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Ch6 Insurance Company Operations (Underwriting (Sources of Underwriting…
Ch6
Insurance Company Operations
Rate Making
Definition
The pricing of insurance and the calculation of insurance premiums (pricing ≠ rating)
Premium Calculation
(The Number of Exposure Units)x(Rate)
A rate is the price per unit of insurance
An exposure unit is the unit of measurement used in insurance pricing, which varies by line of insurance(最大範圍的損失)
determined by...
Actuary (精算師)
Prodution
Definition
The sales and marketing activities of insurers
Producer
Agents who sell insurance
Agency Department
Professionalism in Selling
Underwriting
Definition
The process of selecting, classifying, and pricing applicants for insurance
Underwriter
The person who decides to accept or reject an application
Statement of Underwriting Policy
Underwriting Guide
Lines of Insurance
Territories to be developed
Forms and Rating Plans
Acceptable, Borderlines, and Prohibited Business
Amounts of Insurance
Business that requires approval by a senior underwriter
Other details
Basic Underwriting Principles
Attain Underwriting Profit
Select prospective(潛在的) insureds according to the company's underwriting standards (to reduce adverse selection)
Provide equity(公平) among the policyholders (實質的平等)
Steps in Underwriting
Agent as First Underwriter (Field Underwriting) (the agent is told what type of applicants are acceptable, borderline, or prohibited)
Sources of Underwriting Information
Application
The type of information required depends on the type of insurance requested
Agent's Report
Many insurers require the agent or broker to give an evaluation of the prospective insured
Inspection Report
The company may require an inspection report by some outside agency, especially if the underwriter suspects moral hazards
Physical Inspection (例如:在保員工保險之前，保險員要先確保被保方是否有提供員工相關安全措施或是安全規則)
Physical (身體上的)Examination
An attending physician's report may be required
Making an Underwriting Decision
Accept the Application
Accept to the Application Subject to(有,承受) certain restrictions or Modifications
Reject the Application
Other Underwriting Considerations
Rate Adequacy and Underwriting
Reinsurance and Underwriting (可以再保險比較好)
Renewal Underwriting(不能取消或修改承保條款)
Investments
(because premiums sre paid in advance, they can be invested until needed to pay claims and expenses) (liability → asset)
Life Insurance Investments
Economic and social impact
Life insurance contracts are long-term, and the liabilities of life insurers extend over long periods of time
Investment income is extremely important in reducing the cost of insurance to policyholders because the premiums can be invested and earn interest
Life insurance premiums are important source of capital funds to economy
Assets
General Account (insurance company bear losses)
Fund...?
Contractual obligations for guaranteed fixed dollar benefits
Example
Traditional whole life insurance death benefits
Seperate Account (policyholders bear losses)
Fund...?
The liability for investment-risk products
Example
variable annuities (年金)
variable insurance
private pension benefits
Property and Casualty Insurance Investments
相較Life Insurance 短期
Claim payment can vary widely (so the investment objective of liquidity is important)
Investment income is extremely important in offsetting unfavorable property and casualty underwriting experience
Claims Settlement(索賠協定)
Types of Claims Adjustors
Insurance Agents
What can he/she do...?
having authority to settle small first-party claims (a claim submitted directly by the insured to the insurer)up to some maximum limit
Advantages
Speedy
Reducing adjustments Expenses
Preserving the policyholder's goodwill
Staff Claims Representatives
Definition
Employees of an insurer who adjust most claims
Who are they...?
Salaried Employees
represent only one insurer
What can they do...?
Investigating the Claim
Determining the amount of Loss
Arrange for Payment
Independent Adjustors
an organization or individual that adjusts claims for a fee
Public Adjustors
Represent the insured rather than insurance company and is paid a fee based on the amont of the claim settlement
Steps in Settlement of a Claim
Notice of Loss Must be Given
The Claim is Investigated
Is the person an insured under the policy?
Did the loss occur during the policy period?
Is the cause of loss (peril) covered under the policy?
Is the damaged property covered under policy?
Are the amount of loss or damages covered under the policy?
Is the location where the loss occurred covered under the policy?
Are there any exclusions that apply to the loss?
Does any other insurance apply to the loss?
A Proof of Loss may be Required
A decision is made concerning payment
The claim can be paid
The claim can be denied
The claim may be valid, but there may be a dispute (sometimes require appraisers 估價人)
Basic Objectives in Claims Settlement
Fair and Prompt Payment of Claims
Provide Personal Assistance to the Insured
Verification of a Covered Loss
Reinsurance
Reasons for Reinsurance
Increase Underwriting Capacity
Reinsurance permits the primary company to issue a single policy in excess of its retention limit for the full amount of insurance
Stabilize Profits
The reinsurer would pay that portion of loss in excess of some specified limit
Have the reinsurer reimburse (補償) the ceding insurer for losses that exceed a specified loss ratio during a given year
Reduce the Unearned Premium Reserved
Unearned Premium Reserve (有點像 Unearned Revenue)
Definition
A liability item on the insurer's balance sheet that represents the unearned portion of gross premiums on all outstanding policies at the time of valuation
Policyholders' Surplus
=(Assets)-(Liabilities) (The more business it writes, the greater is the short-term drain on its surplus, because acquisition expenses must be paid up front, but off-setting income is realized with the passage of time)
Provide Protection against a Catastrophic Loss
Enable an insurer to retire from a territory or class of business
Obtain Underwriting Advice from the Reinsurer
Types of Reinsurance
Facultative Reinsurance (臨時再保險)
Definition
An optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit (雙方都沒有義務要簽訂)
frequent application
When the primary insurer has an application for large amount of insurance
Advantages
Flexibility
Disadvantages
Uncertainty (保險公司不知道再保險公司是否會接受再保險)
Problem of Delay (因為在得到再保險之前，都不能分發保險單)
During periods of poor loss experience, reinsurance markets tend to tighten, and facultative reinsurance may be more costly and more difficult to obtain
Treaty Reinsurance
Definition
The primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the business
Advantages (for primary insurer)
Automatic (只要在這個合約裡發生的事情，就會自動被執行)
No Uncertainty or Delay
Economical (因為可以不用在寫保單之前還要貨比三家或協商再保險的條款)
Disadvantages (for reinsurer)
Generally has no knowledge about the individual applicant and must rely on the underwriting judgement of the primary insurer
The premium received by the reinsurer may be inadequate
Definition
Cession (分保單位)
The amount of insurance ceded to the reinsurer
Retention Limit / Net Retention
The amount of insurance retained by the ceding company for its own account
Reinsurer
The insurer that accepts part or all of the insurance from ceding company
Ceding Company
The primary insurer that initially writes the insurance
Reinsurance
An arrangement by which the primary insurer that initially writes the insurance transfer to an other insurer (called reinsurer) part or all of the potential loss associated with such insurance
Retrocession (轉再保)
The reinsurer may retain part or all of the risk with other insurer
Retrocessionaire
The second reinsurer
Method of Sharing Losses
Examples (根據上述兩個基礎)
Quota-Share Treaty (比例形式)
Definition
The ceding company and reinsurer agree to share premiums and losses based on some proportion (The ceding company;s retention is stated as a percentage rather than as a dollar amount
Ceding Commission (分保傭金)
The reinsurer pays it to the primary insurer to help compensate for the expenses incurred in writing the business
Advantages
The primary insurers's unearned premium reserve is reduced
Disadvantages
A large share of potentially profitable business is ceded to the reinsurer
Surplus-Share Treaty (數量形式)
Definition
The reinsurer agree to accept insurance in excess of the ceding insurer''s retention limits, up to some maximum amount (The retention limit is referred to as a line and is stated as a dollar amount)
What about the premiums...?
Also shared based on the fraction (分數) of total insurance retained by each party
Ceding Commission
Advantages
Primary insurer's underwriting capacity on any single exposure is increased
Disadvantages
Increase in administrative expenses (because it's more complex and requires greater record keeping)
Excess-of-Loss Reinsurance (從損失出發，與前兩項不同)
Definition
Designed largely for protection against a catastrophic loss
The reinsurer pay part or all of the loss that exceeds the ceding company's retention limit up to some maximum level
Coverage
A single exposure
A single occurrence (例如災難損失或龍捲風)
Excess losses when the primary insurer's cumulative losses exceed a certain amount during some stated time period, such as a year
Reinsurance Pool
Definition
An organization of insurers that underwrites insurance on a joint basis (The insurers as a group can combine their financial resources to obtain the necessary capacity)
Types
Each pool member agrees to pay a certain percentage of every loss
Each pool member pays for its share of losses below a certain amount. Losses exceeding that amount are then shared by all members in the pool (類似Excess-of-Loss arrangement)
Basic Methods
Pro Rata (按比例計算)
The ceding company and reinsurer agree to share losses and premiums based on some proportion
Excess-of-Loss
The insurer pays only when covered losses exceed a certain level
Alternatives to Traditional Reinsurance
Securitization of Risk (風險證券化)
Definition
An insurable risk is transferred to the capital markets through the creation of a financial instrument
Example (also called Risk-Linked Securities)
Futures Contract
Options Contract
Others
Catastrophe Bonds
Definition
Corporate bonds that permit the issuer of the bond to skip or reduced scheduled interest payments if catastrophic loss occurs
Characteristic
High interest rates
Help institutional investors to diversify their portfolios(因為天災是隨機發生的而且與股市及經濟變動無太大的關聯)
Special Purpose Reinsurance Vehicle (SPRV)
Collect premiums from insures or reinsures and the principal from bond investors, The funds collected are held in trust and invested in U.S. government bonds or other highly rated securities (投資收入是用來繳資本的利息)
What will happen when event occurs...?
Investors lose the interest on the bonds and part or all of the principal, depending on how the bonds are structured, both of which can be used to help pay the insurer's disaster losses
Purchased by who...?
Institutional Investors seeking highly-yielding(高產), fixed-income(固定收益) securities
Other Insurance Company Functions
Accounting
Legal Function
Loss-Control Services
Information System