commercial Property: Is windstorm ideally insurable?
1. Pure Risk 2. Fortuitous 3. Definite and measurable 4. Large number of similar exposure units depending on location, type, and use 5. Can be catastrophic 6. Premiums may not be economically feasible in some locations
Six Characteristics of an ideally Insurable Loss Exposure
1. Pure Risk 2. Fortuitous Losses 3. Definite and Measurable 4. Large Number of Similar Exposure Units 5. Independent and Not Catastrophic 6. Affordable
Claims Reports
Flagged claims helps identify possible errors in claim handling. Can check independent adjuster expenses are reasonable, litigated claims were not handled improperly, or too much money isn't being paid.
Risk Management Standard
adopted by FERMA. -consistent terminology -execution of risk management -organized risk mgmt structure -risk mgmt goals - risk has both an upside and downside
Actuarial Standard of Practice (ASOP) No. 23
advises the actuary to obtain a definition of data elements in the data, identify questionable values, and compare to data used in prior analyses.
Insurance Marketing and Distribution
affects an insurer's ability to attain goals. Meet customer needs/achieve profit.
UW Guidelines: Ensure Adherence to Reinsurance Treaties and Planned Rate Levels
affects the profitability of a book of business and the eligibility for reinsurance. Ex: if the value of a home is understated, the home will be underinsured, and premiums will be inadequate to cover planned losses.
Determination of strategy at different organizational levels
agreement on specific action and delegation of responsibilities to achieve long-term strategies and goals. Who, what, when.
Self-Insurance: Maintain Appropriate Level of Liquidity
can happen if an organization carefully chooses retention level, purchases excess coverage, and has strong cash flow
Self-Insurance: Pay for Losses
can happen if an organization carefully chooses retention level, purchases excess coverage, and has strong cash flow
Accuracy Ratios
can make results comparable from one audit to the next
Automobile Liability
created because drivers and owners of autos owe a duty to others to use their autos in a reasonable, prudent manner and to exercise care for the safety of others
Watercraft Liability
created because drivers and owners of watercraft owe a duty to others to use their watercraft in a reasonable, prudent manner and to exercise care for the safety of others
Workers Compensation Liability
created by state statutes to cover employees for work-related injuries and illnesses.
Organization of ERM
decentralized and integrated to all levels of an organization. The chief risk officer reports to the CEO and coaches other management in establishing strategic risk goals. Part of every job description, project and department. Communication is KEY. Iterative and recursive.
Standards
define acceptable practices, methods, and processes. Not legal requirements, but may become mandatory if the government chooses to legislate them.
Lapse in Insurance
defined as a point in time when a policy has been canceled or terminated for failure to pay the premium.
Processes of ISO 31000:2009
deliberative communication, context, risk evaluation and treatment, and follow up
Specialized Delivery
delivery vehicles such as armored cars or autos for delivering film, magazines, or newspapers, mail or parcel post, and similar items
elastic demand
demand in which changes in price have large effects on the amount demanded
Threat of New Entrants
depends on how difficult it is for outsiders to enter the market. Barriers include economies of scale, unique products/services, statute and regulatory policies
Borrowing Funds
depletes credit & ability to borrow, must be paid back in the future so it is considered retention
Age of Operator
determines likelihood of auto losses, because a disproportionate number of young drivers are involved in motor vehicle accidents. Higher rates to younger drivers. Old drivers may also suck.
Marketing and Distribution
determining what products or services customers want and need, advertising the products, and delivering them to customers. Contributes to earning a profit and meeting customer's needs. Support overall growth and customer retention goals for maximum efficiency.
Marketing Information
develop and maintain info needed in market planning to support management in answering specific questions about customers, producers, and competitors. Must be timely and cost effective.
Net Income
difference between total revenues and total expenses (including taxes)
Windstorm or Flood
difficult to determine in things like hurricane katrina, where policies cover wind but not flooding
Direct and Indirect Loss
direct: damage to property caused by covered cause of loss with no intervening cause. Indirect: use of property (ex: loss of business income).
Separation
dispersing an activity or asset over several locations. Daily rely on each of the separated assets/activities.
Manage Cash Flow Variability
each org/individual has a maximum variability they can tolerate. In an org, this depends on size, financial strength, and risk tolerance of mgmt, investors, and suppliers.
Investments
earn investment income on funds generated by underwriting activities. Allows for lower premiums. Liability losses are paid over a longer period, so require more long term investments. Low underwriting risk can allow an insurer to take more investment risk.
Risk Control: Commercial Insured Size
economically feasible to provide insureds with large premiums/values at risk risk management services. Can have it as an option available for purchase.
Avoidance
eliminate the possibility of a loss. Probability = 0. Don't assume the exposure in the first place - proactive avoidance. Eliminate a loss exposure that already exists - abandonment.
Staff Claims Reps
employees of an insurer that handle most claims (field and office). Usually work from branch or regional offices
Worksite Marketing/Payroll Deduction
employers contract with insurance to offer insurance as a benefit to employees. Usually used for optional life, health and disability coverage. Often discounted premiums are deducted from paychecks.
Effective
enables an organization to achieve desired risk management goals (pre and post loss). Some risk control measures are more effective than others.
Return on Equity
enables investors to compare the return that could have been obtained by investing in the insurer with potential returns that could have been earned by investing their money elsewhere. = Net Income / Average Amount of Owner's Equity (Policyholder's Surplus)
ERM and Communication
encourages an org to widely communicate its risk management approach. Establishes a method to gather info, analyze and communicate that info. Leads to ethics, understanding of gravity of a situation.
Accounting and Finance
ensure the organization has funds to meet its obligations and fairly and fully disclose the financial position of the insurer in connection with GAAP.
Special damages
established for losses that can be quantified, such as loss of earnings.
Faulty Design, Construction or Material
excluded from first-party property insurance. May be included during construction, remodeling, or renovation
Ordinance or Law
excluded from insurance. Law requires demolition of a structure or better materials/plans that are costly.
Global Commerce
expanding since end of WWII. Accelerated during the past two decades as the result of trade agreements, transportation/communication, Internet, and financial innovation.
Core Operations: Retain or Transfer
exposures related to core operations can be better retained because the org has information advantage, more costly to transfer
Individuals: Risk Financing Alternatives
few. Usually only retention and insurance, and they are required to purchase insurance by mortgagees/lenders/state DOI.
Regulation
filed rates may not be approved, leading to profitability concerns. Approval time for filed changes may deter meeting customer needs. Need to hire staff with expertise across states.
Reporting the Findings
final step of the premium audit. Show how they obtained the data so others can replicate. Describe the insured's operations and deviations from the standard.
Product Development: Introduction
final step. Implement sales training and promotion, measure/compare results to plan.
Insurance: Managing Cash Flow Uncertainty
financial security/stability. As long as a loss is covered, the impact on the insured is limited to deductible + amount above limits
Insurer Financial Strength and Reinsurance
financially strong needs less reinsurance. Common stock value can decline so insurers with large amounts of common stock need more reinsurance. Investment in subsidiaries is not marketable so need more reinsurance.
Cause of Loss
fire, windstorm, explosion, and theft are potential causes of loss to property.
Risk Control Reports
first hand evaluation of an account by an insurer's risk control rep. Confirm and supplement application info. Analyze claims to see if underlying conditions could be corrected. Share risk prevention and reduction techniques with accounts that need it.
Primary Layer of Insurance
first level of insurance coverage above any deductible. Working layer, most often used to pay losses.
Choosing Distribution: Geographic Location
fixed costs of establishing exclusive agent/direct writer in a territory are high. Need to have a lot of prospects in a concentrated area. Use independent agents/direct response in sparsely populated areas.
Straight Line Depreciation
fixed percentage of property value is deducted for every year of useful life the owner has enjoyed
Results Standard
focuses on actual achievement of goals, regardless of the effort required to achieve them
Activity Standard
focuses on efforts made to achieve a goal regardless of actual results. Quantity and quality of risk management.
Measurable
frequency and severity of potential losses. Need to know what premium to charge.
Territory
garaging location, where vehicle is used. Theft more likely in city, more likely to have accident in city, more likely to die in accident in rural area. Weather.
Vehicle Use
long commute increases loss potential. Pleasure only, carpool, 3-10 miles, >10 miles, business use
Property Damage Investigation
look at the property to confirm cause of loss/extent of damage
Independent
loss at one loss exposure has no effect on probability of a loss at another loss exposure
Independence of Loss Exposures
loss exposure is not subject to a loss that would simultaneously affect many other similar loss exposures
Consistency and Accuracy of Classification Determinations
premium auditors help the claims department classify losses and exposures
Subject Premium
premium charged by the primary insurer
Rate
premium charged for reinsurance, expressed as a percentage of the subject premium
Per Policy Excess of Loss
primarily with liability insurance. Applies the attachment point and reinsurance limit separately to the losses occurring on each insurance policy and is triggered when a loss on a policy exceeds the attachment point.
Driving Record
prior accidents and moving violations. Poor habits, recklessness, lack of skill. Can use the applicant/insured, index bureaus and motor vehicle records.
Govt: Competitor to Private Insurers
private insurance company isn't operating as efficiently as regulators would like. Perform same marketing, underwriting, actuarial science, claims. Ex: competitive workers comp in some states
Employee Concentration
problem in the 9/11 terrorist attack. Employer with large number of employees at a single location faces complete wipe out.
Account Current Agency Billing
producer prepares a statement showing premiums due to insurer after commissions and transmits that amount every so often (monthly). Producer must pay even when policyholders have not.
Producers and Licensing
producers for primary insurance other than surplus lines brokers are licensed to place business only with admitted insurers.
Differentiation
products and services customers perceive as distinct and are difficult to replicate. Gain market share/competitor advantage. Writing homeowners only in multiple markets is differentiation.
Capacity
The amount of business an insurer is able to write, usually based on a comparison of the insurer's written premiums to its policyholders' surplus.
Workers Compensation Insurance
state run insurance to help employers meet their obligations under state statutes. State govt can be an exclusive insurer, competitor to private insurers, or provide a residual market
Insured/Witness Investigation
statements (written or recorded) from the insured and witnesses can provide valuable info about circumstances surrounding the loss.
Evaluation Tools: Predictive Analytics
statistical and analytical techniques used to develop models that predict future events or behaviors
Decisions
step 5 of the insurance data life cycle. Management makes a profit and cares for customers while highly regarding public welfare.
Product Development: Distribution Requirements
step 5: develop advertising and sales promotional info, develop sales training, plan roll out.
Transformation Aggregations
step two of the data in the insurance data life cycle. Data managers make data available to users in the necessary format with the appropriate level of detail. Most common: missing values, missing records, duplicate records, mapping errors.
Data Requirements
step zero of the insurance data life cycle. Determine intended use of data and the data elements required. Responsible at the source and destination of data. Specification errors and granularity mismatches most likely to occur.
Underwriting Process
steps to determine which submissions will be accepted, for what amount of insurance, at what price, and under what conditions. Also considering book of business.
Characteristics of Contents
(a) ignition sources (b) combustibility (c) susceptibility
Financial Position
- accurate classification of loss exposures ensures accurate insurance rates - timely premium audits help with cash flow management - premium developed by audit is fully earned and affects profit/policyhodlers' surplus
What three factors drive the underwriting cycle?
- structure of the industry's markets - demand for insurer's product/services - supply of products/services
Stages of Strategic Management Process
strategy formulation strategy implementation strategy evaluation
Bottom-Up Data Auditing
take a sample of input records and follows them through processing to the final report
What are difficulties with interpreting the combined ratio?
-Changes in premium volume -Major cat losses -Delays in loss reporting -UW cycles
Specifications
used to estimate replacement cost. state precisely what must be done, including whether to repair or replace the property, the materials, and the quantity
Materials
used to estimate replacement cost. total quantity of materials based on specifications and prevailing material costs.
What are the three sources of reinsurance?
-professional reinsurers -reinsurance departments of primary insurers -reinsurance pools, syndicates and associations
Cause of net income loss
-property loss -liability loss -personnel loss -losses stemming from business risks, like poor strategic planning
Two elements of risk
-uncertainty of outcome (type and time) -possibility of a negative outcome
Implement the Underwriting Decision
1. Communicate to producer/applicant 2. Issuing documents 3. Record data for accounting/stats (location, limit, coverage, price, class). Can red flag problems
3 goals of surplus lines insurers
1. Coverage is placed with eligible nonadmitted insurers 2. Customers unique/unusual requirements can be met 3. Financial security of surplus lines
Insurance Data Life Cycle: 6 Steps
1. Data requirements 2. Data collection 3. Transformation aggregations 4. Analysis 5. Presentation of results 6. Decisions
Two Main Categories of Private Protection Devices
1. Detection Devices 2. Barriers to Criminal Access
5 Major Goals of Insurers
1. Earn a profit 2. Meet customer needs 3. Comply with legal requirements 4. Diversify risk 5. Fulfill their duty to society
BS 31100 4 Main Goals
1. Ensuring an org achieves its goals 2. Ensuring risks are managed in specific areas/activities 3. Overseeing risk mgmt in an org 4. Providing reasonable assurance on an orgs risk mgmt
Step 6: Monitoring Results and Revising the Risk Management Program
1. Establish standards of acceptable performance 2. Compare results with standards 3. Correcting substandard performance or revising standards 4. Evaluating standards that have been substantially exceeded
Steps of the Underwriting Process
1. Evaluate the submission 2. Develop underwriting alternatives 3. Select an underwriting alternative 4. Determine an appropriate premium 5. Implement the underwriting decision 6. Monitor the underwriting decision
Why are pools formed?
1. Needs not met in marketplace 2. Expertise 3. Reinsurance intermediates form reinsurance pools to provide reinsurance to their clients
ISO 31000:2009 3 Parts
1. Principles 2. Framework 3. Processes
Commercial Personnel: Is death ideally insurable?
1. Pure risk 2. Fortuitous 3. Definitiveness and measurability depends on personnel involved 4. Number of exposure units depends on personnel involved 5. Independent and not catastrophic 6. Economically feasible
Commercial Personnel: Is retirement ideally insurable?
1. Pure risk 2. Fortuitous- depend on personnel involved 3. Definitive and measurable- depends on personnel involved 4. Number of similar units depends on personnel involved 5. Independent and non-catastrophic 6. N/A on the premiums- coverage does not exist (would have to cover moral hazard and adverse selection)
Personal Health: Ideally Insurable?
1. Pure risk 2. May or may not be fortuitous (smoking, obesity, pre-existing conditions) 3. May or may not be definite/measurable 4. Large number of similar units 5. Independent and not catastrophic 6. Usually feasible premiums
Personal Retirement: Ideally Insurable?
1. Pure risk 2. Not usually fortuitous 3. Definite/Measurable 4. Large # of similar exposure units 5. Independent and not catastrophic 6. Premiums N/A - insurance coverage for insufficient income in retirement not available
Occupancy
9 classifications, ranging from residential to industrial. Loss reduction can occur through safety training and emergency evacuation procedures
What is usually an acceptable combined ratio?
<100 because it indicates a profit from underwriting even before income from investment activity.
Loss Ratio in Claims Performance
used to measure claims performance. Loss + lae / earned premiums. High loss ratio could indicate the insurer is improperly handling claims. Can reduce costs by giving people what they demand
Premium audit reports as a source of UW info
useful info about operations that may have underwriting implications
Minimum Retention Sought by the Reinsurer
usually minimum retention is a condition of the reinsurance treaty. Especially likely in excess of loss treaties like catastrophe treaties. Ensure the primary insurer is implementing sound risk control, underwriting, and loss adjustment practices
PML in Fire-Resistive Construction
value of a certain number of floors, expressed as a max and min
Producers and Customer Service
value-added services and personalized insurance can differentiate producers in the marketplace. Expected to respond to billing inquiries, review accounts, obtain loss reports, credit scores, DMV reports, answer questions and coordinate with risk control/premium auditors.
Geographic Spread of Loss Exposures and Reinsurance
wide geographic spread may stabilize loss ratio and minimize reinsurance needs. Adverse insurance regulation in one area may be offset by favorable regulation in another.
Management Attitude and Capability in Workers Comp
willingness of management to reduce hazards, morale and claim consciousness, wage analysis (attracting high quality employees and minimizing turnover?), healthcare benefits
What is the goal of underwriting?
write a profitable book of business for the insurer, which supports the insurer's profit goal.
Fleet Safety Programs
written policy and procedures an account uses in the management of its drivers and vehicles. Indicates accounts management understands the value of risk management and is working to prevent and control losses
Pool: Comply with Legal Requirements
yep, if organized within state regulations
Contingent Capital Arrangement: Pay for Losses
yes! Financial consequences of losses are transferred to investors.
Finite Risk Plan: Comply with Legal Requirements
yes! Insurer guarantees all covered claims will be paid.
Pool: Pay for Losses
yes! Risk transfer to other members of the pool. Ultimately, must pay own losses.
Retrospective Rating Plan: Pay for Losses
yes! The insurer pays for losses as they become due.
Contingent Capital Arrangement: Maintain Appropriate Level of Liquidity
yes! can reduce the necessary level of liquidity an org needs to maintain
Contingent Capital Arrangement: Manage Cash Flow Variability
yes! financial consequences of loss are transferred to investors
Retrospective Rating Plan: Comply with Legal Requirements
yes! insurer guarantees all covered claims will be paid.
Focused Cost Leadership Strategy
A business-level strategy through which a company focuses on one group of customers and offers a low-price product or service
Focused Differentiation Strategy
A business-level strategy through which a company focuses on one group of customers and offers unique or customized products that permit it to charge a higher price than that of the competition
Premium-to-surplus-ratio
A capacity ratio that indicates an insurer's financial strength by relating net written premiums to policyholders' surplus. Considered too high when it's greater than 3:1.
Average Value Method
A case reserving method that establishes a predetermined dollar amount of reserve for each claim as it is reported
Sliding Scale Commission
A ceding commission based on a formula that adjusts the commission according to the profitability of the reinsurance agreement.
Flat Commission
A ceding commission that is a fixed percentage of the ceded premiums
Special Hazards of the Class
A characteristic typical of all occupancies in a given class that can cause or aggravate a loss. An example is the hazard of cooking, common to the restaurant class.
Tort
A civil wrong not arising from a breach of contract. A breach of a legal duty that proximately causes harm or injury to another (assault, malpractice).
Coinsurance Clause
A clause that requires the insured to carry insurance equal to at least a specified percentage of the insured property's value.
Morale Hazard
A condition of carelessness or indifference that increases the frequency or severity of a loss. NON-DELIBERATE.
Personnel Loss Exposure
A condition that presents the possibility of loss caused by a person's death, disability, retirement, or resignation that deprives an organization of the person's special skill or knowledge that the organization cannot readily replace.
Property Loss Exposure
A condition that presents the possibility that a person or an organization will sustain a loss resulting from damage (including destruction, taking, or loss of use) to property in which that person or organization has a financial interest.
Risk Control
A conscious act or decision not to act that reduces the frequency and/or severity of losses or makes losses more predictable.
Turnaround Strategy
A corporate-level strategy through which a company rebuilds organizational resources to return to profitable levels
Harvest Strategy
A corporate-level strategy through which a company seeks to gain short-term profits while phasing out a product line or exiting a market
Divestiture Strategy
A corporate-level strategy through which a company sells off a portion of an operation, usually a division or profit center that is not performing to expectations
Broad Evidence Rule
A court ruling explicitly requiring that all relevant factors be considered in determining actual cash value.
Assumption of Risk
A defense against negligence that can be used when the claimant was aware of a danger and voluntarily assumed the risk of injury from that danger.
Third Party Claim
A demand against an insured by a person or organization other than the insured or the insurer, seeking to recover damages that may be payable by the insured's liability insurance.
Local Fire Alarm System
A detection system, triggered by smoke or heat, that sounds a bell, siren, or another alert at the premises only.
Statute of Limitations
A federal or state statute setting the maximum time period during which a certain action can be brought or certain rights enforced.
Surplus relief
A flow of funds into an insurer's policyholders' surplus when policyholders' surplus has been reduced by the insurer's rapid growth in written premiums
Special Damages
A form of compensatory damages that awards a sum of money for specific, identifiable expenses associated with the injured person's loss, such as medical expenses or lost wages.
Self-Insurance
A form of retention under which an organization records its losses and maintains a formal system to pay for them. Well suited for losses that are paid over a period of time, providing a cash flow benefit (workers comp, liability, automotive liability).
Catastrophe Risk Exchange
A forum in which primary insurers can trade insurance risk with other insurers. Geographically concentrated loss exposures can use this exchange.
Risk Retention Group
A group captive formed under the requirements of the Liability Risk Retention Act of 1986 to insure the parent organizations. Provides liability coverage that is not personal, workers comp, or employers' liability. Formed in response to lack of liability insurance coverage available in the market.
Pool
A group of organizations that band together to insure each other's loss exposures. Collects premiums, pays losses, purchases reinsurance, and provides risk control consulting. Well suited for orgs too small to use a captive. Most commonly workers comp.
Book of Business
A group of policies with a common characteristic, such as territory or type of coverage, or all policies written by a particular insurer or agency.
Underwriting Policy
A guide to individual and aggregate policy selection that supports an insurer's mission statement.
Declaratory Judgement Action
A legal action in which the insurer (or insured) presents a coverage question to the court and asks the court to declare the rights of the parties under applicable insurance policy.
Umbrella Policy
A liability policy that provides excess coverage above underlying policies and may also provide coverage not available in the underlying policies, subject to a self-insured retention.
Sidecar
A limited-existence special purpose vehicle that uses quota share agreements with private investors to give the primary insurer additional capacity. Under these arrangements, the primary insurer charges a ceding commission and MAY RECEIVE PROFIT COMMISSION if the book of business is profitable. Investors assume a portion of the risk for a corresponding portion of profits.
Loss Ratio Method
A loss reserving method that establishes aggregate reserves for all claims for a type of insurance
Direct Loss
A loss that occurs immediately as the result of a particular cause of loss
Constructive Total Loss
A loss that occurs when the cost to repair damaged property plus its remaining salvage value equals or exceeds the property's pre-loss value.
Indirect Loss
A loss that results from, but is not directly caused by, a particular cause of loss`
Formula Method
A method of setting claim reserves by using a mathematical formula.
Roundtable Method
A method of setting reserves by using the consensus of two or more claim personnel who have independently evaluated the claim file
Expert System Method
A method of setting reserves with a software application that estimates losses and loss adjustment expenses.
Are most risk funding mechanisms retention or transfer?
A mix of both. Individuals retain the deductible + anything above the policy limit, and transfers anything else.
General Damages
A monetary award to compensate a victim for losses, such as pain and suffering, that do not involve specific measurable expenses.
Finite Risk Reinsurance
A nontraditional type of reinsurance in which the reinsurer's liability is limited and anticipated investment income is expressly acknowledged as an underwriting component. Aka financial reinsurance.
Agency Bill
A payment procedure in which a producer sends premium bills to the insured, collects the premium, and sends the premium to the insurer, less any applicable commission. Most often used with large commercial accounts.
Direct Bill
A payment procedure in which the insurer assumes all responsibility for sending premium bills to the insured, collecting the premium, and sending any commission payable on the premium collected to the producer.
Disaster Recovery Plan
A plan for backup procedures, emergency response, and post-disaster recovery to ensure that critical resources are available to facilitate the continuity of operations in an emergency situation. Loss reduction.
Reinsurance pool
A policy for the full amount of insurance is issued by one member and reinsured by the rest of the members for a predetermined percentage. May accept only non member loss exposures or only member. Can reinsure marrow coverage or broad
Central Station System
A private detection service that monitors the systems of multiple businesses and/or residences and that calls appropriate authorities or dispatches its own personnel when an alarm is activated
Predictive Modeling
A process in which historical data based on behaviors and events are blended with multiple variables and used to construct models of anticipated future outcomes.
Direct writing reinsurer
A professional reinsurer whose employees deal directly with primary insurers.
Co-Participation Provision
A provision in a reinsurance agreement that requires the primary insurer to retain a specified percentage of the losses that exceed its attachment point. For risk control, underwriting, and loss adjustment reasons previously stated.
Variable Quota Share Treaty
A quota share reinsurance treaty in which the cession percentage retention varies based on specified predetermined criteria such as the amount of insurance needed.
Retrospective Rating
A ratemaking technique that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience.
Extension of Exposure
A ratemaking technique that uses rating-related data elements in order to individually recalculate past coverages using current rates
Retrospective Rating Plan
A rating plan that adjusts the insured's premium for the current policy period based on the insured's loss experience during the current period; paid losses or incurred losses may be used to determine loss experience. Designed to finance low-to-medium severity losses. Must have a large insurance premium (>100,000/year) to benefit from retrospective rating. Often used for workers comp, auto liability and general liability, auto physical damage and crime losses.
Experience Rating
A rating plan that adjusts the premium for the current policy period to recognize the loss experience of the insured organization during past policy periods.
Schedule Rating
A rating plan that awards debits and credits based on specific categories, such as the care and condition of the premises or the training and selection of employees, to modify the final premium to reflect factors that the class rate does not include.
Operating Ratio
A ratio that measures an insurer's overall pretax operational profitability from underwriting and investment activities and is calculated by subtracting the investment income ratio from the combined ratio.
Direct Loss
A reduction in the value of property that results directly and often immediately from damage to that property.
Separation
A risk control technique that isolates loss exposures from one another to minimize the adverse effect of a single loss. Usually the byproduct of another decision. Reduces loss severity, but increases loss frequency. Makes losses more predictable.
Loss Reduction
A risk control technique that reduces the severity of a particular loss. Ex: automatic sprinkler systems. Can prevent losses as well, like a burglar alarm. Can be pre or post loss.
Diversification
A risk control technique that spreads loss exposures over numerous projects, products, markets, or regions. More commonly applied to managing business risks, rather than hazard risks. Reduce loss severity while increasing loss frequency. Makes losses more predictable.
Nondiversifiable Risk
A risk that affects a large segment of society at the same time. Inflation, unemployment, natural disasters. Correlated.
Diversifiable Risk
A risk that affects only some individuals, businesses, or small groups. Not highly correlated and can be managed through spread of risk.
Walk-away settlement
A settlement that involves lump-sum payments made by insurers to settle claims and that does not require a release from the claimant
inelastic demand
A situation in which an increase or a decrease in price will not significantly affect demand for the product
Proof of Loss
A statement of facts about a loss for which the insured is making a claim.
Proof of Loss
A statement of facts about a loss for which the insured is making a claim. Time, place, cause, interests, insurance, estimates.
Policy Year
A statistical measurement consisting of all of the policies issued in a given twelve-month period.
Captive Insurer
A subsidiary formed to insure the loss exposures of its parent company and the parent's affiliates. Usually used to cover workers comp, general liability and automobile liability.
Binder
A temporary written or oral agreement to provide insurance coverage until a formal written policy is issued.
Aggregate Excess of Loss Reinsurance
A type of excess of loss reinsurance that covers aggregated losses that exceed the attachment point, stated as a dollar amount of loss or as a loss ratio, and that occur over a specified period, usually one year.Used for property and liability.
Per Risk Excess of Loss Reinsurance
A type of excess of loss reinsurance that covers property insurance and that applies separately to each loss occurring to each risk (loss exposure).
Deluge Sprinkler System
A type of sprinkler system in which all the heads remain permanently open; when activated by a detection system, a deluge valve allows water into the system.
Surplus Note
A type of unsecured debt instrument, issued only by insurers, that has characteristics of both conventional equity and debt securities and is classified as policyholders' surplus rather than as a liability on the insurer's statutory balance sheet.
Parapet
A vertical extension of a fire wall that extends above a roofline
Underwriting Guidelines
A written manual that communicates an insurer's underwriting policy and that specifies the attributes of an account that an insurer is willing to insure.
Warranty
A written or oral statement in a contract that certain facts are true
Difficulty of Exit
Affects insurance supply. Regulatory constraints limit an insurers ability to cease operating, increasing supply
Ease of Entry
Affects supply of insurance. Capital requirements are small and there are few barriers to entry. Increases supply.
Reinsurance
Affects supply of insurance. Expands capacity, provides surplus relief- increases supply. Can also decrease supply if supply of reinsurance decreases o claims aren't paid as anticipated.
Supply of Insurance
Aggregate willingness of all insurers to assume risk at a given time.
How is risk control applied to personnel loss exposures?
Aim to prevent/reduce work related injury/illness -Prevention through training, education, and safety -Prevention through contracts banning sky diving, etc. -Separation by restricting the number of key employees that can use the same aircraft -Reduction through emergency response training
Treaty Reinsurance
Aka obligatory reinsurance. A reinsurance agreement that covers an entire class or portfolio of loss exposures and provides that the primary insurer's individual loss exposures that fall within the treaty are automatically reinsured. Usually insurers must submit all eligible loss exposures to avoid adverse selection.
Facultative certificate of reinsurance
An agreement that defines the terms of the facultative reinsurance coverage on a specific loss exposure.
Catastrophe Option
An agreement that gives the insurer the right to a cash payment from investors if a specified index of catastrophe losses reaches a specified level.
Nonwaiver Agreement
An agreement that is signed by the policyholder and that indicates that the insurer may investigate a claim while reserving the right to deny coverage if necessary
Trend Analysis
An analysis that identifies patterns in past data and then projects these patterns into the future
Pooling
An arrangement that facilitates the grouping together of loss exposures and the resources to pay for any losses that may occur
Rent-A-Captive
An arrangement under which an organization rents capital from a captive, to which it pays premiums and receives reimbursement for its losses. Allows an org to use a captive without using it's own capital to establish it. Each insured keeps its own premium and loss account, so no risk transfer occurs. However, the capital rented by the insured could be diminished by the losses of another insured.
Test Audit
An audit conducted by an insurance advisory organization or bureau to check the accuracy of insurers' premium audits
Loss Reserve
An estimate of the amount of money the insurer expects to pay in the future for losses that have already occurred and been reported, but are not yet settled.
Probable Maximum Loss (PML)
An estimate of the largest likely loss. Very subjective. To many underwriters, it is only meaningful for fire resistive buildings and their contents. For other types of construction, underwriters consider PML equal to amount subject. Must consider how a fire can spread vertically and how smoke and water damage can affect floors the fire doesn't reach.
Working Cover
An excess of loss reinsurance agreement with a low attachment point when volume of losses is expected to be significant. Enables the insurer to spread losses over several years.
Express Warranty
An explicit statement about a product by the seller that the buyer or other user may rely on and that provides a remedy in the event the product does not perform as claimed.
Advisory Organizations
An independent organization that works with and on behalf of insurers that purchase or subscribe to its services. Helps develop commonly used coverage forms.
Domestic Insurer
An insurance company that is incorporated within a specific state, or, if not incorporated, is formed under the laws of that state. An insurer is operating in its domiciled state when its doing business in the state in which it is incorporated/formed.
What is the main focus of operations liability cases?
An unsafe act.
When is actual cash value not applicable?
Antiques (no replacement cost), old buildings, collectibles may appreciate
AS/NZS 4360
Australia/New Zealand generic framework for managing risk. - Directors, elected officials, CEOs, senior execs, staff - adaptable risk management approach that is easy to understand and implement (broad)
Pre-Action Sprinkler Systems
Automatic fire sprinkler systems with automatic and closed-type sprinkler heads connected to a piping system that contains air or nitrogen, with an additional fire detection system that serves the same area as the sprinklers.
Dry Pipe Sprinkler System
Automatic fire sprinkler systems with pipes that contain compressed air or another inert gas that holds a valve in the water line shut until an open sprinkler head releases the gas and allows water to flow through the previously dry pipe to the sprinkler head
Provide surplus relief
Benefit of reinsurance. Allows growth by allowing the insurer to deduct a ceding commission, which increases policyholders surplus.
Facilitate withdrawal from market segment
Benefit of reinsurance. Can purchase portfolio reinsurance to transfer all loss exposures to reinsurer but the primary insurer must continue servicing them.
Who do bailee/carrier policies protect?
Both
How are RM and ERM similar?
Both acknowledge risk can be quantified but only estimated. They both attempt to accurately measure risk in an effort to reduce uncertainty.
Demand for Insurance
Both elastic and inelastic
Corporate Level Strategy
CEO and executive team determine the business in which the company will be involved, allocate resources, coordinate strategies
Captive: Manage Cash Flow Variability
Can be met by charging level premiums to the parent/affiliates and retaining earnings in years with low losses to pay for higher losses in other years
Regulatory Environment
Can decrease insurance supply by setting minimum financial requirements of an insurer or regulating prices to unprofitable levels
Reinsurance departments of the primary insurers
Can offer to affiliated insurers or unaffiliated. Separate from insurance to ensure confidentiality of other insurers competitive info. Insurance companies are often commonly owned and use intragroup reinsurance
Cash Flow
Cash inflow minus cash outflow
Premises Medical Payments Liability Underwriting
Coverage C in CGL coverage form, automatically included. Part of premises and operations loss exposures. Applies to medical expenses of persons other than the insured who are injured on the insured's premises or because of the insured's operations. Does not require the insured to be legally liable to pay for them. Limits are much lower than BI/PD.
Management Liability
Created by the various duties that those in positions of trust owe to those they serve. Directors, officers, and managers hold such positions.
Financial Consequences of a Loss
Depends on: -Type of loss exposure -Cause of loss -Loss frequency/severity Can be easy to estimate (value of burned building) or difficult (value of business lost while the building is restored).
Estimating the PML for Business Income
Determine the most serious direct loss, and use the extent of the damage and its location to estimate (a) the longest period of restoration this loss could reasonably cause, (b) the largest loss of business income the insured is likely to sustain during this period
What is the main goal of underwriting?
Develop and maintain a profitable book of business for the insurer
Business Level Strategies
Developed at the business/division level by managers who are responsible for supporting the corporate level strategy. Cost leadership, differentiation, and focus
Market Segment Selection Considerations: Type of products sold
Do available products meet the specific segment's needs, or the homogenous needs of a larger group? What is the product fit to the market segment?
Market Segment Selection Considerations: Age of Product
Do the products available meet current customer needs?
EDA v Audit
EDA is an after-the-fact, back end process. Auditing is proactive and influences data collection
Syndicate
Each member shares the risk with other members by accepting a percentage of the risk. Members are a single entity under the syndicate name. Key component of Lloyd's, which provides physical and procedural facilities for members to write insurance.
Auditing Books and Records
Ensure proper classification If rate too high: insured is not competitive, legally negligent If rate too low: less likely to prift
ISO 14001:2004
Environmental Management Systems Requirements with Guidance use, proposes a method to include environmental management within the overall management process of an organization
Step 2: Analyzing Loss Exposures
Estimate the possible significance of losses in step 1. The most important 2 steps because if they aren't appropriately identified, they can't be managed. - Frequency - Severity - Total dollar losses - Timing
Evaluate the Submission
Evaluate loss exposures and hazards. Seek to achieve information efficiency.
Govt: partner with private insurers
Ex: TRIP and NFIP. private insurers can no longer adequately provide coverage
Improved Ability to Meet Strategic Goals
Ex: choose a single supplier for reduced costs, huge disruption from supply chain disruption. ERM would have identified this risk and had a backup plan ready.
Expenditures on Risk Management
Ex: risk financing by purchasing insurance. Larger for organizations than individuals
ISO Class 6
Fire resistive construction. Load bearing members can handle fire damage for 2 hours. (a) noncombustible with fire resistance rating of 2 hours (b) protected by a noncombustible covering such as concrete, masonry, plaster, or gypsum that provides at least a two hour fire resistance rating.
Private Fire Protection: Prevention
Fires can be prevented by controlling heat sources and by separating fuel from heat.
Identification of Insureds
First named insured, named insured, or spouse of the named insured is entitled to make a claim. Make sure the claim/notices are sent to the right person.
Who has an insurable interest?
First question a property claim rep must answer. Property insurance protects people/orgs from loss of the value of their interest in property.
ISO Class 1
Frame construction. Weight bearing supports are combustible, meaning the building can suffer structural damage in a fire. Load bearing components are made of wood or other combustible materials like brick/stone veneer.
Investment Income in UW cycles
From 1978-2004, the industry didn't experience a net gain from underwriting, but only experiences operating losses in 4 years. When investment income decreases, the insurer needs better underwriting results or profitability will decrease, turning to a hard market.
Safety Equipment
GPS and wireless technology may earn rate credits.
Canada Statistical Agents
General Insurance Statistical Agency Groupement des Assureurs Automobiles
Reinsurance Intermediaries
Generally represent the primary insurer and work with them to develop a reinsurance program that is placed with a reinsurer/reinsurers. Receive commissions
How are reinsurance programs different when a direct writer reinsurer is used?
Generally use fewer insurers
Pre-Loss Goals
Goals to be accomplished before a loss, involving social responsibility, legality, tolerable uncertainty, and social responsibility.
Structural Change
Gradual, long-term, and fundamental change involving institutional arrangements, products, services, roles, and regulation
Quadrants of Risk
Hazard, Operational, (pure) Financial, Strategic (speculative). Focus on the risk source and who traditionally manages it.
How does underwriting benefit both insurers and insureds?
Helps avoid adverse selection, maintaining profitability and keeping premiums reasonable.
Fire Suppression Rating Schedule
ISO collected information measuring elements of a community's fire suppression system. Develops a public protection classification for each community on a scale of 1-10.
ISO/EIC 27000
IT-Security Techniques-Information Security Management Systems-Overview and Vocabulary, new information security standard published jointly by the ISO and the International Electrotechnical Commission
Monitor Critical Risks (Monitor and Review)
Identifying trends, triggering events, and warning signs May be periodic or on an exception basis. Complex because info can come from any source. May make connections with people with info to warn them
UW Guidelines: Avoid Duplication of Effort
If problems inherent in a situation have been identified and solved, the solution can be applied to all similar situations that may arise in the future.
Occupational Disease
Illness resulting from conditions associated with employment, such as prolonged and repeated overexposure to certain products or ingredients to which the general public is not exposed (asbestosis, radiation, tuberculosis, heart/lung disease)
Utmost Good Faith in reinsurer primary insurer dynamic
Important because each party is obligated to and relies on the other to disclose material facts about the subject of insurance
Adverse Selection
In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance.
Adverse Selection
In general, the tendency for people with the greatest probability of loss to be the ones most likely to purchase insurance. Ex: person with beach house purchases windstorm coverage right before hurricane season.
Retrospective Rating Plan: Manage the Cost of Risk
Includes a significant amount of retention and can reduce the organization's long term cost of risk (charges included in guaranteed cost premium to cover the chance that losses will be higher than expected). Insurer handles claims, filings, taxes, and fees.
Standard Deviation in a Pool
Increases as number of members increase, but not proportionally. Standard deviation of losses per member actually decreases.
Underreserving
Increases insurance supply by artificially increasing surplus. When insurers realize their mistake, surplus and supply are lowered
Govt in Insurance: Social Good
Individuals may not have an incentive to buy insurance, even though it would benefit society. By regulating insurance and making it available at reasonable prices, govt makes people doing what's best for them.
Market Intelligence
Information gathered and analyzed regarding a company's markets to improve competitive decision-making. Used to make decisions regarding opportunities, strategies, and changes in the market.
Information Technology
Infrastructure for internal and external communications. Essential to daily operations, marketing, underwriting, investing, claims. Managing data
What is important when considering your captive's domicile?
Initial capital, taxes, and fees Regulatory environment Premium and investment restrictions Support of infrastructure (accountants, bankers, lawyers)
Schedule Coverage
Insurance for property specifically listed (scheduled) on a policy, with a limit of liability for each item. offered for expensive items.
Excess Coverage
Insurance that covers losses above an attachment point, below which there is usually another insurance policy or a self-insured retention.
Insurance to Value
Insurance written for an amount approximating the full value of the asset(s) insured. Coinsurance can help encourage this, as policyholders insured to value will not face a coinsurance penalty. Also, policyholders are better protected against a total loss!
What is the best way to insure to value?
Insure to value with rates that reflect the loss exposure rather than underinsure at inflated rates.
Proprietary Insurers
Insurer formed for the purpose of earning a profit for its owners. Includes stock insurers, Lloyd's of London and American Lloyds, and insurance exchanges.
Industry Loss Warranty
Is an insurance-linked security that covers the primary insurer in the event that the industry-wide loss from a particular catastrophe exceeds a predetermined threshold. Triggered only by industry losses
Countersignature Law
Laws that require all policies covering subjects of insurance within a state to be signed by a resident producer licensed in that state.
Financial Consequences of Liability Loss
Limitless (limited to the total wealth of a person or organization).
Primary Underwriting Concern of Umbrella and Excess Liability Policies
Loss severity NOT loss frequency. Usually long-tailed, and catastrophe loss exposures could affect liability claims in the future.
Gender and marital status
Men have higher death rates due to more miles driven and greater likelihood of risky behavior such as speeding/driving under the influence. Married young drivers are seen as more stable. Some states prohibit these variables.
Large Deductible Plan: Manage the Cost of Risk
Met better than guaranteed cost insurance, but not as well as retention plans.
ISO Class 5
Modified fire-resistive construction. Material's fire resistance rating is one to two hours. Exterior walls, floors, roofs are fire resistive for 1-2 hours.
Asset Exposed to Liability Loss
Money - Damages - Settlement Costs - Legal/court fees
Ceding Commission
Money paid by reinsurer to primary insurer for the expenses of issuing the underlying policy
What is the importance of matching subjective to objective risk?
More effective risk management
Government Records as a source of UW info
Motor vehicle Criminal Civil Mortgages, business licenses, tax records, SEC filings, bankruptcy filings
Hold-Harmless Agreement: Comply with Legal Requirements
Must be legally enforceable and can meet this goal regarding loss exposures that are required to be transferred.
Other External Constraints
Natural/man made catastrophe losses, disregard for law/order, legal changes.
Pay for Losses
Need funds to pay when a loss occurs to avoid disruption, bad pr. Includes transfer costs.
Cash Flow in UW cycles
Negative cash flow leads to insolvency and a quick change in pricing. When this happens to the majority of insurers (low prices, catastrophe, low investment income) a hard market results.
GAAP Return on Equity
Net Income/Average Owners' Equity. Used by stock insurers.
SAP Return on Equity
Net Income/Average Policyholders' Surplus. Used by both stock and mutual insurers.
Do insurance cycles coincide with business cycles?
No because they are caused by supply and not demand
Contingent Capital Arrangement: Manage the Cost of Risk
No:( Expensive
Benefits of Risk Management to Organizations
Not as risk averse as individuals - preserve financial resources to add value and become a better investment -improved capacity to engage in business activities by limiting management fears
What aspect of loss exposures is changed by pooling?
Not frequency or severity, just the probability distribution of losses (expected value is the same, but the uncertainty around that standard deviation is decreased)
OSHAS 18001
Occupation Health and Safety Assessment Series - certification and evaluation process for organizational health and safety program compatible with other international mgmt systems
Structural Changes in UW cycles
Occur in the context of structural changes in business/society and also contribute to structural change
Performance Metrics for ERM
Optimize risk taking in relationship to strategic goals. How do risk management activities relate to the organization's strategy, and how can we measure success.
Vertical Integration
Practice where a single entity controls the entire process of a product, from the raw materials to distribution. Decreases expenses and increases efficiency.
Economy of Operations
Pre-Loss Goal, a risk management program should operate economically and efficiently, the organization generally should not incur substantial costs in exchange for slight benefits
Contributory Negligence
Prevents a person from recovering damages if the person's own negligence in any way contributed to the harm.
Pay for Losses: retention/transfer?
Primary benefit of transferring, may be able to retain if they are small/there are strong cash flows
Earn a Profit
Primary goal of proprietary insurers. Less important for cooperative insurers. Need to give reasonable rate of return to get investors.
Review of Data
Reasonableness/consistency 1. Consider data definitions 2. Identify questionable data values 3. Review prior data Disclose if a review is not done and disclose any resulting limitations
What administrative services are required in self-insurance?
Recordkeeping Claim Adjustment Loss Reserving Litigation Management Regulatory Requirements Excess Coverage Insurance
Retrospective settlements
Settlements made after property has been repaired and the policyholder has resumed operations. More common
Fair Access to Insurance Requirements (FAIR) Plans
State run plans to make basic property insurance available to property owners who are otherwise unable to obtain insurance due to location or another reason. Usually a pool where private insurers collectively address these customers.
Predictive Analytics
Statistical and analytical techniques used to develop models that predict future events or behaviors. Usually generate a score estimating the likelihood a specific event or behavior will occur. Measure risk/opportunity associated with a given customer/transaction.
Product Development: Opportunity Assessment
Step 1. Monitor the market, identify opportunity, relate opportunities to business strategy, develop specifications and secure mgmt approval.
Product Development: Contract, Underwriting and Pricing
Step 2: Coverage and policy forms, underwriting and claims guidelines, classifications, pricing, secure functional mgmt approval
Product Development: Regulatory Requirements
Step 4: File with regulators, develop statistical information systems, communicate approval
Insurer Structure and Reinsurance
Stock insurers have more access to capital than mutual and reciprocal insurers
Business Income
Sum of (1) net profit or loss that would have been earned or incurred if the suspension had not occurred and (2) normal operating expenses, including payroll, that continue during the suspension.
Profit Expextations
Supply of insurance increases when insurers think they can earn profits (also encourages new insurers to enter the market). Expectation of low/no profits reduces supply
What happens if an insurer has too high of a premium to surplus ratio?
The NAIC flags it for additional solvency surveillance from regulators.
Statutory Accounting Principles
The accounting principles and practices that are prescribed or permitted by an insurer's domiciliary state and that insurers must follow. Limit insurer capacity.
Deposit Premium
The amount the primary insurer pays the reinsurer pending the determination of the actual reinsurance premium owed
How do property, liability, personnel, and net income exposures differ?
The asset which is exposed to loss.
Information Efficiency
The balance that underwriters must maintain between the hazards presented by the account and the information needed to underwrite it.
Reinsurance Program
The combination of reinsurance agreements that a primary insurer purchases to meet its reinsurance needs.
Business Model
The core aspects of an organization, including its vision, mission, strategies, infrastructure, policies, offerings, and processes.
Mix of Business
The distribution of individual policies that compose the book of business of a producer, territory, state, or region among the various lines and classifications.
Attachment Point
The dollar amount above which the reinsurer responds. Expected losses are below the attachment point, unexpected are above.
Breach of Warranty
The failure to meet the terms of a promise or an agreement associated with a product.
Economically Feasible Premium
The insured must be able to afford the premium. This is most important of an ideally insurable loss. There will be no demand for an un-affordable product. Small & highly likely losses can result in expenses higher than the losses themselves.
Strict Liability
The legal responsibility for damage or injury even if you are not negligent. Operating aircraft, storing explosives, having wild animals on the premises.
Loss Limit
The level at which a loss occurrence is limited for the purpose of calculating a retrospectively rated premium. Ex: the first $100,000 per occurrence is included in the retrospective premium, the rest is transferred to the insurer.
Loss of Consortium
The loss by one spouse of the other spouse's companionship, services, or affection
Good Faith
The manner of handling claims that requires an insurer to give consideration to the insured's interests that is at least equal to the consideration it gives its own interests.
Reinsurance Limit
The maximum amount that the reinsurer will pay for a claim and that is commonly stated in the reinsurance agreement
Objective Risk
The measurable variation in uncertain outcomes based on facts and data.
Risk Management Process
The method of making, implementing, and monitoring decisions that minimize the adverse effects of risk on an organization. (assess, control, and finance risk).
Extra Expense
The necessary expenses incurred by the insured during the "period of restoration" that would not have been incurred had the covered loss not occurred. Had to be incurred to avoid or minimize suspension of business.
Increased Management Accountability
The people closest to each risk evaluate and manage it. It is part of corporate culture. Will fail without everyone being accountable.
Period of Restoration
The period during which business income loss is covered under the BIC forms; it begins seventy-two hours after the physical loss occurs and ends when the property is (or should have been) restored to use with reasonable speed. (With regard to extra expense coverage, it begins immediately after the physical loss occurs.)
Loss Costs
The portion of the rate that covers projected claim payments and loss adjusting expenses.
Strategic Management Process
The process an organization uses to formulate and implement its business strategies
Subrogation
The process by which an insurer can, after it has paid a loss under the policy, recover the amount paid from any party (other than the insured) who caused the loss or is otherwise legally liable for the loss.
Reunderwriting
The process of analyzing the characteristics of policies within a portfolio and the trends of those characteristics
Residual Market
The term referring collectively to insurers and other organizations that make insurance available through a shared risk mechanism to those who cannot obtain coverage in the admitted market.
Securitization of risk
The use of securities or financial instruments to finance an insurer's exposure to catastrophic loss.
Why is the strategic management process extra important for insurers?
They must distinguish themselves in a highly regulated market where products do not vary much.
What claims do liability claim adjusters normally handle?
Third-party auto, homeowners, or personal umbrella.
Reinsurance
Transfer from one insurer to another of some or all of the financial xonsequences of the loss exposres covered by the primary insurers policies
Maintain an Appropriate Level of Liquidity: retain or transfer
Transfer reduces the level of liquidity needed. With retention, depends on size of losses/strength of cash flows.
Joint Ownership
Two or more people own an undivided interest in property.
National Council on Compensation Insurance
U.S. insurance rating and data collection bureau specializing in workers' compensation. NCCI annually collects data covering more than four million workers compensation claims and two million policies.
Policyholder's Surplus
Under statutory accounting principles (SAP), an insurer's total admitted assets minus its total liabilities.
Global Insurance
United States insurers compete in other markets, and other countries insurers compete in the US. US experiences an increasing trade deficit in global insurance.
Step 4: Selecting the Appropriate Risk Management Techniques
Use financial and non-financial considerations.
Internet
Used by insurer, representatives, and the customer for emails, quoting, billing, and policy issuance.
Risk in Reinsurance
Usually a building, policy, group of policies, or class of business
Risk Management Frameworks and Standards: Compulsory?
Usually not unless a client or customer contractually requires them. They are regarded as best practices. A few are legally required. Applied differently for each org
Which loss control techniques are appropriate for property loss exposures?
Vary based on the type of property and the cause of loss threatening the property. Ex: fire v. theft. All categories of risk control can be applied in some way.
Middle Markets: Insurance Needs
Vary considerably according to the products/services they provide. Ex: manufacturing airplanes v manufacturing greeting cards
Market Segment Selection Considerations: Technical Resources
What technical resources are needed to support the customers/products sold?
When is replacement value given?
When replacement or repair has occurred. Can release temporary actual cash value or a settlement if necessary
Captive: Comply with Legal Requirements
Yes! Can be structured to meet all legal requirements, but are rarely licensed to operate as primary insurers in the US.
Finite Risk Plan: Manage Cash Flow Variability
Yes! Cash flows are smoothed over multiple periods. Problem: large premiums may be due at offset.
Large Deductible Plan: Maintain Appropriate Level of Liquidity
Yes! Choose the deductible amount carefully. Lower liquidity needed than retention, but higher than guaranteed cost.
Bad Faith Claim
a claim that implies or involves actual or constructive fraud, a design to mislead or deceive another, or a neglect or refusal to fulfill some good-faith duty or some contractual good-faith obligation
Derivatives
a financial contract that derives its value from the value of another asset.
Accept
accept the risk by planning for ways to deal with uncertainty if it occurs
Specialty Market
accounts that have unique needs, such as professional liability, that are not adequately addressed in the standard market
Economic Conditions
affect investment opportunities. Also inflation affects medical/loss related costs. Rampant fraud and inflated claims. Difficult to achieve profit goals.
Horizontal Divisions: PML v. Amount Subject
amount subject considers the benefit of horizontal fire divisions, but PML includes effects of building features that impede the vertical spread of fire from one floor to the next.
Interests in Property
anyone who would be financially harmed by the destruction of that property
New Agent Contracting
application of predictive analytics. Determining which characteristics of exclusive and independent agents result in the most successful market penetration.
Cross-Selling
application of predictive analytics. Identifying existing policyholder groups to whom efforts to sell additional policies will be most successful.
Operation Risks
arise from people or a failure in the processes, systems, controls, or management (IT)
Stakeholder Acceptance
benefit of better communication in ERM. Confident management and employees. External stakeholders are confident an orgs reputation and assets will be protection.
Captive: Pay for Losses
can meet this goal if properly capitalized/managed
Hold-Harmless Agreement: Manage the Cost of Risk
can meet this goal, subject to any other contractual demands the other party requires before accepting the hold-harmless agreement.
Retrospective Rating Plan: Maintain Appropriate Level of Liquidity
can occur if loss limit and maximum premium are chosen carefully.
Risk Control: Additional Revenue
can sell unbundled risk control services to firms that self-insure their losses.
Estimates of Severity
can use different measures, but two employees from the same company should arrive at identical results because there are rules in place.
Unanticipated Catastrophic Losses
catastrophes of unanticipated severity can cause losses that exceed maximum anticipated losses. Can result in insurer insolvencies, withdrawal from certain markets, and reinsurance shortages.
Obsolescence
caused by changes in technology and fashion, main cause of depreciation.
Change Tracking
changes made to claims are tracked to prevent fraud and identify training needs
Regional Claims Offices
claims reps can report directly to home-office claims or regional/divisional offices that oversee a territory. Have manager, supervisors, and staff.
HB 436-2004
companion to AS/NZS 4360 helps implement the standard in an organization
Analysis of internal and external environements
competitors, customers needs, current/future economy, govt regulations. SWOT analysis may enable executives to determine how receptive the market would be to products/services.
ISO Compilation
compiles billions of detailed records of premiums and losses into aggregate industry data for insurers and regulators.
Business Risk Management Review
complex - property, products, services, employees, liabilities that are unique to the organization.
Catastrophe Exposure
complex to select a limit. No limit for the insurers losses, set by the number and face amount of policies subject to losses by a single catastrophic occurrence.
Intermediaries and reinsurance underwriters association (IRU)
composed of intermediaries and reinsurers that broker or assume non-life treaty reinsurance.
Single Business
concentrate efforts and resources on one industry, product, market to build distinct competitive advantage. Can miss opportunities in other areas.
Focus
concentrate on a group of customers, geographic area, or narrow line of products/services while using a low cost or differentiation strategy.
Physical Hazard
condition of property, people, or operations that increases the frequency/severity of a loss.
Internal Claims Audits
conducted by insurer staff to examine technical details of claims settlement, ensure procedures are followed, and verify documentation. Claims, underwriting, hr, training. The reason for the audit determines which files are looked into
External Claims Audits
conducted by someone other than the insurer's own employees to review overall claims handling practices. Reserves, customer complaints, procedures, documentation. Can be done by state insurance regulators to ensure fair conduct/representation of financial condition.
Claimant Investigation
conducted by taking the claimant's statement. Can help determine the value of the injury/damage, how it was caused, and who is responsible.
Legality and Social Responsibility v. Economy of Operations
conflict - complying can have a large cost
Completed Operations Liability
created because organization is responsible for bodily injury or property damage caused by completed work when the work is completed away from the organization's premises
Professional Liability
created by common law, which imposes a higher duty of care on professionals; a professional owes a duty of care to refrain from an action that carries an undue risk of causing harm to someone else
Premises Liability
created by having visitors to an organization's premises
Products Liability
created by manufacturing or distributing products
Vehicle Weight/Type
damage from an auto accident is related to size, weight, and speed of vehicles involved. Ex: tractor trailers
Secondary Data
data collected by other parties. Usually the starting point of research, because it is immediately available at little or no cost.
Premature Death
death of a person with outstanding financial obligations (children to support, mortgage payments), that can result in financial difficulty for the family that depended on their earnings.
Quality Data
defined as data fit for its intended use.
Optimize/exploit
develop actions to optimize positive consequences to achieve gains
Policy Period
did the loss occur during the policy period?
Claims Audits
ensure compliance with best practices and gather stats on claims.
Gradual Cause of Loss
excluded from insurance. Wear and tear, rust, deterioration. Determine the value of the property at the time of loss.
Intentional Acts of the Insured
excluded from property insurance.
External Exposure
exposure to neighboring buildings. Evaluate the fire risk of those buildings and the risk of transfer to the insured building. Loss prevention and reduction: moving or getting external fire protection.
Fender Walls
extensions of a fire wall through the outer walls.
Extent of Public Exposure
factor in underwriting commercial premises and operations liability. Customers, representatives of suppliers, and the general public. Is the exposure common for the classification, and how much variation is likely? Can change with location, type of business or time of business. What is the legal status of people on the premises and what degree of care does the insured need to give them?
FERMA
federation of European risk management associations. -National risk mgmt associations -Individual risk managers from central europe -Reps from health orgs, education, public
Claims
fulfill insurer's promise to make a payment to or on behalf of an insured if a covered event occurs. Designed to achieve a fair settlement in accordance with the applicable insurance policy provisions.
Partial v Full Coverage in Liability Claims
generally an insurer defends the whole claim whenever part of the claim is covered.
Enterprise Wide Risk Management (ERM)
includes hazard, operational, financial, and strategic risks (market timing risk, new products, supplier disruption, competitors, risk to reputation). Seeks to optimize risk taking with respect to strategic goals.
Insurance Broker
independent business owner or firm that sells insurance by representing customers rather than insurers. They shop among insurance to find the best coverage and value for their clients. Usually don't have binding authority.
Experience Modification Factor
index of account's desirability within a particular class. Penalize unfavorable loss experience in future periods. Most insurers use the National Council on Compensation Insurance's experience rating plan.
General damages
intangible losses, such as pain and suffering.
Loss data as a source of UW info
loss frequency/severity, types of losses, trends in loss experience/reporting. Helps predict future losses and price policies.
Pros of Direct Response Distribution Channel
low/no commission costs
Residual Auto Plans
make compulsory automobile liability coverage available to high-risk drivers who have difficulty purchasing coverage at a reasonable rate in the private market. Usually an insurance pool.
Cause of Liability Loss
making of a claim against the organization by another party seeking damages. Even the threat of a claim results in investigation/settlement costs.
National Accounts: Risk Financing Alternatives
many. Likely to combine commercial insurance with retention and captive insurers.
Financial Condition: Retain or Transfer
more financially secure = can retain more
Subcontractors
must receive certificates of insurance, otherwise they will be counted in an org's premium base.
Temporary and seasonal employees
not well trained, greater risk of being injured. Are they considered employees for the purpose of workers comp? NCCI has several endorsements in these policies to deal with things like this.
Subjective Risk
perceived amount of risk based on an individual's/organization's opinion
Physical and Nonphysical Loss to Property
physical: property can no longer be used for its intended purpose because it has been destroyed, damaged, or disappeared. Subject of property insurance Nonphysical: loss of value not caused by physical damage or destruction such as obsolescence
Premium Auditing and Risk Control
premium auditing may be more accurate using info from risk control reviews
Counteroffer
proposal by an offeree to the offeror that changes the terms of, and thus rejects, the original offer
Loss Prevention
reduce the frequency of a loss
Proactive Avoidance
seeks to avoid a loss exposure before it exists
Cost of Residual Uncertainty
the cost of uncertainty that remains once the firm has selected and implemented loss control, loss financing, and internal risk reduction. Costly to reduce/difficult to measure (subjective) and includes impact on consumers, investors, and suppliers.
Behavioristic Segmentation
the division of a total consumer market by purchase behavior
Other Insurers
third type of legal form of ownership, including pools and government insurers.
Exposure Spaces Model
three dimensional depiction of loss attributes. Horizontal axis: various resources of the org that may change in value. Vertical Axis: shows impacts, the consequences or changes in value of the resources. Z-axis: shows causes (events) of the change in value. Used to consider the range of potential impact from positive to negative.
Evaluation Tools: CAT modeling
type of computer program that estimates losses from future potential catastrophic events
Loss of Use
type of property damage that may be covered under liability policies
Price Risk
type of speculative risk. Uncertainty about cash flows due to changes in cost of raw materials or demand for finished products.
Credit Risk
type of speculative risk. Uncertainty about whether or not customers/creditors will make payments when due. Large for banks/financial institutions, but relevant to any organization with accounts receivable.
Labor
used to estimate replacement cost. hours of labor required for a job, can be calculated using a skilled estimators.
Subrogation
when an insurer pays a claim to an insured for a loss caused by a negligent third party, the insurer can recover that payment amount from the negligent third party.
Threat of Substitute Products or Services
products that are capable of performing the same function as those from another industry become widely available. Makes it difficult to increase prices and limits profits for participants in the original industry.
Insurance Exchange
proprietary insurer that acts as an insurance marketplace. Exchange members underwrite insurance/reinsurance purchased on the exchange. Members are individuals, partnerships, or corporations with limited liability. Members belong to syndicates and delegate day to day operations to the syndicate manager.
Why do individuals practice risk management?
protect limited assets from losses & meet personal goals. It is an informal process encompassing capital accumulation, retirement and estate planning.
Insurer Strategies/Goals
provide purposeful direction for the org. Address market share, sales, service, and markets. Aggressive goals can cause an insurer to choose new distribution systems/channels.
Ignition Sources
provide the means for a fire to start: (a) friendly fires that escape containment, (b) friction generating heat and igniting combustible material, (c) electricity sparks that ignite exposed combustibles, (d) chemical reactions
Building Codes
provide underwriters with info about the construction of buildings erected under those codes.
Strategy Evaluation
provides a method for monitoring a strategies success. 1. Establish standards 2. Create/apply measurements 3. Compare results to standards 4. Evaluate/implement corrective actions if necessary
Federal Crop Insurance
provides crop insurance at affordable rates to reduce losses that result from unavoidable crop failures. covers most crops for perils such as drought, disease, insects, and excess rain, and hail. Federal govt subsidizes and reinsures private insurers for selling and servicing the product. Private insurers may offer separate policies for some perils.
Risk Control
provides info to underwriting to assist in selecting and rating risks. Also helps prevent/reduce losses. Can also market risk control services to raise additional revenue.
Internal Accounting
provides report and analysis capability based on transactions associated with sales activity (production, retention, PIF)
NFIP and Social Good
provides strong incentives to amend and enforce building codes to reduce loss exposure to floods- better for society
Diversification
providing a range of products and services used by a variety of customers.
Punitive Damages
punish a wrongdoer for a reckless, malicious, or deceitful act and deter similar conduct
Risk Awareness
reason subjective and objective risk differ. Organizations unaware of their risks assign very low likelihood to risks.
What is the impact of poor data quality?
reduce reliability of actuarial analyses. Could have a direct effect on the insurer's financial statements.
Loss Reduction
reduce the severity of a loss
Solvency II
regulatory requirements for insurance firms in the EU. Facilitated the development of a single insurance market in Europe w. adequate consumer protection.
Compensatory Damages
reimburse or compensate claimants for BI and PD. Include special and general damages.
Sales Promotion
reinforces the image created by advertising at the agency level. Brochures, giveaways, awards.
Negligence
requires legal duty owed to claimant, a breach of that duty that causes harm, a causal connection between the breach and the harm, and actual BI or PD on the claimaint's part.
Fraternal Organizations
resemble mutual companies, but combine a lodge or social function with their insurance function. They write primarily life/health insurance.
Authority Levels
reserve amounts and payment amounts that claim personnel are allowed to set and make. Higher claims = more experienced rep.
Adjusting underwriting policy based on jurisdiction
response to limited capacity. Ex: restrict acceptance to workers comp if benefit levels in a state are rising.
Redirecting focus on target business classes
response to limited capacity. Stop pursuing a class of business with higher than expected losses and develop a marketing campaign for accounts with better returns.
Fire Wall
restricts the spread of fire by serving as a fire-resistive barrier (floor to roof). Must be free standing (support its own weight), have a parapet 18-36 inches above a combustible roof. No open doors, windows or other spaces through which fire can pass
Ex of Target Market
retailers can be a target market within the small business segment
Self-Insurance: Manage Cash Flow Variability
retained loss outcomes are uncertain.
Manage the Cost of Risk Control
risk control expenses are incurred to reduce frequency/severity of losses or make them more predictable. They should only be undertaken if the benefit exceeds the cost.
Business Continuity Management
risk control process for identifying potential threats to an organization and ensuring the organization's continued business operations
Risk Analysis and Improvements
risk control rep may analyze customer's loss history and submit written recommendations about reducing hazards. Training, info, counseling. Sometimes offer periodic testing/maintenance of fire protection systems.
Loss Prevention
risk control technique that reduces the frequency of a particular loss. Ex: pressure relief valves on a boiler are intended to prevent explosions, but don't completely eliminate them. Can also reduce the standard deviation around expected losses and sometimes reduce severity. Implemented before a loss occurs and is closely tied to causes of loss.
Manage the Cost of Risk Financing
risk financing expenses are usually transaction costs (fees paid to brokers, banks/investment institutions to establish accounts, or for trades). Make sure you are receiving adequate services for the price you are paying.
Alternative Risk Transfer (ART)
risk financing measures other than guaranteed cost insurance.
Middle Markets: Insurance Knowledge
risk manager assists with coverage decisions. Use local, regional, or national brokers to access insurance markets
Organization of Traditional Risk Management
risk manager reports to an organizational department such as finance, operations, or legal. Could also be a risk management department. Hazard identification and safety meetings.
Small Business: Risk Financing Alternatives
risk retention groups/purchasing groups
Radius of Operation
road exposure. Distance traveled affects accident frequency
Crimes Committed by Others
robbery, burglary, theft
Support Producers and Insureds
role of line underwriter. Help producers prepare policy quotations that will "win" accounts.
Coordinate with Marketing Efforts
role of line underwriter. Producers should not submit accounts outside UW guidelines, and underwriters should not reject accounts based on bias.
Manage a Book of Business
role of line underwriters. Can be from a producer, written in a territory or LOB, and works to meet overall goals on product mix, loss ratio, and written premium.
Recommend/Provide Coverage
role of line underwriters. Ensure there are risk mgmt techniques in place to address gaps in insurance coverage. May narrow or broaden requested coverage to meet specific needs. Make sure forms are in place to provide required coverage.
Classify and Price Accounts
role of line underwriters. group accounts with similar attributes so they can be priced appropriately (both profitable and competitive). These classifications are filed with state DOI.
Research the Market
role of staff underwriter, actuaries, and marketing. Effect of adding/deleting business, expanding/retiring states, optimal product mix, and premium volume goals.
Assist with Complex Accounts
role of staff underwriter. Consultants to other underwriters. Can review/approve risks with limits too high for a line underwriter.
Conduct Underwriting Audits
role of staff underwriter. Monitor line underwriter adherence to authority/guidelines. Focus on documentation, procedure, selections. Also look at stats by type of insurance, class of business, size of exposure, territory. Show if UW goals are met, but not if they are a product of the guidelines.
Revise Underwriting Guidelines
role of staff underwriter. Must accurately reflect changes in UW policy. Often include systematic instructions for handling classes of accounts, but can be more general.
Evaluate Loss Experience
role of staff underwriter. Should changes be made to underwriting guidelines? Often occurs when losses are greater than anticipated. Includes market analysis for trend.
Research and Develop Coverage Forms
role of staff underwriter. Work with actuaries/legal to develop new coverages/modify existing coverage forms.
Arrange Treaty Reinsurance
role of staff underwriters. Determine need, select reinsurer, negotiate, and maintain relations. Affects the types of coverage and limits that can be offered.
Review and Revise Pricing Plans
role of staff underwriters. Respond to changes in loss experience, competition, and inflation. Prospective Loss Cost + Expenses + Profit = Rate
Conduct Education and Training
role of staff underwriters. Train line underwriters through formal program or specific classes.
Principles of ISO 31000:2009
rooted in risk management, designed to generate value and continuously scan and react to the environment
UW Guidelines: Distinguish Between Routine and Non-Routine Decisions
routine: line underwriter has decision making authority, non-routine: does not.
UW Guidelines: Support Policy Preparation and Compliance
rules and eligibility for various rating plans (retrospective, experience). Regulations are incorporated in the guidelines.
Sales Fulfillment
satisfactory delivery of the products and services that result from the product development activity (customer service, underwriting, claims, etc.) Each functional area has milestones with metrics to measure progress on goals.
Place of Incorporation
second classification of insurers: domestic, foreign, alien
Comply with legal requirements: retention or transfer?
secondary benefit of transfer, can happen with good retention management
Special Purpose Vehicle
securitized assets are sold backed by an asset using this mechanism
Reactive Avoidance
seeks to eliminate a loss exposure that already exists. Avoids loss exposures from future activities but does not eliminate loss exposures from past activities.
Accessible
segments should be able to be effectively reached and served
Insurer Strengths and Distribution
select distribution systems/channels to maximize opportunities to get market share and minimizes weaknesses. Financial resources, core capabilities, expertise and reputation of producers.
Human Resources
select, train, and dismiss employees. Maintain records, performance reviews, compensation management, orientation, employee benefits.
Call Centers
sell insurance products and services through telemarketing (representatives, touch tone, speech enabled). Make sales, answer questions, report claims, handle billing issues and process policy updates.
Appraisal Clause
settle disputes over the value of property or amount of loss. Insurer and insured get estimates from contractors and negotiate to reach an agreement.
Individuals: Insurance Needs
share the need to protect real/personal property and liability coverage for losses arising out of their actions/ownership of property. Allows insurers to pool loss exposures.
Deductible
should be applied before coinsurance unless the policy states otherwise.
Market Research Methods
should be as objective/scientific as possible.
Loss Adjustment Expenses
significant in per risk and per occurrence excess of loss treaties. Consider them when selecting retentions and reinsurance limits
Remote Station System and Proprietary Alarm System
similar to central station systems, except they do not signal a commercially operated central station.
Middle Markets: Negotiating Power
some, because of their credible loss history, high volume of premiums, and broker representation
Selection as a Nonfinancial Measure
specified percentages preferred, standard, non-standard
Claim Guidelines
specify how certain claims handling tasks should be performed. Ensures accurate information and properly handled claims. Used for training and reference for infrequent tasks. Can be electronic or paper and can defend against a bad-faith lawsuit.
Market Risk
speculative risk of investing. Associated with fluctuations in the price of stocks/bonds.
Inflation Risk
speculative risk of investing. May lose purchasing power due to an overall increase in the economy's price levels.
Intertemporal Risk Transfer
spreading of risk through time. Does not require a large number of similar exposure units.
UW Guidelines: Synthesize Insights and Experience
staff underwriters can include approaches taken in underwriting particular classifications/lines of business. Repository for insurer's cumulative expertise.
Choosing Distribution: Core Capabilities
staff, processes, technology. Strength in large commercial accounts may lead a firm to choose agents/brokers.
Regulatory Controls
state based insurance regulations stipulate the financial requirements that insurers must sustain to operate within a state and the marketing conduct to which insurers must adhere. Stabilizes and standardizes.
Market Conduct Regulation
state insurance departments oversee four areas: - sales/advertising - underwriting - ratemaking - claims settlement
Insurer's Supporting Functions
- Risk control - Premium auditing - Actuarial - Reinsurance - IT
Unsafe Conditions
easier to identify than unsafe acts.
Determining Damages in PD Claims
- Can deduct depreciation from replacement cost - Contributory negligence/comparative negligence - Can be subrogation claims from other insurers
Capital Market Alternatives to Traditional and Nontraditional Reinsurance
- Catastrophe bonds - Catastrophe risk exchange - Contingent surplus note - Industry loss warranty - Catastrophe option - Line of credit - Sidecar
Occupancy
- Categories - Characteristics of contents - Occupancy hazards
Why may a given property have a public protection class inferior to the community as a whole?
- Challenging exposure to fires that fire department is not equipped to handle - Fire service may lack year round access to property, especially with private access roads
Data Stages before reaching Actuaries
- Collected by direct or independent agents, third party administrators, managing general agents - Transferred to insurer's processing system - Grouped/accumulated, and mapped to a structure Data are processed and modified by people of different professions and qualifications, leading to possibilities of errors.
Physical Hazards in Premises and Operations Liability
- Common Hazards (slip and fall) - Special Hazards of the Class (certain type of businesses) - Special Hazards of the Risk
What are risks to the business model?
- Competition - Technology - The market - Customer's demands
General Liability Rating Elements
-Location -Coverage -Type of Risk -Policy Limit -Deductible -Coverage Trigger - Rating basis
Developing Safety Management Programs
- Complete evaluation of insured's operations -Establish goals, measures, resources, monitoring - Insured must implement the program on their own, but consultant can help with monitoring
Feedback from Underwriting Audit
- Are procedures being followed? - Are procedures current and realistic? Do they need to be revised?
Reviewing Operations
- Are there classifications not shown on the policy? - How is management cooperating? -Organizational changes/new loss exposures, anything else that stands out - Provide underwriting with sufficient rating info
What is the benefit of risk classification?
- Assess risk with similar attributes -Manage risk with similar techniques -Don't overlook risks in the same class
What are the difficulties of underwriting subcontractors?
- At beginning of policy, insured doesn't know which subcontractors will be used - Cannot notify the insurer every time a new subcontractor is higher - Underwriter must rely on the insured's reputation for hiring competent subcontractors. - Require certificates of insurance for each subcontractor.
Pros of Internet as a Distribution Channel
- Automation lowers costs of underwriting and claims handling - Fewer sales employees needed - Increased brand awareness/marketing potential - Cross selling opportunities
Nuances of Products Liability Claims
- Bases of Liability - Product and Manufacturer Identification - Use of experts - Review of warning and instructions - Improper Use
What changes alert to changing loss exposures?
- Big policy change requests - Big/unique loss occurrences - Risk control/safety inspection reports - Premium audit results
Unique Characteristics of Employee Dishonesty Loss Exposures
(a) Access $ and valuable property, know routines of other employees, and crime controls. (b) Hide losses from discovery (c) Longer time, more losses (d) Employers are reluctant to believe employees would steal from them, creating opportunities for theft and adverse selection. (e) Employers may be reluctant to prosecute stealing employees.
How do claim representatives determine cause of loss?
- Accept the insured's word - Hire experts/SIU to investigate - Personally investigate
Sources of Products Liability
- Breach of Warranty - Negligence - Strict liability in tort
5 Steps to Integrating ERM and Strategic Planning
- Develop ERM goals by establishing the internal and external contexts - Identify risks (risk assessment) - Analyze, evaluate and prioritize critical risks (risk assessment) - Treat critical risks, considering priority (risk treatment) - Monitor critical risks (monitor and review)
Tests for Data Reasonability
- Distributional edit review -Consistency checks -Statistical tests like chi-squared goodness of fit -Graphical tests -Industry comparisons, reasonable range of results
Contents of Fleet Safety Programs
- Driver selection -Vehicle maintenance -Accident Reporting
What is the primary consideration in underwriting workers compensation insurance?
- Existence or non existence of on premises and off premises hazards
Three Financial Consequences of Risk
- Expected cost of losses or gains -Expenditures on risk management -Cost of residual uncertainty
Why does the government become involved in insurance?
- Fill unmet needs - Compel people to buy insurance - Greater efficiency/convenience - Social good
Constraints on Underwriting Policy
- Financial Capacity - Reinsurance - Regulation - Personnel
In what fields do claims representatives most often work?
- First- party property damage claims - Third- party bodily injury claims
Benefits of independent agencies/brokers
- Flexible, can meet needs of many consumers - Spread geographically - Can assist in establishing self-insurance, risk control, alternative risk financing - Can sometimes settle small first party claims
Hit Ratio too Low
- High competition - High rates - Restrictive coverages - Unskilled underwriter - Tight underwriting - Poor service - Poor insurer/producer relationship
Exposures Insured through Surplus Lines Brokers
- High limits - Broad/specialized coverage - Unusual/unique loss exposure - Tailored insurance program - Unfavorable loss exposure (poor claims history)
Why is insurance to value helpful for the insurer?
- Higher limits of property insurance, generating higher premiums that more adequately reflect exposures - An adequately insured book of business - Competitive status for the insurer (underinsurance not generating enough premiums could indicate higher rates, making the insurer less competitive).
On-Premises Hazards
- Housekeeping: physical layout, cleanliness, operations efficiency - Maintenance: machines, equipment, materials and processes
How can risk control help earn a profit?
- Improve underwriting decisions - Improve premium volume - Encourage insureds to improve risk control - Reducing insureds losses - Providing additional revenue - Reducing errors/omissions claims against the insurer
Underwriting Products Liability Loss Exposures
- Inherents hazards of a product (if not inherently hazardous, it has a minor loss exposure) - Applicants business, limits of liability, business size and scope - Not more than one ground for recovery by a plaintiff
Insurance Customers
- Insurance Needs - Knowledge of Insurance - Access Method - Negotiating Ability - Risk Financing Alternatives
Nuances of Transport/Bailment Claims
- Insurance coverages - Legal liability (unless otherwise stated, the carrier is responsible for damage)
Special Considerations in Residential Dwelling Claims
- Insured's Concerns - Additional Living Expense - Contractors for estimates - Restoration/cleaning services
How does regulation impact underwriting policy ?
- Insurers must be licensed - Rates, rules and forms must be filed - Some states must file UW guidelines - Can require coverage for unfavorable loss exposures - May have to withdraw if rate increases don't go through
Construction Materials
- Interior finishing materials on walls, floors, and ceilings - Insulation can contain the heat of a fire on structural members of a building - Roof's exterior provides a barrier against sparks and embers from the external environment
Special Considerations in Residential Personal Property Claims
- Inventory - Depreciation - Sublimits - Scheduled Property
Workers Comp Claims
- Investigating Comp Claims (usually doesn't happen) - Controlling medical expenses - Controlling disability expenses
Determining Legal Liability
- Investigation - Tort Liability - Criminal Liability - Contractual Liability - Statutory obligations (violating a traffic law) - Vicarious Liability - What defenses are available?
What are the four functions of facultative reinsurance?
- Large line capacity for loss exposure that exceed limits of treaty reinsurance - Reduce exposure in a geographic area - Insure loss exposure with atypical characteristics to keep treat reinsurance affordable - Insure classes excluded under treaty reinsurance
How do predictive models in UW work?
- Variables of risk are developed to rank the likelihood of loss - Based on UW guidelines, loss experience (internal and industry) and UW expertise - The ranking developed by the variables is a predictive measure of future profit potential based on the account's characteristics
Determining Coverage
- What is the claimant alleging? This determines coverage, even if untrue. - Coverage problems - some parts of the claim are covered and some are not. - BI and PD, not defamation, false arrest, advertising injury or malicious prosecution - Intentional Acts - Contractual obligations - Property under the insured's control is excluded
Develop Underwriting Alternatives
- accept a submission as is - reject the submission - make a counter- offer
Limits of Risk Transfer
- can almost never transfer 100% of losses (deductibles, limits) - the ultimate responsibility for paying loss falls on the org. Relies on good faith and financial strength of the insurer
Disadvantage of Hedging
- can destabilize the entire finances of a company if bad speculative hedges are made -may no longer be able to pay retained losses - the index/measure may not be highly enough correlated with a businesses losses, which wouldn't provide the needed protection.
Advantage of Hedging
- can reduce an orgs business risk loss exposures - greater capacity to bear both business risks and hazard risks, reducing its dependence on traditional insurance
Pros of Retention
- cost savings - control of claims process - timing of cash flows - incentives for risk control
Pros of Captive
- earn investment income on loss reserves - can cover exposures difficult to insure in primary markets
Factors to Consider when Choosing a Risk Financing Measure
- mix of retention and transfer - loss exposure characteristics - individual or organization specific characteristics
What are the benefits of segmenting markets?
- more close identification of customer needs and products tailored to those needs. - less likely to encounter competition for a specific group.
How are audited files selected?
- random - files with notable claims
Which risk control techniques are used to control liability losses?
-Avoidance -Loss prevention by controlling hazards -Loss reduction through consulting with an attorney, responding respectfully, and participating in alternative dispute resolution
Decline Mode Strategies
-Bankruptcy/Liquidation -Harvest Strategy - Turnaround Strategy - Divestiture Strategy
BS 31100
-British Standards Institution -code of practice for risk management -principles and terminology, recommendations of model, framework, process, and implementation -scalable: all sizes and sectors can use it for proportionate risk management
What 3 things must be determined to pay a loss?
-Cause of Loss -Liability -Loss Amount
Claims and Premium Audit
-Claims can help verify employment classification -Premium audit can verify the correct classification of claims - Can verify workers comp injuries happened to employees - Inventories, contractor's equipment value, automotive value, etc.
Underwriting and Premium Audit
-Classification of exposures - Identification of inadequate exposure estimates - Anticipated loss exposures v. actual - Identify new exposures - Desirability of an account - Advance audits ensure business is classified appropriately
COSO II
-Committee of Sponsoring Organizations of the Treadway Commission Enterprise Risk Management - Integrated Framework - board establishes an org wide strategy to manage risk based on risk appetite - how to initiate dialogue with an org board about establishing ERM goals as part of strategic mgmt - Nothing about risk mgmt processes - Focus on threats to an org and application of controls -Audience must be large enough to require a board
Analyze, Evaluate, and Prioritize Critical Risks (Risk Assessment)
-Competition -Customer demographics/behavior -Technology -Economy -Politics and regulation Ask "what if", evaluate gradual trends, identify top 5 risks, their likelihood, and how they will be treated
Claim Function Goals
-Complying with Contractual Promise for fair, timely and equitable service -Supporting the Insurer's Financial Goals by rejecting fraud and limiting claim expenses
Marketing and Sales with Premium Audit
-Delay of return premium to an insured could affect retention. - Professional conduct important in retention - Can refer the insured to marketing for new products - Pre audits have public relations value, take advantage of record keeping to save the insured money
Off-Premises Hazards
-Duration of Travel -Mode of Transportation -Hazards at remote job sites
What forces act on the property-casualty insurance marketplace?
-Economic -Regulatory -Technology -Underwriting Cycles -Catastrophic Losses
Unique Factors in the Insurance Marketplace
-Economic Forces -Regulatory Controls -Demands for Technology - Underwriting Cycles - Unanticipated Catastrophic Losses
What are the two main benefits of ERM?
-Enhanced decision making -Improved risk communication
Categories of Organizational Controls to Monitor Goals
-Financial -Operational/Process -Human/Behavior
Market Analysis in Global Expansion
-Financial requirements -Return on investment -Competitive advantage -Distribution channels, availability of producers, underwriting practices - Cultural/language barrier
Factors Affecting Reinsurance Needs
-Growth plans -Types of insurance sold -Geographic spread of loss exposures -Insurer size -Insurer structure -Insurer financial strength -Senior management's risk tolerance
Commercial Property: Is fire ideally insurable?
1. Pure Risk: except arson for profit 2. Fortuitous: except arson for profit 3. Definite and measurable 4. Large # of similar exposure units depending on location, type and use 5. Independent and not catastrophic 6. Economically feasible premiums
Commercial Liability: Is premises and operations liability ideally insurable?
1. Pure risk 2. Fortuitous 3. Definite and measurable 4. Large # of similar exposure units 5. Independent and not catastrophic 6. Premiums are feasible
Commercial Net Income: Are net income losses from property losses ideally insurable?
1. Pure risk 2. Fortuitous 3. Definite and measurable 4. Large number of similar units 5. May be catastrophic (substantial portion of the losses from H.Katrina) 6. Feasible premium (business income coverage)
Commercial Liability: Is products liability ideally insurable?
1. Pure risk 2. Fortuitous 3. Definiteness and measurability depend on product 4. # of similar exposure units depends on product 5. can be catastrophic 6. economic premiums depends on the product
Commercial Net Income: Are net income losses from liability losses ideally insurable?
1. Pure risk 2. Fortuitous 3. May not be definite (no hard stopping point to a restaurant losing customers due to bad PR). 4. Large number of similar units 5. Independent and not catastrophic 6. N/A bc this coverage doesn't exist
Insurance Derivative
Financial contract whose value is based on the level of insurable losses that occur during a specific time period.
Strategic Risks
Arise from trends in the economy and society, including changes in the economic, political, and competitive environments, as well as from demographic shifts
How is insurance supply different than other industry's?
Financial rather than physical. Varies with sellers expectations of profits
Why do reinsurers investigate the primary insurer?
Financial strength, experience, reputation, management. Needs to be a good faith relationship
Moral Hazard
A condition that increases the likelihood that a person will intentionally cause or exaggerate a loss (ex:financial difficulty, purchasing an insurance policy). DELIBERATE.
Hold-Harmless Agreement
A contractual provision that obligates one of the parties to assume the legal liability of another party. Non-insurance risk transfer measure. Ex: manufacturer often signs contract to assume liability losses a distributer suffers as a result of distributing the manufacturer's products.
Line authorization guide
A document that provides the minimum and maximum line a primary insurer can retain on a loss exposure. Controls the property limits accepted based on treaty reinsurance.
Special Purpose Vehicle (SPV)
A facility established for the purpose of purchasing income-producing assets from an organization, holding title to them, and then using those assets to collateralize securities that will be sold to investors.
Indirect Loss
A loss that arises as a result of damage to property, other than the direct loss to the property.
Duplication
A risk control technique that uses backups, spares, or copies of critical property, information, or capabilities and keeps them in reserve. Reduces severity without increasing frequency, and also makes losses more predictable. Can also arrange a contract to get lease facilities is something bad occurs.
Finite Risk Insurance Plan
A risk financing plan that transfers a limited (finite) amount of risk to an insurer. Most of the insured's premiums go toward their own losses, and profits are shared with the insured. Usually used for especially hazardous exposures (environmental, earthquake) for which insurance is limited/unavailable. Premium is a very high percentage of the policy limits.
Retention
A risk financing technique by which losses are retained by generating funds within the organization to pay for the losses.
Liability Loss Exposure
Any condition or situation that presents the possibility of a claim alleging legal responsibility of a person or business for injury or damage suffered by another party. Results from the claim itself, not the payment of damages.
Market Segment Selection Considerations: Company Size and Resources
Are we limited by our company size and resources to compete for customers in this market segment?
Direct Writer Marketing System
An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer.
Direct Writer Marketing System
An insurance marketing system that uses sales agents (or sales representatives) who are direct employees of the insurer. May be compensated through salary or commissions, high for NBUS. Don't own expirations. Can also be a broker for products the insurer doesn't sell. Less admin functions than brokers/agents.
Exclusive Agency Marketing System
An insurance marketing system under which agents contract (not employees)I to sell insurance exclusively for one insurer (or for an associated group of insurers). Paid on commission, focused on new business production. Do not own expirations. Issue policies, collect premiums, process claims.
Exclusive Agency Marketing System
An insurance marketing system under which agents contract to sell insurance exclusively for one insurer (or for an associated group of insurers).
Large Deductible Plan
An insurance policy with a per occurrence or per accident deductible of $100,000 or more. High amount of retention, lower premiums. Insurer adjusts/pays all claims, even those below the deductible level. Common for workers comp, auto liability, and general liability.
Nonadmitted Insurer
An insurer not authorized by the state insurance department to do business within that state.
Reciprocal Insurance Exchange
An insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact (expert). Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member.Each member is both an insured and an insurer.
Mutual Insurers
An insurer that is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them. Largest segment of cooperative insurers.
Professional reinsurer
An insurer whose primary business purpose is serving other insurers' reinsurance needs.
Reservation of Rights Letter
An insurer's letter that specifies coverage issues and informs the insured that the insurer is handling a claim with the understanding that the insurer may later deny coverage should the facts warrant it.
What are examples of ERM goals?
Anticipate and reduce deviations from expected outcomes Anticipate and recognize emerging risks Drive consistency in risk taking Reduce earnings volatility
Contingent Surplus Note
as an option a primary insurer can immediately obtain funds by issuing notes at a pre-arranged rate of interest.
How does a loss occur?
assets owned by an individual or organization decrease in value.
Transfer
assign the responsibility to manage the risk to a third party
Increases Large Line Capacity
Benefit of reinsurance. Insurers can assume more significant reinsurance than they'd otherwise be able to.
Provide catastrophe protection
Benefit of reinsurance. Protects solvency
Providing underwriting guideance
Benefit of reinsurance. Reinsurers work with a variety of clients and learn a lot. Must respect clients confidentiality.
Stabilize loss experience
Benefit of reinsurance. Volatile losses are bad for a companies stocks, sales agents, underwriting. Can be for a book of business, class of business, or entire business. Limits liability
Manage cash flow variability: retain or transfer?
Benefit of transferring, retained losses expose individual/org to more variability in cash flows
Measurement of the Exposure Unit Base
auditing error in exposure units distorts rating.
Directive IPPC 96/
Integrated Pollution Prevention and Control -common integrated EU approach to assessing the environmental impact of highly polluting industries
Pre-Audit Survey
auditor confirms info on the application. Can set up appropriate bookkeeping procedures for later.
Merger
Combination of two or more companies into a single firm. Combines resources to reduce overhead expenses, allowing the new company to be more successful than the sum of the parties to the merger.
Security Interests
can exist in almost any property. Created by contract or law. Usually a creditor.
Contractor
covered by its CGL policy for its vicarious liability for the acts of its subcontractors.
What must occur before line underwriters can underwrite?
Determine whether he/she has the necessary authority to make the decision. Communicated in the underwriting guidelines.
Loss exposure v. exposure unit
Exposure unit is a fundamental measure of the loss exposure of an insurer. A loss exposure can be made of multiple exposure units. A $500,000 house exposure could be 5 exposure units (1 unit per $100,000). These 5 units are not independent.
Insurance: Enabling Efficient Use of Resources
Don't need to set aside so much $, can invest, grow, have higher quality of life
Capacity in UW cycles
Financial capacity measure by premiums written: policyholders surplus. A ratio greater than 3;1 is overextended. There has been a trend toward conservative ratios since the 1970-1980 crisis.
Third Party Administrator (TPA)
Handle claims, keep records, and provide statistical analysis for self-insured firms. Often associated with large adjustment firms or insurance companies.
Why is probability important?
Helps focus risk management attention on risks that can be appropriately managed. Helps decide which activities to undertake and which risk management techniques to use.
Demand v Price
Higher the price, smaller the quantity that consumers are willing to purchase. Lower the price, greater the quantity consumers will purchase
Real v Personal Property
How permanently attached is the fixture? Is the fixture well adapted to the real property What was the intent of the owner?
What business rules should metadata include?
How reported claims are defined, interdependencies between data elements.
Market Segment Selection Considerations: Market Segment Competition
How significant is competition in this market segment? What are characteristics of competing insurers in this market segment?
Measuring Insurer Performance
How successful are they at meeting established goals? - Profitability Goals - Customer Needs - Legal Requirements - Social Responsibilities
Microeconomic context
How the behavior of individuals and companies determines supply and demand, and how price interacts with supply and semand
Funds of Insurers
Initial capital from investors Retained Earnings
Finite Risk Plan: Pay for Losses
Insurer pays for losses as they become due. However, the insured ultimately pays for almost all its own losses.
Fulfill their Duty to Society
Insurer should avoid causing public harm. Volunteer/donate, employee benefit plans. Using funds competes with profit and customer needs goals.
Return on Equity in UW cycles
Insurers employ capacity as long as expected return is greater than return on equity threshold. When ROE is too low, insurers may increase prices to satisfy shareholders. Leads to hard market
Rating Agencies
Insurers must maintain excess funds to get a good rating (conflict with profit goals), especially with large catastrophe exposure. Constraining when ratings decline.
Not Catastrophic
Insurers need to be reasonably certain their losses will not exceed specific limits. If a large number of insureds who are covered for the same type of loss occur losses at the same time, the insurance mechanism would fail.
Pain and Suffering
Intangible injuries, including inconvenience and anxiety as well as pain and suffering associated with a physical injury. Usually the largest component of damages.
Damages trigger
Losses > liability limits of at-fault driver. Applies to UIM coverage
Hard Market
Low competition, buyers struggle to fond coverage, new competitors may enter the market.
Public Fire Protection
Made available to all properties in a defined area through governmental authority. Varies by community. Geographic features and lack of hydrants can influence fire service.
What is the purpose of metadata?
Make information as transparent as possible. Prevents misunderstanding of the information that may lead to misuse or improper conclusions.
Claim Information Users
Marketing (customer satisfaction, new product ideas) Underwriting (claim investigation reports, trends, coverage interpretation) Actuarial (loss information, reserving)
Economy of Operations v. Tolerable Uncertainty
May need to pay more than ideal to achieve tolerable uncertainty
Underwriting Performance
Measured by net underwriting gain or loss. Earned premiums - incurred losses and underwriting expenses. Profit or loss derived strictly from the sale of insurance products.
Fire Protection
Measures taken to prevent or reduce the damage done by fire. can be public or private. Includes prevention, detection, and suppression
ISO 14971:2007
Medical Devices-Application of Risk Management to Medical Devices, became EN ISO 14971:2009 when European Center for Normalization opted to make it a European standard for the managing of risk throughout the life of medical devices
association
Member companies use reinsurance and risk sharing techniques. Member companies issue their own policies, but each policy has attached reinsurance that certifies each company assumes a certain percent of the total insurance. Increase ability to handle special/hazardous risks.
Small Business: Knowledge of Insurance
No full time risk manager. Owner or manager with limited knowledge of insurance markets is responsible for making decisions, and often has the help of a local agent/broker.
ISO Class 3
Noncombustible construction. Not fire resistive. Unprotected steel structural supports twist and bend when subjected to the heat of fire. Exterior walls, floor, and roof are supported by and made of metal, gypsum, etc.
Product Proposal and Sales Goals
Part of marketing plan: A summary of the new product's operation; a description of the unmet need the product is designed to fulfill, and summarized sales projections
Premium Audit: Hazards
Physical: construction, materials, poor safety/hygeine Moral: questionable business practices/failing business Morale: indifference to proper maintenance/financial records
Finite Risk Plan: Manage the Cost of Risk
Profit sharing feature encourages and rewards successful risk control, reducing the cost of risk.
What are the insured's duties after a loss?
Provide prompt notice. Submit a proof of loss or sworn statement within 91 days. Protect property from further damage. Cooperate with the insurer.
Is the UW cycle more influenced by supply or demand?
Supply- which is variable compared with inelastic demand.
Underwriting Cycles
a cyclical pattern of insurance pricing, in which a soft market (low rates, relaxed underwriting and underwriting losses) is followed by a hard market (high rates, restrictive underwriting, and underwriting gains) before the pattern repeats itself. Insurers must adapt to the cycle to remain competitive/profitable.
Foreign Insurer
a domestic insurer that is licensed to do business in states other than its domiciled state
How can insurers decrease underwriting expenses?
Use expert computer systems or standardize underwriting guidelines.
Historic Prospective on UW cycles
When the market is soft, an unforeseen and devastating event has caused insurers to reduce supply, raising prices.
Large Deductible Plan: Manage Cash Flow Variability
Yes! Choose the deductible amount carefully. Met better than self-insurance but not as well as guaranteed cost insurance.
Guaranteed Cost Insurance: Comply with Legal Requirements
Yes! Especially regarding loss exposures that are legally required to be transferred
Large Deductible Plan: Comply with Legal Requirements
Yes! Insurer guarantees all claims will be paid.
Large Deductible Plan: Pay for Losses
Yes! Insurer pays losses as they are due and is reimbursed for those under the deductible
Retrospective Rating Plan: Manage Cash Flow Variability
Yes! Loss limit and maximum premium must be reasonably set. However, still some uncertainty.
Can captives insure anyone other than their parent?
Yes! Often administer third party business like warranties on the products they sell. May have different/more restrictive requirements, and require more expertise.
United States Longshore and Harbor Workers' Compensation Act
a federal statute that eliminates the right of most maritime workers (other than crew members on vessels) to sue their employers and, in return, requires such employers to provide injured or ill workers with benefits like those provided by state workers comp
Insurance-Linked Security
a financial instrument whose value is primarily driven by insurance and or reinsurance loss events.
Voluntary Report
a form the insured completes and returns to the insurer's premium audit department
Related Diversification
a growth strategy whereby the current target market and/or marketing mix shares something in common with the new opportunity. Can share distribution system or research/development. Can leverage fixed costs across new products/services to lower unit costs
Fortuitous
a loss that is accidental and unexpected from the insured's point of view. If the insured could control the loss, they may have an incentive to cause loss of property they no longer want to own and premiums would be impossible to calculate.
Capital Market
a market in which long-term securities are traded. Usually only used by insurers and reinsurers to finance risk due to their time and expense to implement.
Individual Case Method
a method of setting reserves based on the claim's circumstances and the claim representative's experience in handling similar claims
Account Underwriting
a method of underwriting in which all of the business from a particular applicant is evaluated as a whole
Agreed Amount
a method of valuing property in which the insurer and the insured agree on the property's value at the time the policy is written and that states the amount in the policy declarations as the amount the insurer will pay in the event of a total loss to the property. Often for arts and valuables.
Spearman's Rho
a non-parametric indication of statistical dependence between two variable data elements
Advance Payments
a payment made to a claimant following a loss to cover the immediate expenses from that loss. Meant to discourage claimants from hiring lawyers. There is no release, but the advance payments count toward a final settlement.
Premium pay (shift differential)
a payroll system that increases the regular hourly wage rate for the night shift or other special conditions
Surplus Lines Broker
a person or firm that places business with an insurer that is unlicensed (nonadmitted) in the state in which the transaction occurs but that is permitted to write insurance because coverage is not available through standard market insurers. Independent and represent multiple insurers.
Growth Plans and Reinsurance
a primary insurer that expects rapid premium growth is likely to need more reinsurance to maintain policyholders surplus, support unstable loss ratios, and navigating new coverage requirements.
Evaluation Tools: Predictive Modeling
a process in which historical data based on behaviors and events are blended with multiple variables and used to construct a model of anticipated future outcomes
Return on Equity
a profitability ratio: net income/net worth. Net worth is also called shareholders' equity or policyholders' surplus.
Underwriting Audits
a review of underwriting files to ensure that individual line underwriters are adhering to UW guidelines.
Affinity Marketing
a type of group marketing that targets various groups based on profession, association, interests, hobbies, and attitudes (alumni, bar associations, credit card users). Sometimes discounted
Determine an Appropriate Premium
accurately classify and properly rate loss exposures in order to pool them. Want adequate premium (competitive and profitable). Rate may be automatically determined by classification, or may be adjusted after.
Post Loss Goals v. Economy of Operations
achieving post-loss goals requires more risk management, which conflicts with economy of operations.
Products Liability and Completed Operations Liability
address exposures to accidents or damage caused by a defect in the finished work, away from the insured's premises, over which the insured has relinquished control.
Why do organizations practice risk management?
adds value and ensures losses/missed opportunities don't prevent it from meeting goals
Retrospective Rating
adjusts the premium for the current policy period to recognize the insured's loss experience during the current policy period
Experience Rating
adjusts the premium for the current policy period to recognize the loss experience of the insured during past policy periods.
Unrelated Diversification
aka conglomerate diversification. Involves acquiring companies that have no relationship to the existing business operations, and is riskier than related diversification. There are additional costs, a loss of synergy among units, and diminishing returns from economies of scale or scope.
Activity Log
aka file status notes. a record of all the activities and analyses that occur while handling a claim. Claim file should speak for itself so anyone reading it knows exactly what happened.
Facultative Reinsurance
aka non obligatory reinsurance. Reinsurance of individual loss exposures in which the primary insurer chooses which loss exposures to submit to the reinsurer, and the reinsurer can accept or reject any loss exposures submitted. Uses a separate reinsurance agreement for each loss exposure it wants to reimburse.
Prospecting
all producers locate persons, businesses, and other entities that may be interested in buying insurance.
Access Security
an individuals ability to review, enter, and change information in a claims information system. Password, managers only data, unauthorized individuals cannot change crucial info
Customer Focus
an insurer must understand the characteristics of specific customer groups and provide products and services that respond to those characteristics
Large-Line Capacity
an insurer's ability to provide larger amounts of insurance for property loss exposures, or higher limits of liability for liability loss exposures, than it is otherwise willing to provide
Mixed Marketing System
an insurer's use of more than one marketing system or distribution channel to attract a wider range of customers.
Strategy Formulation Steps
analysis of external and internal environments; development of long-term strategies and organizational goals; determination of strategy at different organizational levels
Personal Loss Exposure
any condition or situation that presents the possibility of a financial loss to an individual or a family by such causes as death, sickness, injury, or unemployment
Producer
any of several kinds of insurance personnel who place insurance and surety business with insurers, representing the insured, the insurer, or both.
Designing and Evaluating Marketing Campaigns
application of predictive analytics. Defining aspects of advertising efforts that result in the highest response rates from prospective customers.
Individualized Customer Support
application of predictive analytics. Tailoring customer support to specific customers' needs.
Clash Cover
applies when claims from 2 or more policies arise as the result of the same occurrence. Consider the highest limits offered by the primary insurer and the perceived likelihood multiple policies may be involved in a single occurrence.
Political Risks in Global Expansion
arise from actions of host-country governments - kidnap/random - terrorism - civil unrest - war - revolution - changes in government - confiscation of business assets/interference in rights of corporate assets - local businesses treated more favorably?
Operations Liability
arise from an insured's business operations conducted away from its premises and from uncompleted work
Hazard Risks
arise from property, liability, or personnel loss exposures and are generally the subject of insurance. Usually managed by risk manager.
Financial Risks
arise from the effect of market forces on financial assets or liabilities and include market risk, credit risk, liquidity risk, and price risk. Usually managed by a CFO.
Product Liability Loss Exposures
arise out of injury or damage that results from defective or inherently dangerous products.
Premises Liability
arises from the insured's ownership/possession of real property
Line of Credit
arrangement in which a bank or other financial institution agrees to provide a loan to a primary insurer in the event the insurer suffers a loss
Personal and Advertising Injury Liability
automatically included as Coverage B in the ISO CGL coverage form unless excluded. Covers libel, slander, false arrest, wrongful eviction, invasion of the right of private occupancy, and infringement of copyright, trade dress, or slogan. Excludes companies in the advertising business.
Reinsurance in Underwriting Policy
availability and cost. Reinsurance may exclude types of insurance/classes of business or be too expensive.
Standard Market
average to better-than-average accounts for which the standard premium is at least adequate
Prior Claim Investigation
avoid paying for PD/BI that has previously been paid through prior claims by the same insurer or a different insurer.
Avoidance
avoid the exposure completely, (most effective, probability of loss = 0). Expected value of losses exceeds expected benefits of the activity
Moral Hazard Costs
avoided by retention. Cost included in underwriting and claims to verify info submitted
Adverse Selection Costs
avoided by retention. Cost of being pooled with high-risk policyholders.
Social Loading Costs
avoided by retention. Cost of residual pool an insurer is forced to insure is spread among policyholders
Admin Costs
avoided by retention. Underwriting, claims, and investment + profit are included in premiums.
Management Consensus
benefit of better communication in ERM. Corporate culture embraces risk as a component of each decision. Managers know the ups and downs of each decision. They can act with confidence being able to accurately assess risk. (not top down driven). Encourage risk ownership through performance evaluation.
Customer Service
billing, claims, underwriting, agency relations, technology, internet, it.
Strategic Alliance
bring together separate areas of expertise and gain a host-country participant who can access local markets familiar with laws, regulations, and customers.
Mission Statement
broad expression of an entity's purpose or goals that reflects the entity's character and spirit. Specifies the product/services an org provides, its stakeholders, and what is important to the org.
Underwriting Employee Dishonestly Loss Exposures
business owners policies or commercial package policies. Ensure there is no moral hazard, burglary/robbery risk control systems, limited amounts of insurance, solid management who care/are concerned.
Operational v. Premises Loss Exposures
businesses with substantial premises loss exposures (apartment houses/office buildings) generally have minimal operations loss exposures. The operational hazards are more varied than premises hazards.
Financial Risk Transfer Costs
buying options to hedge the cost of currency exchange rate risk
Reinsurance
can be a separate department of an insurer to arrange and maintain reinsurance agreements
Finite Risk Reinsurance Premiums
can be a substantial percentage of reinsurance limits. Low probability of reinsurer underwriting loss.
Importance of Information Systems in Underwriting Authority
can be automatically coded and exceptions can be documented. Personal auto/homeowners may have automated underwriting.
Non-Parametric Rank Tests
can detect inconsistent or divergent patterns in data and provide an objective measure of data quality.
Property Type and Location
claim representative must determine what property is covered and where. Must differentiate between real and personal property
General Release
claimant releases the insured of all liability for the claim and insurer agrees to pay the claimant the agreed settlement amount.
Claims and Risk Control
claims department needs loss adjustment data from risk control. Risk control can also benefit from info about accidents. Risk control can emphasize the importance of thorough loss documentation and proper claim reporting
Legal Form of Ownership
classification of insurers. The two major types are proprietary and cooperative
ISO Commercial Lines Manual
classifies trucks, tractors, and trailers into: service use (transport personnel/material to job sites, lowest rate), retail use (deliveries, highest rate), commercial use (other)
Primary Data
collected first hand by the insurer. More costly to collect, but is specific to the marketing research project.
COPE
common tool of underwriters to evaluate exposures related to fire/other loss. Construction, Occupancy, Protection, and External Factors
Insurable Interest
commonly outright ownership, but may also only have insurable interest in less than the entire property or only for a certain period of time. Max amount the insured can receive.
Public Relations
communications with the public on behalf of the insurer to ensure a strong public image. Communicate with employees to request participation in events to promote the companies positive image. Consistent communication to respond to negative publicity
Cost Leadership
company charges a lower price for products/services by eliminating costs in every aspect of the operation. Products must be fairly standard for this strategy to work.
Pricing as a Nonfinancial Measure
compare modified prices to standard prices. If an underwriter is continually premium crediting to get new business, red flag.
Consistency Tests
compare volumes for premiums, exposures, losses, or claim counts by the highest order data variables to each other or to reported volumes from prior periods
Loss Ratio
compares an insurer's incurred losses with earned premiums for a specific period. = Incurred Losses + LAE / Earned Premiums
Investment Income Ratio
compares the amount of net investment income (investment income - investment expenses) with earned premium over a specific period of time. = net investment income/ earned premiums
Primary method of Data Auditing
comparing collected data to the original source.
Distributional Edit Review
comparison of summary data by key field to a profile of data based on prior experience. Consistency to prior data.
Traditional Risk Management
considers only hazard and operational risks (pure risks) that can affect an org. Focuses on preventing or reducing potential losses.
Construction Classes
construction materials' ability to resist fire damage. Class 1: Frame Construction Class 2: Joisted Masonry Construction Class 3: Noncombustible Construction Class 4: Masonry Noncombustible Construction Class 5: Modified Fire Resistive Construction Class 6: Fire Resistive Construction
COPE
construction, occupancy, protection and external exposure. Way to examine commercial property loss exposures and choose appropriate risk control techniques
Reinsurance Agreement
contract between the primary insurer and reinsurer that stipulates the form of reinsurance and type of accounts to be reinsured.
Independent Adjusters
contract with insurers to handle field claims. Some are self insured, most work for adjusting firms
Subcontractors in Workers Comp
contractor is responsible for workers comp benefits to employees of uninsured subcontractors. Policyholder must prove the loss exposure is insured by the subcontractor or pay a premium based on the subcontractor's payroll as well as the insured's own payroll.
Catastrophe Bond
corporate bonds that permit the issuer to skip or defer/forgoe scheduled payments if a catastrophic loss occurs. If catastrophic losses do not occur, investors receive relatively high premiums.
Specified Causes for Loss Coverage
coverage for direct and accidental loss caused by fire, lightening, explosion, theft, windstorm, hail, earthquake, flood, mischief, vandalism, sinking, burning, collision or derailment.
Maximum Foreseeable Loss (MFL)
generally applied to fire losses. Estimate of the financial cost of the loss that would occur if all protection measures were to fail and no fire department response occurred. Assumes only passive protection measures limit the loss. Some insurers write to the MFL and not the PML, and others underwrite the PML and limit losses through policy limits.
National/Regional Brokers
generally represent commercial insurance accounts that require sophisticated knowledge/service. Risk control/management, claim admin, etc. Can offer products to customers across locations. Receive fees for their services.
Transfer
generating funds from outside the organization to pay for losses (insurance and non insurance).
Retention
generating funds from within the organization to pay for losses
Producers and Claim Handling
give policyholders the number to call/name to speak with. May get basic claim info, communicate with insurer, and assign insured a claims rep. Sometimes can adjust some small first party property claims. Helps with quicker service and lower loss adjustment expenses (provided they don't overpay)
Lessees Interest in Property
good for the life of the lease
Govt in Insurance: Fill Unmet Needs
government can provide services needed by the public that private insurers do not provide
Terrorism Risk Insurance Plan (TRIP)
government insurance plan to fill an unmet need in private insurance. It reinsured losses caused by terrorism, originally for only 3 years, until the private market place could develop their own products. Private market role has increased and federal share of compensation has decreased, but govt hasn't been able to retire the plan yet.
National Flood Insurance Program
government provided flood insurance because premiums would be economically infeasible in a private market. Some private insurers are now willing to insure areas that are not designated "flood zones"
Exclusive Reinsurer
govt provides 100% coverage to insurers writing a particular coverage.
TRIP
govt provides reinsurance on specific loss exposures for which private insurers only retain part of the loss.
ISO's Building Code Effectiveness Grading Schedule
grades from 1-10, indicating the effectiveness of a community's building codes.
Financial Stability in Global Markets
greater stability in economic downturns, diversification of risk
Choosing Distribution: Degree of Control Required
greatest control over direct writers (results & methods), then agency/brokers where they can control results but not methods.
Senior Claims Officer
heads the claims department and reports to CEO/CFO. May have staff located in the same office called the home-office claims department.
Risk Control: Fulfill Duty to Society
help prevent accidental losses using their expertise.
Risk Management
helps individuals/organizations to avoid, prevent, reduce, or pay for negative outcomes of risks so opportunities for reward can be pursued.
Pre-Construction Review
helps policyholder to see how insurance rates and underwriting acceptability are affected by construction.
Cons of Direct Response Distribution Channel
high advertising costs
Risk Tolerance: Retain or Transfer
higher tolerance = more retained exposures
Large Number of Similar Exposure Units
homes, offices, automobiles.
Dilemma of Advertising
how much is enough to communicate effectively with customers while staying in a reasonable budget.
Combustibility
how quickly a material ignites, the rate at which fire spreads, and the intensity/amount of heat a fire generates.
UW Guidelines: Provide a Basis for Predictive Models
identify applicants with lower underwriting risk (rank/score all variables associated with an account and its loss exposures)
Private Fire Protection: Detection
important to detect early, because size of a fire increases exponentially with time, and large fires are more difficult to suppress than small fires.
Establish a Claim/Case Reserve
individual case method, round-table method, average value method, formula method, expert system method, loss ratio method.
Efficiency
inefficiency may be caused by poor management, insufficient capital, lack of IT, an inability to adapt to change. Disadvantage in competition, inability to meet profit goals, inability to contribute to society/customer needs, inability to meet legal requirements.
Distribution System
influenced by customers knowledge of insurance products/risk financing alternatives available. May sell to individuals through agencies to help them with selecting policies, may sell to young drivers via internet. Larger accounts are more suitable for brokers
PML and reinsurance
influences both treaty and facultative reinsurance. Reinsurers have designed many property treaties to facilitate writing large amounts of insurance on a single risk while limiting their exposure within the PML.
Mitigate
initiate activities to reduce the probability, impact, or timing of a risk event to an acceptable risk tolerance
Guaranteed Cost Insurance
insurance policies in which the premium and limits are specified in advance. Premium is guaranteed in that it does not depend on losses incurred in the coverage period.
Policy Insurable Interest
insurance policies limit payment on any claim to the event of the insureds interest. If they could collect more, there would be an incentive to destroy the property.
Collections
insureds won't pay premium bills they think are incorrect. It will delay the process of collection.
Acknowledging a Claim
insurer receives a claim and advises the insured of that fact. Provides the claim number and contact info of the claim rep.
Reinsurer
insurer that assumes some or all of the potential costs of the primary insurer in a resinurance contractual agreement.
Pure Risk
insurer would need to charge an insurance premium so large it would offset any possible gain of a speculative risk. Also reduces the complexity of loss exposures.
Goodwill
insurer's image suffers from errors in premium audit. Causes insureds to switch to new insurers/be less cooperative. Big marketing/underwriting expense to replace lost business.
Mass Marketing/Merchandising
insurers design an offer for their policies to target to large numbers of individuals/groups. Frequently discounted, with the insurer reserving the right to underwrite each applicant.
Insurability
insurers do not have to ensure all loss exposures with ideally insurable characteristics. They may lack expertise or be constricted by state regulations.
Financial Institutions
insurers/producers can market their products/services through a bank or other financial institution. They have a strong customer base, experience cross selling, strength of transaction processing, and efficient use of technology.
Basel II
international standard banking regulators can use when deciding the amount of capital banks need to keep in reserve to guard against financial and operational risk. Designed to protect the international financial system from collapse. Bank must hold capital appropriate for the risk through lending and investment. The greater the bank's portfolio volatility the greater the amount of capital to safeguard solvency
Underwriting and Risk Control
investigations enable better underwriting inspections. Technical support like fire hazards of new building materials. Modify loss exposures to meet eligibility requirements
Syndicate Pool
issues a joint policy to the insured, listing all pool members and specifying the part of the insurance for which each member is responsible. The insured has a contractual relationship with each pool member.
How does ERM improve strategic decision making?
it produces high quality info that is essential to an org's survival. It helps execs make better decisions that leaves their orgs less vulnerable to failure and better equipped to survive external environment changes.
Ex of Niche Market
jewelry stores can be a niche market in the target market of retailers in the segment of small businesses.
Public Private Venture
joint venture with governments or state owned industries
Expert Systems
knowledge or rules based systems. Help insurers improve efficiency and make consistent UW decisions by asking for all necessary info. Used in personal insurance.
Other Internal Constraints
lack of brand name recognition/damaged reputation. Happens to banks trying to enter the insurance market. With a damaged reputation, you need to manage staff morale.
National Accounts: Negotiating Power
large as they generate millions of dollars in premiums each year. Can negotiate broader coverage, lower deductibles, higher limits, or cheaper premiums.
Size
large companies tend to dominate the market and reduce competition. Size influences which markets/customer groups an insurer serves. If a market is dominated by a large org, the smaller insurers may choose niche markets rather than national accounts.
Risk Control: Types of Loss Exposures Insured
large industrial firms need complex risk control, merchants need less sophisticated risk control.
Middle Markets
larger organizations- often large enough that their loss histories provide credible statistics for use in projecting future losses. May have a risk manager to assist with coverage decisions.
Estimation of Loss Reserves
largest liability in the insurer's balance sheet. Errors in estimating outstanding loss amounts can distort reported profits (in the year estimates are made and the year they are corrected). Can also result in reduced premium revenue from underpricing or reduced profitability from overpricing.
National Accounts
largest organizations: Fortune 500, chemical/manufacturing organizations, municipalities.
Insurance: Meeting Legal Requirements
laws and contracts require insurance.
Current Expensing of Losses
least formal retention funding method, and least expensive to administer. Provides least assurance funds will be available, as it relies on current cash flows to cover the cost of losses. Feasible only for losses with low expected value.
Proximate Cause
legal cause, which exists when the connection between an act and an injury is strong enough to justify imposing liability. An unbroken chain of events must link the cause and the event.
Cooperative Insurers
legal form of insurance ownership. Owned by policyholders and exists to provide insurance protection to its policyholders at minimum cost. Includes mutual insurers, reciprocal insurance exchanges, fraternal organizations, and other cooperatives.
Mature Market
like US insurance market, few new potential customers. Competition for market share results in shrinking profit margins.
Probability
likelihood that a particular event/outcome will occur. Quantifiable, between 0, impossible, and 1, certain.
Nonfinancial Measures
link business strategy/outputs to performance. Evaluate based on actions rather than results.
Small Business: Negotiation Power
little
Customer Relations
manages communications with individual customers from the home office. Ensures all written communications seen by customers are understandable and consistent in quality and tone. Forum for complaints, suggestions and questions. Low cost, high value information.
Enterprise Wide Risk Management
managing all of an organization's key risks and opportunities with the intent of maximizing the organization's value. Occurs at the enterprise level, not departmental or business unit.
Advertising
managing the company's communications through mass media with its chosen target markets. Consistent with strategic direction and marketing plans. Reinforce company image.
Geographic Area
many insurance companies only compete in a limited number of states. Their operation radius depends on size, expertise, competition, and customer focus.
Marketing the National Flood Insurance Program
market through established insurance producers who also market other insurance
Factors Affecting Retention Selection
maximum amount the primary insurer can retain; maximum amount the primary insurer wants to retain; minimum retention sought by the reinsurer; co-participation provision
Financial Consequences of Property Loss
maximum limited by the value of the property. May also have an effect on the financial consequences of liability, personnel, or net income losses.
Stated Values and Agreed Amounts
may have a schedule with a value assigned to each item or class. Determined by appraising the insured's property or seeing a sales receipt.
Maximum policy limit
may not be economical to set reinsurance to maximum policy limit, and rather use facultative reinsurance. The limit for a stop loss treaty is ideally the highest loss ratio the primary insurer is likely to reach
Customer Satisfaction
measure of claims performance. Must respond to complaints and investigate.
Insurer-Producer Relationships
measure of customer satisfaction. Independent agents and brokers are also viewed as consumers. Many other insurers are available to producers, must be responsive to producer requests, survey producers about unmet needs/satisfaction
State Insurance Department Statistics
measure of customer satisfaction. State insurance departments tabulate complaints
Consumer Reports
measure of customer satisfaction. Surveys consumers and lists most satisfactory and least satisfactory insurers. Only includes largest insurers.
Customer Satisfaction Data
measure of meeting customer needs. Response cards/phone surveys following a claim.
Meeting Legal Requirements
measured by the number of criminal, civil, and regulatory actions against them. Monitored by state insurance departments, also affects financial ratings.
Amount Subject
measures the exposure to a single loss. Ex: fire insurance is the insured property exposed within a single fire division. Aka "within four walls". Requires subjective measurement about the boundaries of a fire division, and not all underwriters agree what constitutes a fire wall. Must consider ventilating systems and electrical conduits.
Susceptibility
measures the extent to which fire and its effects, either direct or resultant, will damage personal property typical of the occupancy. Important in determining probable maximum loss.
Age and Type of Auto
mechanical condition, bumper-impact results, damageability, reparability, likelihood of theft
Fire Doors
meet National Fire Protection Association design specifications (20 minutes - 3 hours). Each door must be automatically self closing and unobstructed. Opening that can compromise the integrity of a fire division if not properly designed.
Meet Regulatory Requirements
meet workers comp insurance regulations, fair and equitable. Uniform rules and rates prescribed by the state.
Guaranteed Cost Insurance: Pay for Losses
meets this goal if the losses are covered by the policy
Small Business: Insurance Needs
met by a limited number of commercial insurance policies: businessowners policy, workers comp, commercial auto
Guaranteed Cost Insurance: Manage the Cost of Risk
not ideal- admin costs, adverse selection/moral hazard costs, premium taxes, social loadings
Structure of Org: Diversified Company
more likely to use multidivisional structure to organize operations and segregate each unit into separate profit centers.
Survival
most basic post-loss goal. Resuming operations to some extent, even if it isn't the pre-loss level.
Strict Liability in Tort
most common basis for products liability suits, imposes liability on any person who produces an unreasonably dangerous product.
National Accounts: Insurance Knowledge
most comprehensive with a large risk management department and a regional or national broker representing them
Personnel in Underwriting Policy
must have a sufficient number of properly trained underwriters to effectively implement underwriting policy. Must have sufficient volume of premium/IT to be efficient in a territory.
Self-Insurance: Comply with Legal Requirements
must meet certain legal requirements to qualify as a self-insurer
Subcontractor
must purchase its own CGL policy to cover itself against liability claims arising out of its work for the general contractor.
Missed Opportunities
net income loss caused by a missed opportunity for profit, such as not modifying a product to meet changes in market demand.
Failure to Perform
net income loss caused by a product's failure to perform as product, a contractor's failure to complete a scheduled project, or a debtor's failure to make scheduled payments.
Loss of Goodwill
net income loss caused by providing poor service, obsolete products. Has a monetary value in for-profit-organizations. Organizations may pay for accidents they aren't legally responsible for to maintain goodwill.
Individuals: Negotiating Power
none. Contracts are offered on an as-written basis by insurers and their other option is to look somewhere else.
Small Business Risk Management
not a dedicated function, one of many carried out by the owner/senior manager.
Lloyd's of London
not an insurer. It is a marketplace like a stock exchange. Members are investors who hope to earn a profit. Members are usually corporations who have liability limited to the amount of insurance they write. It provides coverage for unusual/difficult to insure loss exposures like marine and aviation.
Exposing Building
one that significantly increases the possibility of a fire in the insured building. A fire in an exposing building is an exposure fire.
Tortfeasor
one who commits a tort
Customer Retention
overcharged insureds switch to another insurer. Undercharged stay with insurer. Premium volume decreases, and underwriting results deteriorate.
What is an agency's most valuable asset?
ownership of expiration list, and thus the right to sell its expiration lists to another independent agent
Consulting from Producers
paid on a fee basis. Usually performed for insureds, but can also be done for prospects. Some states prohibit agents from receiving both commission and a fee.
Marketing Strategies
part of a marketing plan. Plans and proposals for how the product will be developed, priced, promoted, and sold. Include determining appropriate distribution channels for products and services.
Marketing Goals
part of marketing plan. An outline of the proposed target market, including detailed sales projections and specifics as to how success with be measured
Projected Outcome
part of marketing plan. Pure loss ratio and ultimate loss ratio over a 5 year period.
Situational Analysis
part of marketing plan: a SWOT analysis of the marketplace, competition, technology, regulations
Premises and Operations Liability Loss Exposure
possibility an org will be held liable because of injury or damage from: a. accident on premises owned or rented by the org b. accident away from premises that arises out of org's ongoing operations
Growth
post-loss goal. Increasing market share, size/scope of activities and products. If expansion makes management more willing to accept risk, they may not allocate enough to risk management. They could realize the importance of protecting their assets and pay a lot.
Earnings Stability
post-loss goal. Known risk management costs, lower retention. Consistency of results over time is important.
Continuity of Operations
post-loss goal. No loss can be allowed to interrupt the organization's operations for any appreciable time. More demanding than survival. Must understand: - what operations continuity is essential -what is the maximum tolerable interruption for each operation Must have standby resources in place, which is expensive, but essential for some orgs like govt.
Primary loss exposure facing most businesses
premises and operations
General Liability Exposures
premium = rate * exposures. Can be a fixed exposure rate (sq ft) or a variable exposure rate (sales/payroll)
Collect Ratemaking Data
premium audit breaks down exposure units by class. Necessary for statistical reports. Important in loss costs that establish rates, which are established with the state.
Assigning Claims to Reps
territory, type of claim, extent of damage, workload. After receiving the assignment, the rep contacts the ensured to acknowledge the assignment and explain the claim process.
Demographic Segmentation
the division of markets based on demographic variables (age, gender, education, occupation, ethnicity, income, family size, family life cycle)
Geographic Segmentation
the division of markets by geographic units
Employers Liability
third-party coverage under which an injured employee must prove negligence.
Building Height
unique problems if the height restricts the capability of fire services to fight fires from outside. Controlling combustible materials in a high rise building is crucial.
Personal Auto Exposures
car years or car months based on the term of the policy implied from the transaction effective date to the transaction expiration date.
Outstanding Losses
case-based reserve amounts an insurer estimates it will pay in the future related to a specific claim.
Exposure
data element that measures extent of risk, and is generally a component of the rating basis for coverage.
What are the levels of data quality?
- Adequate - Require enhancement/correction - Require subjective adjustment - So inadequate the analysis cannot be performed.
Four well known Statistical Agents in the US
- American Association of Insurance Services - ISO Data - Independent Statistical Services - National Independent Statistical Services
What factors should actuaries consider when evaluating the quality of a dataset for a particular analysis according to ASOP No. 23?
- Appropriateness (more years of data for long tailed lines of business) - Reasonableness (internally and externally consistent) - Comprehensiveness - Material limitations - Alternatives - Sampling methods
Minimum Standards for Metadata
- Are all data elements listed? - Has the source of each data element been provided? - Is there a special value used to indicate missing data? - Are any transformations being applied to data?
Advanced Metadata Considerations
- Are all the contents of each data element properly described? - Have all values of categorical data been described? - Range of numerical data elements provided? - Valuation date of all data? - Scheduled plan of updates? - Business process change during experience period? - Data definition change during experience period?
ASOP No. 23: 6 questions actuaries should consider when selecting data?
- Are the data appropriate for the analysis and sufficiently current? - Are the necessary data elements reasonable, comprehensive, and consistent? - Are there known material limitations of the data? - What is the cost/limitation of obtaining alternative data in a reasonable time frame? - What is the benefit of alternative data compared to availability and cost to collect it? - What were the sampling methods used to collect data?
Role of the Statistical Agent in Data Collection
- Comply with data reporting requirements of states - Precise reporting instructions and statistical plans
Reliance on Other Information Relevant to the Use of Data
- Contract provisions - Plan documents - Reinsurance treaties - Actuaries can rely on this unless it is apparent it is materially erroneous - Disclose the reliance on this thing provided by others
Exceptions to Code-As-Rated
- Extra detail to examine future possible rating variables - Non rating data element - Less detail, combine coverages to save labor/record space
How can actuaries be data quality advocates?
- Familiarize selves with data quality literature - Manage data within their company and from external suppliers - Screen data for problems
How are actuaries data quality protectors?
- High stakes in the quality of data - Knowledge of the data content - Expertise to develop sophisticated data testing tools
What affects the quality of a final project besides the quality of the data?
- How the data are processed (collected, transformed, aggregated) - How the data are analyzed (using appropriate actuarial methods) - How the data are presented (is it clear/concise)
Missing Data Problems
- Increases uncertainty - Variable may have to be discarded - Analysis can't be performed
Statistical Plan Reporting Instructions
- Jurisdictions, lines of business to which the plan applies - Instructions on situations like mid-term endorsement/cancellation. - Define each element to be collected
Homeowners Rating Elements
- Location - Policy Forms - Construction - Public Protection Class - Policy Limits - Deductible - Type of Construction
Actuarial Documentation Should Include
- Process the actuary followed to evaluate the data, review of prior data - Description of possible material defects - Description of adjustments/modifications made to the data, including rationale - Comply with disclosure requirements
Business Need for Data
- Review past premiums, exposures, losses, and expenses to project future costs - Statistical agents aggregate data from all insurers to develop a pool of credible data. - Additional detail/new data elements to better improve rating/classification may be collected.
Disclosure per ASOP No. 41
- Source of data - Did you review the data? If not, what are the possible limitations - Extent of reliance on data supplied by others - Material adjustments/assumptions applied to the data - Limitations on the result due to uncertainty about data quality - Any unresolved concerns that could impact the project - Is there a material uncertainty or bias? - Did conflicts arise from complying with authority?
For what is data evaluated to determine its quality?
- Validity (allowable values) - Accuracy - Reasonableness (past data) - Completeness
At what steps of data collection can quality be compromised?
- Wrong deductible due to clerical entry error or software/processing errors. - Adjuster cares more about speed and fairness than accurate recording
Usability of Data
- sufficient - require enhancement, additional data, or corrected data - judgmental analysis or assumptions are required - has there been previous checking, verification, auditing - obtain different data/decline to complete assignment
Homeowners Exposures
Amount of insurance years (amount of insurance and the term of the policy) House years (term of the policy implied from transaction effective and expiration date)
Date of Loss
day on which the loss occurred. When analyzed on an accident year basis, loss date determines the assignment of the paid and/or outstanding loss or LAE to the proper accident year.
Users of Data and Privacy
data is proprietary and contains info about who it insures, the premium it charges, and the claims it has paid. Would be bad if given to competitors. Social security number, credit scores, and health records are legally/ethically confidential.
Sources of Data Quality Problems
Knowing the source of data errors facilitates detection, remediation and prevention. - Unreported changes in layout - Temporary reversions to defaults - Unreported changes in measurement - Missing values - Inappropriate default values - Gaps in time series
Growing Data Management Skill Set of Actuaries
data quality issues are more relevant and actuaries are better equipped to handle them.
Transaction Effective Date
date on which coverage begins/changes (day, month, year). Premiums only.
Transaction Expiration Date
date on which coverage ends (day, month, year). Premiums only.
Accounting Date
date the transaction was entered into insurer's financial books (month and year) for both premiums and losses.
Inception Date
date when the record representing the transaction is generated or coded; required for both premium and losses. Typically the date on which coverage begins (month and year)
Statistical Plan
a formal set of directions for recording and reporting insurance premiums, exposures, losses, and sometimes loss expenses, to a statistical agent that aggregates data for regulators
Statistical Agent
an organization that helps insurers satisfy legal requirements for reporting data to regulators. Process data submitted by insurers, performs quality checks, consolidates data from different insurers.
What is the benefit of box and whisker plots?
can show data containing an intentionally introduced error such as a first number replaced with a number ten times its value.
