Insurance Operations

Finance 4356

Chapter One

1.Identify the categories that may be used to distinguish insurers from one another. (pp. 1.3-1.10)

2.Explain the role that the risk transfer process plays in the risk management process. (p. 1.10)

3.Describe the steps in the risk management process. (p.1.10)

4.Describe the primary function of the following insurer functions: (pp.1.12-1.13)

(a) Marketing

(b) Underwriting

(d) Loss Control

(e) Reinsurance

(f) Investment

5.Describe the factors that may make the expense, loss, and combined ratios less reliable indicators of insurer performance than is generally assumed. (pp. 1.19-1.20)

6.What are the usual sources of investible funds that insurers use to generate investment earnings?

(pp. 1.24-1.25)

7.How do the objectives of underwriting and marketing departments counterbalance one another? (p.129)

8.Explain how underwriting and investment activities are interrelated. (pp. 1.31-1.32)

9.Insurance Company (IC) has the following year-end financial results: (pp.1.23-1.25)

(a) Written premium $50,000,000

(b) Earned premium 45,000,000

(d) Incurred losses 30,000,000

(e) Loss adjustment expense 6,000,000

(f) Net investment ratio 15 percent

Calculate the following measures of financial performance for IC:

(a)Loss ratio

(1)Trade basis

(2)Statutory basis

(b)Expense ratio

(1)Trade basis

(2)Statutory basis

(c)Combined ratio

(1)Trade basis

(2) Statutory basis

(d)Operating profit (or loss)

(1)Trade basis

(2)Statutory basis

3.“From an economic standpoint, loss control is preferable to risk transfer because it reduces the waste of valuable resources, both human and material.” Explain why loss control varies in importance from insurer to insurer. (p.130)

Chapter Two

1.Identify three recurring issues in insurance regulation. (pp.2.3-2.4)

2.What role did each of the following play in establishing which level of government should regulate insurance? (pp.2.4-2.13)

(a) Paul v. Virginia

(b)South-Eastern Underwriters case

(c)McCarran-Ferguson Act

3.How does the Financial Services Modernization Act address each of the following issues?

(a) authority for regulating insurance, banking, and securities functions (pp.2.14-2.16)

(b)bank’s authority to underwrite insurance

(c)privacy

(d)agent licensing

4.Describe the ways in which the NAIC affects the regulation of insurance. (pp.2.21-2.22)

5.Insurance regulation takes place primarily at the state level, but the issue of federal regulation is often raised. (p.2.26)

(a) What arguments have been advanced in favor of federal regulation?

(b)What arguments have been advanced in favor of continued regulation by the states?

6.What requirements must be met to form each of the following? (pp. 2.26-2.30)

(a) domestic stock insurance company

(b)domestic mutual insurance company

7.What methods do state regulators use to monitor and regulate insurer solvency? (pp. 2.33-2.34)

8.What are the objectives of insurance rate regulation? (pp. 2.38-2.39)

9.What steps have insurance regulators taken in an effort to prevent solvency problems arising from improper underwriting practices? (p. 2.45)

10.Contrast each of the following pairs as they apply to insurance rates. (pp. 2.38-2.39)

(a) adequate rates and excessive rates

(b) fair discrimination and unfair discrimination

Chapter Three

1.What duties does an agent owe a policyholder? (p. 35)

2.Distinguish among (1) an independent agency system, (2) an exclusive agency system, and (3) a direct writer system with regard to (pp. 3.8-3.14)

(a) relationship with insurers (employee or independent contractor)

(b) ownership of expirations

3.What are four objectives of market distribution system management? (p. 3.23)

4.Describe the activities performed by insurance agents. (pp. 3.25-3.27)

5.Describe changes in market share between independent agents and other marketing systems by major lines of business. (pp. 3.30-3.33)

6.A major direct writing company that has traditionally emphasized personal coverage has indicated that it will move aggressively into the commercial market. (pp. 3.30-3.33)

(a) Will the traditional operating methods of the direct writers provide them with the same advantages in the commercial markets that they have had in the personal markets? Give reasons for your answer.

(b) Explain the factors that have enabled the independent agents and brokers to continue in their dominant position in the commercial market.

(c) Describe the industry data resources that his company might use to evaluate its success in gaining a larger share of the commercial market.

Chapter Four

1.Describe the purpose of underwriting and the effect of adverse selection on the insurance selection process. (p.43)

2.Explain how the line of business that an insurer will write is affected by (pp. 4.11-4.12)

(a) capacity to write business

(b) regulation

(d) reinsurance

3.Explain how the use of claims-made policies in the place of occurrence-based policies can improve the loss development delay associated with liability lines of business. (pp. 4.28-4.29)

4.IIA Insurance Company recognizes that the combined ratios should not be the sole measure used to evaluate performance. Describe other, nonfinancial measures available to IIA. (pp. 4.29-4.30)

5.What are the steps in the underwriting decision-making process? (p. 4.32)

6.What four major modifications can be made or recommended to make a submission more acceptable to an underwriter? (p. 4.40)

7.XYC Insurance Company has the following year-end financial results:

Written premiums$50,000,000

Earned premiums 45,000,000

Underwriting expenses 18,000,000

Loss and loss adjustment expenses 36,000,000

Determine the underwriting results for the past year on a trade and statutory basis for the following measures: (p. 4.27)

(a)loss ratio

(b)expense ratio

(c)combined ratio

8.You are a personal insurance underwriter for Acme Insurance Company, an insurer using the independent agency system. One day you receive a request for automobile insurance for a client of one of your newly appointed agents. The applicant is a twenty-four-year-old single male who was previously insured by a direct writer. The application indicates no accidents or traffic violations in the previous three-year period. You are concerned that perhaps the field underwriting was a little lax in this case, and you believe additional information should be obtained because the applicant is “new” business for your company. (pp. 4.32-4.40)

(a) List the external and internal sources of underwriting information that you might use to assist you in your decision, and categorize each source as either an “internal source” or an “external source.”

(b) What factors will determine how much and what kinds of information might be requested?

(c) Briefly describe the kinds of information each source listed provides, and indicate whether the information should be categorized as objective or subjective.

Chapter Five

1.Why are high-rise buildings a concern to fire underwriters? (p. 59)

2.What are the principal ignition sources? (p.512)

3.Give three examples of special hazards in: (p. 5.16)

(a) mercantile occupancies

(b) service occupancies

4.Describe the factors to consider in determining whether an adjacent building constitutes an exposing structure. (pp. 5.22-5.23)

5.What constitutes a flood? (p.5.39)

6.Describe the factors that should guide the selection of a co-insurance percentage for business income coverage. (p. 5.44)

7.What does protection and indemnity (P&I) insurance cover? (pp. 5.56)

8.You are a multiple-line underwriter, and a producer has submitted to you application for property coverage on three automobile accessory stores. These stores’ inventories are substantially the same, and although they are located in different cities, their public and private protection and exposures are at a par. However, the construction of the building, B’s store is in a noncombustible building, and C’s store is in a building of mill construction.

(a) Based only on the preceding information, rank the three automobile accessory stores in order of desirability from a fire underwriting standpoint, and explain the characteristics of the three classes of construction that determined the ranking you have assigned. (pp. 5.3-5.6)

(b) Define the terms “public protection” and “private protection” as used in fire insurance underwriting. (p. 5.17)

9.One-Day Cleaners has six retail outlets for its laundry and dry-cleaning service. Clothing is trucked to and from a central plant that cleans and presses all of the garments. Identify the factors that should be considered in determining the probable period of restoration if the central plant were destroyed by fire. (pp. 5.44-5.46)

Chapter Six

1. What elements must be present to find a party negligent? What is the measure for negligence?(pp 6.4)

\2.Identify at least one advantage and one disadvantage in each of the following attempts to provide universal

coverage for all motor vechicles.(pp6.7-6.10)

a.financial responsibility

b.compulsory

c.mandadory uninsured motorists coverage

d.no-fault laws

Is this a societal problem or a legal one?Explain

3. Why should a workers compensation underwriter investigate use of (6.36)

a.temporary and seasonal workers

b.subcontractors

c.use of Administaff employees

4., What are advantages and disadvantages of package policies of an insurer?(pp6.46/47)

5. You are underwriting a general liability exposure of a package policy covering a restaurant.

Identify 3 major areas of exposure with which you must be concerned, and describe the hazards that may be

involved in each ;area of exposure.(pp 6.21-6.24)

6.In the age of consumerism, the marketing function has taken on an enormous significance in the

underwriting of products insurance. Describe the products liability underwriting significance of the

following marketing techniques.(pp 6.30-6.32)

a.introducing new product lines

b.using comparisons with a competitors product in advertising

7. List and define the types of damages that can be awarded under tort liability.(pp6.5 and notes)

Are there any restrictions on limits and have there been efforts to limit damage awards?If so,

what are they and how ?

Chapter Seven

1.Identify the primary regulatory goals of ratemaking. (7.3)

2.List the five characteristics that rates should have to enable an insurer to be competitive and profitable. (7.4)

3.Describe the three components of an insurance rate. (7.5)

4.List the five basic ratemaking terms. (7.6)

5.Describe the three ratemaking methods. (7.13 – 7.16)

6.What are the disadvantages of the policy-year data collection method? (7.17 – 7.19)

7.What are the advantages of the calendar-year data collection method? (7.18 – 7.20)

8.How does the accident-year method avoid errors inherent in the calendar-year method? (7.20)

9.How are the effects of large losses on ratemaking controlled? (7.29)

10.XYZ Insurance Company has collected the following data:

Unearned premiums – December 31, 20X0$25,000,000

Written premiums for 20X0$45,000,000

Unearned premiums – December 31, 20X0$30,000,000

Loss reserves – December 31, 20X0$20,000,000

Loss paid during 20X1$40,000,000

Loss reserves – December 31, 20X1$30,000,000

Calculate earned premiums under the calendar-year ratemaking method. (7.18 – 7.20)
Calculate incurred losses under the calendar-year ratemaking method. (7.18 – 7.20)

11.Using the following loss development data, calculate loss development factors and developed losses.

(7.22 – 7.24)

AccidentMonths of Development

Year12243648

17,1009,58510,20810,514

27,80010,14010,647

38,20011,480

48,500

Chapter Eight

1.Explain the principal functions of reinsurance. (pp. 8.3-8.10)

2.What kinds of reinsurance are most effective in providing insurer financing? (p. 8.12)

3.How does facultative reinsurance differ from treaty reinsurance? (p. 8.25)

4.What are the principal categories of financial reinsurance? (p. 8.30)

5.What are the principal reasons for forming reinsurance pools? (p. 8.31)

6.The Titanic Marine Insurance Company insured a ship for $1 million at an annual premium of $30,000.

(pp. 8.13-8.14)

(a)How much of the coverage and premium would it cede to its reinsurer under a quota share treaty with a 25 percent retention?

(b)How much would it recover from its reinsurer on a covered loss of $300,000?

7.(a) How much would the reinsurer be obligated to pay under a surplus share treaty for a covered loss of $100,000 on a building insured for $1 million? The treaty retention is $50,000, and the treaty limit is $2 million.

(pp. 8.14-8.15)

(b) Would your answer be different for a per risk or per policy excess treaty with the same retention and limit? Explain. (pp. 8.18-8.23)

Chapter Nine

1.What are the steps in designing a catastrophe reinsurance program? (pp. 9.5-9.6)

2.How is a reinsurance program affected by (pp. 9.6-9.10)

(a) volume of business written?

(b) size and quality of surplus?

(d) growth plans?

3.Describe the steps in setting the retention of a catastrophe treaty. (pp. 9.13-9.14)

4.Why should the reinsurer be concerned with the financial strength of the primary insurer? (pp. 9.17-9.18)

5.What are the advantages of employing the services of a reinsurance broker? (pp. 9.20-9.21)

6.What three factors affect the negotiation of the ceding commission? (p. 9.21)

7.Describe the procedure for the adjustment of claims between the primary insurer and the reinsurer for each of the following: (p. 9.25)

(a) pro rata treaty

(b) working cover or per occurrences excess treaty

8.Explain the factors that should be considered in designing a reinsurance program. (pp. 9.3-9.17)

9.Describe how proposed changes to reinsurance regulations will affect reinsurers and reinsurance intermediaries. (pp. 9.33-9.35)

Chapter Ten

1.What actuarial services does an insurer need to operate effectively? (pp. 10.3-10.4)

2.What actuarial functions are usually performed by an advisory organization? (p. 10.4)

3.What are the components of a rate? (p. 10.7)

4.Why are accurate loss reserve estimates important? (pp. 10.7-10.8)

5.What factors cause a lag in reflecting loss experience in ratemaking? (pp. 10.10-10.12)

6.What are the three approaches to ratemaking? (pp. 10.17-10.20)

7.What are the components of the expense loading? (pp. 10.18-10.19)

8.Using Exhibit 10-2 in the text, the pay-out pattern of losses. (p. 10.9-10.10)

9.The actuary for IIA Insurance Company has determined that IIA’s loss ratio for Homeowners in Alabama is 75 percent. IIA’s desired loss ratio is 68 percent. Using the loss ratio method for ratemaking, calculate the percentage rate change. (p. 10.18)

10.Given the following data and using the pure premium ratemaking method, calculate the gross premium. (pp. 10.18-10.20)

Incurred losses $500,000

Earned exposure units 10,000

Expense ratio 40%

Chapter 11

1.What are the major steps in the ratemaking process? (p. 11.3)

2.In what lines of business or under what circumstances are loss reserve estimates likely to be in error using the calendar-year method? (p. 11.6)

3.How does the accident-year method avoid errors inherent in the calendar-year method? (pp. 11.6-11.7)

4.What is the purpose of loss development factors? (p. 11.8)

5.What is the purpose of trending? (p. 11.11)

6.What factors should be considered in selecting between linear and exponential trending? (p. 11.12)

7.Under what circumstances can the pure premium method not be used? (p. 11.20)

8.How are the effects of large losses on rat4emaking controlled? (p. 11.23)

9.What component of final rates is not included in prospective loss costs? (p. 11.25)

10. Using the following loss development data, calculate loss development factors and developed losses:

(pp. 11.8-11.9)

Accident YearMonths of Development

12 24 36 48

17,1009,58510,20810,514

27,80010,14010,647

38,20011,480

48,500

11.If loss frequency is increasing at 10 percent annually and loss severity is increasing at 9 percent annually, what is the combined annual trend in losses? (pp. 11.11-11.12)

12.XYZ Insurance Company has collected the following data for a certain line of business:

Premium on-level$62,000,000

Developed and trended losses $48,000,000

Expected loss ratio 70%

What rate changes would you recommend? (pp. 11.13-11.14)

Chapter 12

1.When the average value method of case reserving is used, how are the average values determined? (p. 12.4)

2.What advantages does an expert system offer insurers using the judgment method of case reserving?

(pp. 12.4-12.5)

3.What types of claims would be reserved using the tabular method of case reserving? (p. 12.5)

4.In addition to the incurred but not reported component of IBNR, what other losses does IBNR include?

(pp. 12.6-12.7)

5.What factors may affect the selection of values other than the mean value in calculating a loss development factor? (p.12.11)

6.What are the arguments, pro and con, for not using discounted loss reserves? (pp. 12.19-12.20)

7.What is an insurer’s primary goal in designing a reinsurance program? (p. 12.22)

8.What decisions must an insurer make in planning its reinsurance program? (p. 12.25)

9.How does A.M. Best’s BCAR differ from NAIC’s RBC model? (p. 12.32-12.38)

10.For each of the following claims, select the most appropriate loss reserving method and justify your selection. (pp. 12.9-12.19)

(a)medical malpractice

(b)auto physical damage

(c)fire

(d)workers compensation

Chapter 13

1.Describe the primary objectives of the claim department. (pp. 13.3-13.4)

2.Describe how information developed by the claim function would be useful to (pp. 13.5-13.6)

(a)marketing.

(b)underwriting.

(c)the actuarial department.

3.Describe the circumstances under which a policyholder might employ the services of a public adjuster.

(pp. 13.15-13.16)

4.Describe the revenue-earning opportunities that using unbundled claim services present. (p. 13.18)

5.What are the four major categories in which policy exclusions can be placed? (p. 13.21)

6.Describe the practice of “stair-stepping” reserves. (p. 13.37)

7.List six activities that are considered unfair claim practices by the NAIC Model Act. (p. 13.49)

8.A claim representative has received a claim that required additional investigation to determine whether the insurer is liable under the policy. (pp. 13.21-13.22)

(a)Why would the claim representative need to specifically reserve the insurer’s rights to deny the claim at a later date?

(b)Contrast the use of a reservation of rights letter with a nonwaiver agreement.

Chapter 14

1.Why do property insurance policies describe the value of the property insured in only a general way? (p.14.4)

2.Explain why an insurable interest is necessary. (pp. 14.4-14.5)

3.Describe the guidelines adjusters use to determine whether property constitutes a fixture. (p. 14.9)

4.Describe how coverage for indirect loss is triggered under property policies providing loss of income or extra expense coverage. (pp. 14.10-14.11)

5.Describe how proper estimates for building damage replacement costs are determined. (pp. 14.17-14.18)

6.Describe the policyholder’s duties following a loss. (pp. 14.23-14.27)

7.Why are the values of commercial structures more difficult to determine than the values of residences?

(p. 14.42)

8.Describe the pre- and post-loss activities that can assist insurers when catastrophes occur. (pp. 14.56-14.57)

9.Describe the factors that complicate the determination of depreciation. How has determination of fair market value solved problems with valuing property? (pp. 14.19-14.20)

Chapter 15

1.What three issues must be resolved in every liability claim? (p. 15.4)

2.Describe the actions an adjuster should take when coverage under the policy is questionable. (pp. 15.4-15.6)

3.Explain the rationale used in some states to justify coverage for international acts. (pp. 15.7-15.8)

4.Describe the defenses that insurers may use to defend their policyholders from charges of negligence.

(pp. 15.14-15.5)

5.Contrast the circumstances under which a claim for wrongful death or a survival action may be asserted.

(p. 15.16)

6.Explain why it is often in the best interests of the claimant and the defense attorneys to settle claim s without going to court. (p. 15.21)