CIP C16 Business of Insurance-
REVAMPED
5 Ways Insurance companies spread risk - CORRECT ANSWER--Share risk with
other insurance companies (for very large risk, several insurers subscribe to
percentage of risk)
-Reinsure the risk
-deductible
-spread risk over diverse geographical region (soften risk of localized disasters)
-form risk pools (syndicates of insurance and reinsurance companies, organized
to underwrite particular risk)
Two principles of insurance - CORRECT ANSWER-1. Premiums of the many are
used to pay the losses of the few
(risk transferred to insurer, deductible, company shares and spreads risk,
geographic spread of risk, forming risk pools)
Premium shall be commensurate with the risk
(Capital meets probabilities of loss, premiums must be adequate to pay future
claims, fierce competition, adverse selection, long and short tail lines, time gaps
in pricing)
Negative consumer perceptions of industry and how to improve - CORRECT
ANSWER--prices go up/down as capacity tightening
-left customers with poor opinion
-media portrays negative image (politicatians promise to do something about
rates)
-insurers want to educate insurance people about how insurance industry works
-can provide more information on questions like (good risk vs bad, how is a risk
priced, why rates go up, why a profitable industry benefits everyone0
-feel if a claim not made, premium should be returned/reduced
-present services in postitive light
-insurance protection intangible
-
,10 ways insurance affects society and economy - CORRECT ANSWER--banks
willing to issue mortgages on buildings that are insured
-developers willing to advance funds to building contractors on projects
guaranteed by surety bonds
-retailers more willing to accept commercial risks with liability insurance
-professionals more willing to provide services when insured against risk of
malpractice
-manufacturers more willing to accept risks associated with shipping goods
(when insured)
-members of society more willing to use automobiles
-peace of mind
-provides employment
-contributes to economy
-investments help finance governments
-claim payments boost local economies and create jobs
Goal of reinsurance - CORRECT ANSWER--gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event
were to occur
Four basic functions of Insurance - CORRECT ANSWER-Financing - offers a
unique method of financing to insurance companies, frees up capital that would
be otherwise tied up, meet solvency regulations, expansion of operations
Stabilization - keep insurer's growth and development, used to keep operational
results reasonable without fluctuations, can help maintain confidence from
stakeholders, attract new capital
Capacity - require ability to insure businesses beyond their resources, take on
risks higher than they would normally write, may not want to be limited to small
lines, cater to needs of big producers
Reinsurance used to protect against catastrophic loss - look to protect resources
such as their capital and surplus,their loss ratio and their investment position
Law of Large numbers: - CORRECT ANSWER-mathematical premise which
states that the degree of certainty in probabilities increases as the number of
,events increases - insurance companies rely on loss forecasts built on using data
from large groups of similar risks
5. Adverse Selection - CORRECT ANSWER-Process by which potential
policyholders use private knowledge of their own high level of risk when deciding
whether or not to buy insurance (high risk individuals will buy lots of insurance
and pay high rates where low risk clients might not buy any insurance because
the price is too high)
(Also occurs when a broker places its poorer risks with one insurer and its better
risks with another - low risk client will seek best rates where poorer risk will stay
with existing company because they won't be able to find rates elsewhere)
9. Residual market - CORRECT ANSWER-mechanisms have been established
by automobile insurance industry to provide a last resort insurance facility for
consumers. This ensures that insurance coverage is available even to those who
are considered a high risk. Facility Association.
Three effects of Mergers - CORRECT ANSWER-• Reduce capacity from what is
currently an already tight market
• Give Insurance companies a slight smaller reinsurance universe from which to
glean capacity
• Give other insurers the opportunity to grow-albeit to a fairly small degree
Stock Companies - CORRECT ANSWER--either privately held or publicly traded
-same capital structure as any other capital enterprise
-shareholders invest in corporations
-stocks sold to shareholders who hope for reasonable profit on investments
-security to policyholders for assumed liabilities is represented by subscribed or
paid up capital and any surplus
-premiums fund liabilities
-policyholders contribute premiums to pay for claims
-if premiums do not cover liabilities, capitol of investors funds shortfall
-insurers income will pay expenses
Mutual companies - CORRECT ANSWER--operate for mutual benefit of their
members
-purpose is to insure one another against the possibility of certain types of losses
, -premium assessment plan or premium note plan
-levies limited under plan
-signs premium note identifying the limit he/she is willing to pay is company
suffers set back
-full premium calculated once operated experience factored in
-policyholders also share profits amoungst themselves (usually in form on
premium)
Corporate governance - CORRECT ANSWER-signifies how a corporation directs
itself - and how control of this process is managed
-encompasses the process, structure and information used to manage a
company
Pyramid structure - CORRECT ANSWER--traditional
-industrial enterprises
-vertical decision making
-internally focused top-down governance
Flat or networked structure - CORRECT ANSWER--changing economic
environment
-recognizes information and knowledge as wealth creating assets in addition to
labour and capital
-distributed decision-making
-internally and externally distributed governance
Insurance companies organized for high level oversight - CORRECT ANSWER--
traditional corporate set up
-board of directors chosen to direct company
-foreign companies appoint chief agent
-advisory board responsible for investments
-senior management develops philosophy and vision
-board of directors chosen by stock holders
-CEO is senior officer responsible for running
-board responsible for compliance
-Audit committee
Conduct review committee
REVAMPED
5 Ways Insurance companies spread risk - CORRECT ANSWER--Share risk with
other insurance companies (for very large risk, several insurers subscribe to
percentage of risk)
-Reinsure the risk
-deductible
-spread risk over diverse geographical region (soften risk of localized disasters)
-form risk pools (syndicates of insurance and reinsurance companies, organized
to underwrite particular risk)
Two principles of insurance - CORRECT ANSWER-1. Premiums of the many are
used to pay the losses of the few
(risk transferred to insurer, deductible, company shares and spreads risk,
geographic spread of risk, forming risk pools)
Premium shall be commensurate with the risk
(Capital meets probabilities of loss, premiums must be adequate to pay future
claims, fierce competition, adverse selection, long and short tail lines, time gaps
in pricing)
Negative consumer perceptions of industry and how to improve - CORRECT
ANSWER--prices go up/down as capacity tightening
-left customers with poor opinion
-media portrays negative image (politicatians promise to do something about
rates)
-insurers want to educate insurance people about how insurance industry works
-can provide more information on questions like (good risk vs bad, how is a risk
priced, why rates go up, why a profitable industry benefits everyone0
-feel if a claim not made, premium should be returned/reduced
-present services in postitive light
-insurance protection intangible
-
,10 ways insurance affects society and economy - CORRECT ANSWER--banks
willing to issue mortgages on buildings that are insured
-developers willing to advance funds to building contractors on projects
guaranteed by surety bonds
-retailers more willing to accept commercial risks with liability insurance
-professionals more willing to provide services when insured against risk of
malpractice
-manufacturers more willing to accept risks associated with shipping goods
(when insured)
-members of society more willing to use automobiles
-peace of mind
-provides employment
-contributes to economy
-investments help finance governments
-claim payments boost local economies and create jobs
Goal of reinsurance - CORRECT ANSWER--gives peace of mind to insurers
-confidence instilled that financial ruin will not occur is a major unplanned event
were to occur
Four basic functions of Insurance - CORRECT ANSWER-Financing - offers a
unique method of financing to insurance companies, frees up capital that would
be otherwise tied up, meet solvency regulations, expansion of operations
Stabilization - keep insurer's growth and development, used to keep operational
results reasonable without fluctuations, can help maintain confidence from
stakeholders, attract new capital
Capacity - require ability to insure businesses beyond their resources, take on
risks higher than they would normally write, may not want to be limited to small
lines, cater to needs of big producers
Reinsurance used to protect against catastrophic loss - look to protect resources
such as their capital and surplus,their loss ratio and their investment position
Law of Large numbers: - CORRECT ANSWER-mathematical premise which
states that the degree of certainty in probabilities increases as the number of
,events increases - insurance companies rely on loss forecasts built on using data
from large groups of similar risks
5. Adverse Selection - CORRECT ANSWER-Process by which potential
policyholders use private knowledge of their own high level of risk when deciding
whether or not to buy insurance (high risk individuals will buy lots of insurance
and pay high rates where low risk clients might not buy any insurance because
the price is too high)
(Also occurs when a broker places its poorer risks with one insurer and its better
risks with another - low risk client will seek best rates where poorer risk will stay
with existing company because they won't be able to find rates elsewhere)
9. Residual market - CORRECT ANSWER-mechanisms have been established
by automobile insurance industry to provide a last resort insurance facility for
consumers. This ensures that insurance coverage is available even to those who
are considered a high risk. Facility Association.
Three effects of Mergers - CORRECT ANSWER-• Reduce capacity from what is
currently an already tight market
• Give Insurance companies a slight smaller reinsurance universe from which to
glean capacity
• Give other insurers the opportunity to grow-albeit to a fairly small degree
Stock Companies - CORRECT ANSWER--either privately held or publicly traded
-same capital structure as any other capital enterprise
-shareholders invest in corporations
-stocks sold to shareholders who hope for reasonable profit on investments
-security to policyholders for assumed liabilities is represented by subscribed or
paid up capital and any surplus
-premiums fund liabilities
-policyholders contribute premiums to pay for claims
-if premiums do not cover liabilities, capitol of investors funds shortfall
-insurers income will pay expenses
Mutual companies - CORRECT ANSWER--operate for mutual benefit of their
members
-purpose is to insure one another against the possibility of certain types of losses
, -premium assessment plan or premium note plan
-levies limited under plan
-signs premium note identifying the limit he/she is willing to pay is company
suffers set back
-full premium calculated once operated experience factored in
-policyholders also share profits amoungst themselves (usually in form on
premium)
Corporate governance - CORRECT ANSWER-signifies how a corporation directs
itself - and how control of this process is managed
-encompasses the process, structure and information used to manage a
company
Pyramid structure - CORRECT ANSWER--traditional
-industrial enterprises
-vertical decision making
-internally focused top-down governance
Flat or networked structure - CORRECT ANSWER--changing economic
environment
-recognizes information and knowledge as wealth creating assets in addition to
labour and capital
-distributed decision-making
-internally and externally distributed governance
Insurance companies organized for high level oversight - CORRECT ANSWER--
traditional corporate set up
-board of directors chosen to direct company
-foreign companies appoint chief agent
-advisory board responsible for investments
-senior management develops philosophy and vision
-board of directors chosen by stock holders
-CEO is senior officer responsible for running
-board responsible for compliance
-Audit committee
Conduct review committee
