Mccloskey(3501) topic 1

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  1. What is the most common type of insurance company in the US?
    Stock Insurance company
  2. What are some examples stock insurance companies?
    Cigna, AIG,Travelers
  3. What is a proprietary insurer?
    An insurer that's goal is to earn a profit. (designed to make money)
  4. Who owns stock insurance companies?
    The stockholders
  5. What are the two ways a stock insurer can raise capital?
    • Selling stock
    • Issuing debt(not as common)
  6. Is it common for a stock insurance company to issue debt?
  7. What is LLoyds of London?
    • A proprietary insurer
    • It is a marketplace like a stock exchange
  8. Is LLOYDS of London an insurance company?
    NO. They are an exchange
  9. What is the term used for an owner of Lloyds of london
    A name (or underwriter)
  10. What is LLoyds backed by?
    The individual members' fortunes
  11. Each member of Lloyds of London belongs to a____________ that has its own manager/underwriter.
  12. syndicate
    A collection of "Names" that delegate authority to a manager
  13. 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
  14. Is Lloyds of London financially sound?
    Yes, they have a strong record of not defaulting (300 plus years)
  15. What caused LLoyds' financial crisis in the 1980's?
    Asbestos related claims.
  16. After the asbestos claims, what did LLoyds do?
    They started recruiting more names to dilute the amount of money lost(aka recruit to dilute)
  17. Who bought equitas?
    warren buffet
  18. What is equitas?
    The holding company Lloyds comprised of all of their bad risks
  19. after recruit to dilute what rules did Lloyds begin to impose.
    new liability rules
  20. mutual insurer
    A cooperative insurer that is owned by policyholders and formed to provide low cost policies to policyholders
  21. Under a mutual insurer where does excess profit after claims and reserves go?
    it is returned to members of the mutual as dividends.
  22. What limits dividends that mutual insurers issue?
    Inability to issue stock limits the dividends
  23. IN a mutual ownership interest is_______
    not accumulated
  24. Are mutual dividends taxed?
    no, they are viewed as refunds by the irs.
  25. In a mutual, who often controls the future of employment?
    the manager
  26. True/false many mutuals have a difficulty issuing debt?
  27. 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
  28. What does compensating managers in stock give them incentive to do?
    keep the stock price high
  29. what are many mutual companies trending towards?
  30. how are mutual insurance companies managed?
    the manager of the mutual has all of the control
  31. What is demutualization?
    it is the conversion of a mutual insurer to a stock company
  32. When a mutual demutualizes what happens to policyholders?
    they still keep their policies, but they are given stock or opportunities to buy stock.
  33. What are some examples of large companies that demutualized?
    prudential, met life, john hancock, etc.
  34. what is a reciprocal exchange?
  35. what is another name for a cooperative insurer?
    unincorporated mutuals
  36. How are cooperative insurers and mutuals similar?
    they both have the goal of being low cost to the policyholder.
  37. 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.
  38. Who carries the burden of risk in a cooperative insurer?
    the members of the exchange
  39. true/ false. Cooperative insurers are not an example of a reciprocal exchange?
  40. An example of a reciprocal exchange is a ________ insurer.
  41. Who manages cooperative insurers?
    an "attorney in fact"
  42. How is an "attorney in fact" paid?
    thy are paid a fee by the cooperative insurer
  43. What is an, "Attorney in fact"
    they are essentially a ceo, but in more of a referee type capacity.
  44. true/false surplus requirements for a reciprocal exchange are lower than that of other insurers?
  45. Surplus requirements for _________ are lower than that of other insurers.
    reciprocal exchanges(aka cooperative insurers)
  46. Which type of insurer has higher than average default rates?
    cooperative insurers(reciprocal exchange)
  47. what markets do reciprocal insurers grow fast in?
    hard markets
  48. True/false reciprocal exchanges grow slowly in hard markets.
    false. reciprocal exchanges grow fast in hard markets
  49. What is a pool?
    It is where insurers that are grouped together share risk that no individual insurer wants to bear.
  50. Many pools are _______markets/________.
    residual markets/statutory
  51. What type of risks are typically pooled by insurers?
    select large risks(nuclear power plants, airline crashes, etc.)
  52. What are some examples of things insurers are forced to pool by law.
    • auto assigned risk pool
    • workers compensation
  53. what statute requires insurers to pool certain (bad) risks.
    Fair Access to Insurance Requirement (FAIR)
  54. What is FAIR?
    a statute that requires insurers to take on certain risks even if they are bad.
  55. What are the four major goals of insurers?
    • Earn a profit
    • meet consumer needs
    • comply with legal requirements
    • diversify risk
  56. 1st major goal of insurers?
    earn a profit
  57. 2nd major goal of insurers?
    meet customer needs
  58. 3rd major goal of insurers?
    comply with legal requirements
  59. 4th major goal of insurers?
    diversify risk
  60. Profit is most commonly associated with______ insurers.
  61. why must insurers earn a profit?
    to provide a return on investment for stockholders
  62. 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
  63. true/false meeting with customer needs can conflict with the profit goal?
  64. meeting ____________ can conflict with the profit goal
    customer needs
  65. To meet customer needs an insurer must understand that customers are essentially purchasing a_____________.
    transfer mechanism
  66. ______ promotes good reputation and the ability to attract capital and customers.
    legal compliance
  67. What happens to an insurer if they do not comply with legal requirements?
    fines and penalties
  68. True/false. Insurers do not have to comply with state regulations.
    false. the expenses associated with compliance are substantial
  69. What is an emerging goal resulting from the increase in catastrophic losses over the past decade?
    the importance of diversifying risk
  70. the 2000's has been nicknamed_______ by the insurance industry.
    the decade of disaster
  71. 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
  72. What does diversification allow insurers to do?
    earn a profit and fulfill social responsibilities
  73. internal constraints an insurer may face include:(5)
    • efficiency
    • expertise
    • size
    • financial resources
    • other internal constraints
  74. 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
  75. to move into a niche market and insurer must have_____ in underwriting, pricing and claims settlement
  76. Moving into a niche or specialty market requires expertise in:(3)
    • Underwriting
    • pricing
    • claims settlement
  77. does the size of the insurer affect the type of business it does?
  78. ______insurers have the ability to do much more with the resources available to them than____ insurers.
  79. 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.
  80. _____ insurers can be more nimble, allowing it to respond to an emerging trend in a faster manner
  81. If______ are sparse, insurers can't carry out basic functions such as research new markets or adequately train its staff.
    financial resources
  82. what are some examples of other internal constraints an insurer may face?
    • lack of brand recognition
    • damaged reputation
    • morale issues etc.
  83. What internal constraint may hurt a newly established insurer?
  84. A lack of name or brand recognition
  85. If________ has been tarnished, an insurer may need to develop a campaign to retain the confidence of its customers and the public.
    brand image
  86. damaged reputation is an example of an_______.
    internal constraint
  87. What did aig rebrand itself during its troubled times?
  88. True/false Aig rebranded itself during its troubled times.
    true. they rebranded as chartis
  89. External constraints an insurer may face include:(5)
    • regulation
    • rating agencies
    • public opinion
    • competition
    • economic conditions
  90. regulation varies by______ and is complex and extensive.
  91. insurance companies are regulated primarily by_____.
  92. What does insurance regulation help to do?
    • monitor an insurers solvency
    • extend rates and forms an insurer uses
  93. _______ rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
    rating agencies
  94. rating agencies
    rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
  95. criticisms in handling of hurricane claims or non affordable auto insurance in some states is an example of_____
    negative public opinion
  96. Insurance tends to go through_____ cycles and ____cycles.
    hard and soft
  97. _____are characterized by periods of decreased competition and rising rates
    hard cycles
  98. _______cycles lead to increased profitability and high rates f return
  99. ______ are characterized by moderate or declining prices and increases in competition.
    soft cycles
  100. ______ occur after hard cycles
    soft cycles
  101. _______cycles affect the cost of insurance losses through increased medical cost, consumption costs, and other loss related costs.
    inflationary cycles
  102. Inflationary cycles are an example of a change in______
    economic conditions
  103. True/false Investment operations can be affected severely by economic downturns
  104. What became more popular as more firms became more skilled at the art of pooling?
    alternative risk transfers
  105. In what year was legislation passed that allowed firms to combine and form an rrg?
  106. risk retention groups can insure liability risks of its respective firms except_______.
    workers compensation
  107. _________ are exempt form many state rules and regulations that make it difficult or impossible for a group type captive to exist.
  108. Why are rrgs cheaper than captives?
    they have less capital requirements and fewer premium taxes
  109. ______ were allowed by federal regulations because of the hard market that existed at the time.
  110. true/false. Most RRGs have sufficient non parent risk to make premium tax decuctible
  111. How are rrgs taxed?
    They have sufficient not parent risk to make them premium tax deductible
  112. What is the leading form of alternative risk transfer?
    Self insurance
  113. t/f Stop loss insurance is not a form of alternative risk transfer
  114. T/f In some states self insurance for workers comp and auto is regulated
  115. 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
  116. captive
    a wholly owned subsidiary of a parent corporation
  117. t/f The parent of a captive is usually an insurer?
  118. Where are captives usually domiciled
  119. What are some popular places to domicile captives?
    • the caymans
    • bermuda
    • ireland
  120. If not domiciled offshore, where are captives typically located
    in captive "friendly" states
  121. Examples of captive friendly states include
  122. Why are many captives located offshore?
    • Because there is less regulation than in the us
    • tax advantages
  123. t/f prior to the 1980's all premium paid to captives was tax deductible
  124. regarding captives, prior to the 1980's:
    • all premiums paid to captives was tax deductible
    • also no income taxes on captive income
  125. 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
  126. what are the 2 types of captives
    • pure
    • group
  127. pure captive
    a captive that only deals with the risk of the parent company
  128. group captive
    a captive to insure the risk of several parents
  129. A type of captive that only insures parent risk
    pure captive
  130. a type of captive that insures risk of several parents
    group captive
  131. 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
  132. captives save money, especially during___________.
    hard markets
  133. the premium taxes captives save on are typically around__%
  134. 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
  135. What is usually the primary motivation to start a captive?
    obtaining the right coverage, and freedom
  136. when an organization uses an insurance carrier to "issue paper"
  137. When fronting, how much risk does the carrier bear?
  138. when fronting where is the risk transferred?
    back to the captive of the insured via an indemnity or reinsurance agreement
  139. 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
  140. In fronting; the _____ has a tax advantage(which minimizes the impact of self funding)
  141. When fronting, captives that reinsure can save_____% on excise taxes
  142. True/false when forming a captive there is a lower tax rate to encourage reinsuring?
  143. There is a____% excise tax for premium to an non us insurer vs a____% tax on non us reinsurance carrier
    4, vs 1
  144. Why is it encouraged for captives to use reinsurance?
  145. 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)
  146. What is the main risk of organization/insured that is fronting?
    The fronting insurer losing it's a rating
  147. What is the main risk of fronting for the carrier?
    The captive defaulting or going insolvent.
  148. What is the formula for measuring insurance company net worth?
    a-l=oe or net worth
  149. what is "a-l=oe or net worth" of a company often referred to as?
    policyholder surplus
  150. loss reserves
    estimate of future claims
  151. What are the two major liabilities of insurance company financial performance?
    • loss reserves
    • unearned premium
  152. unearned premium is listed as a ____ on the income statement.
  153. what are three rating agencies
    • AM best
    • moodys
    • S&p
  154. what do insurer ratings depend on?
    They greatly depend on insurer surplus
  155. why do brokers prefer to place business with "A" rater insurers?
    they are less likely to become insolvent
  156. What is the goal of the broker?
    to protect the policyholder from going insolvent
  157. Who oversees insolvency proceedings?
    state insurance commissioners.
  158. Who are new insurers licensed by?
    a state commission
  159. when opening a new insurer what does the state commission evaluate?
    business plan, proposed policies and forms, and the profile of key officers.
  160. capital requirement is essentially
    A deposit to assure future claims payment
  161. what does the loss ratio measure
    • it evaluates underwriting performance of the insurer
    • and measures how well a company controls insured losses
  162. _______ measures how well a company controls insured losses.
    loss ratio
  163. loss ratio formula
    • Incurred losses
    • earned premiums
  164. Incurred losses encompass(3)
    • paid losses
    • changes in loss reserves
    • LAE. aka loss adjustment expense
  165. what does lae stand for
    Loss adjustment expense
  166. Expense ratio(formula)
    • underwriting and admin expense
    • written premiums
  167. expenses that are calculated in the expense ratio include:
    • administration expenses
    • operating expenses
    • marketing
    • commission
  168. Under statutory accounting, how is unearned premium recorded?
    listed as a liability
  169. 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
  170. the sum of the loss ratio and the expense ratio
    combined ratio
  171. What combined ratio indicated profit on an insurance operation?
    less than 100%
  172. What can the combined ratio evaluate?
    underwriter, agents/brokers, product lines or even a geographic area
  173. _____ can be the basis for contingent commission/profit sharing.
    the combined ratio
  174. What does INBR stand for?
    The introduction of art into finances
  175. what are some limitations of the combined ratio?
    • calculations of inbr
    • and investment income is not always considered
  176. _______ allows for companies to write products without underwriting profit.(also keeps premium down.)
    investment income
  177. T/F. investment income is crucial to the insurance industry
  178. T/f investment income of an insurer raises premiums.
    false, investment income keeps premium down
  179. why are insurance rates regulated?
    regulators want insurance to be affordable and adequate
  180. what does  "affordable and adequate" insurance do?
    it cover insured losses and admin expenses while being affordable to consumers
  181. Affordability to customer is especially important with_________________.
    compulsory insurance
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Mccloskey(3501) topic 1
Mccloskey exam #1
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