Cpcu 520

Front 1

What is the purpose of the risk management process?

Back 1

To identify loss exposures in order to minimize the potential negative effects of risk and to select the most effective risk management techniques.

Front 2

Identify two ways U.S. property and casualty insurers are classified.

Back 2

-Legal form of ownership
-Place of incorporation
-Licensing status
-Marketing system used

Front 3

Contrast stock insurers with cooperative insurers.

Back 3

- Stock insurers are owned by stockholders (investors) whereas cooperative insurers are owned by policyholders. Consequently, the organizational focus of these two types of insurers differs. Stock insurers aim to make a profit for owner-investors.
- Cooperative insurers seek to provide low cost insurance protection to its owner-insureds.

Front 4

Describe three insurer goals.

Back 4

-Earn a profit to provide a return on investments
-Meet customer needs by providing products and services
-Comply with legal requirements to promote good reputation and ability to attract capital and customers
-Fulfill duty to society to promote well-being

Front 5

a)Give the formula for computing combined ratio on a financial and trade basis.
b)Explain the significance of the combined ratio in evaluating the profitability of an insurance company.

Back 5

a) Financial Basis Combined Ratio Formula:
[(Incurred Losses + Loss Adjustment Expense) / Earned Premium] +
[Incurred Underwriting Expenses / Earned Premium]

Trade Basis Combined Ratio Formula:
[(Incurred Losses + Loss Adjustment Expenses) / Earned Premium] +
[Incurred Underwriting Expenses / Written Premium]

b) The combined ratio is the sum of the loss and expense ratios.
A combined ratio of less than 100% indicates that the
insurer earned a profit on its insurance operations.
A ratio above 100% is indicative of an insurer losing money on its insurance operations. This ratio is also known as an underwriting profit or loss.

Front 6

Give two examples of risk control measures.

Back 6

-Install smoke detectors
-Install sprinkler systems
-Initiate driver safety training programs
-Install burglar alarms
-Maintain fire protection equipment

Front 7

Sugartown Insurance Company (SIC) executives became interested in the aviation insurance market when rates increased after several airline disasters occurred. Describe two internal and two external constraints that SIC would have to overcome in order to enter the aviation insurance market.

Back 7

Internal constraints:
-Efficiency-poor management
-Expertise-qualified aviation underwriters
-Size-insurer's size affects ability to meet goals
-Financial resources-insufficient resources limits ability to hire and train staff
-Newly established insurer could lack name recognition
External constraints:
-Regulation to monitor solvency and protect policy holders
-Public opinion can have positive or negative effects on the industry
-Competition is driven by either a hard or soft market
-Economic conditions can affect investment operations in economic down-turns
-Marketing systems are systems used to distribute products through sales and service
-Catastrophic losses hinder insurer's ability to meet goals.

Front 8

Distinguish between licensed (admitted) and unlicensed (nonadmitted) insurers.

Back 8

Licensed insurer-authorized by the state insurance department to transact business in a particular state.
Unlicensed insurer-has not been granted authority to operate in a particular state.

Front 9

Marketing is an integral part of an insurance company's activities. To be a success, the marketing department must have a well-planned marketing program. What are three essential elements necessary for a successful marketing program?

Back 9

- Advertising and public relations programs to inform customers about the company's products.
- Training programs to prepare the company's employees and agents to meet the public's needs.
- Setting production goals and strategies for achieving them.
- Effective motivation and management of the producer network.

Front 10

List the six steps in the risk management process.

Back 10

-Identify loss exposures
-Analyze loss exposures
-Examine the feasibility of risk management techniques
-Select the most appropriate technique
-Implement the risk management technique
-Monitor the results and make changes as needed

Front 11

Give an example of using avoidance as a risk management technique.

Back 11

Any valid example of avoiding a loss exposure by not incurring it in the first place (such as deciding not to buy an additional property) or eliminating a loss exposure that already exists (such as selling a property that the organization already owns).

Front 12

Malvern Insurance Company (MIC), a mutual insurer, is considering changing its organizational form to that of a stock insurance company.

Back 12

a) A mutual insurer is owned by its customers, the policyholders.
- In a change like this, the policyholders would have to turn the ownership of the insurer over to another group that purchases ownership through MIC's sale of stock. It is likely that existing policyholder-owners will be given an opportunity to purchase shares of stock in the new stock insurer. New policyholders, after the demutualization, will not be owners of MIC.
b) Mutual insurers can raise capital by issuing surplus notes. Issuing surplus notes and their repayment must be approved by state insurance department officials. Reinsurance transactions, such as those referred to as financial reinsurance, can increase an insurer's net worth. Profitable operations, while not exactly a "capital infusion," will result in increased amounts of surplus.
- MIC could retain more of its funds by curtailing dividend payments to MIC policyholders.
- While a risky alternative, the insurer could invest in stocks orother securities that appreciate in value.
- In some instances, state insurance regulators will approve a bank loan to an insurer.

Front 13

Describe the Attorneys General Lawsuit:

a) Who were the defendants?
b) What illegal action did the attorneys general allege?
c) What insurance products were involved?

Back 13

They charged that

a) insurance companies, reinsurers, and industry organizations
b) had conspired to create a global boycott
c) certain types of commercial general liability coverages,
particularly for environmental damages from pollution

Front 14

Insurance regulation occurs primarily at the state level, but the issue of federal regulation is often raised. What aguments have been advanced in favor of federal regulation?

Back 14

-Federal regulation can provide regulatory uniformity across all states.
-Federal regulation would be more efficient.
-Federal regulation could attract higher-quality personnel

Front 15

In most states, the insurance commissioner is an appointed position; however, many states now have elected commissioners. What arguments do proponents of an elective system cite to support their position?

Back 15

-An appointed commissioner is subject to dismissal, while an elected commissioner is in office for an elected term.
-Elected officials are keenly aware of issues that are important to the public.
-An appointed commissioner might feel inclined to address the interests of those responsible for the appointment, while an elected commissioner is not obligated to special interests.

Front 16

Insurance regulation occurs primarily at the state level, but the issue of federal regulation is often raised. What arguments have been advanced in favor of continued regulation by the states?

Back 16

-State regulation is more responsive to local needs.
-The NAIC can facilitate uniformity of state laws.
-State regulation allows for greater opportunities for innovation.
-State regulation is a known entity, and its strengths and weaknesses have already been identified.
-State regulation results in a desirable decentralization of political power.

Front 17

What events led to the filing of the Attorneys General Lawsuit?

Back 17

The conspiracy to create a global boycott of certain types of commercial general liability coverages, particularly coverage for environmental damages stemming from pollution.

Front 18

Provide the appropriate term that matches each of the following rating law scenarios:

(a) A state requires that the state insurance department approve rates before use.
(b) A state requires that an insurer file rates with the state insurance department, but it can use them immediately.
(c) Prior approval is required only if the new rates exceed a certain percentage above (or below) the rates previously filed.
(d) Rates do not have to be filed with the state insurance department.

Back 18

(a) Prior approval law
(b) File-and-use law
(c) Flex rating law
(d) Open competition system

Front 19

Identify the two goals of solvency regulation.

Back 19

- Reducing the insolvency risk (through monitoring controls)
- Protecting the public against loss when insurers fail

Front 20

Identify four "unofficial regulators" that influence insurer activity.

Back 20

- Financial rating agencies
- Insurance advisory organizations
- Insurer trade organizations
- Consumer organizations

Front 21

What are three types of sales department activities that are prohibited by law.

Back 21

- Dishonesty or fraud
- Misrepresentation
- Twisting
- Unfair discrimination
- Rebating

Front 22

The Financial Services Modernization Act, also known as the Gramm-Leach-Bliley Act was signed into law in 1999. Describe the effect of this legislation on insurance operations.

Back 22

It is intended to facilitate affiliations among banks, insurance agencies, and investment services.
OR
It reaffirms the McCarran-Ferguson Act, making it clear that states will have primary regulatory authority for insurance activities.

Front 23

Explain why the McCarran Ferguson Act is an important milestone in insurance regulation.

Back 23

Subject to certain conditions, McCarran Ferguson returned the regulation of insurance to the states

Front 24

Identify three ways insurance regulation protects consumers.

Back 24

- Most consumers cannot analyze and understand complex legal documents like insurance policies.
- Regulators protect consumers against fraud and unethical market behavior.
- Regulators can attempt to ensure that insurance is readily available.
- Regulators can keep consumers informed.

Front 25

Describe how the National Association of Insurance Commissioners (NAIC) responded to requirements in the Gramm-Leach-Bliley Act (GLB) for full reciprocal licensing arrangements for insurance agents.

Back 25

NAIC created a Producer Licensing Model Act. The act requires states to establish either a system of reciprocal producer licensing or uniform standards for licensing.

Front 26

Explain how a state insurance department responds when an insurer becomes insolvent?

Back 26

- The insurer is placed in receivership by the state insurance department
- Liquidation according to the state's insurance code
- Creditors treated equally
- Priority system for disposal of assets is set up

Front 27

Explain why regulation of insurance policies is necessary.

Back 27

-Insurance policies are complex documents.
-Insurance policies area almost always drafted by insurers who sell the policies to the public on a take-it-or- leave-it basis.

Front 28

Insurance regulation is designed to protect consumers against fraudulent actions of insurance representatives. Describe two potential types of fraudulent acts.

Back 28

- An insurance representative sells insurance that is not needed.
- A producer misrepresents the nature of coverage to make a sale.
- An insurer refuses to pay a legitimate claim.
- An insurer unfairly reduces a claim amount paid.
- A dishonest insurance manager contributes to insurer insolvency.

Front 29

A state legislative committee debates whether the state's regulators should control insurers' rates or whether to allow the competitive market, as well as a state association of insurers, to determine rates. Identify two recurring issues in insurance regulation that this debate illustrates.

Back 29

- The extent to which insurance should be regulated.
- Whether to require, encourage, or prohibit collaboration among insurers.

Front 30

Describe the impact of each of the following:

a) Paul v VA
b) SEUA
c) McCarran Ferguson

Back 30

a) This 1869 legal decision serves as the foundation of the long standing belief that insurance is not subject to federal regulation.
b) This 1944 legal decision overturned previous decisions and made insurance subject to federal statutes.
c) The act was passed by Congress in 1945 and restored the state's responsibility for insurance regulation.

Front 31

Identify three changes resulting from the settlement in the Attorneys General Lawsuit.

Back 31

- Establishment of the Public Entity Risk Institute
- Reimbursement of the states and private plaintiffs for legal expenses
- Reorganization of ISO
- Replacement of insurer committees with insurer advisory panels
- Rate and form decisions by ISO staff instead of insurer committees
- Elimination of perception that ISO provided vehicle of insurer collusion

Front 32

Identify the three principal means for regulating insurance contracts.

Back 32

-Legislation
-Insurance departments' rules, regulations, and guidelines
-Courts

Front 33

Identify the three reasons for insurance regulation.

Back 33

- To protect consumers
- To maintain insurer solvency
- To avoid destructive competition

Front 34

Contrast how Paul v. Virginia and Southeastern Underwriters legal cases affected insurance regulation.

Back 34

Paul held that insurance was exempt from federal regulation, while SEU held that insurance was subject to federal regulation.

Front 35

Identify three types of regulatroy activities typically undertaken by state insurance departments.

Back 35

-Approving policy forms
-Holding rate hearings and reviewing rate filings
-Licensing new insurers
-Investigating policy holder complaints
-Rehabilitating or liquidating insolvent insurers
-Issuing cease-and-desist orders
-Conducting periodic audits of insurers
<other answers apply>

Front 36

Describe two of the four principal methods to ensure solvency and give an example or illustration of how each method works.

Back 36

-Establish financial requirements – the risk-based capital requirement
-Review of financial annual statements – the NAIC Annual Statement
-Insurance Regulatory Information System (IRIS) – diagnostic tests
-Conduct onsite field examinations – state laws require examination periodically

Front 37

Identify the three major objectives of rate regulation.

Back 37

To ensure that rates are
- Adequate
- Not excessive
- Not unfairly discriminatory

Front 38

Briefly explain whether each of the following insurance personnel must be licensed.

(a) Producers
(b) Brokers
(c) Insurance consultants
(d) Claim adjusters

Back 38

(a) Producers must be licensed in each state in which they do business.
(b) Brokers must be licensed in each state in which they do business.
(c) Licensing requirements for consultants vary among the states that have a license requirement.
(d) Claim adjusters must be licensed in some states, not others.

Front 39

Although the insurance industry operates in a rapidly changing environment, there are three issues related to regulation that have never been fully resolved. Identify three recurring issues in insurance regulation.

Back 39

- Focus of regulatory control-whether insurance should be regulated by state or federal governments - or both.
- The extent to which insurance should be regulated.
- Whether to require, encourage, or prohibit collaboration among insurers.

Front 40

Contrast the following terms.

(a) Domestic insurer
(b) Foreign insurer
(c) Alien insurer

Back 40

(a) Domestic insurer-Does business in its home state
(b) Foreign insurer-Is allowed to do business in a state that is not its home state
(c) Alien insurer-An insurer that is domiciled outside the U.S.

Front 41

Explain the four types of activities for which agents can be penalized under state unfair trade practices acts?

Back 41

-A dishonest agent embezzles premiums.
- An agent tells a client that a homeowners policy covers flood situations (when it does not) just to sell the policy.
- An agent persuades a life insurance policyholder to replace an existing policy with an inferior policy.
- A producer offers part of her commission to an applicant to try to persuade him to buy a policy.
-Other examples also apply

Front 42

Describe the underwriting cycle.

Back 42

The underwriting cycle is a cyclical pattern of insurance pricing in which a soft market is followed by a hard market before the pattern repeats itself.

Front 43

Identify one of the three recurring issues in insurance regulation and provide a brief illustration of that issue.

Back 43

(Any valid illustration - these are examples): Issue: Whether insurance should be regulated by state or federal governments - or both. Illustration: A state court must decide whether it has jurisdiction over an insurance dispute or whether a federal court has appropriate jurisdiction over the case.

Issue: The extent to which insurance should be regulated. Illustration: A state legislature must decide whether to put a cap on auto insurance rates that have soared in the state capital metropolitan area.

Issue: Whether to require, encourage, or prohibit collaboration among insurers. Illustration: A state insurance department decides whether it should take action against several insurers rating homeowners policies.

Front 44

Explain which one of the following arrangements would be illegal under the Financial Services Modernization Act.

National Bank #1 starts an operating subsidiary to underwrite insurance. National Bank #2 starts an insurance affiliate under a bank holding company structure.

Back 44

National Bank #1 cannot start an operating subsidiary to underwrite insurance because it would be too easy for a failing bank to tap insurance assets.

Front 45

Describe the roles of (a) a principal and (b) an agent in an agent-principal relationship.

Back 45

a) The principal is the person or firm that an agent represents.
b) The agent is a person or firm authorized to represent another person or firm in the performance of some function

Front 46

How has the Gramm-Leach-Bliley Act affected insurers and the agency force with regard to (a) marketing systems and (b) vertical integration?

Back 46

(a) Insurers are using multiple marketing systems to complement their selected primary system.
(b) Brokerage firms have acquired insurers.
Insurers or holding companies have acquired agencies and brokerage firms

Front 47

What are three factors necessary for group marketing to be successful?

Back 47

- Having the support of the sponsoring organization or employer
- Offering discounted premiums
- Treating the employees (participants) as a preferred group for underwriting purposes
- Facilitating program operation

Front 48

Describe three of the challenges to insurers using the Internet as an alternative distribution channel.

Back 48

- A Web site must easily and quickly provide quotes.
- Less information is available, so a Web site must maintain a FAQ section or a "live contact" or e-mail opt-out.
- The insurer must determine the extent of services to provide-sales only or a combination of sales and service.
- Consumers are more informed about products and prices, shifting the consumer's focus toward price rather than service.
- Some customers are unwilling to transmit personal and financial information over the Internet.
- Information posted on the Web site must be kept fresh, interesting, and accessible.

Front 49

Describe the exclusive agency marketing system with respect to (a) the producer's status as an employee or independent contractor, (b) ownership of policy expirations, and (c) compensation methods.

Back 49

(a) Independent contractor that represents a single insurer (not employee or insurer)
(b) Exclusive agents typically do not have ownership of expirations. Some insurers do grant limited ownership of expirations as long as the agency contract is in force.
(c) Commission

Front 50

On what general factors does the selection of a distribution channel depend?

Back 50

- Customer preferences
- A firm's operations

Front 51

Describe the activities generally performed by call centers.

Back 51

- Respond to general inquiries
- Handle claim reporting
- Answer billing inquiries
- Process policy endorsements
- Cross-sell to current customers
- Sell products

Front 52

What are three benefits of the Internet as an alternative insurance distribution channel?

Back 52

- Reduced costs for underwriting (claim processing) services because of lower overhead arising from automated operations
- Streamlined business practices-fewer employees are needed to conduct direct sales
- Increased brand awareness
- Broadened marketing potential
- Lead-generation and cross-selling opportunities for all products, not just property-casualty insurance

Front 53

What are three examples of the firm's operations that an insurer or a producer should examine when selecting a distribution channel?

Back 53

- The optimum channel for reaching the target market must be selected.
- The selected channel should capitalize on the firm's core capabilities.
- The expertise of the current staff and producers must be sufficient to manage the selected channel.
- If multiple channels are selected, they should complement one another.
- Benefit should outweigh the cost.
- Some channels are better than others at sales and service.
- Future acquisitions, strategic alliance, or mergers may affect the channel.
- Resources must be available to support the selected channel.

Front 54

Describe three methods that banks and financial services firms commonly use to expand into insurance.

Back 54

- Organic growth-A firm builds and develops its own insurance operation.
- Merger or acquisition-A firm merges with or acquires an existing insurer, agency, or brokerage.
- Outsourcing-A firm contracts with an independently operated insurance provider in order to offer its goods and services to customers.
- Combinations of methods 1 through 3

Front 55

Describe the following functions of producers.

a) Prospecting
b) Sales
c) Premium collection

Back 55

a) Locating persons (businesses) (entities) that might be interested in purchasing insurance products (services)
b) Contacting the prospective client, determining the prospect's needs, preparing and presenting a proposal, and closing the sale.
c) Preparing policy invoices, collecting premiums, deducting commissions, and sending net premiums to the insurers.
Alternative answer: with direct billing, the insurer handles premium collection.

Front 56

Describe the direct writer marketing system with respect to (a) the producer's status as an employee or independent contractor, (b) ownership of policy expirations, and (c) compensation methods.

Back 56

(a) Employees of the insurers they represent
(b) They usually do not have any ownership of expirations.
(c) Compensated by salary, by commission, or by both salary and a portion of the commission generated.

Front 57

What are four elements of a product management plan?

Back 57

- A SW/OT analysis of the current marketplace
- Analyses of the competition
- Critical factors required for success
- Resource requirements
- Technology requirements
- Training requirements
- An assessment of the existing legal environment
- An assessment of the existing regulatory environment

Front 58

Describe the independent agency and brokerage marketing system with respect to (a) the producer's status as an employee or independent contractor, (b) ownership of policy expirations, and (c) compensation methods.

Back 58

(a) Independent contractor (not employees of insurance company)
(b) Independent producers own the policy expirations.
(c) A flat percent commission on all business submitted and in some cases, a contingent or profit-sharing commission earned by meeting volume or profit goals

Front 59

What are two examples of customer preferences that an insurer or a producer should examine when selecting a distribution channel?

Back 59

- Customers value ease of use and speed.
- For some customers, price is more important than service.
- Customers want "opt-outs" available.
- Customers expect speedy responses from their insurance providers.
- Customers want online access to their insurance account information.

Front 60

Describe the challenge to insurers in using the Internet as a distribution channel of the assumed cost advantage.

Back 60

- Consumers often think that a product bought over the Internet will be less expensive than the same product bought from a producer. This might not necessarily be true

Front 61

What is one advantage and one disadvantage of allowing producers to handle claims?

Back 61

- Advantages:
Quicker service to policyholders
Lower loss adjustment expenses to the insurer
- Disadvantage:
Overpayment of claims
Note: Accept payment of noncovered claims as a disadvantage

Front 62

What should be included in the "product proposal and sales goals" element of a basic insurance product marketing plan?

Back 62

- A summary of the new product's operation
- A description of the unmet need the product is designed to fulfill
- Summarized sales projections

Front 63

Describe three of the basic elements of an insurance product marketing plan.

Back 63

- Product proposal and sales goals
A summary of the new product's operation
A description of the unmet need the product is designed to fulfill
Summarized sales projections.
- Situational analysis
A SWOT analysis of the current marketplace
Analyses of the competition
Critical factors required for success
Resource (technology) (training) requirements
An assessment of the existing legal and regulatory environments
- Marketing goals
An outline of the proposed target market
Detailed sales projections
Specifics as to how success will be measured
- Marketing strategies
Plans (proposals) for how the product will be developed (priced) (promoted) (sold)
Determining the appropriate distribution channels for products (services)

Front 64

With regard to the direct response distribution channel, (a) describe its operation, (b) identify one advantage, and (c) identify one disadvantage.

Back 64

(a) Relies on advertising by mail (internet) (telephone).
Encourages customers to contact the insurer directly.
(b) Commission costs are greatly reduced.
(c) Advertising costs are typically higher.

Front 65

How has the Gramm-Leach-Bliley Act affected the marketing of insurance products?

Back 65

- Banking institutions have entered the insurance industry as sellers and distributors of insurance products.
- The insurance and banking industries have formed business alliances and collaborations.
- Insurers are collaborating in new ways with banks and other businesses to uncover additional cross-selling opportunities.

Front 66

Describe a producer's duties to place policies with solvent insurers when the insurance is placed (a) with an insurer licensed in the state and (b) with an insurer not licensed in the state.

Back 66

(a) If the producer has no knowledge of any information indicating that the insurer is financially impaired, the duty is satisfied.
(b) The producer might have a duty to exercise greater care regarding the insurer's financial status.
Note: Accept answers that expand the producer's responsibility regarding nonadmitted insurers.

Front 67

When an insurer appoints a producer, normally a written contract is executed. Describe two of the producer's duties normally specified in the written contract.

Back 67

- Accounting for policies
- Accounting for other supplies furnished by the insurer
- Accounting for insurer funds handled by the producer
- Adhering to the accounting, administrative, and underwriting rules of the insurer

Front 68

Woodruff Insurance Company is considering offering its personal insurance products over the Internet. What aspects of personal insurance products make this a viable option?

Back 68

- Personal insurance products are typically considered to be less complex than commercial insurance products.
- Many customers view them as commodities for which price matters more than service.
- Because of its simplified, fairly standard format, personal insurance generally requires the least amount of "hands-on" service.

Front 69

Describe the issue of consistency of communication in combining traditional marketing systems and alternative distribution channels.

Back 69

- An insurer must send customers the same clear, consistent message about its products and services across all marketing systems.
- Whether a customer contacts the insurer through a local agent, by accessing the Internet, or by telephoning a call center, the messages he or she receives must be consistent.
- The insurer's internal communications must be consistent across marketing systems and distribution channels.
- Workflows, data management, and underwriting standards must be coordinated.

Front 70

Describe three of the powers an insurer typically grants when it appoints a producer.

Back 70

- Authority to bind coverages
- Claim adjusting authority of the producer
- The types of insurance the producer is permitted to write
- The commissions to be paid

Front 71

Identify two considerations in combining traditional marketing systems and alternative distribution channels.

Back 71

- Maintaining consistent customer communications
- Providing a consistent customer experience
- Matching the type of insurance with an appropriate marketing system

Front 72

Distinguish between actual authority and apparent authority in the agent-principal relationship.

Back 72

- Actual authority is conferred by the principal under the agency contract.
- Apparent authority arises when a principal creates a reasonable belief in a third party that an agent has certain authority, even though the agent does not.

Front 73

What should be included in the "marketing strategies" element of a basic insurance product marketing plan?

Back 73

- Plans (proposals) for how the product will be developed
- Plans (proposals) for how the product will be priced
- Plans (proposals) for how the product will be promoted
- Plans (proposals) for how the product will be sold
- Determining the appropriate distribution channels for products and services

Front 74

Insurance Company Executive stated, "Our company wants to eliminate our agents to reduce our cost of doing business." Agency Principal responds to these remarks by saying, "Work must be performed within the insurance process regardless of who performs it. Elimination of agents can only increase an insurer's cost of doing business."

Ignoring which of these perspectives might be correct, identify three work functions (or activities) generally performed by agents that an insurance company that eliminated its agents would need to replace.

Back 74

- Prospecting
- Risk management review
- Sales
- Risk analysis
- Policy issuance
- Premium collection
- Customer service
- Claim handling
- Consulting
- Policy changes

Front 75

What "self-service" transactions may be available from insurers' Web sites?

Back 75

- Changing address
- Changing phone number
- Making e-mail inquiries
- Reviewing policy billing
- Reviewing policy order status
- Making limited types of coverage changes

Front 76

What are the three underwriting alternatives available when reviewing an application for insurance?

Back 76

-Accept the submission as is.
-Reject the submission.
-Accept the submission subject to certain modifications.

Front 77

Staff underwriters support and direct the activities of line underwriters.

a) Identify four major staff underwriting activities.
b) For each activity identified in (a) above, provide a specific
example of how these activities are accomplished.

Back 77

a) -Researching the market
-Research and development of coverages and policy forms
-Evaluating underwriting experience
-Develop underwriting guides and bulletins
-Review and revision of rating plans
-Formulating of underwriting policy
-Conduct underwriting audits
-Assist with education and training
b) -Effect of adding or deleting business
-Making changes in the underwriting guide
-Modify policy forms and endorsements
-Response to change in loss experience, competition and inflation
-Guides in underwriting decisions
-Management control tools
-Determine educational needs of staff

Front 78

Underwriting guides (or guidelines) and bulletins are one of the most important tools for communicating an insurer's underwriting policy to those who must implement the underwriting policy. Identify two important purposes of underwriting guides.

Back 78

- Ensure uniformity and consistency of underwriting decisions
- Synthesize insights and experience
- Distinguish routine from nonroutine decisions
- Avoid duplication of effort

Front 79

What are the four major types of modifications that could be imposed upon an unacceptable submission to make it an acceptable submission?

Back 79

-Require loss control measures.
-Change insurance rates, rating plans, or policy limits.
-Amend policy terms and conditions.
-Use facultative reinsurance.

Front 80

a) Identify the six steps in the underwriting decision-making process.
b) Other than the application and an accompanying questionnaire, identify four sources of information usually available to an underwriter for a commercial property account.

Back 80

a) -Evaluating loss exposures
-Determining underwriting alternatives
-Selecting an underwriting alternative
-Determining the appropriate premium
-Implementing the underwriting decision
-Monitoring the loss exposures
b) -Inspection reports
-Financial rating service data
-Governmental records
-Loss data
-Field marketing personnel
-Premium auditors
-Claim files
-Production records

Front 81

Define and give an example of each of the following:

a) Physical Hazard
b) Moral Hazard
c) Attitudinal or Morale Hazard

Back 81

a) Physical Hazard - Tangible characteristics of the property, persons, or operations to be insured that affect the probable frequency and severity of loss due to one or more perils. Example: An untrained driver
b) Moral Hazard - Condition that exists when a policyholder may try to cause a loss, or may exaggerate a loss that has occurred. Example: Weak financial condition
c) Attitudinal or Morale Hazard - A condition that exists when a person is less careful than he or she should be because of the existence of insurance. Example: Poor management

Front 82

What is the purpose of underwriting?

Back 82

To develop and maintain a profitable book of business

Front 83

Identify four non-financial measures used to evaluate underwriting results.

Back 83

-Selection standards
-Product mix
-Pricing standards
-Accommodated risks
-Retention ratio
-Success ratio
-Service to producers

Front 84

Describe two underwriting concerns regarding sprinkler leakage risk.

Back 84

- Damageability of the contents
- The physical condition, design and maintenance of the sprinkler system

Front 85

Protection and Indemnity (P & I) coverage on ocean marine insurance is unique protection for the shipowner. Describe two major coverages provided by protection and indemnity.

Back 85

- Loss of life and bodily injury. Coverage is provided for BI liability claims to people onboard or elsewhere; including crewmembers.
- Property damage. Coverage is provided for PD liability claims to property of others onboard; fixed objects and the other ships and their cargo.

Front 86

Explain why the age of a building affects fire underwriting

Back 86

Age is a concern for fire underwriting because it may be an indicator of obsolete heating, cooling, electrical, and fire protection systems. The building might not meet current building codes.

Front 87

Identify four ways that the age of a building can affect its underwriting desirability for property insurance.

Back 87

- There might have been a different building code in effect when the structure was originally built. This has implications because even a well-maintained structure might be "substandard." Also, should a loss occur, the insured might have to then meet current building code standards - a type of loss not usually covered under an unendorsed property policy.
- The structure may have been designed for a different occupancy than the use to which it is now being put. This new usage might cause excessive wear and tear.
- Conversion might have pierced fire-stops or created concealed spaces.
- Old buildings often present a valuation problem. Policyholders might not carry sufficient insurance to replace the structure.

Front 88

What is the significance of amount subject and probable maximum loss to the property underwriter? Your answer should include a definition of each of the italicized words.

Back 88

Amount subject is generally taken to mean the "worst case scenario." Some underwriters say this is one fire division, while others would say
this is the entire property subject to a particular cause of loss.

Probable maximum loss is the largest loss the underwriter believes is likely to occur. This evaluation is, in part, subjective but is often supported by the presence of a sprinkler system, proximity of a fire department, and the nature of the insured occupancy, as well as other factors.

Underwriters use amount subject and probable maximum loss to determine what amount the insurer would be obligated to pay if a covered loss occurs.

Front 89

Describe two time element coverages usually included in a homeowners policy.

Back 89

- Additional Living Expense compensates the policyholder for extraordinary expenses incurred while the residence is being repaired.
- Fair Rental Value is the amount of rent that could have been fairly charged for the premises had there been no covered direct loss.
- Loss of use by order of civil authority indemnifies when a civil authority prohibits the policyholder from occupying the residence because of a covered loss to other property.

Front 90

Why are high-rise buildings a concern to property underwriters?

Back 90

-High-rises cause a problem in fighting the fire from the exterior due to ladder capacity.
-Firefighters must fight the fire from the inside and this causes a delay in the response.
-High-rises have a large number of occupants, making life safety the priority; extinguishing the fire is secondary.

Front 91

Explain the factors that affect the level of loss control services provided to customers by insurers.

Back 91

Personal versus commercial-Insurers with substantial personal insurance policies generally do not make extensive use of loss control services. The small policy premiums don't allow for loss control expenses. Insurers writing a large amount of commercial business are expected to use loss control services.

Commercial policyholder size-Commercial insureds generate large premiums due to larger values at risk, which in turn premits the allocation of loss control services to those policyholders.

Types of exposures involved-The greater the loss exposure, the more likely loss control services will be used.

Front 92

Commercial crime losses arise from two broad exposures. What are those exposures?

Back 92

- Crimes committed by employees (employee dishonesty or fidelity).
- Crimes committed by others (burglary, robbery, or theft).

Front 93

Describe two ways an insurer's loss control activities can assist in meeting the insurer's profit objective.

Back 93

-Improving underwriting decisions.
-Increasing premium volume by making marginal accounts acceptable.
-Encouraging policyholder loss control.
-Reducing the number of losses that occur.
<other answers apply>

Front 94

Soil conditions is one of the three major factors an underwriter must consider when underwriting a property's earthquake exposure. Identify the other two major areas an underwriter should consider.

Back 94

- Location within a geologically determined earthquake zone
- Building design, construction techniques and materials

Front 95

Give two reasons why schools, churches, and playgrounds have a higher-than-average exposure to vandalism.

Back 95

- Most vandalism is committed by children and young adults.
- Groups of children are more likely to commit vandalism, and schools, churches, and playgrounds are frequented by groups of children.

Front 96

Whether written monoline or as part of a package, fire is generally the most important cause of loss to underwrite in property insurance. Give one reason for the above assessment.

Back 96

Fire loss always has a total loss potential.

Front 97

Describe how loss control representatives can assist underwriters in rehabilitating an account.

Back 97

Loss control can work with underwriters to modify a policyholder's loss exposures and to help policyholders remain within underwriting guidelines once modifications have been made to the premises.

Front 98

Seaside Restaurant is located on "restaurant row" in Murrels Inlet, South Carolina. Seaside is owned by Donald Bunda, who has managed three restaurants in the past ten years. Seaside is Donald's newest venture, and it has been operating for six months. Donald is "upbeat" about Seaside because Murrels Inlet is touted as being the seafood capital of the area.

The building is wood frame construction built on wood pilings. Seaside can seat 300 people. It consists of three levels. The first level is a bar where many guests wait to be seated in the dining area. The middle level houses the kitchen. The third level is the dining area.

Seaside's specialty is, of course, seafood, which is served from the "all-you-can-eat" seafood buffet. Most of the food is deep-fried, but several of the dishes are offered broiled.

In the application, the producer describes the Murrels Inlet fire department as having "one of the finest volunteer fire departments in the area." It has just recently negotiated the purchase of a new fire engine from the nearby community of Myrtle Beach. The agent adds that "water isn't a problem because part of the building is built over water." Seaside has a sprinkler system.

Immediately adjacent to and on either side of the Seaside are two other restaurants. On the right is Drunken Jacks, a landmark on "restaurant row" because it stands five stories and has two levels of dining. The Hawaiian Restaurant is on the other side of Seaside. Its owners have recreated the Hawaiian effect by using palm branches for roofing.

Keeping with the tradition of Murrels Inlet, Seaside maintains a cannon that is fired each day to ceremonially announce the return of "the fleet." This is a great family draw to Murrels Inlet's "restaurant row."

Using COPE as your guide, evaluate the Seaside Restaurant for property insurance.

Back 98

Construction
Wood frame construction is the least-protected form of construction. Its importance is relative to the other COPE factors.

Occupancy
While there are probably worse occupancies, restaurants are one of the worst and one that most underwriters will have to deal with sooner or later. Most of the food Seaside cooks is deep-fried. Deep fryers catch fire, and the grease they use tends to coat many of the surfaces in the kitchen, creating another fire hazard.

Protection
The Murrels Inlet Fire Department may be "one of the best around" and still not be able to prevent substantial damage from fires. A volunteer fire department means seaside has been a high fire insurance protection class for rating purposes. Seaside's sprinkler system is a plus. The underwriter should be certain that it works and gets regular maintenance. Having "easy access to water" is wonderful, it also means that fire fighters will not be able to approach the side of the building over the water. This likely means that egress is limited and that firefighters will be primarily concerned with making sure that people are evacuated safely before their full attention is devoted to fighting the fire.

External Exposure
Probably the only thing worse than being a restaurant is being surrounded by restaurants. On one side, the five-story structure has the possibility of showering Seaside with sparks should it catch fire. On the other side, the palm fronds might serve to spread a fire at the Hawaiian restaurant to all the structures windward of it.
Regarding the cannon, keeping black powder on the premises is a hazard. More daunting is the fact that every restaurant and bar on "restaurant row" might have one of these.

Front 99

When underwriting umbrella liability insurance, why is it important to check the limits of liability on the underlying policies?

Back 99

To be sure there is maintenace of primary insurance; to be sure underlying limits are sufficient.

Front 100

What are the steps in the premium auditing process?

Back 100

-Planning
-Reviewing operations
-Determining employment relationships
-Finding and evaluating books and records
-Auditing the books
-Analyzing and verifying premium data
-Reporting the findings

Front 101

What four elements must be present for a court to find a party negligent?

Back 101

- A legal duty owed to the plaintiff to use due care
- A failure to conform to the standard of care required in the situation, with the defendant's conduct creating an unreasonable risk of harm
- A causal connection between the negligent act and the plaintiff's injury
- Actual bodily injury or property damage to the plaintiff

Front 102

Identify two underwriting factors generally used in evaluating and for pricing a personal passenger automobile risk.

Back 102

- Age of operators
- Age and type of auto
- Driving record
- Auto use
- Territory
- Gender and marital status
- Occupation
- Personal characteristics
- Physical condition of driver
- Safety equipment

Front 103

In what three situations do financial responsibility laws usually require proof of financial responsibility?

Back 103

-After an auto accident that causes BI or PD greater than a specified dollar amount.
-After conviction of serious offense (reckless driving, DUI, leaving the scene of an accident).
-After failure to pay final judgment arising from an auto accident.

Front 104

Why are driving records important when underwriting a personal auto policy?

Back 104

Provides loss history giving insight into driving habits, moving violations, and regard for safety.

Front 105

What are three common concerns when underwriting professional liability?

Back 105

-Underwriters must know the differnece between occurence and claims-made policies.
-Underwriters must review the settlement conditions in their company's policies.
-Underwriters must know how defense costs are treated.
-Underwriters must be aware of self-insured retentions in the policies.

Front 106

Give four examples of specific on-premises hazards that could lead to workers compensation losses.

Back 106

-Housekeeping
-Maintenance
-Occupational disease
-Hazards leading to cumulative trauma

Front 107

Explain why accurate premium audits are important for the

a) Insured
b) Insurer

Back 107

a) If errors occur the insured will not pay the proper premium and experience modification could be incorrect causing improper premiums to be charged in the future.
b) Premium audits must be accurate for customer retention, to maintain goodwill, and increase efficiency.

Front 108

Office Supply (OS) sells office supplies. OS's inventory includes all the typical office supply items (paper, pens, pencils, folders, etc.), office furniture (chairs, file cabinets, fireproof safes, etc.), and office technology equipment (computers, fax machines, copiers, etc.). OS also serves as a drop-off for an overnight delivery service, maintains private mailboxes, and operates a copy center. OS is located in a strip shopping center, keeps its merchandise in large metal racks, has wide aisles, and is well lit.

Describe three examples of physical hazards that might exist at OS.

Back 108

The conditions described in the case seem fairly typical of most retail operations.
- Perhaps the most common hazard is a "slip and fall." Wet or polished floors or simply slick shoes can cause a patron to fall and be injured.
- Many of the office products are for display not for immediate use. For instance, office chairs on display might not be completely assembled. A patron might decide to "try out" one of these and be injured.
- Many of these "metal rack" bulk stores have ladders in the aisles that are used to reach merchandise. Although these ladders are probably for the use of store personnel, there is nothing stopping patrons from trying to reach high-level merchandise themselves.
- The "in-house" mailbox service and copy service likely bring in more traffic than a normal office supply store. The greater the traffic, the greater the potential hazard.

Front 109

A rate filing is a document prepared for and submitted to state regulatory authorities. What are four elements that should be included in a rate filing?

Back 109

- A schedule of the proposed new rates
- A statement about the percentage change, either an increase or a decrease, in the statewide average rate
- If the same percentage change does not apply to the rates for all territories and rating classes, an explanation of the differences
- Necessary statistics to support the proposed rate changes, including territorial and class relativities
- If investment income is reflected directly in the rates, an illustration of the necessary calculations
- Expense loading data
- Sufficient explanatory material to enable state insurance regulatory personnel to understand and evaluate the filing

Front 110

In what circumstances might an insurer use the services of actuarial consultants?

Back 110

- The insurer might be too small to retain a staff actuary.
- Staff actuaries might lack adequate expertise in specific areas.
- The insurer might believe that an outside consultant will provide more objectivity.
- Regulators and reinsurers sometimes require insurers to provide a consulting actuary's opinion to verify the accuracy and reasonableness of the staff actuaries' work.

Front 111

An insurer's incurred losses are $500,000. It has 100 earned exposure units. Its expense loading is 20 percent. Calculate the gross rate.

Back 111

$500,000 divided by 100 = $5000
$5000 divided by (1-.20) = $6250

Front 112

What data is required for the pure premium ratemaking method?

Back 112

- Incurred losses
- Earned exposure units
- Expense loading

Front 113

In the real world, what factors complicate the ratemaking process?

Back 113

- Not all exposure units are the same.
- Applicants request different policy limits.
- Applicants request different deductibles.
- Applicants live in different geographic areas.
- It is difficult to project claim costs.
- It is difficult to project expenses.
- The future will not be exactly like the past.
- Few claims are paid immediately.

Front 114

What data is required for the loss ratio method of ratemaking?

Back 114

- Actual loss ratio (or Incurred losses and earned premiums)
- Expected loss ratio (or 100% - expense loading percentage)

Front 115

What are three characteristics that rates should ideally have?

Back 115

- Be stable
- Be responsive
- Provide for contingencies
- Promote loss control
- Be simple

Front 116

Why do delays in data collection and use matter in ratemaking?

Back 116

- During a delay, economic and other factors can increase or decrease the rates the insurer should charge if the premium is to reflect the expected losses.
- Inflation can affect claim costs.

Front 117

What are three ratemaking data collection methods used in ratemaking data development?

Back 117

- Policy-year data collection method
- Calendar-year data collection method
- Accident-year data collection method

Front 118

How does the calendar-year data collection method differ from the accident-year data collection method?

Back 118

- The only difference is how incurred losses are calculated.
- The calendar-year method calculates incurred losses using accounting records. The accident-year method calculates incurred losses using all losses and claims arising from insured events that occur during the period.

Front 119

What items must be included in a rate filing?

Back 119

- Schedule of the proposed new rates
- Statement about the percentage change
- Explanation of why the same percentage change does not apply to the rates for all territories and rating classes
- Data to support the proposed rate changes, including territorial and class relativities
- Calculation showing how investment income is reflected in the rates
- Expense loading data
- Explanatory material to enable state insurance regulators to understand and evaluate the filing

Front 120

What are the steps in establishing a base insurance rate?

Back 120

- Calculate the amount needed to pay future claims.
- Calculate the amount needed to pay future expenses.
- Add those two sums to determine the insurance rate.

Front 121

How are earned premiums calculated for the calendar-year data collection method?

Back 121

Earned premiums = Written premiums for the year + (unearned premiums at the beginning of the year - unearned premiums at the end of the year)

Front 122

How do credibility assumptions vary between auto insurance and fire insurance?

Back 122

- In auto insurance, statewide loss data are assumed to be fully credible.
- In fire insurance, a three-part weighted average is used, combining the state loss data, regional loss data, and state loss data for several rating classes.

Front 123

Why does the experience period used in ratemaking vary by type of insurance?

Back 123

- Laws require a specific number of years for some lines of business.
- Longer experience periods are used to avoid the large swings in expenses that might otherwise result.
- The variability of losses over time affects the length of the experience period.
- The credibility of the resulting ratemaking data affects the length of the experience period.

Front 124

How do trending practices differ between liability insurance and fire insurance?

Back 124

- For liability insurance, trending claim frequency and claim severity is common.
- For fire insurance, trending claim frequency is not common; trending is restricted to claim severity.
- For fire insurance, trending both losses and premiums is necessary.

Front 125

An insurer's actual loss ratio is 75 percent. Its expected loss ratio was 85 percent. What is the rate change percentage for calculating new rates?

Back 125

.75 - .85 = -.10
-.10 divided by .85 = -.12 or -12 percent

Front 126

Why does investment profit vary by type of insurance?

Back 126

- Property losses are paid quickly so unearned premiums reserves and loss reserves are not available for long periods to invest.
- Liability losses usually have larger loss reserves and are often not paid until years after losses occur. Thus loss reserves and unearned premium reserves are available for longer periods to invest.

Front 127

Contrast the policy-year and accident-year data collection methods.

Back 127

- Policy-year analyzes all policies issued in a given twelve-month period.
- Accident-year analyzes all losses arising from accidents that occur during a year.

Front 128

How does the use of loss development factors differ between liability insurance and auto physical damage insurance?

Back 128

- Liability insurance frequently uses loss development factors because of the long delay in loss settlement and the resulting large accumulation of loss reserves.
- Auto physical damage insurance rarely uses loss development factors in ratemaking because claims are settled much more quickly.

Front 129

Contrast the purposes of loss development and trending when adjusting data for ratemaking purposes.

Back 129

- Loss development is an attempt to correct errors in reporting past losses and to estimate the ultimate settlement value of losses during a previous period.
- The purpose of trending is to adjust the developed losses from the experience period to reflect conditions that are expected in a future period.

Front 130

What is the primary goal of ratemaking?

Back 130

- To develop a rate structure that enables the insurer to compete effectively while earning a reasonable profit on its operations
- To develop rates that adequately cover all losses and expenses and leave a reasonable amount for profits and contingencies

Front 131

What causes ratemaking variations among different types of insurance?

Back 131

- Characteristics of loss exposures
- Regulatory requirements
- Political considerations

Front 132

How are incurred losses calculated for the calendar-year data collection method?

Back 132

Incurred losses = Losses paid during the year + (Loss reserves at the end of the year - Loss reserves at the beginning of the year

Front 133

What is the role of actuaries in the ratemaking process?

Back 133

- To supervise ratemaking activities
- To verify the accuracy and reasonableness of staff actuaries' work
- To serve in advisory organizations to calculate loss costs

Front 134

What is one advantage and one disadvantage of the policy-year data collection method?

Back 134

Advantage:
- Apples-to-apples exact matching of losses, premiums, and exposure units to a specific group of insured entities
Disadvantages:
- Longer delays in gathering statistics than other methods
- Additional expense in gathering data that are used only for ratemaking

Front 135

Explain how loss development factors are applied.

Back 135

Data analysis produces loss development factors. Immature data are then multiplied by a loss development factor to produce a sound estimate of
the data that will result when losses have fully matured.

Front 136

What are three regulatory goals for insurance rates?

Back 136

- Rates should be adequate.
- Rates should not be excessive.
- Rates should not be unfairly discriminatory.

Front 137

What is the best use of

a) the pure premium method of ratemaking?
b) the loss ratio method of ratemaking
c) the judgment method of ratemaking?

Back 137

a) To develop rates from past experience
b) To modify existing rates
c) To develop rates when data are limited

Front 138

For the loss ratio ratemaking method

a) what is the formula for the actual loss ratio?
b) what is the loss ratio ratemaking equation?

Back 138

a) Incurred losses divided by earned premiums
b) Rate change = (actual loss ratio - expected loss ratio) divided by the expected loss ratio

Front 139

Why is it difficult to estimate loss reserves in the ratemaking process?

Back 139

- Few insurance losses are paid immediately.
- At any point in time, many losses have been reported but not yet paid.
- At any point in time, many losses have occurred but not yet been reported.

Front 140

Other than loss reserve estimation, delays in data collection, and investment income, what are three factors that affect ratemaking?

Back 140

- Loss severity
- Loss frequency
- Economic inflation
- Economic deflation
- Legislative changes
- Regulatory changes
- The insurer's project expenses

Front 141

What is one advantage and one disadvantage of

a) the calendar-year data collection method
b) the accident-year data collection method?

Back 141

a) Advantages:
- Statistics available immediately
- Little expense involved in compiling data
Disadvantages:
- Accounting records do not contain exposure unit data
- Least accurate of the three ratemaking methods
b) Advantages:
- More accurate than the calendar-year method, because it uses incurred losses during a specific year
- Faster than the policy-year method, because policy year need not be completed
Disadvantages:
- Neither earned premiums nor incurred losses are tied directly to a specific group of policyholders
- Accident-year data are slightly more expensive to compile than calendar-year data

Front 142

What are the steps in the ratemaking data development process?

Back 142

- Collect data
- Adjust data
- Determine territorial and class relativities
- Prepare rate filings and submit rate filings to regulatory authorities as required

Front 143

Contrast linear trending and exponential trending in ratemaking data development.

Back 143

- Linear trending assumes that the data being trended will increase or decrease by a fixed amount each year.
- Exponential trending assumes that data being projected will increase or decrease by a fixed percentage each year, as compared to the previous year.

Front 144

For what types of insurance is the judgment ratemaking method still used?

Back 144

- Ocean marine
- Some classes of inland marine
- Aviation insurance
- Types of insurance for which limited data are available
- Terrorism coverage

Front 145

a) What are the steps in the pure premium ratemaking method?
b) How might an insurer separate their expense loadings in the pure premium ratemaking method?

Back 145

a) - Calculate the pure premium.
- Calculate the expense loading.
- Add the pure premium and the expense loading to produce the gross rate.
b) - Fixed expenses are stated as a dollar amount per exposure unit.
- Variable expenses are stated as a percentage of the gross rate

Front 146

How does the claim department meet its first goal of satisfying the insurer's obligations to the policyholder?

Back 146

By providing fair, prompt, and equitable service to the policyholder

Front 147

Garden Insurance Company's claim department has over 80 offices across the U.S. Each office has a property unit and a casualty unit. Describe the organization of Garden Insurance Company's claim department.

Back 147

- Decentralized
- By type of insurance

Front 148

What are three specific areas in which unfair claim practices legislation defines procedures and practices?

Back 148

- File and record documentation
- Misrepresentation of policy provisions
- Failure to acknowledge pertinent communications
- Standards for prompt, fair, and equitable settlements applicable to all insurers
- Standards for prompt, fair, and equitable settlements applicable to automobile insurance
- Standards for prompt, fair, and equitable settlements applicable to fire and extended coverage-type policies with replacement cost coverage

Front 149

What are two non-financial measures used to evaluate

a) the claim function?
b) the performance of individual adjusters?

Back 149

a) - Turnover of claims
- Average cost of settlement
- Number and percentage of litigated files
- Litigation win/lose ratios
- Ratio of allocated to unallocated costs
- Average caseload per adjuster
- Staff turnover
- Customer satisfaction
b) - File turnover
- Ratio of litigated to settled claims
- Average settlement costs compared to other adjusters with similar claims

Front 150

Explain how the following can hinder a claim department in achieving the insurer's profit goal.

a) overpaid claims
b) underpaid claims

Back 150

a) - Overpaid claims lower profits.
- Overpaid claims unnecessarily raise the cost of insurance for all policyholders.
b) - Underpaid claims can result in angry policyholders and eroded goodwill.
- Underpaid claims can lead to litigation.
- Underpaid claims can result in regulatory oversight because of complaints.

Front 151

Contrast a typical claim settlement document in a first-party property claim and in a third-party claim.

Back 151

- First-party property claims often use a proof of loss form. The policyholder submits this form as a sworn submission of the claim and as an offer to settle.
- Third-party claims generally use a release, a legally binding document providing that, in exchange for the specific sums to be paid to the claimant, the claimant releases the policyholder from all claims arising out of that particular claim.

Front 152

Contrast a centralized claim operation with a decentralized claim operation.

Back 152

Centralized:
- Can be efficient in terms of cost of office rental, supervisory overhead, information systems support, and support staff.
Decentralized:
- Can be more costly and difficult to supervise

Centralized:
- Works well when less supervision is required or when claims do not require personal inspection.
Decentralized:
- Works well for claims that must be adjusted in person

Front 153

What are two reasons that an insurer might decide to hire independent adjusters?

Back 153

- To handle claims in places where the insurer does not have staff available
- To handle claims during peak activity
- To handle claims outside the expertise of the insurer's adjusters

Front 154

What are four categories into which bodily injury damages can fall?

Back 154

- Expenses for medical treatment
- Loss of earnings
- Pain and suffering
- Permanency
- Loss of consortium
- Future damages
- Punitive damages
- Survival and wrongful death
- Extra-contractual damages

Front 155

What factors determine how an insurer structures its claim operations?

Back 155

- Type of insurance
- Volume of business
- Geographic location
- Density of loss exposures
- Need to personally inspect losses
- State laws might require an office in the state
- Availability of local independent adjusting firms

Front 156

How can the claim department help the marketing department by providing claim information?

Back 156

- Claim information can be a source of new coverage ideas.
- Claim information can be a source of product innovations for niche marketers.
- Claim information can reveal details of customer satisfaction.
- Claim information about the timeliness of settlements can assist in marketing a product.

Front 157

Describe the contents of preliminary claim reports.

Back 157

- The names of claimants
- The quantity of claimants
- Some initial evaluation of whether any coverage issues need to be explored
- Preliminary information on the aspects of liability involved in the claim
- Information to guide the examiner in establishing the initial reserve for the claim

Front 158

Describe the contents of claim summarized reports.

Back 158

- A paragraph about coverage
- A paragraph about liability
- A paragraph about damages
- Paragraphs about other loss factors
- Key information already obtained
- The information that needs to be investigated

Front 159

What are two ways that claim information can help individual underwriters?

Back 159

- A post-loss evaluation could reveal characteristics of the loss exposure that an underwriter should have detected when the application was originally reviewed.
- Reviewing the claim file can uncover operations and activities that the underwriter would have investigated more thoroughly had they been apparent on the application.
- Material aspects of the insured loss exposures might have changed since the policy was first underwritten; that might prompt policy cancellation or nonrenewal.
- A minor loss can create an opportunity for the underwriter to take corrective action, through the loss control department, that could prevent a subsequent major loss from occurring.

Front 160

What is the most important purpose of claim status reports?

Back 160

To facilitate the constant reevaluation of the reserves being maintained on the claim

Front 161

Describe the enforcement of Unfair Claims Settlement Practices Acts in various states.

Back 161

- Enforcement is limited in most states.
- In only a minority of states can individuals exert a right of action based on the act in first-party claims.
- Even fewer states permit a right of action in third-party claims.
- In most states, enforcing the act is the full responsibility of the state insurance department.

Front 162

State insurance regulators exercise controls by licensing adjusters, investigating consumer complaints, and performing market conduct investigations. Describe these three methods of regulation.

Back 162

Licensing:
- No standard procedure or uniform regulation exists.
- Some states require licensure only for independent adjusters or for public adjusters.
- Some states require staff adjusters to be licensed.
- Licensing might involve posting a bond or passing a written examination.

Consumer complaints:
- Most states have a specific time limit within which inquiries by the department must be answered or acted on.
- Failure to respond can result in expensive fines or loss of license.

Market Conduct Investigations:
- These investigations might be conducted as part of a normal audit or in response to specific complaints.
- The audit includes more than just claim practices.

Front 163

What are the four steps in the claim adjusting process?

Back 163

- Determine whether the loss is covered by the applicable policy
- Determine the cause of loss and legal liability, if necessary
- Determine the amount of damages or extent of loss
- Settle the claim

Front 164

What are the two primary goals of the claim function?

Back 164

- Complying with the contractual promise
- Achieving the insurer's profit goal

Front 165

What problems does the reserving practice of “stair-stepping” cause?

Back 165

- The true value of the claim does not become evident to senior claim management until perhaps years after the initial reserve was set.
- Cost-control procedures that might have helped to reduce the overall loss exposure will not be considered until too late.
- Stair-stepping can mislead the insurer into delaying a report to a reinsurer.
- Stair-stepping can cause a delay in notifying the policyholder of a potential excess loss situation.

Front 166

Describe the effect of technology on a claim department's interaction with the public.

Back 166

- Technology has allowed many insurers to improve the quality and speed of their claim service.
- Cell phone and the Internet streamline the claim process and improve customer satisfaction.
- Wireless technology can eliminate many of the problems related to conventional communications systems following catastrophes.

Front 167

How can the following affect the outcome of individual claims?

a) overreserving
b) underreserving

Back 167

a) Overreserving claims can create a tendency to overpay claims.
Overreserving claims can create a tendency to settle too quickly without adequate negotiation.
b) Underreserving claims can cause the insurer to take too firm a position, a stance that can lead to litigation.

Front 168

Describe the general functions of each of the following positions within a claim department.

a) Claim Managers
b) Examiners
c) Supervisors
d) Adjusters

Back 168

a) - Involved in individual claim file decisions
- Involved in loss management
- In charge of claim files
- In charge of general administration and supervision of the claim department
b) - Assessment of coverage, liability, and damages
- Extends settlement authority to adjusters
- Recommends settlement amounts to a superior
- Prepares data input
- Reports claims to reinsurers
- Establishes a file reserve
- Refers claim file to counsel
c) - Responsible for the unit's daily activities
- Supervises claim personnel
- Supervises claim files
- Gives guidance to assigned adjusters and appraisers
- Has authority over defense attorneys and independent adjusters
d) - Responsible for investigating, evaluating, and negotiating coverage, liability, and damages
- Has direct contact with policyholders, claimants, witnesses, and attorneys
- Liaison to the producer

Front 169

a) What are two advantages of using a defense attorney from the jurisdiction in which the claim is submitted?
b) What is one advantage of using in-house counsel for claim defense?

Back 169

a) - Familiarity with the local legal system
- Can identify with the community
- Can identify with potential juries
b) In-house counsel might be less expensive.

Front 170

What is included in a claim closing report?

Back 170

- The basis of settlement
- Other conclusion of the claim if not settled
- The documents necessary to close the claim
- A copy of the settlement check
- The release or proof of loss
- A dismissal of any litigation
- Final billings for any service performed in the settlement

Front 171

What are two challenges an adjuster faces when handling residential personal property claims?

Back 171

- Few people can provide an accurate account of their personal property-what they have, where it was purchased, and when it was purchased.
- Fire and theft are two of the most common causes of loss affecting personal property. In those claims, damaged personal property is seldom available for inspection.
- Special sublimits often apply to personal property, particularly that property that is vulnerable to theft. Insured may be unaware of sublimits.

Front 172

When handling a property claim, why is it important to distinguish between real and personal property?

Back 172

- The two types of property might be valued differently (ACV versus replacement cost).
- The two types of property might have different limits of coverage.
- The two types of property might have different coinsurance requirements.

Front 173

What sources of disagreement can exist in an estimate for building damage?

Back 173

- Estimates might not be detailed enough to resolve differences easily.
- Differences of opinion can exist regarding whether property can be cleaned, repaired, or replaced.
- Allowances for waste and working conditions can vary.
- Labor rates and hours of labor can vary among estimates.
- Estimates include a great deal of judgment, which can lead to disagreements.

Front 174

A property claim adjuster must answer many questions for a property loss. How are the answers to those questions determined?

Back 174

- By applying the insurance policy provisions to specific situations
- By consulting the policy and applying policy language to the given situation
- Adjuster must determine the dollar amount of damaged property using the policy language only for how property will be valued in general terms.

Front 175

Other than ownership in property, describe other kinds of insurable interests in property.

Back 175

- Lessees of property have an interest in the use of the property for the life of the lease.
- Custodians of property have an interest in the property to the extent of their fees and for their legal liability for the property's safe return to its owner.
- Security interests are created by contractual agreement or by law.

Front 176

What are an adjuster's three highest priorities following a serious loss to a home?

Back 176

- Ensure the physical safety of the policyholder's family
- Ensure the safety and security of the damaged home and its contents to prevent further damage
- Explain the coverage and adjustment procedure to the policyholder

Front 177

Describe the difficulties a property adjuster might encounter with (a) gradual causes of loss and (b) ordinance or law exclusions.

Back 177

a)
- Property that has suffered from a gradual cause of loss might suffer a subsequent loss that is covered.
- The adjuster must separate property that suffered the gradual damage from that which did not.
- The claim is limited to the extent to which the property's value has been further diminished by the covered cause of loss.
b)
- Local ordinances or laws might require the demolition of a damaged structure. The cost of demolition might be more than the cost to rebuild the structure.
- Local ordinances or laws might require construction that is more expensive than those originally used in the damaged structure.
- The adjuster must segregate such costs from the covered costs in estimates.

Front 178

a) Why are business income claims considered complex?
b) On what issues can an adjuster concentrate to simplify the task of handling business income losses?

Back 178

a) Proper settlement of these cases requires detailed analysis of and considerable speculation about extensive financial records.
b)
- Identify the best loss settlement approach
- Determine the business income loss
- Determine the period of restoration

Front 179

What are three benefits to an insurer or an adjuster of insisting that the insured perform all duties after a loss?

Back 179

- Helps the adjuster to verify the extent of the loss
- Helps the adjuster to verify the dollar amount of the loss
- Helps to protect against fraudulent claims
- Helps to protect against exaggerated claims
- Protects the adjuster from a critical review in a subsequent claim audit
- Might uncover fraudulent claims
- Might uncover policyholder misrepresentations

Front 180

What is one element of pre-loss planning and one element of post-loss planning for property adjusters and insurers in catastrophe claims?

Back 180

Pre-loss:
- Have a sufficient number of adjusters in potential disaster areas while maintaining acceptable service throughout the rest of the country
- Prepare kits that include forms, maps, telephone directories, temporary licenses, tape measures, clipboards, calculators, and anything else a visiting adjuster needs to operate on the road.
- Ensure that every adjuster who is likely to be called into an area is licensed
- Be prepared to rent office space; have telephones, copy machines, desks, and other equipment installed; and to procure temporary living quarters and rented cars on short notice.
Post-loss:
- Local agents should be advised of claim handling procedures so that they can inform insureds.
- Recognize that normal claim adjusting procedures will likely be modified.
- Claims that would normally require an in-person inspection might be handled by telephone.
- Adjuster will work long hours and be separated from their families and normal lives for long periods.

Front 181

What are two bases upon which a carrier/bailee might be found liable for damage to goods in its possession?

Back 181

- The law specifies the carrier/bailee's extent of legal liability to the owner.
- The contract between the parties also affects legal liability between them.

Front 182

What is (a) one example of an indirect loss and (b) two examples of nonphysical losses?

Back 182

a)
- Loss of use of property
- Business income loss
b)
- Obsolescence
- Loss of market
- Investment loss
- Financial fraud

Front 183

What are the questions that adjusters must answer as part of the property claim adjusting process?

Back 183

- Who has an insurable interest in, and who is insured with respect to, damaged property?
- What property is insured under a policy, where is it insured, and during what time period?
- Against what causes of loss does the insurance protect?
- What is the dollar amount of the loss?
- What are the insured's duties after a loss?
- What procedures must the adjuster follow to settle the claim?

Front 184

What are an adjuster's most important duties on crime losses?

Back 184

- To verify the exact cause of loss
- To verify the property's existence and value
- To investigate any fraud possibilities

Front 185

What are three characteristics of merchandise claims that make them challenging and unique?

Back 185

- Valuation raises unique issues. Replacement cost is the cost to the policyholder, not retail price. Actual cash value standards can be difficult to apply to merchandise because of markdowns, sales, and shop wear.
- It offers the best opportunities for salvage and the use of salvor services. Some merchants refuse to deal in damaged goods and insist on 100 percent of damages.
- Its claims must be settled in special ways. Reporting form policies require special handing.

Front 186

Insurance policies generally do not permit replacement cost settlements until the property has been repaired or replaced. What options under a replacement cost policy does an adjuster have if the insured needs funds to pay for work before work is completed?

Back 186

- Pay based on actual cash value until repairs or replacement is completed
- Parcel out a replacement cost settlement as repair or replacement is gradually completed.

Front 187

How do property policies describe real property?

Back 187

- Most policies state the described buildings and structures at a given location.
- Other policies provide blanket coverage but still require a schedule of locations to identify the buildings to be insured.

Front 188

A commercial insured suffers a total loss to a building. The policy lists a mortgagee for the building.
a) Describe a potential problem with the mortgagee in this case.
b) What should be the adjuster's response to this problem?

Back 188

a) Commercial mortgage agreements usually make the mortgage amount completely due and payable upon the destruction of the structure. The mortgagee may resist rebuilding the structure and want to be paid in full.
b) The adjuster must put the names of the owner and the mortgagee on the claim settlement check and keep both parties advised o the settlement. Beyond these actions, the adjuster has no obligation to either party.

Front 189

a) Generally, who has an insurable interest in property?
b) Describe two types of property ownership.

Back 189

a) Anyone who would be financially harmed by the destruction of property
b) - A sole owner has complete interest in the property.
- Under joint ownership, two or more owners each have a complete, indivisible interest in the property.
- Joint ownership between husband and wife is known as tenancy by entireties.
- Ownership in common involves two or more owners, each with an identifiable fractional financial interest in the property.

Front 190

Describe a challenge that each of the following presents for an adjuster and how the adjuster might handle that challenge.
a) An insured under an automobile policy is driving a vehicle belonging to someone else.
b) The parties in an auto accident disagree about what happened.

Back 190

a) Coverage determination may be difficult depending on the circumstance. Adjusters should investigate and manage the claim.
- The vehicle might have inadequate policy limits. The adjuster might become heavily involved in the claim or ensure its handling.
b) Determining negligence and liability can be difficult. An accident reconstruction expert might be helpful in determining what actually happened.

Front 191

Describe the five stages of a civil lawsuit.

Back 191

- Pleadings are papers filed with the court clerk in which each side gives its account.
- Discovery is the formal process by which each party obtains the evidence and information known to the other parties.
- Motions are formal requests to the court for a decision or ruling.
- At trial, each side presents its evidence and has an opportunity to cross-examine and counter the other side's evidence.
- An appeal is a request to a higher court to overturn the trial decision.

Front 192

What are two reasons it is important to negotiate a claim settlement before trial?

Back 192

- The courts would be overwhelmed if even a small percentage of claims that are settled were tried.
- Insurers would pay more in legal fees and verdict amounts than they would pay in negotiated settlements.
- Trying cases is enormously stressful for all parties.

Front 193

Why is control of medical expenses a challenge in workers compensation claims?

Back 193

- Workers compensation medical expenses are potentially unlimited.
- Workers compensation adjusters have limited tools with which to challenge medical expenses.
- Workers compensation insurers often do not have the bargaining power that health insurers have with medical providers.
- Some states do not allow the employer or insurer to select the treating physician.
- Workers compensation claims can also include claims for psychological conditions, which are very expensive.

Front 194

Describe three documents used to initiate a lawsuit.

Back 194

- A summons is a simple notice to the defendant that a lawsuit has been filed.
- A complaint is a listing of allegations in which the plaintiff establishes his or her case.
- The defendant must file an answer in response to each of the plaintiff's allegations and might also raise affirmative defenses.

Front 195

What aspects of contractual assumptions of liability in operations liability claims make them challenging for adjusters?

Back 195

- Legal interpretation of contractual liability can be complex.
- The contractual assumption of liability might encompass defense and indemnity or just indemnity.
- Insurance coverage for contractual assumptions of liability varies.
- Control of the claim's defense might be an issue with parties to the contract when coverage is in doubt.

Front 196

Describe each of the following challenges in handling products liability claims.

a) Product and manufacturer identification
b) Review of warnings and instructions
c) Improper use

Back 196

a)
- Products have component parts from sources other than the assembling manufacturer.
- Retailers sell products that are manufactured elsewhere but that carry their store label.
- Unless the manufacturer can be identified, the retailer is responsible to the claimant.
b)
- The adjuster should review the adequacy of existing warnings and instructions.
- The adjuster must investigate whether the claimant read and remembered the warnings and instructions.
c)
- Claimants might be injured while using products in ways that are not intended or foreseeable.
- Adjusters who suspect improper use should obtain detailed statements from the claimants or inspect medical records or reports to consumer products regulatory agencies.

Front 197

Why are many professional liability claims litigated?

Back 197

- The policyholder's professional reputation is at stake.
- The policyholder is usually involved in his or her own defense.
- The policyholder's consent may be required for the insurer to settle the claim.

Front 198

Describe three ways in which an uninsured motorists claim presents a challenge for an adjuster.

Back 198

- The insured generally assumes that legal representation is necessary.
- The uninsured motorist is generally either unavailable or uncooperative.
- A person who drives without insurance is usually not a credible witness, even if available and cooperative.
- Fraud and exaggeration can be at least as common in uninsured motorists claims as they are in third-party liability claims.
- The policyholder can require arbitration. Arbitrators tend to give the policyholder the benefit of every doubt.

Front 199

What three questions must an adjuster answer in determining coverage for intentional acts in a liability claim?

Back 199

- Did the insured intend the result of his or her action or merely intend to commit the action without contemplating the injurious outcome?
- Can intentional acts be excluded when the claimant also alleges negligence or strict liability on the insured's part?
- Is the insured liable for the intentional acts of an agent or a servant, if the insured is vicariously liable?

Front 200

Explain how an adjuster prepares for negotiations.

Back 200

- The adjuster investigates liability and damages.
- The adjuster documents liability and damages.
- The adjuster reviews the file to ensure that he or she can discuss all aspects of the claim.
- The adjuster evaluates the claim intelligently.
- The adjuster determines both a good first offer and a probably range of settlements.

Front 201

When adjusting a liability claim, how does an adjuster go about determining coverage?

Back 201

- Adjusters are primarily concerned with the possible application of exclusions.
- The essential coverage clause of most liability insurance policies is simple. Therefore, any type of bodily injury or property damage for which the insured is allegedly liable is covered, unless it is specifically excluded.
- The claimant's allegations determine coverage, even if those allegations are disputed and even if they are eventually proved untrue.

Front 202

a) What is a common complaint in a medical malpractice claim?
b) What is one defense against a medical malpractice claim?

Back 202

a)
- Failing to obtain a patient's informed consent
- Not providing the necessary standard of care
b)
- The patient failed to divulge all relevant information to the physician.
- The patient failed to follow the prescribed course of treatment.
- The patient failed to report complications.

Front 203

Isabel Insurance Company has purchased a 5-line surplus share treaty with a $50,000 line.

a) How much of the premium would the reinsurer receive?
b) How much of the loss would the reinsurer pay?

Underlying policy's amount of insurance $250,000
Underlying policy's premium $ 1,000
Underlying policy's loss amount $100,000

Back 203

$250,000 - $50,000 = $200,000
$200,000 divided by $250,000 = 80%
a) $1,000 x 80% = $800
b) $100,000 x 80% = $80,000

Front 204

Describe the effectiveness of per occurrence excess of loss treaties for each of the following:

a) Stabilizing loss experience
b) Providing large-line capacity
c) Surplus relief

Back 204

a) Effective to the extent that loss experience fluctuates from an accumulation of losses from a single occurrence.
b) Might enhance large-line capacity, but not purchased for that purpose.
c) Not effective because the reinsurer does not pay a ceding commission.

Front 205

Describe the function of a reinsurance intermediary and explain how a reinsurance intermediary compensated?

Back 205

Function
- To bring together two potential contracting parties
- To assist them in agreeing on contract terms
Compensated
- A commission paid by the reinsurer
- A fee negotiated with the primary insurer

Front 206

Contrast treaty reinsurance and facultative reinsurance.

Back 206

-Treaty reinsurance uses one agreement for a group of loss exposures. Facultative reinsurance uses one agreement for each loss exposure.
- In treaty reinsurance, the primary insurer agrees in advance to cede certain type of loss exposures and the reinsurer must accept them. In facultative reinsurance, the reinsurer is under no obligation to accept any particular loss exposure offered.

Front 207

Identify two reasons that reinsurance regulation is limited?

Back 207

- Reinsurance business is conducted between two insurers, so the knowledge and bargaining power of the parties is deemed to be relatively equal.
- Some feared that rigid regulation of U.S. reinsurers would limit their ability to compete with alien reinsurers, both here and abroad.
- Traditionally, reinsurers were few in number and were well-financed, with a long history of ethical and sound business dealings.

Front 208

Describe two types of risk that a primary insurer transfers with a finite risk reinsurance agreement

Back 208

- Investment risk is the possibility that an investment portfolio will yield a lower return than expected.
- Timing risk is the possibility that losses will be paid more quickly than expected.

Front 209

Is a reinsurance intermediary an agent of the primary insurer or an agent of the reinsurer? Explain.

Back 209

- The courts have held that a reinsurance intermediary is the primary insurer's agent.
- A reinsurance intermediary could become the reinsurer's agent either by specific contractual agreement or by the reinsurer's actions that lead the primary insurer to believe that the intermediary is the reinsurer's agent.

Front 210

Fundamental Insurance Company has purchased a per risk excess of loss treaty with a $100,000 retention and a $1,000,000 limit. How much of the loss would the reinsurer pay for each of the following losses?
a) Policy A underlying limit of $50,000 and loss amount of $50,000
b) Policy B underlying limit of $250,000 and loss amount of $100,000
c) Policy C underlying limit of $1,000,000 and loss amount of $500,000
d) Policy D underlying limit of $2,000,000 and loss amount of $1,500,000

Back 210

a) $0 - loss is less than the retention
b) $0 - loss is equal to the retention
c) $500,000 - $100,000 retention = $400,000
d) $1,500,000 - $100,000 = $1,400,000. $1,000,000 reinsurance limit payable.

Front 211

What is the principal consideration in setting retentions for (a) pro rata treaties and (b) excess of loss treaties?

Back 211

a) The amount of surplus relief needed.
b) The size of loss that the primary insurer can absorb without undue effect on the policyholders' surplus or the loss ratio for the type of insurance included in the treaty

Front 212

Describe two advantages to a primary insurer of finite risk reinsurance?

Back 212

- The primary insurer can rely on long-term protection because the agreement typically has a multi-year term.
- Finite risk reinsurance provides the primary insurer with a predictable reinsurance cost over the coverage period.
- Finite reinsurers commonly share profits from favorable loss experience with primary insurers. No additional premium is due even if losses exceed premiums.

Front 213

Explain why per risk excess of loss treaties are less effective than pro rata treaties in providing surplus relief?

Back 213

Ceding commissions are normally not paid by the reinsurer to the primary insurer.

Front 214

Describe how state insurance regulators enforce requirements to include specific clauses in reinsurance agreements?

Back 214

- The primary insurer is penalized when the clauses are not included.
- The primary insurer is unable to take credit against their unearned premiums and loss reserves for premiums paid to and losses recoverable from reinsurance when the clauses are not included.

Front 215

What are four functions of reinsurance?

Back 215

- Stabilize loss experience
- Improve large-line capacity
- Provide catastrophe protection
- Provide surplus relief
- Provide underwriting guidance
- Facilitate withdrawal from a territory or type of business

Front 216

Explain why an insurer that plans to grow rapidly need to be reinsured more heavily than one that plans to grow slowly?

Back 216

-Loss ratios on new business are likely to be higher and less predictable than loss ratios on business that has been seasoned through renewal underwriting.
- A rapidly growing insurer is more likely to need surplus relief than an insurer that is growing slowly.

Front 217

What are two purposes for a ceding commission in a reinsurance agreement?

Back 217

- To compensate the primary insurer for the expenses of acquiring the underlying policy
- To share part of the profit the reinsurer has earned on profitable transferred loss exposures

Front 218

What are two advantages of treaty reinsurance for a primary insurer?

Back 218

- The primary insurer can underwrite, accept, and reinsure loss exposures without prior consultation with the reinsurer on each pending application.
- Because prior negotiation is not required, the handling expense for each policy is less under treaty reinsurance than under facultative reinsurance.

Front 219

What information should a primary insurer obtain from a reinsurer with which it wants to do business?

Back 219

- Is the reinsurer financially sound?
- Is the reinsurer well managed?
- Are its claim practices satisfactory?
- Can it offer the services that the primary insurer needs?
- Are its rate competitive?
- Is it licensed in the primary insurer's state of domicile, or can it make other arrangements so that the primary insurer can take credit for the reinsurance on its Annual Statement?

Front 220

Identify three situations in which facultative reinsurance would be useful for a primary insurer.

Back 220

- A primary insurer might want to write a particular type of insurance that is not covered by any of its treaties.
- Facultative reinsurance enables primary insurers to provide coverage on large loss exposures that would otherwise exceed their individual underwriting capacity.
- A treaty exclusion might apply to a particular risk.
- A primary insurer might want facultative reinsurance for the portion of a loss exposure that exceeds the reinsurance treaty's limit.
- A primary insurer can use facultative reinsurance to protect its treaties from adverse loss experience.

Front 221

Coastal Insurance Company purchased a per occurrence excess of loss treaty with a $1,000,000 retention and a $10,000,000 limit. How much would the reinsurer pay for the following losses?
a) A single loss of $1,000,000
b) An accumulation of losses from the same event totaling $900,000
c) An accumulation of losses from the same event totaling $3,400,000
d) A total loss of $2,100,000 from three separate events

Back 221

a) $0 - equal to the retention
b) $0 - less than the retention
c) $3,400,000 - $1,000,000 retention = $2,400,000
d) Unless a single event exceeded the $1,000,000 retention, $0.

Front 222

How are retentions set for (a) per occurrence excess of loss treaties and (b) aggregate excess of loss treaties?

Back 222

a) Decide how much policyholders' surplus and how many percentage points of loss ratio the insurer can risk on one year's catastrophes. Then estimate the maximum number of catastrophes that might reasonably be expected to occur in one year.
b) Determine the loss ratio for which the reinsurance premium is affordable and that is acceptable to the reinsurer.

Front 223

What are two disadvantages to the primary insurer of using facultative reinsurance?

Back 223

- Increased administrative expenses.
- Uncertainty of whether reinsurance will be available for the risk.
- Primary insurer must disclose competitive information to potential reinsurers.

Front 224

Variable Insurance Company has been in business for five years. During that time, its loss frequency and loss severity have fluctuated widely. Recommend one type of reinsurance that would be appropriate for Variable. Explain.

Back 224

- An aggregate excess of loss treaty caps the primary insurer's loss ratio (subject to percentage participations and treaty limits), whether caused by frequency or severity.
- A per occurrence excess of loss treaty would help stabilize loss experience from an accumulation of losses from a single occurrence.
- A per risk or per policy excess of loss treaty would stabilize Variable's loss experience by lessening the effect of large losses.

Front 225

Volatile Insurance Company writes only one type of insurance. Over 90 percent of the policy have limits under $200,000 but several policies have limits as high as $2,000,000. Volatile is currently growing rapidly. Recommend two types of reinsurance to meet Volatile's needs. Explain.

Back 225

For the majority of policies:
- Quota share for the majority of policies with limits under $200,000 to provide surplus relief.
- Surplus share for the majority of policies with limits under $200,000 to provide surplus relief.
For the high-limit policies:
- Facultative reinsurance for the unusual policies with high limits to cover those limits.
- Per policy excess of loss reinsurance for the high-limit policies to protect against large losses - Per risk excess of loss reinsurance for the high-limit policies to protect against large losses.

Front 226

Describe three of the contents of the Underwriting and Investment Exhibit in the Annual Statement.

Back 226

- The Statement of Income includes underwriting income, premiums earned, losses incurred, loss expenses incurred, and other underwriting expenses.
- Investment income comprises investment income from interest, dividends, real estate, and net realized capital gains.
- Other Income lists gains or losses from charge-offs of agents' balances, finance charges, and any other miscellaneous income.
- The Capital and Surplus Account shows all gains and losses in surplus.

Front 227

Explain how the purpose of SAP differ from the purpose served by GAAP.

Back 227

- SAP rules serve a particular regulatory purpose. GAAP is designed to meet the varying needs of the different users of financial statements.
- SAP focuses on correctly measuring liquidation values. GAAP focuses on correctly measuring earnings.

Front 228

How does the income statement differ from the balance sheet?

Back 228

- An income statement portrays financial results over a time period. A balance sheet is a snapshot.
- An income statement shows gains or losses from non-operating activities, such as the purchase or sale of assets. A balance sheet shows the end results of all activities.

Front 229

What information is included in Schedule F of the Annual Statement?

Back 229

- Expanded information on an insurer's reinsurance arrangements
- Details about assumed reinsurance
- Details about portfolio reinsurance ceded or assumed
- Details about ceded reinsurance recoverables
- Details of the aging of reinsurance recoverables
- Details of unauthorized reinsurance
- Details on reinsurance recoverables more than 90 days overdue
- The liability item "Provision for reinsurance"

Front 230

List four items that are typically included as business assets on a balance sheet.

Back 230

- Buildings
- Equipment
- Office furnishings
- Inventory
- Bonds
- Stocks
- Cash
- Cash equivalents (money market funds and instruments)
- Accounts receivable

Front 231

What are two types of information included in the General Interrogatories section of the Annual Statement?

Back 231

- Changes in the corporate charter (bylaws)
- Dealings with affiliated entities (foreign owners) (directors) (officers) (Shareholders)
- Control of capital stock by others
- Dealings with trade associations
- Unusual exposures
- Reinsurance arrangements
- Receipt of promissory notes (letters of credit) in lieu of premiums

Front 232

What are the two principal liabilities of insurers?

Back 232

- Reserves for losses
- Reserves for unearned premiums

Front 233

Explain the effect of SAP accounting for policy acquisition costs and commissions on an insurer's surplus.

Back 233

- An insurer writing significant new business will experience a drain on its surplus.
- An insurer might have to purchase reinsurance to maintain the level of surplus needed to write new business.

Front 234

What comprises the following on an insurer's income statement?

a) Sources of income
b) Expenses

Back 234

a) Earned premiums; investment earnings
b) Incurred losses; loss adjustment expenses; other underwriting expenses

Front 235

Describe the types of information contained in the Cash Flow account of the Annual Statement.

Back 235

- Sources of cash from operations (premiums) (investment income)
- Sources of cash from investments (proceeds from the sale, maturity, or repayment of bonds, stocks, and other investment holdings)
- Sources of cash from financing activities (cash provided from surplus notes, borrowed funds, and other sources)
- Uses of cash from operations
- Uses of cash from investments
- Uses of cash from financing activities (payment of dividends to stockholders, transfers to affiliates, repayment of outstanding loans)
- Reconciliation of cash and short-term investments (net change in cash and in short-term investments)

Front 236

Explain why unearned premium reserves are considered a liability on the insurer's balance sheet.

Back 236

Policyholders pay premiums before the period for which they are covered. Although insurers receive cash for the premium at the start of the policy period, they earn premium proportionately as the policy period transpires. At the end of the policy period, all premiums received will be earned. But, in the meantime, insurers must recognize as a liability the unearned premium amounts they have received from policyholders.

Front 237

What is the crucial purpose of Schedule P in the Annual Statement?

Back 237

To provide information to analyze loss reserve and incurred loss development

Front 238

What information is included in Schedule P of the Annual Statement?

Back 238

- Separate information is listed for each Annual Statement line of business
- Premiums earned by line of business by year
- Loss payments (defense and cost containment) (adjusting and other payments) by line of business by year
- Salvage (subrogation) received by line of business by year
- Number of claims reported (outstanding) by line of business by year
- Losses (defense) (cost containment) (adjusting and other) unpaid
- Salvage (subrogation) anticipated
- Total losses (loss expenses) incurred
- Loss (loss expense) percentage
- Nontabular discount
- Inter-company pooling participation percentage
- Net balance sheet reserves after discount

Front 239

How do investors in an insurer use that company's financial statement?

Back 239

Investors are interested in a good return on the investment they have made in the company. Investors determine the value of their investment and potential returns by reviewing quarterly and annual financial reports published by the insurer.

Front 240

What information is included in the Five-Year Historical Data section of the Annual Statement?

Back 240

- Five-year trends in the major balance sheet (income statement) items
- Percentage allocations of the various invested assets to total invested assets
- Key operating ratios
- One-year and two-year reserve development factors for each of the five years

Front 241

What information is included in Schedule D of the Annual Statement?

Back 241

- Elaborates on the key invested assets (bonds) (preferred stock) (common stock)
- Specific information for all bonds
- Detailed information for each preferred stock
- Detailed information for each common stock
- All bonds and stocks sold (redeemed) (otherwise disposed of)
- All bonds and stocks both acquired and fully disposed of during the report year
- Shares of subsidiary (controlled) (affiliated) companies

Front 242

Other than the purpose of each, describe two differences between SAP and GAAP accounting.

Back 242

- SAP treats certain assets as valueless even though they would have some positive value under GAAP.
- SAP requires policy acquisition costs and commissions to be immediately written off. GAAP would allow these expenses to be capitalized and amortized over the policy's life.
- SAP values bonds at amortized amounts. GAAP generally requires bonds to be valued at market value.
- SAP allows no consolidation for subsidiaries, controlled, or affiliated entities. GAAP consolidates the financial statements of majority-owned subsidiaries with the parent company's financial statements.
- SAP account for pensions considers only current retirees and employees who are fully vested. GAAP accounting requires provisions for all employees, both vested and non-vested.

Front 243

What information is included in the Annual Statement's Title Page and Jurat?

Back 243

- Legal name of the company
- NAIC company code number of the company
- Contact for purposes of the Annual Statement
- Directors of the company
- Signatures of the company's president, secretary, and treasurer

Front 244

Describe the elements of an insurer's balance she

Back 244

Assets - what the organization owns; the uses of an organization's funding
Liabilities - what the organization owes to others; the source of an organization's funding
Net worth - the difference between assets and liabilities

Front 245

Identify three users of insurer financial statements.

Back 245

- Management
- Investors
- Rating services
- Regulators
- Policyholders
- Producers
- Risk managers

Front 246

What information is analyzed in A.M. Best's quantitative profitability tests?

Back 246

- Underwriting profit (loss)
- Investment profit (loss)
- Capital gains (losses)

Front 247

For A.M. Best's quick liquidity ratio, many assets are considered quick assets. Name two.

Back 247

- Cash
- Short-term investments issued by companies not affiliated with the insurer
- Bonds maturing within one year and issued by companies not affiliated with the insurer
- Government bonds maturing within five years
- Eighty percent of common stocks issued by companies not affiliated with the insurer

Front 248

What do each of the following A.M. Best qualitative tests measure?

a) Reinsurance agreement analysis
b) Spread of risk

Back 248

a) - The appropriateness of the reinsurance agreements purchased
- The reinsurers' financial strength
b) -The size of its premium volume
- The geographic spread of its business
- The diversity of types of insurance written
- The marketing system used

Front 249

Describe A.M. Best's qualitative management test

Back 249

- Management's experience, capabilities, and integrity are assessed based partly on the insurer's past success if the present management has been in place for several years.
- The assessment is based on past experience of the managers in other positions.
- The assessment is based on the raters' opinions of the managers, developed through periodic meetings with them.

Front 250

What does A.M. Best's Capital Adequacy Ratio (BCAR) measure?

Back 250

The adequacy of the insurer's capital relative to the risks it assumes in its operations

Front 251

An insurer's liabilities to liquid assets ratio is increasing. What would be NAIC's conclusion?

Back 251

- The insurer might face liquidity problems.
- The insurer might be nearing insolvency.
- Further analysis of reserve adequacy, asset values, and the insurer's ability to meet its obligations to policyholders is needed.

Front 252

a) What does an insurer's leverage represent?
b) What does an insurer's change in net premiums written ratio represent?

Back 252

a) The extent to which an insurer uses funds from liabilities (that represent funds belonging to others) to supplement its capital in financing its operations
b) The growth in an insurer's underwriting exposure

Front 253

a) What do A.M. Best's liquidity tests measure?
b) Identify two A.M. Best liquidity tests.

Back 253

a) An insurer's ability to meet claim obligations without selling long- term investments or fixed assets that might be saleable only at a substantial loss during unfavorable market conditions.
b) - Quick liquidity ratio
- Current liquidity ratio
- Overall liquidity ratio
- Operating cash flow test
- Class 3-6 bonds to PHS ratio

Front 254

What does a liquidity ratio measure?

Back 254

- The extent to which an insurer can meet its obligations as they come due
- The relationship between assets and liabilities
- The nature of assets available to discharge debt

Front 255

What two factors might cause an insurer's two-year overall operating ratio to exceed 100 percent?

Back 255

- Large losses
- Reserve strengthening on specific types of insurance
- Increasing loss adjustment expenses
- Increased underwriting expenses because of a change in marketing systems
- Higher commissions
- Operational inefficiencies

Front 256

What do each of the following A.M. Best leverage tests measure?

a) Net premiums written to policyholders' surplus ratio
b) Net liabilities to policyholders' surplus ratio
c) Net leverage ratio
d) Gross leverage ratio

Back 256

a) Measures leverage resulting from the insurer's current premium writings
b) Measures the insurer's exposure to unpaid obligations, unearned premiums, and exposure to reserving errors
c) Measures an insurer's exposures to both pricing errors and errors in estimating liabilities, after reinsurance, in relation to policyholders' surplus
d) Measures an insurer's exposure caused by pricing errors in its current book of business, reserve estimation errors, and reinsurance exposure

Front 257

Regarding an insurer's profitability ratios,

a) what does a profitability ratio measure?
b) identify three profitability ratios.

Back 257

a) - The profitability of an individual insurer
- The profitability of the industry as a whole
- The underwriting performance of an insurer
b) - Loss ratio
- Expense ratio
- Combined ratio
- Operating ratio
- Investment income ratio
- Return on invested funds ratio
- Return on net worth ratio
- Earnings per share
- Dividend paid per share of stock
- Unassigned surplus per share

Front 258

What are two comparisons for which an insurer's combined ratio is useful?

Back 258

- To compare results among various types of insurance
- To compare results among insurers
- To compare the results of a single insurer over several accounting periods

Front 259

What are three values are used to calculate a liquidity ratio?

Back 259

- Cash
- Invested assets (market value)
- Unearned premium reserve
- Loss reserves
- Loss adjustment expense reserves

Front 260

What does the operating ratio measure?

Back 260

A company's overall pretax operational profitability from underwriting and investment activities

Front 261

Why would the NAIC be more concerned with high net premiums written to policyholders' surplus ratio for a liability insurer than for a property insurer?

Back 261

- A higher degree of uncertainty in projecting future losses for liability insurance
- The relative instability of liability as compared with property insurance

Front 262

What are three factors that can affect an insurer's capacity ratio?

Back 262

- Rapid growth
- Underwriting gains (losses)
- Capital gains (losses) realized (unrealized)
- Changes in the value of securities
- Changes in net written premiums
- Changes in policyholders' surplus

Front 263

Red and Green Insurance Co.
Red and Green Insurance Company (RGIC) reports the following financial information after its first year of operation:

Net Written Premiums $5,000,000
Earned Premiums $4,000,000
Policyholders' Surplus $2,500,000
Market Value of Invested Assets $3,000,000
Unearned Premium Reserve $2,000,000
Incurred Losses (loss adjustment expenses) $2,750,000
Expenses Incurred $1,000,000
Net Investment Income $ 250,000

Back 263

story problem on other side

Front 264

Calculate RGIC's capacity ratio and show your calculations.

Back 264

a) $5,000,000 divided by $2,500,000 = 2

Front 265

Calculate the following

a) RGIC's loss ratio with loss adjustment expenses
b) RGIC's financial basis expense ratio
c) RGIC's trade basis expense ratio.

Back 265

a) 2,750,000/ = .688
4,000,000

b) 1,000,000/ = .25
4,000,000

c) 1,000,000/ = .20
5,000,000

Front 266

Calculate

a) RGIC's financial basis combined ratio
b) RGIC's trade basis combined ratio.

Back 266

a) Financial basis combined
.688 + .250 = .938 (.94)

b) Trade basis combined ratio
.688 + .200 = .888 (.89)

Front 267

Calculate RGIC's financial basis operating ratio.

Back 267

Step one (investment income ratios)
250,000/ = .06
4,000,000

Step two
.94 - .06 = .88

Front 268

What is the purpose of actuarial loss reserve analysis and verification?

Back 268

To determine whether the loss and loss adjustment expense reserves cover the losses and loss adjustment expenses that have been incurred but have not yet been paid.

Front 269

What is one advantage and one disadvantage of using only closed claim loss triangles in accident-year loss analysis?

Back 269

- Eliminates the effects of errors in estimating case reserves.
- The number of months needed for finalizing ultimate loss development is greater than in open-claim loss triangles.

Front 270

What are the components of the IBNR reserve?

Back 270

- Reserves for unreported losses
- Reserves for losses that have been reported but for which the established case reserves are inadequate
- Reserves for losses that have been settled and then reopened

Front 271

What is a primary goal of bond portfolio management?

Back 271

To structure the portfolio so that the face amounts and maturity schedule of investment cash inflows correspond to the firm's expected cash outflows

Front 272

For cash matching to be effective, what two conditions must exist?

Back 272

- The zero-coupon bonds' maturity dates and maturity values must precisely match the expected cash outflows from the underwriting portfolio.
- The insurer must be able to purchase enough of each type of security to match its expected claims, assuming that such bonds are available.

Front 273

Describe the asset restrictions that state regulation imposes on insurers.

Back 273

- Only certain assets are permitted to be included on an insurer's balance sheet.
- Other investment must be assigned zero value on the insurer's balance sheet.
- Insurers can invest in nonadmitted assets; however, they must be assigned zero value on the insurer's balance sheet.

Front 274

What is the role of state insurance departments in the operation of the NAIC's risk-based capital (RBC) system?

Back 274

- To take regulatory action when warranted, before an insurer becomes too financially weak to be rehabilitated
- To implement the regulatory action specified

Front 275

Identify two methods of establishing case reserves.

Back 275

- The average-value method
- The judgment method
- The tabular method

Front 276

Identify the level and describe the action required for any two of the action levels in the NAIC's risk-based capital (RBC) system.

Back 276

- No action required: capital above 200 percent or more of the minimum RBC amount
- Company action level: Between 150 and 200 percent of the computed minimum RBC amount, the insurer is required to submit a comprehensive financial plan containing proposals to correct the insurer's financial problems.
- Regulatory action level: Between 100 and 150 percent of the computed minimum RBC amount, the regulator conducts an examination or analysis. The insurer files a comprehensive financial plan.
- Authorized control level: Between 70 and 100 percent of the computed minimum RBC amount, the regulator may place the insurer under regulatory control.
- Mandatory control level: Below 70 percent of the computed minimum RBC amount, the regulator is required to place the insurer under regulatory control.

Front 277

Describe two risks to which an insurer is exposed when investing in bonds.

Back 277

- Credit risk is the risk that customers or other creditors will fail to make promised payments as they come due.
- Interest rate risk refers to risk associated with the fluctuation of a security's value because of changes in market-determined interest rates.
- Reinvestment risk refers to the uncertainty about the rate at which periodic interest payments can be reinvested over the life of the investment.

Front 278

Describe the risks that the NAIC risk-based capital (RBC) formula considers.

Back 278

- Asset risk is the risk that an asset's value will be lower than expected.
- Credit risk reflects the possibility that the insurer will not be able to collect money owed to it.
- Underwriting risk reflects that premiums and loss reserves can be inadequate for the losses they must cover.

Front 279

What is the overall effect of investment restrictions on insurers?

Back 279

- To encourage predominant investment in high-quality bonds
- To ensure that insurers have well-diversified portfolios

Front 280

What circumstances complicate the problems associated with managing investment and underwriting portfolios?

Back 280

- Insurance loss payments are spread throughout the year.
- Insurance loss payments could be paid out over several years.
- Perfectly matching investments and liabilities on a continuous basis is not a realistic goal.
- Future cash outflows associated with the underwriting portfolio are not known with certainty.
- Future cash outflows associated with the underwriting portfolio must be estimated.

Front 281

Describe the operation of the report-year loss analysis technique.

Back 281

- The report-year technique deals with a constant number of claims in the portfolio.
- The dollar amount of claims within the portfolio can change as claims are settled or case reserves are amended, and claims can move from being open to being closed.

Front 282

Describe the following immunization as approaches to eliminating investment risk.

a) cash matching
b) portfolio

Back 282

a) The process of matching an investment's maturity value with the amount of expected loss payments
b) The process of matching investment and liability duration

Front 283

What investment restrictions exist to help ensure that insurers have well-diversified portfolios?

Back 283

- Insurers can only invest up to a certain percentage of their assets in many of the permitted investments.
- Insurers are typically restricted in how much of their assets can be invested in any single investment.
- Insurers are restricted in the percentage of another company's securities they can own.

Front 284

Why is financial management of insurers different than financial management of non-insurers?

Back 284

- Admitted asset definitions differ.
- Investment restrictions exist.
- State regulators impose risk-based capital requirements.

Front 285

Describe the NAIC's risk-based capital (RBC) system.

Back 285

- A system to determine the minimum amount of capital an insurer needs to support its operations, given the insurer's risk characteristics
- An objective test of the insurer's solvency
- A system that enables insurance regulators to take regulatory action when warranted, before an insurer becomes too financially weak to be rehabilitated

Front 286

What are the two principal components of underwriting risk in the NAIC's risk-based capital (RBC) formula?

Back 286

- Premium risk
- Loss reserving risk

Front 287

Identify the following in the NAIC risk-based capital (RBC) formula

a) two risks considered as asset risks
b) two risks considered as credit risks

Back 287

a) - Investments in subsidiaries
- Fixed income assets
- Bonds
- Loans
- Equity assets
- Common stock
- Preferred stock
b) - Receivables from affiliates (subsidiaries) (parents)
- Federal income tax recoverable
- Interest (dividends) (real estate income) due and accrued
- Receivables related to uninsured accident and health plans
- Aggregate write-ins for assets other than invested assets

Front 288

What is one strength and one weakness of the report-year loss analysis technique?

Back 288

Strengths
- It permits the analyst to follow the development of a specific group of claims.
- It permits the analyst to test the accuracy of early case reserving.

Weakness
- It does not provide information needed to determine the amount of reserve required for losses that have been incurred but have not yet been reported.
- For insurance in which the majority of claims are reported in the same year in which the loss occurred, it provides little additional information compared to the information provided by the accident-year loss analysis.
- The report-year technique alone is inadequate to analyze loss reserves.

Front 289

How is the report-year loss analysis technique different from the accident-year loss analysis technique?

Back 289

Loss data are grouped by report year, the year in which the loss was first reported to the insurer, rather than by accident year, the year in which the loss occurred.

Front 290

Describe the operation of the accident-year loss analysis technique.

Back 290

- Uses loss triangles
- Each line of data represents one accident year.
- The analyst chooses multipliers to calculate the loss development factors.
- Ultimate development factors are used to project immature loss data to full maturity.

Front 291

Describe one method of estimating the IBNR reserve.

Back 291

- Estimate the ultimate total amount of incurred losses for the period and subtract the paid losses and case reserves for reported losses. The remainder is the total IBNR reserve.
- Estimate the pure IBNR reserve independently, without considering the case reserves. Then, separately calculate the reserve deficiencies to determine the total IBNR reserve

Front 292

Why is integrating an investment strategy with the strategies of other functional areas particularly important for insurers?

Back 292

- Investment earnings are a primary source of funds to pay losses.
- Investment portfolio must be structured to provide sufficient earnings and cash flow to pay loss.
- Property losses tend to be settled quickly while liability loss may be outstanding for ten or more years until settled.
- Insurers management must investment and underwriting decisions.

Front 293

What is a mission statement?

Back 293

- It pinpoints what product or service the company provides.
- It pinpoints who its customers and other stakeholders.
- It pinpoints what is important to the organization.
- While broad in nature, the mission statement reflects the character and spirit of a company.

Front 294

What are three advantages of exporting as a method of expanding global operations?

Back 294

- Exporting is the simplest mode of entry.
- It carries the lowest degree of risk.
- It is a cost-effective way to expand gradually.
- Managerial responsibility can be contracted to an export broker.

Front 295

Identify the two phases of the strategic management process.

Back 295

- Strategy formulation involves creating mission and vision statements; establishing organizational goals; analyzing the external and internal environments; and determining strategy at different organizational levels.
- Strategy implementation involves designing an effective organizational structure to support the strategy and implementing organizational strategic controls.

Front 296

a) What organizational structure would be most appropriate for an insurer following a cost leadership strategy?
b) What organizational structure would be most appropriate for an insurer following a single-business strategy?

Back 296

a) A flat organization to minimize costs related to maintaining multiple reporting relationships
b) A functional structure to define departments by the operation they perform

Front 297

Explain how the following affect the bargaining power of buyers of the insurance business.

a) The line of business
b) The cyclical nature

Back 297

a) Customers in the personal insurance market can exert great pressure on insurers to lower prices and increase availability.
b) Buyers have greater bargaining power and can negotiate for broader coverages at lower premiums in a soft market than in a hard market.

Front 298

Brown Insurance Company has decided to begin selling insurance directly to customers in addition to its existing distribution channel. What corporate-level strategy is Brown following?

Back 298

- Vertical integration
- Forward integration

Front 299

a) What programs might be included in a reward system?
b) For a reward system to be effective, how must rewards be structured?

Back 299

a) - Profit-sharing programs
- Stock options plans
- Other bonus arrangements
b) Rewards must be clearly linked to goal achievement.

Front 300

Define the strategic management process.

Back 300

- The process an organization uses to formulate and implement its business strategies.
- The creation of an alignment between external forces and the organization's internal resources so as to create a sustainable competitive advantage.

Front 301

Describe two corporate-level strategies for an insurer that is experiencing decreasing profits, loss of market share, and numerous external threats.

Back 301

- Bankruptcy or liquidation
- Harvest strategy to seek short-term profits while phasing out the troublesome product line or exiting the market
- Turnaround strategy to rebuild organizational resources to return the company to profitable levels
- Divestiture strategy to sell off part of its operation

Front 302

What is the purpose of organizational goals?

Back 302

- To set its direction
- To clarify expectations
- To support the control function
- To increase motivation within the organization

Front 303

Describe Porter's three business-level strategies.

Back 303

- With a cost leadership strategy, companies seek to achieve cost efficiencies in all operational areas in order to charge a low price.
- A differentiation strategy requires the company to develop products or services that are distinct and for which customers will pay a higher price than that of the competition.
- A focus strategy involves using either a low-cost approach or a differentiation strategy, but only for a specific market segment. Focus companies concentrate on either a group of customers, a geographic area, or a narrow line of products or services.

Front 304

Explain how the bargaining power of suppliers affects the insurance business.

Back 304

Reinsurers are a supplier to primary insurers. Without access to reinsurance, many insurers would be constrained in the types and amounts of insurance they could profitably write.

Front 305

What are the responsibilities of the franchiser and the franchisee under a franchise?

Back 305

The franchiser provides:
- Training
- Technical assistance
- Specialized equipment
- Advertising services
- Other support

Front 306

What economic factors should be considered in an analysis of the global environment?

Back 306

- Level of economic stability
- Monetary policies
- The prevailing attitude toward foreign investors
- The potential for exchange-rate volatility
- The country's gross domestic product
- The country's national income
- Personal income
- Wage levels
- Individual disposable income

Front 307

How are financial controls used?

Back 307

- To assess the company's stock price
- To assess the return on investment (ROI)
- To evaluate projects based on cost/benefit analysis
- To compare the performance of one department to that of another
- To allocate resources within the organization through a budget

Front 308

Describe three barriers to entry into the insurance industry.

Back 308

- Economies of scale that allow an insurer to lower overall costs and thus premiums.
- Offering unique or customized products or services, making it difficult for another insurer to compete.
- The ability to access distribution channels that a new entrant cannot access.
- The human and financial capital to start an insurer
- Regulatory requirements regarding rates
- The presence of switching costs between insurers
- Cost disadvantages independent of scale
- The need to invest large amounts of capital for production facilities

Front 309

What are two disadvantages of admitted insurance for multinational loss exposures?

Back 309

- Higher premiums required
- Policies might be written in a foreign language
- Risk management philosophy may be difficult to establish
- Solvency of locally admitted insurer might be difficult to determine

Front 310

What is the role of functional-level strategies for an insurer?

Back 310

- To specify how the underwriting, claim, actuarial, and other departments will advance business-level strategies
- To establish how functional departments support the organization's business- and corporate-level strategies

Front 311

Why are regulatory requirements of concern when analyzing the global insurance environment?

Back 311

- The degree of regulation varies.
- Specific requirements vary by jurisdiction.
- Each country in the European Union has its own set of insurance regulatory requirements.
- Asia has a wide range of markets and regulatory approaches.
- The IAIS sets international standards supervising insurance regulation, not the NAIC.

Front 312

Describe two forms of organizational structure and give an example of an appropriate use for each.

Back 312

- Functional structures define departments by the operation they perform. A single-business company might use this structure.
- Multidivisional structures segregate each division into separate profit centers. A diversified company might use this structure.
- Another structure organizes company operations by region or type of product or customer. This approach supports a differentiation strategy.
- A flat organization has few levels from the top of the organization to the bottom. This supports a cost leadership strategy.

Front 313

What is one way in which culture can affect laws in the global environment?

Back 313

- Differing concepts of legal responsibility
- Different legal process
- Different legal structure
- Differing support of risk transfer

Front 314

Identify two characteristics of the insurance industry that can be expected in industries having a high level of competition.

Back 314

- Many companies
- Little product differentiation
- High exit costs

Front 315

What are (a) two advantages and (b) two disadvantages of using nonadmited insurer for multinational loss exposures?

Back 315

a) - Currency and language problems minimized
- Risk management policy can be implemented
- Economies of multiple insurance uniformity
- solvency problems minimized by centralized control
- No overrides to obtain local insurance
- Element of confidentiality
b) - Insurer and insured subject to fines for noncompliance to local rules and laws
- Premiums might not be tax-deductible
- Premiums and losses are difficult to allocate
- Loss payments might be subject to local recapitalization taxes

Front 316

Describe three generic corporate-level strategies available for companies in a growth mode.

Back 316

Single business - Confine efforts to a single industry or market
Vertical integration - Either produce its own inputs or dispose of its own outputs
Related Diversification - Expand business operations in areas similar to a company's existing operations
Unrelated Diversification - Acquire companies that have no relationship to the existing business operations

Front 317

What are two incidental international loss exposures for which a domestic insurer might provide coverage for their domestic insureds?

Back 317

- Overseas travel by company representatives
- Sales made in foreign countries
- Participation in foreign trade shows or exhibits
- Small, pilot sales offices
- Imports from foreign countries

Front 318

What are two advantages of admitted insurance for multinational loss exposures?

Back 318

- Favorable local tax laws
- Premiums and losses pad in the local currency
- Easier compliance with government laws and regulations
- Insurance costs reflected according to exposure

Front 319

a) What are two reasons an insurer might choose as a corporate-level strategy vertical integration?
b) What is one disadvantage of vertical integration?

Back 319

a) - To raise market-entry barriers
- To control the quality of goods
- To use capital more efficiently
b) - Increased costs
- Lack of management expertise related to moving backward or forward through different stages of the production process

Front 320

Contrast corporate-level strategies and business-level strategies in terms of who forms the strategies.

Back 320

- Corporate-level strategies are formed by the CEO and the executive team.
- Business-level strategies are formed by managers who are responsible for supporting the stated corporate-level strategy.

Front 321

Describe

a) Operational or process controls
b) Human or behavior controls

Back 321

a) Used to monitor work flow, production processes, and customer service.
b) - Include rules, policies, and procedures that provide operating guidelines for employees
- Can be used to measure individual performance

Front 322

Describe two forms of foreign direct investment.

Back 322

- In a strategic alliance, two organizations work together to achieve a common goal. The participants retain ownership of their individual companies.
- A joint venture is a specific type of strategic alliance that involves shared ownership, shared responsibilities, and often joint management of the foreign venture.
- In a wholly owned subsidiary, the domestic company owns and controls assets in a foreign country.

Front 323

Describe the two aspects of strategy implementation.

Back 323

- Designing an effective organizational structure to support the strategy
- Implementing organizational strategic controls

Front 324

If English is spoken in many countries, why is the native language still a consideration in the global environment?

Back 324

- Because the native language is used in contracts, advertising, package information, and instructions for products sold in that country
- Because employees in those countries might not speak English

Front 325

Regarding political risks in the global environment,

a) What is one concern to reducing political risk?
b) What is one way to reduce political risk?

Back 325

a) - Potential for confiscation of business assets
- Interference with the rights of ownership of corporate assets
- Local businesses treated more favorably regarding taxes, government contracts, or access to financing
b) - Political risk insurance
- Use of consultants to report or score what risks are present and how dangerous those risks are

Front 326

What risks are associated with international licensing as a method of expanding global operations?

Back 326

- Potential for loss of control over the product or service
- Illegal use of the trademark
- Possible conflicts with licensees

Front 327

Blue Insurance Company (BIC) is recognized in the insurance industry as an excellent training company because of its "New Hire Induction" classes. However, employee turnover is unusually high. In spite of the instability of its labor force, BIC is analyzing the purchase of a small insurance company that offers products that would complement BIC's current offerings. One reason for considering this purchase is that a rumor is circulating that a large insurer is about to enter BIC's geographic territory.

Conduct a SWOT analysis for BIC.

Back 327

Strength - excellent and recognized training program
Weakness - high employee turnover
Opportunity - purchase of another insurer
Threat - New competitor (increased competition)