RMIN 4000Exam # 3 Study Guide Lectures: 19 - 33Lecture 19 (March 17)What are the functions of Insurance companies? 1. Ratemaking2. Underwriting3. Production4. Claim settlement 5. Reinsurance6. Investments What is associated with Ratemaking?Rate is a cost per exposure and premium is the total cost of the policy found my multiplying the rate by exposure units Exposure unit is the unit of measurement used in insurance pricing Actuary is the person who determines rates and premiums Highly skilled mathematician involved in all phases of insurance company operations Many insurance company use square footage for calculating the premium for property insurance. Liability insurance rates are calculated on perils and are based on revenues/ sales. It is much more complex situation. Ratemaking refers to the pricing of insurance and the calculation of insurance premiums It is very hard to difficult to figure out what to price insurance policies because it is uncertain and the insurance company does not know what the costs are going to be Extremely technical in most lines of insurance Involves selection of classes of exposure on which to collect statistics regarding probability and severity of loss Relatively uncomplicated in Life Insurance Elaborate classifications are necessary in liability and workman’s compensation insurance What is associated with Underwriting?Underwriting refers to process of selecting, classifying, and pricing applicants for insurance A Line Underwriter makes daily decisions concerning the acceptance or rejection of business and is expected to follow official company policy Statement of underwriting policy is a clear statement Insurer must establish an underwriting policy that is consistent with company objectives Could include the classes of businesses that are acceptable, borderline, or prohibited Top-level management such as chief Underwriting officer sets standards and guidelines. What are principles of underwriting?1. Attain underwriting profit:Underwriting is a balancing act Have to keep making money for the insurance companyKeeping procedures and clients happy . . . and coming back for more insurance Job is to accept exposures at appropriate rate 2. Select prospective insides according to company’s underwriting standards Goal is to produce a group of insureds by categories whose actual loss experience is not likely toexceed the projected loss experience Maintain underwriting standards and avoid adverse selection 3. Provide equity among policy owners Equitable rate should be charged and each group of policy owners should pay its own way in terms of losses and expenses One group of policy owners should not subsidize another group What are the steps of underwriting?SubmissionQuotations and Declinations Binders of Insurance Policy IssuanceWhat is a field underwriter?: Field underwriting, the agent is told what types of applicants are acceptable, borderline, or prohibited Lecture 20 (March 19)What are some sources of underwriting information?Application: provides information which is helpful in underwritingAgent’s report: Many insurers require agent or broker to give an evaluation of prospective insured Inspection report: some companies may require an inspection report by some outside agency Physical inspection: Property and casualty, underwriter may require a physical inspection beforethe application is approved. Physical examination: life insurance, physician exam may be required to determine the applicant’s health status What decisions can an underwriter make?1. Accept the application 2. Accept the application subject to certain restrictions or modifications3. Reject the application Other underwriting considerations Rate Adequacy and underwriting: When rates are considered adequate for a class, insurers are milling to underwrite new business If rates are adequate, underwriting profits are higher and underwriting is more liberalReinsurance and underwriting: availability of reinsurance may result in more liberal underwriting Renewal underwritingPolicies are not cancelable in Life insuranceIn property, policies can be canceled or not renewed If the loss experience is unfavorable, insurer may either cancel or not renew the policy The Underwriting Cycle Property and liability insurance in Property and Casualty Insurance markets fluctuate between: Hard market: tight underwriting standards & high premiums (Insurer’s market) Soft Market: loose underwriting standards and low premiums (Insurance buyer’s market)Two Factors include the markets: Insurance Industry capacity Investment returns Policyholder’s surplus is insurer’s assets - liabilities Capacity refers to the relative level of surplus; Greater surplus, more willing underwriters will write new business or reduce premiums; therefore Capacity also refers to the maximum limit of insurance, the company will provide to any one insured. What is a combined ratio?Way of finding out if underwriting operations is profitable or unprofitable It is calculated by: (Losses + Loss Adjustment Expenses + Underwriting Expenses)/ Premiums If combined ratio is less than 1, then underwriting operations are profitable If combined ratio is more than 1, then underwriting operations are unprofitable. What are loss adjustment expenses?Loss Adjustment expenses include the cost associated with adjusting the loss Underwriting expenses include cost of underwriters, agents, brokers, What is associated with the production step?Production refers to the sales and marketing activities of insurers but it is confusing Agency department Life insurers have an agency or sales department Responsible for recruiting and training new agents and the supervision of general agents, branch office managers and local agents Property and casualty insurers have a marketing department Assist agents in field, special agents may be appointed Special agent is a highly specialized technician who provides local agents in field with technical help and assistance Agents and brokers are often referred to as producers This is not the same production as MarketingMarketing is the process of exposing the insured to the different insurance companies and helping them find the correct insurance policy with favorable terms. Professionalism in selling An agent should be competent professional with a high degree of technical knowledge in a particular area of insurance and who also