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Flashcards in Ch 6 Deck (55):

Insurer Risk Control Goals

1. Earn a Profit
2. Meet Customers' Needs
3. Comply with Legal Requirements
• Some states require RC service to be offered insured
• Some insurers charge a fee for anything above that service
4. Fulfill a Duty to Society
• Help business/individuals recover from loss
• Humanitarian and ethical benefits to society


1-1: Describe how RC activities help insurers 'Earn a Profit'?

1. Improve UW decisions - provides info for acceptance/pricing
2. Improve Premium Volume - move an account from marginal to acceptable
3. Encourage Insureds to Improve Risk Control
4. Reduce Insureds Losses
5. Provide add'l Revenue Source - sell unbundled RC services, supplemental risk control services
6. Reduces the Errors & Omissions on Claims


How RC Activities Help 'Meet Customers Needs'

1. Accts become more attractive
2. Control premiums
3. Reduce disruption to operations
4. Remain socially responsible
5. Comply with Occupational Safety/Health Standards
6. Comply with laws
7. Improve financial performance
8. Insurers who use independent gents to market their products develop relationships with potential accounts.


List RC Legislative Pressures

• Occupational Safety & Health Act
• Consumer Products Safety Act
• Comprehensive Environmental Response
• Compensation & Liability Act
• Threat of Large Liability Judgment


1-2: Describe the benefits an insurer receives by offering RC services through agents in the independent agency system.

• Enhances the relationship with producers staff, and the customers of the independent agency.
• Increases its own market share as well as that of the other agency
• Attracts and retains higher quality accts
• Helps agency and its customers accomplish their goals


Benefits for Physical Surveys to Insured & Underwriters

1. UW provides better understanding of LE insured
2. Insured gains better understanding of LE insured
3. Insured is more confident of recovery post loss; decrease in chance of a coinsurance penalty


2-1: Types of RC Services

1. Conduct Physical Surveys
-Collect UW info on LE
-Observe Mgmt commitment to RC & Employee attitudes Re: Safety
-Written recommendations to eliminate/control LE

2. Perform Risk Analysis & Improvement
- Review loss histories (risk analysis); write recommendations (improvements)
-Rep provides training, info, an counseling to insured
-insurers provide technical info to Insureds
-some risk control departments enter into service contracts to test/maintain fire protection systems
-risk control may also look for assistance when building a new structure. Risk control rep can help them save money and meet underwriting guidelines.

3. Develop safety management programs
-Review insurance operations
-Helps insured establish risk control goals; select measures; organize resources to implement the measures; establish procedures to monitor the program.
-Insured implements the program, without direct assistance from risk control rep.
-Monitor the program


2-2: Factors Affecting Service Levels

. Line of Insurance
• PL doesn't' offer extensive RC services
• Reps are trained/specialized for high-valued property
2. Commercial Insured Size
• Large premiums = economically feasible to provide RC service
• Add'l service is optional w/ fee
3. Type of LE Insured
• Large/complex = need for skilled personnel/equipment
4. Potential Legal Liability
• Threat of being named leads some insurers to not offer service
• Some states protect insurer from liability
• UW requires certain RC as part of quote/ ins. Agreement


Principal Opportunities for RC Cooperation between Departments

1. Underwriting
• RC Inspection reports are useful to UW
• RC provides tech support "
• Rehab accts from marginal to acceptable
2. Marketing & Sales
3. Premium auditing
• Auditors visit at the end of policy period / RC at beginning
• Improves documentation and accuracy of RC
4. Claims
5. Producers


3-1: Explain how the RC function provides info to UW that enables them to make better decisions • I

nspection reports provide a clear profile of an applicant's LE and hazards
• Technical assistance to UW by examining ops/hazards
• Main communication link between insurer and insured


3-2: Principal Opportunities for RC Cooperation between RC & 'Marketing & Sales'

• Helps move application into the acceptable range - a sales goal
• Shows that ins. co. understands business ops and hazards
• Plays a role in the retention of insured
• RC reps can learn that serves the insured needs or wants


3-3: How can RC visit to the insured at the beginning of a policy period assist a premium auditor

• PA visits at end of policy period - deficiency and misunderstandings occur before the end of the policy. The RC rep can improve documentation.


How RC Cooperation helps 'Claims' Department

1. Claims relies on RC for loss exposure data and background
2. Info re: individual WC accidents
3. RC has expertise needed in areas claims may be unfamiliar (engineering, mechanical, technological)
4. Support claims function by reviewing and emphasizing the importance of thorough loss documentation and proper claim reporting procedurs


Term: Premium Audit

Methodical examination of PH operations, records and books to determine the actual exposure units and premium for insurance coverage.


4-1: Primary Reasons of Audits

1. Determine correct premiums
2. Collect ratemaking data
3. Meeting regulatory requirements
4. Deter/Detect Fraud
5. Reinforce Confidence of Insured
6. Obtain additional info


Term: Exposure Unit

Unit of measure (area, gross, receipts, payroll) used to determine an insurance policy premium


4-2: How does the premium auditing contribute data to the rate making process

Without premium audits, volume and total insured LE cannot be determined w/ certainty.


Primary Reasons of Audits: Determine Correct Premium

• Primary reason for audit
o Appropriate premium=profitability
o Overcharge = loss of business
• Calculations are done at the end of the policy when the exposure units are availability
• Determine the premium base and actual earned premium
• provide with accurate information to determine whether the renewal premium estimate is in line with the audited exposures


Term: Total Loss Costs

The portion of the rate that covers projected claim payments and loss adjusting expenses.


4-3: How does the premium auditing reinforce confidence of insured?

Insureds who observe the audit process will realize that they are being treated according to uniform and equitable standards. A good auditor will explain the process. This leaves a good impression.


Stages of the Premium Auditing Process

1. Planning
2. Reviewing Operations
3. Determining Employment Relationship
4. Finding & Evaluation Books/Records
5. Auditing Books/Records
6. Analyze Premium Related Data
7. Report Findings


Premium Auditing Stage: Planning

1. Voluntary reports (PH Report) - completed by PH. Insurer chooses to accept; perform 2-yr audit; or immediate field audit.
2. Field Audits (physical audit) - examine books and determine... o Anticipate classification
o Approach
o Records to use
o Records location
o Who to contact
o Which questions to ask


5-1: Factors Premium Auditors Consider as they decide whether to conduct a Field Audit

o Legal requirement
o Premium size
o Insured operations
o Prior audit experience
o Cost of auditing
o Nature of the policy
o Geographic factors
o Staffing requirements

-Some audits are mandatory (WC in some states)
-Advisory organizations require audits of high premium policies and may restrict audit waivers
-predictive modeling may be used in the planning process to efficiently decide when audits should be conducted.


Premium Auditing Stage: Reviewing Operations

Observe nature of business
• Compare it to similar businesses
• Look for classifications missing from policy
• Assess management quality and cooperation
• Report to UW for rating changes
• Note org changes
• New loss exposures
• Experience of management
• Financing operations
• Marketing of product
• Deviation of its income
• Unusual hazards
• Marketing of products
• Income derived


Describe the Process of Auditing Risks

• PA do not audit policy, they audit risk by reviewing operations, organization and business processes and reports changes/new exposures not previously identified to the UW.


Term: Test Audit

Audit conducted by the insurance advisory organization to check the accuracy of insurers premium audits


5-3: Why is determining the employment relationships important to premium auditing

Premium audit determines employees covered by insurance based on payroll and sales. Definition of employee is not the same for both GL and WC. Must distinguish between independent contractor and employees.


Premium Auditing Stage: Finding & Evaluating Books/Records

• PA must have access to all books/records re: insurance premiums
• Insured must keep records to take full advantage of insurance rules
• Pre-audits are done by acceptance or shortly after for large accts


Term: Premium Pay (Shirt Differential)

A payroll system that increases the regular hourly wage rate for the night shift or other special conditions.


Why are proper classifications important to the 'auditing of books/records'

Proper classifications are important because...
• Incorrect rate (too high) causes a lost in competitive advantage and there are legal ramifications for negligence on the part of the insurer
• Incorrect rate (too low) is unprofitable for insurer


Term: Deposition Premium

The amount paid by the primary insurer to the reinsurer pending determination of actual reinsurance premiums.


Premium Auditing Stage: Analyze & Verify all Premium Related Data

A. Is data?
1. Reasonable
2. Consistent with industry
3. Logical
4. Complete
5. Explainable
B. Reconcile and compare with accounting standards
C. Misclassified? Notify UW ASAP


Premium Auditing Stage: Report Findings

1. Summarize billing information
2. Show how data was obtained
3. Describe insurance operations and explain any deviations from the usual operations in the industry


Term: Experience Modification

A rate multiplier derived from the experience rating computation. If premium audit is inaccurate, future premiums will be too based on this term.


Why Premium Audits Must Be Accurate

A. Importance for the Insured
• May end up paying wrong amount now and on future policies
B. Importance for the Insurer
1. Financial Position
-equitable rates
-timely audits affect cash flow
-premium developed by audit is fully earned
2. Customer Retention
3. Goodwill
-If there are errors, the insurer's image suffers.
This could lead to the insured leaving or not cooperating.
-Marketing has to replace lost business.
4. Efficiency
5. Collections
-Will not pay bills they suspect to be incorrect
C. Importance for the Insurance Rates
-Help claims accurately department classify losses and loss exposures.
-An audit error in determining exposure units affects the rate structure for that class.


6-1: Why is audit accuracy important to insurers?

Insureds who pay excessive insurance premiums are placed at a competitive disadvantage and can experience financial problems.
• Insureds who pay low/inaccurate premiums have a potential for an undeserved competitive advantage.

*inaccurate audits can result in incorrect experience modification calculation resulting in future incorrect premiums.


6-2: Three ways accuracy of premium audits affect insurer financial position.

PA affects insurer balance sheet. It is also important to
1. Ensuring equitable and accurate insurance rates
2. Timely audits affect insurers cash flow management
3. Premium has an immediate affect on profit and policy holder surplus (insurers ability to write new business).


6-3: How does accuracy of PA affect collection of premium?

• Insured are less likely to pay premiums bill they think is incorrect
• Insurers collection department will spend more time resolving billing issues


PA Contributes to Insurer Functions in (depts.)...

1. Underwriting
2. Marketing/Sales
3. Claims
4. Risk Control


PA Contributes to 'Underwriting' PA & UW relationship is essential to profitable accts

1. Classify exposures correctly
2. Notify UW of inadequate exposure estimates
3. Report developed based on anticipated v. actual LE
4. Pre-Audit Surveys Support UW
5. Assist with Identifying new LE
6. Info based on acct desirability
7. Observe moral, morale, physical hazards


7-2: Why are timely premium audits important to 'Marketing Sales'

Delay of a return premium could cost insurer business


PA Contribution to 'Marketing & Sales'

1. Conduct/Skill of PA is important to relationship with insured and accounnt retention.
2. PA can identify new LE that can lead to additional sales
3. Insurer appreciates effort of the PA to improve record keeping and save insurer $$


7-3: Why is the verification of class codes important? .

auditors correct classification codes assigned to insureds claims. This ensures that claims and premiums are matched in the same classifications, providing insurance regulators with accurate data and improving credibility of rates.


5-2 describe the process of auditing the risk.

-business practices

What it does: identifies new loss exposures and assesses management quality and cooperation, previously unreported risk classifications, and unusual hazards.


5-4. A premium auditor has been assigned to audit ABC, a small department store, for Danforth Insurance Co. Danforth insures ABC for workers compensation and general liability. The workers comp premium is based on payroll, and the liability premium is based on sales. Describe the process a premium auditor might use in auditing ABC's accounting records.

Verify premium-related data against general accounting records of ABC to reconcile any discrepancies.

WC premium: look at payroll records to determine job and wages for each employee to make sure employees are classified in the right job classification and their earnings are correctly reported.

GL premium: compare sales figures from accounting records with the premium data to ensure that there hasn't been a significant increase or decrease in sales that wold result u a premium adjustment.


6-4 The premium auditors for Danforth Insurance Co, an insurer operating in the western part of a state, considers a commercial industry exposure to be Classification X. The premium auditors for Forthley Insurance Co., an insurer operating in the eastern part of the state, consider the same commercial industry exposure to be classification Y. Explain how these different classifications affect insurance rates in the state.

Inconsistency distorts data. Nobody will pay the correct rate. Inequitable rates for all insureds.


7-1 Describe premium auditing's contribution to underwriting.
A. Explain importance of premium auditing in classifying insured exposures.

B. Explain the importance of premium auditing in the identification of inadequate exposure estimates.

C. Explain the importance of premium auditing i-Margin providing information on the desirability of an account.

importance of premium auditing in classifying insured exposures: info on newly issued policy may not be accurate or complete. Properly classifying an exposure is complex and operations of an insured change. The premium audit helps identify discrepancies and changes. The policy can be updated.

importance of premium auditing in the identification of inadequate exposure estimates: underestimated or improperly classified exposures result in incorrect deposit premiums for renewals. Premium auditors discover new exposures for which underwriting information might be deficient.

importance of premium auditing in providing information on the desirability of an account: PA meet managers, review business records, observe operations and become aware of physical, morale, moral hazards that may indicate an undesirable account.


How does risk control contribute to marketing?

-Make marginal accounts acceptable
-Shows applicants and insureds that the insurer understands their business operations and hazards
-Help retain customers
-Can learn what coverage or services insureds need or want.


How does risk control contribute to premium auditing?

Visit at start of policy.Can improve documentation by telling company what audit will be looking for.


Premium Audit: Collect Ratemaking data

Insurer needs to obtain a class-by-class breakdown of exposure units to submit to advisory rating organizations. If the advisory organization has credible statistics showing premium volume, loss experience, and the exposure units for each rating class, the actuaries can calculate loss costs and use these to establish rates.


How premium audit assist claims

-Verifying or correcting classification codes on claims
-Verify that injured employees were actually employees at the time of loss
-Report inventories, equipment lists and values, automotive equipment values.


How does premium audit assist risk control?

-Can serve as a source of risk control information for accounts risk control doesn't visit.
-Can contribute information about unsafe procedures or working conditions, observations of insureds' vehicles, and other hazards that provide opportunities for further risk control investigation and recommendations.


Which one of the following morale hazards might a premium auditor uncover for underwriting?

Choose one answer.

A. Poor safety practices
B. Poor financial records
C. Hazardous materials
D. Questionable business practices

Poor financial records might be a morale hazard a premium auditor would uncover for underwriting.


Which one of the following statements is true concerning risk control?

A. Risk control can use claim information to pave the way for the premium audit.
B. Risk control can assist marketing by providing advice on improving safety.
C. Risk control can sell additional lines of coverage.
D. Risk control departments are purely a function of insurers.

B. Risk control can assist marketing by providing advice on improving safety.


Which one of the following statements is correct with respect to developing safety management programs?

Choose one answer.

A. Less experienced risk control representatives are often assigned to developing safety management programs.
B. Developing a safety management program begins with a complete evaluation of the policyholder’s operations.
C. Safety management program development can often be done remotely without the need to visit the policyholder’s premises.
D. Examples of safety management programs include fire safety, driver safety, and machine operation safety.

B. Developing a safety management program begins with a complete evaluation of the policyholder’s operations.