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RMI 4292 Exam One Study Guide - Jones Chapter 1 Largest writer of insurance is State Farm at $52 Billion Classifications of Insurers - Form of Ownership o Proprietary – Insurer formed for the purpose of earning a profit for its owners  Include Stock insurers, Lloyds of London and American Lloyds - Stock Insurers are owned by their stockholders o Cooperative – An insurer that is owned by its policy holders and formed as a corporation for the purpose of providing insurance to them  Mutual companies where policy holders come together for each others benefit o Other  Pools- several insurers, not otherwise related that join together to insure loss exposures that individual insurers are unwilling to insure - Place of Incorporation – important because insurance is regulated at the State Level o Few are incorporated in FL because FL has a corporate tax - Licensing Status – Where can you do business - Distribution Systems and Channels - How do you get the product out to the market place Form of Ownership - Proprietary – owned by stock holders seeking to earn a profit - Cooperative – Owned by its policy holders - Pools - Associations Form by Type - Proprietary o Stock Insurers o Lloyds Associations – not actually an insurance company but actually a market  Lloyds created the term underwriter  Individual syndicates give bids on what coverage they will offer - Cooperative o Mutual Insurers o Reciprocal Exchanges Stock Insurers – largest type of insurance companies - For-profit Corporation - Owned by Stockholders - Stockholders o Elect Board of DirectorsRMI 4292 Exam One Study Guide - Jones o Receive Profit(s) - Capital o Stock Sale and/or Retained Earnings Mutual Insurers – If perfectly run, will break even every year - Not-for-Profit Corporation - Owned by Policyholders - Policyholders o Elect Board of Directors o Receive Profit(s) - Capital o Premiums/Retained Earnings/Assessments  Can assess their policy holders incase their rates were not high enough to cover losses Pools and Associations – provides some place for irregularities to find coverage - Characteristics o A group of several insurers  not otherwise related o Severity of Risk too high for any one o Formed  voluntarily  to meet statutory requirements - Syndicate Pool o Issues a joint (syndicate) policy o Insured has a contractual relationship w/each member of the pool - Reinsurance Pool o One member of the pool issues the policy o Insured has a contractual relationship only w/issuing member  Everything else done internally/behind the scenes Place of incorporationRMI 4292 Exam One Study Guide - Jones - Domestic – operating in the state in which they are incorporated - Foreign – licensed to operate but not your state of incorporation - Alien – incorporated outside the United States Licensing Status - Admitted – Licensed o State insurance department sets the rates and standards - Non-Admitted – Unlicensed o Subject to Surplus Lines taxes Functional Areas in the industry - Contract Development – have to have a policy on “paper” - Marketing / Production - Underwriting - Pricing / Ratemaking - Reinsurance - Claims - Loss Control Contract Development - The insurance transaction is a promise, you don’t gain anything by having insurance, just reimbursement if something happens and is covered by your policy - Drafting/Creating o Insurer o Agents/Brokers o Policy-holders o Advisory Organizations - Why? o Facilitate Insurance Transaction o Reduce Uncertainties Marketing/Production - Marketing o Determine what products or services customers want and needRMI 4292 Exam One Study Guide - Jones o Communicate what’s available - Production – KJ says “production solves all problems” o Sale of Product to Public - Why? o Inform Public o Complete Sale in an Efficient Manner Underwriting - Process to determine: o Risks to assume/avoid  Do we want to cover this?  Is there any experience related? o Rates to be charged o Policy terms/conditions to be used - Why? o Develop a Profitable Book of Business  If losses are at or below expectations a profit will be made o Avoid Adverse Selection- helps the insurer remain profitable and keeping premiums reasonable for insureds Pricing and Rate Making - Determine appropriate rates (premium) o Prediction of expected losses o Allocation of losses and expenses - Why? o Rates will be low enough to be competitive o Rates high enough to be profitable o Satisfy regulatory requirements Reinsurance - Risk Transfer – to the insurer o Ceding insurer o ReinsurerRMI 4292 Exam One Study Guide - Jones o Types of reinsurance o Financial Impact - Why? o Spreading loss exposures Claims - - Process to determine o If a loss is covered o If the loss is covered by the policy o How much to pay - Why? o Prompt, fair payment of legitimate claims  Every claims department wants to pay legitimate claims at a fair price and get them out the door  impact on Insurer profitability Loss Control - Frequency o Unsafe conditions o Unsafe acts - Severity o Reduce probable losses - Why? o Lower expected costs Insurer Goals - Earn a Profit - Meet Customer Goals - Comply w/Legal Requirements - Diversify Risk - Fulfill Societal Duty Constraints – Internal - EfficiencyRMI 4292 Exam One Study Guide - Jones - Expertise - Size - Financial Resources - Other Constraints – External - Regulation - Rating Agencies - Public Opinion - Competition - Economic Conditions - Marketing and Distribution - Other Measuring Insurer Performance - Profitability Goals o Premiums and Investment Income o Underwriting Performance o Operating Performance o Loss Reserving - Customer Needs - Legal Requirements - Social Responsibilities Insurance Functions - Core Functions o Marketing and Distribution o Underwriting o Claims - Supporting Functions - Other AreasRMI 4292 Exam One Study Guide - Jones Chapter 2 Evolution of insurance Regulation - Paul v Virginia – the 1869 legal decision determined that insurance was not interstate commerce…. Became the legal precedent for the exemption of insurance from federal regulation - Sherman Antitrust Act – This 1890 congressional act prohibited collusion to gain monopoly… prevented insurers from banding together to control rates and coverage - South-Eastern Underwriters


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FSU RMI 4292 - Chapter 1

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