INS 3103- Chap 6
INS 3103- Chap 6 INS 3103
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This 0 page Class Notes was uploaded by Tina Ta on Thursday March 3, 2016. The Class Notes belongs to INS 3103 at Mississippi State University taught by Seth Pounds in Fall 2015. Since its upload, it has received 23 views. For similar materials see Principles of Insurance in Business at Mississippi State University.
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Date Created: 03/03/16
Chapter 6 Insurance company operations I Basic Company Functions Ratemaking Underwriting Production Claim Settlement Reinsurance Investments Accounting LegalFuncUon Loss Control Services Information Technology ll Rate Making 0 Rate making refer to price of ins calculation of ins premiums Rate priceunit of ins Exposure unit unit of measurement used in ins pricing gt PREMIUM RATE EXPOSURE UNITS Eg 01 x 100 of property ins premium for 500000 building is what A How Insurance Pricing Differs from Pricing of Other Products 0 Total premiums charged must be adequate for paying all claims expense during policy period this can be dif to do B Activities of Actuaries Rates premiums are determined by actuary using company39s past loss experience and industry stat PampC in LampH use stat data on births death disease employment Actuaries also determine adequacy of loss reserve allocate expense and compile stat for comp mgt state regulatory of cials Ill Underwriting process of select classify and price applicants for ins Underwriting Policy 1 Statement of underwriting policy Importance to clear establish policies that are consistent w company39s objectives 2 Underwriting policy followed spelled out in the underwriting guide 0 Accept borderline prohibit classes of bus NO DUI only 1 DUI no high blood pressure Amts of ins can be written Bus that requires approval by senior underwriter Territories to be developed Forms rating plans to be used Basic Underwriting Principles Seeking an underwriting pro t 0 Select prospective insureds according to comp39s underwriting standards Reduce adverse selection against insurer Adverse selection tendency of pp w higher than avg chance of loss to seek ins at standard rates If not control by underwriting this ll result in higher than expected loss lvs Provide equity among policyholders 1 gr of policyholders sldn t unduly subsidize another gr 20 yr old and 80 yr old sldn39t pay same amt for life ins If they paid identical rates younger would subsidizing older inequitable Steps in Underwriting Agent as the rst underwriter underwriting start w agent eld underwriting Sources of underwriting information Application Agent s report their evaluation of prospective insured Inspection report done by outside agency usually w property ins Physical inspection actual underwriter Attending physician39s report and physical examination certain types of life ins Medical Information Bureau MIB report trade association that comp mems are given access to info on applicants After review info make underwritino decision 0 Accept application recommend that policy be issued 0 Accept application subject to restrictionsmodi cations Crime ins may require alarm systembars on window homeowner ins may require larger deductible Reject application needs to be justi ed Many insurers now use computerized underwriting for certain personal lines of ins that can be standardize results in expedited decisions Other Underwriting Considerations 0 Rate adequacyrefers to underwriting cycle lf rates are quotgoodquot then underwriters accept new bus if rate quotbadquotgt underwriters become more conservative in their section 0 Availability of reins make underwriting more liberal in its section Whether policy cansld be cancelledrenewedif loss exp is unfavorable insurer can cancel or not renew policy IV Production sales mkt activities of insurers General Nature 0 Agents are often reffered to as producers Adencv Department 0 Life insurers hv agencysales departmentrecruittrain new agents 0 Property liability insurers hv mkt departments agents help explain their products to eld agent Professionalism in Selling mkt of ins hs been characterized by trend toward professionalism 1 The professional39s approach agent sd be competent professional w high degree of technic knowledge in particular area of ins and who also places needs of hisher clients lst 2 Professional designations for ins personel American College Chartered Life Underwriter CLU Chartered Financial Consultant ChFC American Institue for Chartered Property Casualty Underwriter CPCU Certi ed Financial Planner Board of Standard CFP National Alliance for Ins Edu amp Research Certi ed Insurance Counselor CIC V Claims Settlement Basic Objectives 0 Veri cation of covered loss is personproperty covered under policy 0 Fair to both parties and prompt payment of claims 0 Provide personal assistance to insured Some laws prohibit unfair claims practices Refuse to pay caims wo conduct reasonable investigation 0 Not attempt to provide prompt fair equitable settlement 0 Offer lower settlement to compel insured to institute lawsuits to recover amt due Types of Claims Adjustors Ins agent often hs authorized to settle sma rstparty caims up to some limit 0 Company adjustor usually salaried employee of the company who39ll investigate a claim determine amt of loss negotiation and and arrange for pmt of both lst and 3rdparty claims 0 Independent adjustor orgindiv Adjust claims for feeused when catastrophic oss occurshighy training produce a large number of claims in geographical area also used in areas where company doesn39t hv enough volume to warrant setting up of ce and also where special technical skills are needed Public adjustor represents insured is paid fee based on amt of claim settlementrepresent insured in complex situationwhen dispute arise Steps in Settlement of a Claim VI Claim process begin w notice of loss typically immediateas soon as possible after loss hs occurred provision in policy Claim is investigated adjustor must determine that cover loss hs occurred determine amt of loss Adjustor may require proof of loss before claim is paid sworn statement fr insured Adjustor decide if claim sld paiddenied policy provision address how disputes maybe resolved Reinsurance Reinsurance arrangement by which primary insurer transfers to another insurer part or all of potential losses associated w such ins Ceding company primary insurerinsurer that initially writes the business Reinsurer firminsurer accepts ins from ceding insurercompany Retention limitNet retention amount of insurance retain by the ceding company Cession amt of ins ceded to reinsurer Reasons for Reinsurance Increase underwriting capacity to write new buscomp may asked to assume liab For losses in excess of its retention limit Stabilize profits when loss occurs ur portion is reduced Reduce unearned premium reserve which represent unearn portion ofgross premium on all outstand polocies at time of valuation Protect against catastrophic loss Retire fr busfr line of insterritory allow transfer of liab Obtain underwriting advice on line for which insurer hs little exp Types of Reinsurance Agreement Facultative reinsurance optional casebycase method that is used when ceding comp receive application for ins that exceed its retention limit Often used when primary insurer hs application for large amt of ins Treaty reinsurance primary insurer hs agreed to cede ins to reinsurer reinsurer hs agreed to accept bus All bus that fall win scope of agreement is auto reinsured according to terms of treaty a Advantages b Types of automatic treaties There re 2 basi methos for sharing losses 0 Under Prorata method ceding comp reinsurer agree to share losses premium based on some proportion Under Excess method reinsurer pay only when cover losses exceed certain lv 0 Under Quotashare treaty ceding insurerreinsurer agree to share premiums osses based on some proportion Eg Assume that Apex Fire Ins and Geneva Re enter into quotashare arrangement by which losses premiums are shared 5050 If 100000 loss occur Apex Fire pay 100k to insured but is reimbursed by Geneva Re for 50k Under Surplusshare treaty reinsurer agree to accept ins in excess of ceding insurer39s retention limit up to some max amt Eg Assume that Apex Fire lns hs retention limit of 200kCaIed a line for single policy and that 4 lines or 800k are ceded to Geneva Re Assume that 500k property ins policy is issued Apex Fire takes 1St 200k of ins or 25 and Geneva Re takes remain 300k or 35 If 5k loss occur who pay what gt Answer picphone Excessof losstreaty design for protect against catastrophic loss A treaty can be written to cover single exposure1 building single occurrence tornado or excess losses during some time period Eg Apex Fire lns want protection for all windstorm losses in excess 1mil Assume Apex enter into excessof loss arrangement w Franklin Re to cover single occurrence during speci ed time period Franklin Re agree to pay all losses exceed 1mil But only to max of 10mil If 5mil hurricane loss occur Franklin woul pay 4mil Reinsurance pool org of insurer that underwrites ins on joint basisinsurers as a gr can combine their n Resource to obtain necessary capacity to insure a loss Reins pool work in 2 ways Each pool mem agree to pay certain of every loss Each pool mem pay for hisher share of losses below certain amt losses exceed that amt are then shared by all mems in pool Alternatives to Traditional Reinsurance 0 Some insurer use capital mkts as alternative to traditional reins Securitization of risk insurable risk is transferred to capital mkt through creation of n Instrument such ascatastrophe bondfuture contract option contract or other n Instrument Catastrophe bonds corporate bonds that permit issuer of bond to skipreduce interest pmt if catastrophic loss occur Catastrophe bonds are growing in imp And are now considered by many to be standard supplement to traditional reins VII Investments exhibit 6163 A Life Insurance Investments Bc premiums are paid in advance they can invested until needed to pay claims and expense 0 Life ins contracts long term thus safety of principal is a primary consideration 0 Yield is also important because it lowers the cost of life insurance Investments have considerable economic and social impact on the economy B Property and Casualty Insurance Investments 0 Liquidity is more important than in life insurance because the contract is for a shorter period of time and claims are settled quickly 0 Investment income is important in reduce cost of ins to policyowner and offsetting unfavor underwriting exp bc it can offset any unfavorable underwriting results 0 In contrast life ins property ins contract short term in nature and claim pmt can vary widely depend on catastrophic losses in ation medical cost VIII Other Insurance Company Functions 0 Information Systems extremely imp in daily operation of insurer Computers widely used in many areas include policy process simulation studies mkt analysis and policyholder service 0 Accounting department prepare fin Statements develop budgets 0 Legal department attorneys are used in advanced underwriting estate 0 Property and liab Insurer also provide many loss control service 1 Internal controls 2 Preparation of reports to management 3 Preparation of tax returns 4 Preparation of financial statements for review by regulators C Legal Function D Loss Control Services
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