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What is the most common type of insurance company in the US?
Stock Insurance company
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What are some examples stock insurance companies?
Cigna, AIG,Travelers
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What is a proprietary insurer?
An insurer that's goal is to earn a profit. (designed to make money)
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Who owns stock insurance companies?
The stockholders
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What are the two ways a stock insurer can raise capital?
- Selling stock
- Issuing debt(not as common)
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Is it common for a stock insurance company to issue debt?
no.
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What is LLoyds of London?
- A proprietary insurer
- It is a marketplace like a stock exchange
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Is LLOYDS of London an insurance company?
NO. They are an exchange
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What is the term used for an owner of Lloyds of london
A name (or underwriter)
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What is LLoyds backed by?
The individual members' fortunes
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Each member of Lloyds of London belongs to a____________ that has its own manager/underwriter.
syndicate
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syndicate
A collection of "Names" that delegate authority to a manager
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What types of risks does Lloyds usually take on?
- unique risks
- risks with very little pricing data
- reinsurance
- usually very large
- sometimes pr
- patent infringement
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Is Lloyds of London financially sound?
Yes, they have a strong record of not defaulting (300 plus years)
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What caused LLoyds' financial crisis in the 1980's?
Asbestos related claims.
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After the asbestos claims, what did LLoyds do?
They started recruiting more names to dilute the amount of money lost(aka recruit to dilute)
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Who bought equitas?
warren buffet
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What is equitas?
The holding company Lloyds comprised of all of their bad risks
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after recruit to dilute what rules did Lloyds begin to impose.
new liability rules
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mutual insurer
A cooperative insurer that is owned by policyholders and formed to provide low cost policies to policyholders
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Under a mutual insurer where does excess profit after claims and reserves go?
it is returned to members of the mutual as dividends.
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What limits dividends that mutual insurers issue?
Inability to issue stock limits the dividends
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IN a mutual ownership interest is_______
not accumulated
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Are mutual dividends taxed?
no, they are viewed as refunds by the irs.
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In a mutual, who often controls the future of employment?
the manager
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True/false many mutuals have a difficulty issuing debt?
true
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what keeps a stock insurance managers in check(as compared to a manager at a mutual)?(3)
- fear of takeover keeps the stock manager in check
- managers get compensated in stock
- publicly traded companies are monitored more closely
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What does compensating managers in stock give them incentive to do?
keep the stock price high
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what are many mutual companies trending towards?
demutualization
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how are mutual insurance companies managed?
the manager of the mutual has all of the control
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What is demutualization?
it is the conversion of a mutual insurer to a stock company
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When a mutual demutualizes what happens to policyholders?
they still keep their policies, but they are given stock or opportunities to buy stock.
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What are some examples of large companies that demutualized?
prudential, met life, john hancock, etc.
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what is a reciprocal exchange?
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what is another name for a cooperative insurer?
unincorporated mutuals
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How are cooperative insurers and mutuals similar?
they both have the goal of being low cost to the policyholder.
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What is the difference between a cooperative insurer and a mutual?
In a cooperative insurer the risk is burdened by other members in the exchange.
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Who carries the burden of risk in a cooperative insurer?
the members of the exchange
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true/ false. Cooperative insurers are not an example of a reciprocal exchange?
false
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An example of a reciprocal exchange is a ________ insurer.
cooperative
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Who manages cooperative insurers?
an "attorney in fact"
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How is an "attorney in fact" paid?
thy are paid a fee by the cooperative insurer
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What is an, "Attorney in fact"
they are essentially a ceo, but in more of a referee type capacity.
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true/false surplus requirements for a reciprocal exchange are lower than that of other insurers?
true
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Surplus requirements for _________ are lower than that of other insurers.
reciprocal exchanges(aka cooperative insurers)
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Which type of insurer has higher than average default rates?
cooperative insurers(reciprocal exchange)
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what markets do reciprocal insurers grow fast in?
hard markets
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True/false reciprocal exchanges grow slowly in hard markets.
false. reciprocal exchanges grow fast in hard markets
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What is a pool?
It is where insurers that are grouped together share risk that no individual insurer wants to bear.
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Many pools are _______markets/________.
residual markets/statutory
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What type of risks are typically pooled by insurers?
select large risks(nuclear power plants, airline crashes, etc.)
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What are some examples of things insurers are forced to pool by law.
- auto assigned risk pool
- workers compensation
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what statute requires insurers to pool certain (bad) risks.
Fair Access to Insurance Requirement (FAIR)
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What is FAIR?
a statute that requires insurers to take on certain risks even if they are bad.
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What are the four major goals of insurers?
- Earn a profit
- meet consumer needs
- comply with legal requirements
- diversify risk
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1st major goal of insurers?
earn a profit
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2nd major goal of insurers?
meet customer needs
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3rd major goal of insurers?
comply with legal requirements
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4th major goal of insurers?
diversify risk
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Profit is most commonly associated with______ insurers.
proprietary
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why must insurers earn a profit?
to provide a return on investment for stockholders
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How does an insurer meet customer needs?
- by providing products and services at competitive prices
- understand customers are purchasing a transfer mechanism
- customers expect prompt service and timely responsess
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true/false meeting with customer needs can conflict with the profit goal?
true
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meeting ____________ can conflict with the profit goal
customer needs
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To meet customer needs an insurer must understand that customers are essentially purchasing a_____________.
transfer mechanism
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______ promotes good reputation and the ability to attract capital and customers.
legal compliance
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What happens to an insurer if they do not comply with legal requirements?
fines and penalties
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True/false. Insurers do not have to comply with state regulations.
false. the expenses associated with compliance are substantial
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What is an emerging goal resulting from the increase in catastrophic losses over the past decade?
the importance of diversifying risk
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the 2000's has been nicknamed_______ by the insurance industry.
the decade of disaster
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A high concentration of losses in a geographic area highlights an insurers need to:(2)
- spread risk over a wider geographic area
- spread risk over multiple types of insurance business
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What does diversification allow insurers to do?
earn a profit and fulfill social responsibilities
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internal constraints an insurer may face include:(5)
- efficiency
- expertise
- size
- financial resources
- other internal constraints
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What are some things that can explain a lack of efficiency?(4)
- poor mgmt
- insufficient capital
- lack of information technology
- inability to adapt to change
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to move into a niche market and insurer must have_____ in underwriting, pricing and claims settlement
expertise
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Moving into a niche or specialty market requires expertise in:(3)
- Underwriting
- pricing
- claims settlement
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does the size of the insurer affect the type of business it does?
yes
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______insurers have the ability to do much more with the resources available to them than____ insurers.
larger,smaller
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What is an advantage that a smaller insurer has over a larger insurer?
Smaller insurers can be more nimble, allowing it to respond to an emerging trend in a faster manner.
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_____ insurers can be more nimble, allowing it to respond to an emerging trend in a faster manner
smaller
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If______ are sparse, insurers can't carry out basic functions such as research new markets or adequately train its staff.
financial resources
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what are some examples of other internal constraints an insurer may face?
- lack of brand recognition
- damaged reputation
- morale issues etc.
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What internal constraint may hurt a newly established insurer?
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A lack of name or brand recognition
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If________ has been tarnished, an insurer may need to develop a campaign to retain the confidence of its customers and the public.
brand image
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damaged reputation is an example of an_______.
internal constraint
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What did aig rebrand itself during its troubled times?
chartis
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True/false Aig rebranded itself during its troubled times.
true. they rebranded as chartis
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External constraints an insurer may face include:(5)
- regulation
- rating agencies
- public opinion
- competition
- economic conditions
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regulation varies by______ and is complex and extensive.
state
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insurance companies are regulated primarily by_____.
states
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What does insurance regulation help to do?
- monitor an insurers solvency
- extend rates and forms an insurer uses
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_______ rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
rating agencies
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rating agencies
rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
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criticisms in handling of hurricane claims or non affordable auto insurance in some states is an example of_____
negative public opinion
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Insurance tends to go through_____ cycles and ____cycles.
hard and soft
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_____are characterized by periods of decreased competition and rising rates
hard cycles
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_______cycles lead to increased profitability and high rates f return
hard
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______ are characterized by moderate or declining prices and increases in competition.
soft cycles
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______ occur after hard cycles
soft cycles
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_______cycles affect the cost of insurance losses through increased medical cost, consumption costs, and other loss related costs.
inflationary cycles
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Inflationary cycles are an example of a change in______
economic conditions
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True/false Investment operations can be affected severely by economic downturns
true
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What became more popular as more firms became more skilled at the art of pooling?
alternative risk transfers
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In what year was legislation passed that allowed firms to combine and form an rrg?
1986
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risk retention groups can insure liability risks of its respective firms except_______.
workers compensation
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_________ are exempt form many state rules and regulations that make it difficult or impossible for a group type captive to exist.
rrgs
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Why are rrgs cheaper than captives?
they have less capital requirements and fewer premium taxes
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______ were allowed by federal regulations because of the hard market that existed at the time.
rrgs
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true/false. Most RRGs have sufficient non parent risk to make premium tax decuctible
true
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How are rrgs taxed?
They have sufficient not parent risk to make them premium tax deductible
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What is the leading form of alternative risk transfer?
Self insurance
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t/f Stop loss insurance is not a form of alternative risk transfer
false.
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T/f In some states self insurance for workers comp and auto is regulated
true
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what things are required for self insure companies due to regulation(in soe states)?
- actuarially based loss forecasts
- contingent letter of credit
- internally held fund
- and a line of credit
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captive
a wholly owned subsidiary of a parent corporation
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t/f The parent of a captive is usually an insurer?
false
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Where are captives usually domiciled
offshore
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What are some popular places to domicile captives?
- the caymans
- bermuda
- ireland
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If not domiciled offshore, where are captives typically located
in captive "friendly" states
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Examples of captive friendly states include
Vermont,colorado,deleware
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Why are many captives located offshore?
- Because there is less regulation than in the us
- tax advantages
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t/f prior to the 1980's all premium paid to captives was tax deductible
true
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regarding captives, prior to the 1980's:
- all premiums paid to captives was tax deductible
- also no income taxes on captive income
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IRs addressed the issue with captive taxation by doing what?
now, the parent company only has a tax advantage if captive risk is at lease 2/3 from non-parent sources
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what are the 2 types of captives
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pure captive
a captive that only deals with the risk of the parent company
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group captive
a captive to insure the risk of several parents
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A type of captive that only insures parent risk
pure captive
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a type of captive that insures risk of several parents
group captive
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advantages of captives
- they save money(especially in hard mkts)
- save premium taxes
- save on loading costs
- often only option to handle risk appropriately
- freedom
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captives save money, especially during___________.
hard markets
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the premium taxes captives save on are typically around__%
4%
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t/f saving money is the primary motivation to start a captive
false, it is the pressure of obtaining the right coverage-and the freedom
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What is usually the primary motivation to start a captive?
obtaining the right coverage, and freedom
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when an organization uses an insurance carrier to "issue paper"
fronting
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When fronting, how much risk does the carrier bear?
none
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when fronting where is the risk transferred?
back to the captive of the insured via an indemnity or reinsurance agreement
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Who do companies front?(4)
- fronting company can earn fees
- allows captives to /self insure to comply with state laws
- or meet certain contractual arrangements that require insurance
- tax breaks
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In fronting; the _____ has a tax advantage(which minimizes the impact of self funding)
reinsurer
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When fronting, captives that reinsure can save_____% on excise taxes
2-4
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True/false when forming a captive there is a lower tax rate to encourage reinsuring?
true
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There is a____% excise tax for premium to an non us insurer vs a____% tax on non us reinsurance carrier
4, vs 1
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Why is it encouraged for captives to use reinsurance?
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based on tax rules what can a firm with a captive do?(2)
- Buy insurance from an A rated insurer
- arrange for reinsurance of primary insurer with non us-captive owned by a firm.(often bundled with an aso agreement)
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What is the main risk of organization/insured that is fronting?
The fronting insurer losing it's a rating
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What is the main risk of fronting for the carrier?
The captive defaulting or going insolvent.
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What is the formula for measuring insurance company net worth?
a-l=oe or net worth
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what is "a-l=oe or net worth" of a company often referred to as?
policyholder surplus
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loss reserves
estimate of future claims
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What are the two major liabilities of insurance company financial performance?
- loss reserves
- unearned premium
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unearned premium is listed as a ____ on the income statement.
liability
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what are three rating agencies
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what do insurer ratings depend on?
They greatly depend on insurer surplus
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why do brokers prefer to place business with "A" rater insurers?
they are less likely to become insolvent
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What is the goal of the broker?
to protect the policyholder from going insolvent
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Who oversees insolvency proceedings?
state insurance commissioners.
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Who are new insurers licensed by?
a state commission
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when opening a new insurer what does the state commission evaluate?
business plan, proposed policies and forms, and the profile of key officers.
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capital requirement is essentially
A deposit to assure future claims payment
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what does the loss ratio measure
- it evaluates underwriting performance of the insurer
- and measures how well a company controls insured losses
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_______ measures how well a company controls insured losses.
loss ratio
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loss ratio formula
- Incurred losses
- earned premiums
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Incurred losses encompass(3)
- paid losses
- changes in loss reserves
- LAE. aka loss adjustment expense
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what does lae stand for
Loss adjustment expense
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Expense ratio(formula)
- underwriting and admin expense
- written premiums
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expenses that are calculated in the expense ratio include:
- administration expenses
- operating expenses
- marketing
- commission
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Under statutory accounting, how is unearned premium recorded?
listed as a liability
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Why is written premium listed as a liability?
because if a policyholder cancels their policy, the insurer must return the unused portion of the premium to the policyholder
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the sum of the loss ratio and the expense ratio
combined ratio
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What combined ratio indicated profit on an insurance operation?
less than 100%
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What can the combined ratio evaluate?
underwriter, agents/brokers, product lines or even a geographic area
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_____ can be the basis for contingent commission/profit sharing.
the combined ratio
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What does INBR stand for?
The introduction of art into finances
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what are some limitations of the combined ratio?
- calculations of inbr
- and investment income is not always considered
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_______ allows for companies to write products without underwriting profit.(also keeps premium down.)
investment income
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T/F. investment income is crucial to the insurance industry
true
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T/f investment income of an insurer raises premiums.
false, investment income keeps premium down
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why are insurance rates regulated?
regulators want insurance to be affordable and adequate
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what does "affordable and adequate" insurance do?
it cover insured losses and admin expenses while being affordable to consumers
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Affordability to customer is especially important with_________________.
compulsory insurance
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