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C16 Business of Insurance Exam/185 Questions and Answers
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C16 Business of Insurance Exam/185Questions and Answers
5 Ways Insurance companies spread risk - --Share risk with other insurance
companies (for very large risk, several insurers subscribe to percentage of
risk)
-Reinsure the risk
-deductible
-spread risk over diverse geographical region (soften risk of localized
disasters)
-form risk pools (syndicates of insurance and reinsurance companies,
organized to underwrite particular risk)
-Two principles of insurance - -1. Premiums of the many are used to pay the
losses of the few
(risk transferred to insurer, deductible, company shares and spreads risk,
geographic spread of risk, forming risk pools)
Premium shall be commensurate with the risk
(Capital meets probabilities of loss, premiums must be adequate to pay
future claims, fierce competition, adverse selection, long and short tail lines,
time gaps in pricing)
-Short tail and Long tail compared - -Tail refers to the amount of time
between the incident and the determination of claim
-Short tail-lines are those where the injury or other harm becomes known
quickly (relatively short period of time between event and resolution)
-Long tail-lines feature claims separated from the circumstances that caused
it by 10, 15, 20 yrs or more
-to price risks time gaps must be considered for long-tail lines
-to pay claims from many years ago
-to pay for claims in the future with today's premium
-Negative consumer perceptions of industry and how to improve - --prices
go up/down as capacity tightening
-left customers with poor opinion
-media portrays negative image (politicatians promise to do something about
rates)
-insurers want to educate insurance people about how insurance industry
works
-can provide more information on questions like (good risk vs bad, how is a
risk priced, why rates go up, why a profitable industry benefits everyone0
-feel if a claim not made, premium should be returned/reduced
-present services in postitive light
-insurance protection intangible
,-
-10 ways insurance affects society and economy - --banks willing to issue
mortgages on buildings that are insured
-developers willing to advance funds to building contractors on projects
guaranteed by surety bonds
-retailers more willing to accept commercial risks with liability insurance
-professionals more willing to provide services when insured against risk of
malpractice
-manufacturers more willing to accept risks associated with shipping goods
(when insured)
-members of society more willing to use automobiles
-peace of mind
-provides employment
-contributes to economy
-investments help finance governments
-claim payments boost local economies and create jobs
-Goal of reinsurance - --gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned
event were to occur
-Four basic functions of Insurance - -Financing - offers a unique method of
financing to insurance companies, frees up capital that would be otherwise
tied up, meet solvency regulations, expansion of operations
Stabilization - keep insurer's growth and development, used to keep
operational results reasonable without fluctuations, can help maintain
confidence from stakeholders, attract new capital
Capacity - require ability to insure businesses beyond their resources, take
on risks higher than they would normally write, may not want to be limited to
small lines, cater to needs of big producers
Reinsurance used to protect against catastrophic loss - look to protect
resources such as their capital and surplus,their loss ratio and their
investment position
-Five areas of challenge facing insurance industry - -Globalization
Rapid advances in technology
Public image issues
Volatile investment markets
Increasingly severe weather
growing competition
mounting shareholder and regulatory scrutiny
downloading and offloading by government
, -Long-tail catastrophic auto injury exposures affect reinsurers and insurers -
-- severe injuries
-long-tail trends for prior accident years
-inadequate reserving
-
-Law of Large numbers: - -mathematical premise which states that the
degree of certainty in probabilities increases as the number of events
increases - insurance companies rely on loss forecasts built on using data
from large groups of similar risks
-5. Adverse Selection - -Process by which potential policyholders use private
knowledge of their own high level of risk when deciding whether or not to
buy insurance (high risk individuals will buy lots of insurance and pay high
rates where low risk clients might not buy any insurance because the price is
too high)
(Also occurs when a broker places its poorer risks with one insurer and its
better risks with another - low risk client will seek best rates where poorer
risk will stay with existing company because they won't be able to find rates
elsewhere)
-7. Two concerns of Ontario Auto excess reinsurers that relate to long-tail
liabilities: - --Increasingly larger claims (increase in number of claims
exceeding thresholders)
-Inherent challenges in long-tail pricing because it's difficult to accurately
predict the outcome of claims that have not yet occurred and will remain
open for years
-Late reporting to insurers
-Caps on soft tissue injury but not on catastrophic injures
-Adequate claims reserving at the primary company level
-re-pricing in certain excess layers
-impact of medical and health care inflation on claims
-9. Residual market - -mechanisms have been established by automobile
insurance industry to provide a last resort insurance facility for consumers.
This ensures that insurance coverage is available even to those who are
considered a high risk. Facility Association.
-Advantages attributed to the direct response method: - -• Professional
advice with no commission costs or fees paid to independent brokers
• Technology-enables sales and services (1-800 telephone services, Internet)
• Extended hours of access for consumers
-Seven potential effects of foreign ownership: - -1. Deployed capital: Many
more choices for placement of capital when international
, 2. Divesting certain lines
3. Cost of retrocession covers and reinsurance
4. Emerging risks
5. Setting underwriting philosophies and procedures
6. Technology
7. Investment markets
-Three effects of Mergers - -• Reduce capacity from what is currently an
already tight market
• Give Insurance companies a slight smaller reinsurance universe from which
to glean capacity
• Give other insurers the opportunity to grow-albeit to a fairly small degree
-17. Three risks that insurers will face in mature or merging market: - -•
Exposures to asbestos
• Large natural catastrophes
• Products liability
• Political risk
• Corporate scandales
• Environmental liability
• Terrorism
• Litigiousness
-Stock Companies - --either privately held or publicly traded
-same capital structure as any other capital enterprise
-shareholders invest in corporations
-stocks sold to shareholders who hope for reasonable profit on investments
-security to policyholders for assumed liabilities is represented by subscribed
or paid up capital and any surplus
-premiums fund liabilities
-policyholders contribute premiums to pay for claims
-if premiums do not cover liabilities, capitol of investors funds shortfall
-insurers income will pay expenses
-Mutual companies - --operate for mutual benefit of their members
-purpose is to insure one another against the possibility of certain types of
losses
-premium assessment plan or premium note plan
-levies limited under plan
-signs premium note identifying the limit he/she is willing to pay is company
suffers set back
-full premium calculated once operated experience factored in
-policyholders also share profits amoungst themselves (usually in form on
premium)
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