Chapter 6

Question 1

what are the major insurance company operations?

Answer 1

-ratemaking
-underwriting
-production
-claims settlement
-reinsurance
-investments

Question 2

what is ratemaking?

Answer 2

the pricing of insurance and the calculation of insurance premiums

Question 3

what is the ratemaking challenge?

Answer 3

an insurance company does not know in advance the cost of their products

Question 4

what is underwriting?

Answer 4

the process of selecting, classifying and pricing applicants for insurance

Question 5

what is the purpose of underwriting?

Answer 5

to develop and maintain a profitable book of business

Question 6

what decision does an underwriter make?

Answer 6

the decision to accept or reject an application for insurance

Question 7

what is production?

Answer 7

the sales and marketing activities of insurers

Question 8

what are agents/brokers who sell insurance often called?

Answer 8

producers

Question 9

in production, what should an agent/broker do?

Answer 9

-be competent professional
-have a high degree of technical knowledge in a particular area of insurance
-place the needs of their client first
-code of ethics

Question 10

what is claim adjusting ?

Answer 10

the process of determining coverage, legal liability and damages, and settling the claim

Question 11

what are the basic objectives of a claims settlement?

Answer 11

-verification of a covered loss
-fair and prompt payment of claims
-provide personal assistance to the insured

Question 12

what is reinsurance?

Answer 12

an arrangement by which the primary insurer transfer to another insurer part or all the potential losses associated with such insurance

Question 13

who initially writes the insurance?

Answer 13

primary insurers

Question 14

who is the reinsurer?

Answer 14

the person who gets the primary insurers transfer

Question 15

when are insurance premiums invested?

Answer 15

the time period between the receipt of the premium and the payment of the claim

Question 16

what is extremely important in lowering the cost of insurance to policy owners and offsetting unfavorable underwriting experience?

Answer 16

investments

Question 17

who is an actuary?

Answer 17

a person who uses complex statistical methods and technology to analyze loss and other data to determine rates and premiums

Question 18

what are the regulatory goals of rate making?

Answer 18

-rates must be adequate
-rates must not be excessive
-rates should not be unfairly discriminatory

Question 19

what are the business goals of rate making?

Answer 19

rates should
-be stable
-be responsive
-provide for contingencies
-promote loss control
-be simple

Question 20

what states the company’s underwriting policy?

Answer 20

underwriting guide

Question 21

what is included in the underwriting guide?

Answer 21

-lines of business written
-policy forms and rating plan used
-acceptable, borderline and prohibited business
-amounts of insurance that can be written
-geographic territories
-business that requires approval from a senior underwriter

Question 22

what are the underwriting principles?

Answer 22

-attain an underwriting profit
-select prospective insureds according to the company’s underwriting guidelines
-provide equity among the policyholders

Question 23

what are the sources of underwriting information?

Answer 23

-application
-agent/broker
-financial statements
-physical inspection
-physical examination
-claims file
-vendor reports

Question 24

what are the underwriting decisions?

Answer 24

-accept the application and issue the policy
-accept the application subject to restrictions or modifications
-reject the policy

Question 25

what are other underwriting considerations?

Answer 25

-are rates currently adequate? -is reinsurance available? -should existing business be cancelled or non renewed?

Question 26

what are the insurance professional designations?

Answer 26

-chartered life underwriter (CLU) -chartered property casualty underwriter (CPCU)

Question 27

what are the different types of claims?

Answer 27

-"first party" -"third party"

Question 28

what are claims submitted by the insured to the insurer?

Answer 28

first party claims

Question 29

for first party claims, who makes claims payments to the insured?

Answer 29

the insurer

Question 30

what are claims submitted against a negligent insured for bodily injury, physical damage, death, personal injury, etc?

Answer 30

third party claims

Question 31

for third party claims, who pays damages (caused by the insured) to an injured third party?

Answer 31

insurer

Question 32

what are the types of claims adjustors?

Answer 32

-insurance agents -staff claims representatives/adjustors -independent adjustors -public adjustors

Question 33

who may have authority to settle small "first party" claims?

Answer 33

insurance agents

Question 34

who is a salaried employee who investigates a claim, determines the amount of loss and issues payments?

Answer 34

staff claims representative/adjustors

Question 35

who is an individual or organization that adjusts the claims for a fee (common after catastrophes)?

Answer 35

independent adjustors

Question 36

who represents the insured and are paid a fee based on the amount of the claim settlement ?

Answer 36

public adjustors

Question 37

what is the claims process?

Answer 37

-notice of loss -claim investigation -proof of loss -payment of loss or denial of claim

Question 38

what questions are asked for a claim investigation?

Answer 38

-did the loss take place during the policy period? -was damage caused by a covered peril? -is the damage property covered by the policy? -are there policy exclusions that apply? -does any other insurance apply?

Question 39

what is a ceding company?

Answer 39

the primary insurer that initially wrote the insurance

Question 40

what is the reinsurer?

Answer 40

the company that accepts the insurance from the ceding company

Question 41

what is the retention limit?

Answer 41

the amount of insurance retained by the ceding company

Question 42

what is cession?

Answer 42

the amount of insurance ceded to the insurer

Question 43

what is retrocession?

Answer 43

a transaction in which a reinsurer transfers risks it has reinsured to another reinsurer

Question 44

what are the functions of reinsurance?

Answer 44

-increase underwriting capacity -stabilize profits -reduced the unearned premium reserve -provide protections against catastrophic loss -retire from a line of business -obtain underwriting advice on a line for which the insurer has little experience

Question 45

what are two principal types of reinsurance?

Answer 45

facultative and treaty

Question 46

what type of principal reinsurance is transacted on an individual risk (ex. large factory) where the primary insurer cedes the individual risk to the reinsurer?

Answer 46

facultative reinsurance

Question 47

what type of principal reinsurance is used on a case by case basis?

Answer 47

facultative reinsurance

Question 48

what type of principal reinsurance is where the primary insurer cedes all risks within one or more specific lines of business to the reinsurer?

Answer 48

treaty reinsurance

Question 49

what are the types of reinsurance agreements?

Answer 49

proportional (pro rata) and non-proportional (excess of loss)

Question 50

what type of reinsurance agreement is when the ceding company and reinsurer agree to share a predetermined percentage of losses and premium?

Answer 50

proportional (pro rata)

Question 51

what are the two types of proportional (pro rata) reinsurance agreements?

Answer 51

"quota share" and "surplus share"

Question 52

what is quota share under proportional reinsurance agreement ?

Answer 52

the ceding company and the reinsurer share premiums and losses based on fixed percentage

Question 53

what is surplus share under proportional reinsurance agreement? (pro rata)

Answer 53

when the reinsurer agrees to accept insurance in excess of the ceding insurer's retention limit

Question 54

when are losses and premiums shared in the same proportion that each party shares in the same individual risk?

Answer 54

surplus share (pro rata)

Question 55

what is non proportional (excess of loss) reinsurance agreement?

Answer 55

the ceding company retains a predetermined dollar amount of a loss (retention)

Question 56

what is designed for protection from a catastrophic loss?

Answer 56

excess of loss reinsurance

Question 57

what is extremely important in lowering the cost of insurance to policy owners and offsetting unfavorable underwriting experience?

Answer 57

investments

Question 58

what do state laws restrict?

Answer 58

the riskiness of the portfolio

Question 59

what types of investments are typically invested?

Answer 59

"safe" investments - mostly bonds

Question 60

what type of insurance is a long-term exposure so premiums can be invested in long-term assets including real estate?

Answer 60

life

Question 61

what type of insurance is a short-term exposure so premiums are invested in marketable securities such as high-quality bonds and stocks?

Answer 61

Property and Casualty

Question 62

what are other insurance company operations?

Answer 62

-information systems -accounting -legal department -loss control services