Mccloskey(3501) topic 1
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Mccloskey(3501) topic 1
RMI 3501 Exam
Mccloskey exam #1
What is the most common type of insurance company in the US?
Stock Insurance company
What are some examples stock insurance companies?
What is a proprietary insurer?
An insurer that's goal is to earn a profit. (designed to make money)
Who owns stock insurance companies?
What are the two ways a stock insurer can raise capital?
Issuing debt(not as common)
Is it common for a stock insurance company to issue debt?
What is LLoyds of London?
A proprietary insurer
It is a marketplace like a stock exchange
Is LLOYDS of London an insurance company?
NO. They are an exchange
What is the term used for an owner of Lloyds of london
A name (or underwriter)
What is LLoyds backed by?
The individual members' fortunes
Each member of Lloyds of London belongs to a____________ that has its own manager/underwriter.
A collection of "Names" that delegate authority to a manager
What types of risks does Lloyds usually take on?
risks with very little pricing data
usually very large
Is Lloyds of London financially sound?
Yes, they have a strong record of not defaulting (300 plus years)
What caused LLoyds' financial crisis in the 1980's?
Asbestos related claims.
After the asbestos claims, what did LLoyds do?
They started recruiting more names to dilute the amount of money lost(aka recruit to dilute)
Who bought equitas?
What is equitas?
The holding company Lloyds comprised of all of their bad risks
after recruit to dilute what rules did Lloyds begin to impose.
new liability rules
A cooperative insurer that is owned by policyholders and formed to provide low cost policies to policyholders
Under a mutual insurer where does excess profit after claims and reserves go?
it is returned to members of the mutual as dividends.
What limits dividends that mutual insurers issue?
Inability to issue stock limits the dividends
IN a mutual ownership interest is_______
Are mutual dividends taxed?
no, they are viewed as refunds by the irs.
In a mutual, who often controls the future of employment?
True/false many mutuals have a difficulty issuing debt?
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
What does compensating managers in stock give them incentive to do?
keep the stock price high
what are many mutual companies trending towards?
how are mutual insurance companies managed?
the manager of the mutual has all of the control
What is demutualization?
it is the conversion of a mutual insurer to a stock company
When a mutual demutualizes what happens to policyholders?
they still keep their policies, but they are given stock or opportunities to buy stock.
What are some examples of large companies that demutualized?
prudential, met life, john hancock, etc.
what is a reciprocal exchange?
what is another name for a cooperative insurer?
How are cooperative insurers and mutuals similar?
they both have the goal of being low cost to the policyholder.
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.
Who carries the burden of risk in a cooperative insurer?
the members of the exchange
true/ false. Cooperative insurers are not an example of a reciprocal exchange?
An example of a reciprocal exchange is a ________ insurer.
Who manages cooperative insurers?
an "attorney in fact"
How is an "attorney in fact" paid?
thy are paid a fee by the cooperative insurer
What is an, "Attorney in fact"
they are essentially a ceo, but in more of a referee type capacity.
true/false surplus requirements for a reciprocal exchange are lower than that of other insurers?
Surplus requirements for _________ are lower than that of other insurers.
reciprocal exchanges(aka cooperative insurers)
Which type of insurer has higher than average default rates?
cooperative insurers(reciprocal exchange)
what markets do reciprocal insurers grow fast in?
True/false reciprocal exchanges grow slowly in hard markets.
false. reciprocal exchanges grow fast in hard markets
What is a pool?
It is where insurers that are grouped together share risk that no individual insurer wants to bear.
Many pools are _______markets/________.
What type of risks are typically pooled by insurers?
select large risks(nuclear power plants, airline crashes, etc.)
What are some examples of things insurers are forced to pool by law.
auto assigned risk pool
what statute requires insurers to pool certain (bad) risks.
Fair Access to Insurance Requirement (FAIR)
What is FAIR?
a statute that requires insurers to take on certain risks even if they are bad.
What are the four major goals of insurers?
Earn a profit
meet consumer needs
comply with legal requirements
1st major goal of insurers?
earn a profit
2nd major goal of insurers?
meet customer needs
3rd major goal of insurers?
comply with legal requirements
4th major goal of insurers?
Profit is most commonly associated with______ insurers.
why must insurers earn a profit?
to provide a return on investment for stockholders
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
true/false meeting with customer needs can conflict with the profit goal?
meeting ____________ can conflict with the profit goal
To meet customer needs an insurer must understand that customers are essentially purchasing a_____________.
______ promotes good reputation and the ability to attract capital and customers.
What happens to an insurer if they do not comply with legal requirements?
fines and penalties
True/false. Insurers do not have to comply with state regulations.
false. the expenses associated with compliance are substantial
What is an emerging goal resulting from the increase in catastrophic losses over the past decade?
the importance of diversifying risk
the 2000's has been nicknamed_______ by the insurance industry.
the decade of disaster
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
What does diversification allow insurers to do?
earn a profit and fulfill social responsibilities
internal constraints an insurer may face include:(5)
other internal constraints
What are some things that can explain a lack of efficiency?(4)
lack of information technology
inability to adapt to change
to move into a niche market and insurer must have_____ in underwriting, pricing and claims settlement
Moving into a niche or specialty market requires expertise in:(3)
does the size of the insurer affect the type of business it does?
______insurers have the ability to do much more with the resources available to them than____ insurers.
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.
_____ insurers can be more nimble, allowing it to respond to an emerging trend in a faster manner
If______ are sparse, insurers can't carry out basic functions such as research new markets or adequately train its staff.
what are some examples of other internal constraints an insurer may face?
lack of brand recognition
morale issues etc.
What internal constraint may hurt a newly established insurer?
A lack of name or brand recognition
If________ has been tarnished, an insurer may need to develop a campaign to retain the confidence of its customers and the public.
damaged reputation is an example of an_______.
What did aig rebrand itself during its troubled times?
True/false Aig rebranded itself during its troubled times.
true. they rebranded as chartis
External constraints an insurer may face include:(5)
regulation varies by______ and is complex and extensive.
insurance companies are regulated primarily by_____.
What does insurance regulation help to do?
monitor an insurers solvency
extend rates and forms an insurer uses
_______ rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
rate insurers based on financial strength as an indication of an insurers ability to meet its policyholders obligations.
criticisms in handling of hurricane claims or non affordable auto insurance in some states is an example of_____
negative public opinion
Insurance tends to go through_____ cycles and ____cycles.
hard and soft
_____are characterized by periods of decreased competition and rising rates
_______cycles lead to increased profitability and high rates f return
______ are characterized by moderate or declining prices and increases in competition.
______ occur after hard cycles
_______cycles affect the cost of insurance losses through increased medical cost, consumption costs, and other loss related costs.
Inflationary cycles are an example of a change in______
True/false Investment operations can be affected severely by economic downturns
What became more popular as more firms became more skilled at the art of pooling?
alternative risk transfers
In what year was legislation passed that allowed firms to combine and form an rrg?
risk retention groups can insure liability risks of its respective firms except_______.
_________ are exempt form many state rules and regulations that make it difficult or impossible for a group type captive to exist.
Why are rrgs cheaper than captives?
they have less capital requirements and fewer premium taxes
______ were allowed by federal regulations because of the hard market that existed at the time.
true/false. Most RRGs have sufficient non parent risk to make premium tax decuctible
How are rrgs taxed?
They have sufficient not parent risk to make them premium tax deductible
What is the leading form of alternative risk transfer?
t/f Stop loss insurance is not a form of alternative risk transfer
T/f In some states self insurance for workers comp and auto is regulated
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
a wholly owned subsidiary of a parent corporation
t/f The parent of a captive is usually an insurer?
Where are captives usually domiciled
What are some popular places to domicile captives?
If not domiciled offshore, where are captives typically located
in captive "friendly" states
Examples of captive friendly states include
Why are many captives located offshore?
Because there is less regulation than in the us
t/f prior to the 1980's all premium paid to captives was tax deductible
regarding captives, prior to the 1980's:
all premiums paid to captives was tax deductible
also no income taxes on captive income
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
what are the 2 types of captives
a captive that only deals with the risk of the parent company
a captive to insure the risk of several parents
A type of captive that only insures parent risk
a type of captive that insures risk of several parents
advantages of captives
they save money(especially in hard mkts)
save premium taxes
save on loading costs
often only option to handle risk appropriately
captives save money, especially during___________.
the premium taxes captives save on are typically around__%
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
What is usually the primary motivation to start a captive?
obtaining the right coverage, and freedom
when an organization uses an insurance carrier to "issue paper"
When fronting, how much risk does the carrier bear?
when fronting where is the risk transferred?
back to the captive of the insured via an indemnity or reinsurance agreement
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
In fronting; the _____ has a tax advantage(which minimizes the impact of self funding)
When fronting, captives that reinsure can save_____% on excise taxes
True/false when forming a captive there is a lower tax rate to encourage reinsuring?
There is a____% excise tax for premium to an non us insurer vs a____% tax on non us reinsurance carrier
4, vs 1
Why is it encouraged for captives to use reinsurance?
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)
What is the main risk of organization/insured that is fronting?
The fronting insurer losing it's a rating
What is the main risk of fronting for the carrier?
The captive defaulting or going insolvent.
What is the formula for measuring insurance company net worth?
a-l=oe or net worth
what is "a-l=oe or net worth" of a company often referred to as?
estimate of future claims
What are the two major liabilities of insurance company financial performance?
unearned premium is listed as a ____ on the income statement.
what are three rating agencies
what do insurer ratings depend on?
They greatly depend on insurer surplus
why do brokers prefer to place business with "A" rater insurers?
they are less likely to become insolvent
What is the goal of the broker?
to protect the policyholder from going insolvent
Who oversees insolvency proceedings?
state insurance commissioners.
Who are new insurers licensed by?
a state commission
when opening a new insurer what does the state commission evaluate?
business plan, proposed policies and forms, and the profile of key officers.
capital requirement is essentially
A deposit to assure future claims payment
what does the loss ratio measure
it evaluates underwriting performance of the insurer
and measures how well a company controls insured losses
_______ measures how well a company controls insured losses.
loss ratio formula
Incurred losses encompass(3)
changes in loss reserves
LAE. aka loss adjustment expense
what does lae stand for
Loss adjustment expense
underwriting and admin expense
expenses that are calculated in the expense ratio include:
Under statutory accounting, how is unearned premium recorded?
listed as a liability
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
the sum of the loss ratio and the expense ratio
What combined ratio indicated profit on an insurance operation?
less than 100%
What can the combined ratio evaluate?
underwriter, agents/brokers, product lines or even a geographic area
_____ can be the basis for contingent commission/profit sharing.
the combined ratio
What does INBR stand for?
The introduction of art into finances
what are some limitations of the combined ratio?
calculations of inbr
and investment income is not always considered
_______ allows for companies to write products without underwriting profit.(also keeps premium down.)
T/F. investment income is crucial to the insurance industry
T/f investment income of an insurer raises premiums.
false, investment income keeps premium down
why are insurance rates regulated?
regulators want insurance to be affordable and adequate
what does "affordable and adequate" insurance do?
it cover insured losses and admin expenses while being affordable to consumers
Affordability to customer is especially important with_________________.