Finance 431: Property-Liability Insurance Lecture 2: Overview of Insurance OperationsRegistering Your i-clickerOverview of Insurance OperationsTypes of InsurersSlide 5What Type of Insurer is State Farm?What Type of Insurer is Allstate?What Type of Insurer is CNA?Place of Incorporation and Licensing StatusFor Illinois Policyholders What Type of Company is Sun Life of Canada?Principal Steps in Risk ManagementWhat step in the risk management process would involve estimating that the chance of getting into an automobile accident over the next year is 10%?What step in the risk management process would involve obtaining a quote for auto insurance?Risk Transfer ProcessObjectives of InsurersConstraints on Achieving ObjectivesMeasurement of Insurer PerformanceComponents of Profit MeasurementSlide 19Combined Ratio ExampleSlide 21Property-Liability Industry ProfitabilityWhat elements of investment income are omitted in the operating ratio calculation on the prior exhibit?Slide 24Functions Required to Meet NeedsInterdependence Among FunctionsFinance 431:Property-Liability InsuranceLecture 2: Overview of Insurance OperationsRegistering Your i-clicker•Go to www.iclicker.com (as listed on the back of your i-clicker)•Click on Register ** (on left side of page)•Input your name as requested•Your Student ID is your Net id (your U of I e-mail address before the @) Do not input your UIN•Input your Clicker ID which is listed on the back of your i-clicker•Type in the verification word as indicated•Click EnterOverview of Insurance OperationsTypes of InsurersRisk Transfer ProcessObjectives of InsurersConstraints of Achieving ObjectivesMeasurement of Insurer PerformanceFunctions Required to Meet NeedsInterdependence Among FunctionsTypes of InsurersLegal Form of OwnershipProprietary InsurersStock Insurance CompaniesLloydsInsurance ExchangesCooperative InsurersMutual Insurance CorporationsReciprocal ExchangesCaptive InsurersRisk Retention Groups and Purchasing GroupsFraternal OrganizationsTypes of InsurersOther InsurersHealth Maintenance Organizations (HMOs)Blue Cross-Blue ShieldBanksPools and AssociationsGovernmental InsurersWorkers CompensationMine SubsidenceFederal Insurance ProgramsWhat Type of Insurer is State Farm?A) Stock insurance companyB) Mutual insurance companyC) Reciprocal exchangeD) Captive insurerE) None of the aboveWhat Type of Insurer is Allstate?A) Stock insurance companyB) Mutual insurance companyC) Reciprocal exchangeD) Captive insurerE) None of the aboveWhat Type of Insurer is CNA?A) Stock insurance companyB) Mutual insurance companyC) Reciprocal exchangeD) Captive insurerE) None of the abovePlace of Incorporation and Licensing StatusDomestic - incorporated in that stateForeign - incorporated in another stateAlien - incorporated in another countryAdmitted - licensed to provide insurance in a stateNonadmitted - operating without a licenseSurplus lines brokers can place business with nonadmitted insurers if admitted insurers will not write the coverageFor Illinois Policyholders What Type of Company is Sun Life of Canada?A) DomesticB) ForeignC) AlienD) ExtraterrestrialE) None of the abovePrincipal Steps in Risk Management1. Identify loss exposures2. Measure loss exposures3. Evaluate the different methods for handling the risk•Risk assumption•Risk transfer•Risk reduction4. Select a method5. Monitor results and implement necessary changesWhat step in the risk management process would involve estimating that the chance of getting into an automobile accident over the next year is 10%?A) Identify loss exposuresB) Measure loss exposuresC) Evaluate the different methods for handling the riskD) Select a methodE) Monitor results and implement necessary changesWhat step in the risk management process would involve obtaining a quote for auto insurance?A) Identify loss exposuresB) Measure loss exposuresC) Evaluate the different methods for handling the riskD) Select a methodE) Monitor results and implement necessary changesRisk Transfer ProcessRisk ManagerConsultantsInsurance Agents and BrokersInsurersInsurance FunctionsPolicy contract developmentPricingMarketingUnderwritingLoss adjustmentLoss controlReinsuranceInvestmentsObjectives of InsurersProfit ObjectiveCustomer Needs ObjectiveDeterminants of Insurance Cost1. Losses2. Expenses3. ProfitLegal Requirement ObjectiveHumanitarian and Societal ObjectivesContributionsEmployee benefitsConstraints on Achieving ObjectivesInternalEfficiencyExpertiseSizeFinancial ResourcesMiscellaneousMarket recognitionPoor reputationExternalRegulationPublic OpinionCompetitionEconomic ConditionsRecessionInflationInvestment resultsDistribution SystemsMiscellaneousCatastrophesMeasurement of Insurer PerformanceProfit MeasurementProblems in Measuring ProfitabilityCatastrophesLoss Reserve InaccuracyPremium VolumeImpact of GrowthComponents of Profit MeasurementExpense RatioLoss Adjustment Expenses/Earned PremiumOther Expenses/Written PremiumLoss RatioIncurred Losses/Earned PremiumComponents of Profit MeasurementCombined RatioStatutoryIncurred Losses + LAE + Incurred Expenses Earned Premiums Earned PremiumsTrade BasisIncurred Losses + LAE + Incurred Expenses Earned Premiums Written PremiumsCombined Ratio ExampleWritten Premium $100 millionEarned Premium 95 “Incurred Losses and LAE 76 “Underwriting Expenses 19 “Statutory Combined Ratio76 + 19 = 100%95 95Trade Basis Combined Ratio76 + 19 = 99%95 100Components of Profit MeasurementInvestment EarningsInvestment IncomeInterestDividendsRentsRealized Capital Gains or LossesUnrealized Capital Gains or LossesOperating RatioCombined Ratio – (Investment Earnings/Earned Premium)Property-Liability Industry Profitability Combined OperatingYear Ratio NII/EP Ratio1996 105.8 14.4 91.41997 101.6 15.3 86.31998 106.0 14.6 91.41999 108.0 14.0 94.02000 110.4 14.0 96.42001 115.9 12.2 103.72002 107.4 11.2 96.22003 100.1 10.2 89.92004 98.9 9.7 89.22005 101.2 12.0 89.22006 92.6 12.3 80.4Source: Best’s Aggregates and Averages Property/Casualty Edition 2007 U.S. Industry Ratios pp. 90-92What elements of investment income are omitted in the operating ratio calculation on the prior exhibit?A) Realized capital gains and lossesB) Unrealized capital gains and lossesC) All capital gains and lossesD) Expenses associated with investmentsE) None of the aboveMeasurement of Insurer PerformanceMeeting Customers’