Insurance Operations

Types, Characteristics and Differences of Insurance Organizations - Mutual [subcategories: Fraternal, Reciprocals], Stock, Lloyds [Insurance Exchange], Self Insurance Captive, Surplus Lines, Government Insurers

Steps to the Risk Management Process

Elements to an Ideally Insurable Risk

Risk Management Techniques -- Risk Assumption, Risk Avoidance, Loss Prevention and Control, Risk Transfer/Insurance and when to use them on the basis of loss frequency and severity characteristics [low, high]

Insurance Occupations: Actuarial, Accounting, Underwriting, Marketing, Investments, Legal, Claim Settlement

Insurer Goals - Earn a profit, meet policyholder needs, comply with legal requirements, fulfil responsibilities to society, and the obligations of the insurer under the policies it sells

Mortgagee Clause and Settlement Options in HO and Commercial Lines Coverages

Use of financial basis combined ratio and the loss ratio

Insurance Claims Adjustment Process - Common exclusions - other insurance, business, intentional loss, difficult to measure the amount of loss

Differences between GAAP and Statutory Accounting in Insurance

Differences between Life and Casualty Insurer operations in terms of investment, length of premium payment stream, analysis of financial strength [ e.g. Casualty Insurer - Loss Ratio/Combined Ratio; Life Insurer - Admitted Assets in relation to policyholder reserves]

Insurance Regulation --- Paul vs. Virginia, history related to Merritt, Armstrong Investigations, Appleton Rule, State vs. Federal Regulation, compartmentalization of insurance underwriting, US. vs. Southeasetern Underwriters, Public Law 15 [McCarran-Ferguson Act], Gramm-Leach-Bliley Act.

Special Legal Principles used in Insurance -- Utmost Good Faith, Contract of Adhesion, Aleatory Contract and Unilateral Contract Features

Different Types of Reinsurance Contracts --- Automatic vs. Facultative, Pro-Rata vs. Excess-Loss

Reasons for Insurance Regulation: protect consumers, maintain insurer solvency, prevent destructive competition, arguments favoring federal regulation as opposed to state regulation

Insurance Rate Regulation -- Prior Approval vs. File and Use Provisions, 3 major goals: adequacy, not excessive, not unfairly discriminatory, Examples of Unfair Underwriting and Rate setting practices

Differences and legal ramifications of an Independent vs. Direct Writing vs. an Exclusive Agency system

The role of Excess/Surplus Lines Brokers

Advantages vs. disadvantages of Group Underwriting

Difference between a direct, physical damage loss vs. an indirect, consequential loss

The purpose and different types of reinsurance arrangements - Facultative/Automatic Reinsurance Contracts and their impact on insurer capital and the competitiveness of the insurance industry

Differences in the types of hazards - Physical, Morale and Moral, which ones are insurable and why some are not.

Different types of risks, which are insurable which require other risk management tools. Goals of the insurer when utlizing loss control activities [pre and post lost]

Legal Issues in Insurance -- Civil versus Criminal wrongs, liability, definition of negligence, vicarious liability, three levels of duty owed to those visiting property,

Commercial General Liability Insurance - Premises and Operations Liability, Personal injury, Premises Medical Payments, Contractual Liability, Products and Completed Operations Liability

Differences in the Independent Agency System versus the Direct Writing Agency System

Differences between Claims Made versus Occurenced Based Underwriting

Underwriting Issues Related to the PAP and the Personal Umbrella Liability Policies, Compulsory Auto Liability Ins. laws, high risk driver plans, uninsured motorist coverage, no fault insurance, factors used to rate the policies: age of operator, type of auto, auto use, driving record, territory, gender and marital status, occupation, personal characteristics, physical condition of the driver, safety equipment.

Advantages of doing a Premium Audit -- determine correct premiums, meet regulatory requirements, collect ratemaking data, inhibit fraud, reinforce policyolder confidence, obtain addition information

Differences in Reinsurance Treaties --- Facultative vs. Automatic, Stop loss vs. Pro-Rata

Differences between life insurance policies -- Term Life, Whole Life, Universal Life, Variable Life Insurance, financial planning issues related to fitting the highest amount of coverage at the least cost, or determining a policy that generates the highest cash value over a long period of time

Differences in the cost of insurance based on the mortality table

Current drivers of health care costs - lack of distributed medical health system, cost of medical malpractice, uninsured population with transfer of costs

Factors to consider when setting premiums --- adequacy, not unfairly discriminatory, equity amongst insureds

Advantages and disadvantages of buying term versus permanent life insurance

Differences between - traditional health insurance, HMO Network, PPO plans

Calcualtion of probabilities of death using the mortality table

Calculation of single premium life annuity immediate

Required factors for determining a life or health insurance premium -- probability of loss, discount rate, benefits promised and loading for expenses, taxes, profits and contingencies

Understanding of the impact reserves have as a liability on an insurer's balance sheet

Importance of major medical insurance as an example of risk transfer to cover large, infrequent loss

Conditions in order for an insurance contract to come into existence

Sample Questions

1.The proximate cause of loss is: (a) a loss event not covered within an insurance policy (b) the first peril in a chain of events resulting in loss (c) a loss that occurs in close proximity to an insured (d) a loss from risks that are catastrophic in nature (e) the last peril in a chain of events resulting in loss

2. A pure risk is defined as: (a) anything that increases either the severity or frequency of loss (b) a risk that produces a loss where the outcome is either a loss or no loss (c) the possibility that a loss will occur (d) the proximate cause of loss (e) a loss that increases in risk due to technological change

3.Leaving your key in the ignition in your unlocked car in the UNI Dome parking lot is an example of a: (a) named peril (b) moral hazard (c) morale hazard (d) homogeneous risk (e) indirect loss

4.All of the following are direct losses EXCEPT: (a) the roof is blown off your house (b) a house loses shingles during a windstorm (c) you have to rent a new apartment after the one you are living in is destroyed in a fire (d) you are sued for $50,000 following an auto accident with another driver (e) a friend sustains a broken arm due to slipping on a piece of ice from your refrigerator requiring medical treatment

5.One measure of a casualty insurer’s ability to cover its incurred losses, loss adjustment expenses and incurred underwriting expenses out of earned premiums is: (a) the financial basis combined ratio (b) the trade basis loss ratio (c) the incurred cost operating ratio (d) the Herfendahl combined ratio (e) the profitability ratio

6. Which of the following is NOT an example of a pure risk? (a) a potential liability claim on the financial advice you gave a client (b) potential theft of a motorcycle (c) potential loss on your investment in 10 shares of Berkshire Hathaway stock (d) potential loss of your wallet containing a stock certificate worth $5,000 (e) potential loss of your laptop computer from the library while studying for your risk management and insurance exam

7. Which of the following is a suitable definition of “insurance?” (a) a credit card available to protect you in the event of a rainy day (b) a financial contact whereby an individual pays a small certain payment known as the premium, in exchange for being indemnified against large uncertain losses, known as the contingency insured against (c) a financial arrangement that redistributes the costs of expected losses amongst the owners of an insurance company (d) an investment contract designed to allow the insured to earn a fair rate of return on investment commensurate with risk (e) a contractual agreement in which the insurer agrees to pay the insured only if the insured requests the money

8.Risk avoidance is the best risk management tool when the chance of loss is _____and the loss severity is _____. (a) high, high (b) low, low (c) low, high (d) high, low (e) certain, low

9.A type of insurance agency system whereby the agent owns the list of clients, and receives income primarily from commissions is: (a) a direct writing agency system (b) a independent commission system (c) a field service agency system (d) an independent agency system (e) an e-market agency arrangement

10.A mutual insurance company is: (a) an insurer that is owned by the policyholders, and may pay dividends to them (b) owned by shareholders who purchase stock in the business (c) a non-profit business organization (d) not required to file a statutory accounting statement with the insurance commissioner (e) required to abide by a file and use provision in order to set new premium rates

11. Insurance underwriting might best be defined as: (a) the process of selling IPO securities to new investors (b) the selection of who is to be insured and the determination of an appropriate premium based on risk (c) the determination of coverage after an insured files a claim (d) the process of examining the accounting records of an insurer prior to filing the statutory statement (e) determination of how much to pay on a particular loss based on the principle of indemnification

12. Insurance or risk transfer in best used in risk management when the frequency of loss is _______ and the severity of loss is ______________. (a) low, high (b) high, low (c) low, low (d) high, high (e) high, speculative

13. The most difficult and important step in risk management process and one that can lead to a risk manager being terminated if it is not conducted properly is: (a) risk identification, particularly those risks that are foreseeable (b) finding the least costly insurer to cover all the risks that may impact an organization (c) determining an appropriate premium for the pure and speculative risks (d) selecting the best method for handling risk (e) hiring a highly trained accountant to create a tax-sheltered captive within the organization

14.A reciprocal insurance organization: (a) is a large property-liability insurance company with headquarters in London (b) sells insurance directly to the public through the mail (c) sells only inland and outland marine coverage to insure transportation risks (d) a type of insurer with an attorney in fact where the liability for losses is transferred to members of the organization (e) is a marketplace where separate underwriting syndicates accept risk exposures for their own accounts

15 .The department within the insurance organization responsible for the calculation of insurance rates, developing rating plans, and estimating loss reserves is: (a) the actuarial department (b) the claims department (c) the investments department (d) the reinsurance department (e) paid loss retrospective rating department

16. A direct writing agency system for selling insurance: (a) allows agents to sell a variety of insurance policies from any number of insurers (b) utilizes the internet to sell insurance policies to customers (c) involves paying agents on a strictly commission basis (d) requires that an insurance agent sell only policies issued by one insurer, in return the agent receives a salary plus some commission income (e) permits an agent to work as a broker for a prospective insured

17.Taking a $1,000 deductible on your individual health insurance policy is an example of: (a) risk avoidance (b) loss reduction (c) risk assumption (d) risk transfer (e) hedging

18. The principle of utmost good faith: (a) holds only the insurer to a higher standard of honesty in the execution of the insurance contract (b) generally does not apply in employee life insurance since these covers are administered under group underwriting (c) requires that the insurer fulfill on the promises made in the insurance contact, and that the insured provide accurate information on the insurance application and not withhold information considered material to the contract (d) means that there will be an inequality between the actual value of payments amongst the policy participants (e) requires that the insurer provide the insured with a written contract in order for the policy to come into existence

19. A type of reinsurance contract whereby one insurer transfers a portion of its insurance coverage on issued policies to another insurer based on a previously negotiated arrangement based on mutually agreed upon underwriting standards is called: (a) a facultative reinsurance treaty (b) an automatic reinsurance treaty (c) a stop-loss reinsurance contract (d) a pro-rata reinsurance arrangement (e) an excess loss, facultative reinsurance

20. The type of accounting statement required by state insurance commissioners in order for an insurer to be admitted to sell cover is: (a) a qualified statement of insurance (b) a GAAP financial report (c) a prior approval financial statement (d) a statutory statement (e) a supervisory insurance

21.The principle of indemnity in insurance means: (a) a person has the right to sue an insurer for loss when they are not satisfied with the payment of a claim (b) that a person may not collect more than his/her actual financial loss in the event of damage caused by an insured peril (c) that a person will not be reimbursed for a loss unless he can show proof of loss (d) an employer is always responsible for the careless acts on an employee (e) a adjusters may not be held liable for twice the claim if a settlement has already been reached on a policy

22. The goal of risk management is to: (a) Maximize insurance expenditures (b) Make certain that uninsured losses do not occur (c) Minimize the adverse consequences of losses and uncertainty connected with pure risks (d) Get the best buys in the field of insurance (e) Eliminate financial loss

23. The U.S. Supreme Court Case that established that insurance was not interstate
commerce, and could not be federally regulated, but rather could only be regulated by the states was: (a) Paul versus Virginia (b) Munn versus Virginia (c) The Southeastern Underwriters case (d) Townsend versus New Hampshire (e) McCarran-Ferguson

Answer Key:

B. 2. B 3. C 4. C 5. A 6. C 7. B 8. A 9. D 10. A

B 12 A 13. A 14. D 15. A 16. D 17. C 18. C19. B

20. D 21. B 22. C 23. A