RMI 4292 – Test 2 Study Guide 1 Chapter 6 Notes Risk Control - Insurer Goals o Earn a profit – better underwriting information allows for better decisions which makes an underwriting profit  Improving Premium Volume – insurers can view marginal accounts as an acceptable one to increase premium paid  Can also be done by reducing errors and omissions claims, encouraging insureds to improve risk control o Meet customer needs –  by satisfying customer needs for risk control services, insurers can attract new customers, retain old ones, and gain an advantage in the market o Comply with legal requirements –  some states require a minimum amount of risk control procedures to be offered to commercial clients o Fulfill duty to society –  produce financial resources to help individuals and business recover from accidental losses - Services Provided by Insurers o Physical surveys/inspections –  basically the collecting of underwriting information, like… construction type, workers occupations, site diagrams, and fire protection systems o Risk analysis and improvement –  reviewing of the loss history and recommendation of risk controlling activities o Safety management programs –  assist the insured in establishing risk control goals while selecting appropriate methods - Factors affecting Service Levels o Line of insurance –  generally an agent that writes for personal lines is unlikely to provide extensive risk control services, the amount of premium for a typical home doesn’t justify the extra expense for safety inspections o Commercial insured size –  Depends on the size of the account, but generally there is some type of risk control services o Types of loss exposures insured –  depends on the type of firm, some need very specialized equipment and specialized risk control factors implemented o Potential legal liability –  sometimes insurers don’t offer risk control services at all so they don’t become legally liable if something happensRMI 4292 – Test 2 Study Guide 2 Cooperation between Risk Control and Other Functions - Underwriting – o risk control provides information to underwriters that allows them to make better decisions - Marketing and Sales – o Helps the marketing department meet goals and decide if a clients risk control methods are adequate or need to be changed a little - Premium Auditing – o Risk controllers use this opportunity to do their own inspections and gather valuable information which helps the quality of the audits - Claims – o The risk control side needs claim experience to be able to direct attention to certain areas of a company with a higher loss exposure - Producers/Agents – o some larger agencies have producers that perform their own risk control methods that are similar to that of the insurer, they should coordinate to gain mutual benefits Premium Auditing - Reasons o Determine correct premiums –  the insurer must make sure it is charging enough to operate successfully while still being competitive enough to maintain business o Collect ratemaking data –  insurers collect data to project future losses and they add their own expense component to determine their rate o Meet regulatory requirements –  some states require all premium audits to meet the same requirements as for workers compensation  Workers comp regulations tend to be more restrictive based on the nature of the coverage - Max of workers comp is $2300/week based on income o Deter and detect fraud –  Insureds are less likely to submit false or misleading information to an insurer when they know it will be checked  Although it’s not the sole purpose of premium auditing, they sometimes find fraud - Fraud is a civil and criminal offense  Ensures following the contract o Reinforce confidence of insureds –  they will know they are getting what they pay for if someone comes and shows care when collecting data to make rates both competitive and adequateRMI 4292 – Test 2 Study Guide 3 o Obtain additional information  Maybe they are incorrectly classified  New loss exposure?  Named Insureds - Premium Auditing Process o Planning  Insurers cannot afford to audit every policy, every year so they must decide which ones to focus on o Reviewing operations  Observe the nature of the business - Compare it to similar businesses - Look for classifications not shown in the policy  Assess management quality and operation  Report any information to the underwriting department o Determining employment relationships  Must look at the employees covered by types of insurance that is based on payroll o Finding/Evaluating Books/Records  They can examine all books or records related to insurance premium  But they must decide which ones are most efficient and reliable which can sometimes be difficult o Actual audit  Must decide the proper classification of the insured - If it is incorrect and the rate is too the insured is being overcharged - If it is too low the account is less likely to be profitable for the insurer o Analyzing and evaluating  Once they have collected all of the data, they must decide if it is reasonable - Are they logical? - Does the data seem complete? - Does the data reflect enough detail for the insureds operations? - Is the data consistent with industry averages? - Can deviations from expected amounts be explained? o Reporting  The premium related data must be recorded and submitted and the billing info clearly summarized so the audit can be processed and billed immediately  They must also show reports on how they came to their conclusions so that the audit steps may be retraced - Importance of Accuracy in Premium Audits o Insured  make sure the rates are fair o InsurerRMI 4292 – Test 2 Study Guide 4  timely and effective audits can significantly benefit the insurer’s financial position, customer relations, operational efficiency, and collections o Financial position  Accurate classification of loss exposures is important to ensure equitable and accurate insurance rates - For example, misplacing hazardous business in a lower rated classification results in lower premium volume  Also affect the insurers cash flow management - Audits are the foundation for premium collection process  Premium hat has