Myhr & Markham, Boor - Insurance Operations

  1. Six Steps to the Risk Managemenet Process
    • Identify exposures
    • Analyse exposure
    • Investigate the various techniques to address the loss exposures that have been identified
    • Select the technique
    • Implement the technique selected
    • Monitor results and make any necessary changes
  2. Techniques to Address Loss Exposures
    • Risk control
    • Risk financing
    • Loss exposure avoidance
  3. Law of Large Numbers
    Mathematical principle that says that relative accuracy of predictions about future outcomes increases as the number of similar, but independent, exposure unit increases
  4. Examples of Alternative Risk Financing Techniques
    • Self-Insurance Programs
    • Captives
    • Risk Retention Programs
  5. Characteristics Used to Classify Insurance Companies
    • Legal form of ownership
    • Place of incorporation
    • Licensing status
    • Marketing system used
  6. Classifications of Insurers Defined By Their Legal Form of Ownership
    • Proprietary Insurers
    • Cooperative Insurers
    • Other Insurers (eg. pools and government insurers)
  7. Purpose of Propriatary Insurers
    Formed to earn a profit for their owners
  8. Examples of Propriatary Insurers
    • Stock Insurance Companies
    • Lloyds
    • Insurance Exchanges
  9. Purpose of Cooperative Insurers
    Owned by their policyholder and usually formed to provide insurance protection to their policyholders at minimum cost
  10. Examples of Cooperative Insurers
    • Mutual insurance companies
    • Reciprocal exchances
    • Fraternal organizations
    • Others: captive insurers, risk retention groups, purchasing groups
  11. Types of Insurance Companies Based on Place of Incorporation
    • Domestic
    • Foreign
    • Alien
  12. Domestic Insurer
    Incorporated in state or formed by the laws of the state
  13. Foreign Insurer
    Domestic that is licensed to do business in states other than its domiciled state
  14. Alien Insurer
    Insurer formed in another country
  15. Describe Licensed Insurer
    Insurer authorized by the state insurance department to transact business within a particular state
  16. Describe Unlicensed Insurer
    Insurer not authorized by the state insurance department to transact business in that state
  17. Three Core Insurance Functions
    • Marketing
    • Underwriting
    • Claims
  18. Nine Supporting Insurance Functions
    • Loss Control
    • Reinsurance
    • Actuarial
    • Investments
    • Information Technology
    • Premium Audit
    • Human Resources
    • Legal Services
    • Accounting
  19. Traditional Marketing Systems
    • Independent agencies and brokerage
    • Direct writers
    • Exclusive writers
  20. Main Characteristics that Distinguish Traditional Marketing Systems
    • Contractual relationship between producer and insurer
    • Ownership of expirations
    • Compensation method
  21. Independent Agency and Brokerage Marketing System
    • Insurance marketing system under which:
    • Agent is contracted to sell for insurer
    • Agent can represent multiple insurers
    • Agent owns expirations
    • Agent is compensated with commission: flat % on all business submitted; contingent or profit-sharing by meeting volume and/or profit goals
  22. Exclusive Agency
    • Insurance marketing system under which:
    • Agent is contracted to sell for insurer
    • Agent required to represent single insurer
    • Expirations are owned by the insurer
    • Agent is compensated with commission: guaranteed minium salary; one rate for new business and lower rate for renewals
  23. Direct Writer
    • Insurance marketing system under which:
    • Agent are employees of a single insurer
    • Agents can be compensated by salary, commission, or a combination of the two
    • Expirations are owned by the insurer
  24. Component of Marketing Plan
    • Product proposal and sales goals
    • Situation analysis: SWOT (Strenghts, Weaknesses, Opportunities, and Threats)
    • Marketing goal: outline of the proposed target market
    • Marketing strategies: plans and proposals for how the product will be developed, priced, promoted, and sold
  25. Primary Types of Authority in Agent-Principle Relationship
    • Actual Authority: Authority conferred by the principle on an agent under an agency contract
    • Apparent Authority: Authority that arises from a 3rd partys reasonable belief based on appearances created by a principal that an agent has authority to act on behalf of that principle´╗┐
  26. Describe Managing General Agents (MGA)
    • Independent business organizations that function almost as branch offices for one or more insurers
    • Appoint and supervise independent agents and brokers for insurers using independent agency and brokerage system
  27. Describe Excess and Surplus Lines Brokers
    Persons or firms that place business with insurers not licensed in the state in which the transaction occurs but that are permitted to write insurance because coverage is not available through standard market insurers
  28. Functions of Producers
    • Prospecting
    • Risk management review
    • Sales
    • Policy issuance
    • Premium collection
    • Customer service
    • Claim handling
    • Consulting
  29. Types of Premium Collection
    • Agency Bill: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
    • Direct Bill: Payment procedure in which insurer sends premium bills to insured, collects the premium and sends any commissions payable on the premium to the producer
  30. Methods of Prospecting
    • Referrals from present clients
    • Referrals from strategic partners
    • Advertising
    • Interactive web sites
    • Telephone solicitations
    • Cold canvass (i.e., solicitation without appointment)
  31. Purpose of Underwriting
    Develop and maintain a pro table book of business for the insurer
  32. Steps of Underwriting Process
    • Evaluate Loss Exposures
    • Determine Underwriting Alternatives
    • Select an Underwriting Alternative
    • Determine the Appropriate Premium
    • Implement the Underwriting Decision
    • Monitor the Loss Exposures
  33. Hazard Categories
    • Moral
    • Morale
    • Physical
    • Legal
  34. Moral Hazard
    Condition that increases the likelihood that a person will intentionally cause or exaggerate a loss
  35. Morale Hazard
    Condition of carelessness or indiff erence that increase the frequency or severity of loss
  36. Physical Hazard
    Tangible condition of property, persons, or operations that increases the frequency or severity of loss
  37. Legal Hazard
    Condition of the legal environment that increases loss severity or frequency
  38. Major Types of Modi cations to Make a Submission More Acceptable to an Underwriter
    • Require loss control measures
    • Change insurance rates, rating plans, or policy limits
    • Amend policy terms and conditions
    • Use facultative reinsurance
  39. Experience Rating
    Ratemaking technique that adjusts the insureds premium for the upcoming policy period based on the insureds experience for the current period
  40. Schedule Rating
    Rating plan that awards credits and debits based on speci c categories such as the care and condition of the premises
  41. Retrospective Rating
    Ratemaking technique that adjusts the insureds premium for the current policy period based on the insureds loss experience during the current period
  42. Additional Factors to Consider When Deciding to Accept Submission
    • U/W Authority - may need to refer to higher authority
    • Supporting Business
    • Mix of Business
    • Producer Relationships
    • Regulatory Restrictions
  43. Types of Underwriters
    • Line Underwriters
    • Staff Underwriters
  44. General Di erences Between Staff and Line Underwriters
    • Line
    • Primarily responsible for implementing the steps in the underwriting process
    • Usually located in branch/regional offices
    • Staff
    • Assist underwriting management with making and implementing underwriting policy
    • Usually located at home office
  45. Functions of Line Underwriters
    • Assist with determining appropriate coverage
    • Provide service to producers and policyholders
  46. Functions of Staff Underwriters
    • Research the market
    • Research and develop coverages
    • Evaluate underwriting experience
    • Review and revise rating plans
    • Formulate underwriting policy
    • Develop underwriting guides
    • Conducting underwriting audits
    • Assisting with education and training
  47. Fire Insurance Classes of Construction
    • Frame
    • Joisted masonry
    • Noncombustible
    • Masonry noncombustible
    • Modif ed fire resistive
    • Fire-resistive
  48. Sources of Occupancy Hazards
    • Housekeeping practices
    • Heating equipment
    • Electrical equipment
    • Smoking
  49. Property Causes of Loss
    • Fire
    • Lightning
    • Explosion
    • Windstorm
    • Hail
    • Vandalism and Malicious Mischief
    • Water Damage
    • Flood
    • Earthquake
    • Collapse
  50. Sources of Legal Liability
    • Torts
    • Contracts
    • Statutes that impose liability without regard to fault
  51. Classes of Wrongful Acts
    • Criminal Acts: Crimes against others, which are also off enses against society
    • Civil Acts: Violate the rights of individuals by tort or breach of contract
  52. Types of Torts
    • Negligence
    • Intentional Tort
    • Strict Liability
    • Vicarious Liability
  53. Elements of Negligence
    • Legal duty owed to plaintiff
    • Failure to conform to the standard of care required by the situation
    • Causal connection exists between the negligent act and the bodily injury or physical damage
    • Bodily injury or physical damage occurred
  54. Intentional Tort
    • Wrongful act or omission intended to cause harm
    • Examples: Assault and battery, Libel, Slander, Invasion of privacy, Copyright violation
  55. Strict Liability
    • Liability imposed without regard to fault
    • Examples: Abnormally dangerous activities, Sale of dangerously defective products
  56. Vicarious Liability
    • Liability arising when one party is held liable for the actions of another party
    • Examples: Principle-Agent, Employer-Employee, Parent-Child
  57. Types of Liability Damages
    • Compensatory: Compensate the injured party for the harm caused by the wrongful act
    • Punitive: Punish defendants whose conduct is willful, wanton, or grossly negligent
  58. Types of Premises and Operations Loss Exposures
    • Premises liability
    • Operations liability
    • Completed operations
  59. Premises Liability
    Loss exposures that arise from the ownership or possession of real property
  60. Operations Liability
    Loss exposures that arise from a policyholders business activities conducted away from its own premises and from uncompleted work
  61. Completed Operations
    Loss exposures that arise from an organizations finished work
  62. Types of Physical Hazards
    • Common hazards
    • Special hazards of the class
    • Special hazards of the risk (beyond those anticipated by the standard rates for the class)
  63. Parties Who Commonly Have Insurance other than Property Insurance
    • Landlords and Tenants
    • Bailors and Bailees
    • Mortgagors and Mortgagees
  64. Types of Property
    • Real: land and everything attached to it
    • Personal: all other property
  65. Replacement Cost
    Cost to repair or replace property using new materials of like kind and quality with no deduction for depreciation
  66. Actual Cash Value
    Replacement cost minus depreciation
  67. Insureds Duties After a Property Loss
    • Provide prompt notice
    • Protect property
    • Assist with loss adjustment process
    • Provide proof of loss
    • Submit to examination under oath
    • Insured may enlist help of Public Adjuster to handle all duties
  68. Procedures to Follow to Settle Property Claims
    • Determine the cause of loss
    • Determine the amount of loss
    • Document the cause and amount of loss
    • Avoid waiver and estoppel
    • Determine salvage value and subrogation rates
  69. Defi ne Waiver
    Voluntary and intentional relinquishment of a known right by the insurer that results in estoppel
  70. De fine Estoppel
    Principle that prevents the insurer from asserting a right that it has already waived
  71. Four Steps in Adjusting a Liability Claim
    • Determine coverage
    • Determine legal liability
    • Determine damages
    • Negotiate and settle claims
  72. Describe Steps When Coverage Problems Exist
    • Explain in writing to policyholder what the issues are and how the adjuster will proceed
    • Send Reservation of Rights letter or Nonwaiver agreement
    • Investigate claim
  73. Defenses to Liability Claims
    • Absence of negligence
    • Comparative or contributory negligence
    • Assumption of risk
    • Statute of limitations
  74. Types of Damages Awarded for BI Claims
    • Expenses for Medical Treatment
    • Loss of Earnings
    • Pain and Su ffering
    • Permanency/Dis figurement
    • Loss of Consortium
    • Future Damages
    • Wrongful Death
  75. Types of Compensatory Damages
    • General - intangible; highly subjective such as pain and suff ering;
    • Special - tangible; can be quanti fied such as loss of earnings
  76. Settlement Techniques in Liability Claim Adjustment
    • Structured settlements
    • Advance payments
    • Walk-away settlements
  77. Describe the Duty to Defend
    • Insurer must defend an entire claim whenever a plaintiff 's allegations for any part of the claim are covered
    • Can be more important to the insured than the duty to indemnify
    • Especially important in frivolous, fraudulent, or meritless claims (Absent insurer's defense, plaintif f could coerce settlements)
    • Insurer's duty is also its right (Insurer can choose attorney and dictate defense strategy)
    • When two defense attorneys involved, insurer's attorney has the right to control the case as long as the insurer's money is at stake
  78. Types of Alternative Dispute Resolution in Liability Claim Adjustment
    • Negotiation
    • Mediation
    • Arbitration
    • Appraisal
    • Mini-trial or summary jury trial
    • Pretrial settlement conference
  79. Reasons for Insurance Industrys Flat Demand Curve
    • So many buy it out of need:
    • Required by law for Auto and WC
    • Often required by lender (HO)
    • Businessowners protecting company's financial resources (GL)
  80. Commodity Nature of the Insurance Marketplace
    • Regulation requires all insurers use same WC coverage forms
    • Often a propensity to use standardized bureau forms for other lines
    • Can lead customers to believe that all insurance companies' products are identical
  81. Insurance Product Attributes that Can Create a Brand Name
    • Financial strength of the insurer
    • Ability to successfully fi ght third party claims
    • Coverage extensions o ffered in the policy
    • Extent of coverage for marginal claims
    • Flexibility in customizing insurance programs to meet a customer's needs
    • Accessibility of the claims department
    • Quality of loss control
  82. Steps in Insurance Business Cycle
    • Insurers lose money
    • Insurers raise prices
    • Period of high pro tability
    • Many new firms enter the market
    • Excess Capacity created
    • Prices are depressed
    • Lower pro tability results
    • Some firms leave the market
    • Low supply
    • Cycle starts again
  83. Considerations That Could Delay An Insurers Exit From The Marketplace
    • Loss portfolio transfer required by regulators prior to exiting
    • Regulator may require the company to maintain a speci ed level of capital and surplus until all liabilities are paid
    • Regulators may design a hurdle to maintain availability in unprofi table lines
    • Withdrawal may aff ect marketing of related lines for the company
  84. Describe Reserve Management
    • Tendency of insurer to over-reserve during profi table periods and under-reserve during unprofi table periods
    • Extends the cycle
  85. Soft Market
    Sum of premium goals for all companies in operation exceeds the amount of insurance desired by all potential insureds
  86. Hard Market
    Sum of premium goals for all companies in operation is less than the amount of insurance desired by all potential insureds
  87. Methods Other than Rate Decreases to Lower Prices
    • Selection criteria to lower-priced company
    • Individual risk rating plans
    • Manipulate classi cations
  88. Strategies for Responses to Business Cycle
    • Riding the Cycle: Maintaining Market Share
    • Countercyclical Strategy: Conserving Capital
    • Some Combination of 1 and 2
  89. Riding the Cycle
    • Attempt to maintain a constant market share through all parts of the cycle
    • Match the market price, regardless of how low
    • Weak focus on pro fitability
    • More suited for mutual insurance companies
    • Greater policyholder persistency
    • Companies must be careful that the lack of focus on profi tability does not produce insolvency or a greatly weakened surplus
  90. Countercyclical Strategy
    • Attempt to maintain profi tability by only selling business that will produce profi t
    • Write minimal business in soft markets and sell as much as possible in hard markets
    • Conserves company capital
    • Just write enough business in soft market to maintain infrastructure for the hard market
    • High pro fitability per unit of premium
    • Low leverage on surplus
Card Set
Myhr & Markham, Boor - Insurance Operations
Exam 5 - Myhr & Markham, Boor - Insurance Operations