XCEL SOLUTIONS - BASIC
PRINCIPLES REVIEW EXAM Q&A
Reserves - ANSWER-- The accounting measurement of an insurer's future
obligations to its policyholders
- Classified as liabilities on the insurance companies accounting statements since
they must be settled at a future date
- Set aside by insurance companies and designated for the payment of future claims
Liquidity - ANSWER-- Insurer's ability to make unpredictable payouts to policyowners
Guaranty Associations - ANSWER-- Established by all states for purpose of
supporting insurers and protect consumers in case an insurer becomes insolvent
- State life and health guarantee associations provide a safety net for all member life,
health, and annuities insurers in a particular state
- Protect insureds in the event of insurance insolvency or inability to pay claims up to
a certain limit
Independent Rating Services - ANSWER-- Credit rating agencies that rate (or
"grade") the financial strength and stability of insurers
- Nationally Recognized Statistical Rating Organizations: A.M.Best, Moody's,
Standard and Poor's, Fitch Ratings
- Each rating service has own rating system, but most use an A to F letter grading
system
Commercial Insurers (aka Private Insurance Companies) - ANSWER-- Sell for profit
- Multi-Line Insurer
- Two main groups: Stock and Mutual
Stock Companies - ANSWER-- Incorporated under state laws
- Purpose: Make a profit for stockholder
- Called "Nonparticipating Insurers"
- Stocked dividends are paid to stockholders
- Dividends are subject to taxation
Mutual Companies - ANSWER-- Owned by Policyholders
- Called "Participating Insurers"
- Mutual Company Dividends are payed to policyholders
- Dividends are NOT subject to taxation
- Accumulated interest on dividends is taxable
Mutualization - ANSWER-Stock --> Mutual Insurer
Demutualization - ANSWER-Mutual --> Stock Insurer
Mixed Insurer - ANSWER-- Operates as both a participating and non-participating
insurer
- Dividends are NEVER guaranteed
, Strong Assessment Mutual Companies - ANSWER-Classified by the way premiums
are charged:
Pure Assessment Mutual Company
- Based on loss sharing
- No premium payable in advance
- Each member assessed an individual portion of losses that occur
Advance Premium Assessment Mutual Company
- Charges premium at beginning of policy period
- Any surplus is returned to policyholders as dividends
- Additional assessments levied against members if total premiums aren't enough to
meet losses
- Amount of assessment levied is limited either by state-law or insurer's by-laws,
normally
Fraternal Benefit Societies - ANSWER-- Type of Mutual Company, nonprofit
religious, ethnic or charitable organizations
- Provide insurance solely to their members
- Fraternal must be formed for reasons other than obtaining insurance
Risk Retention Groups - ANSWER-- Type of Mutual Company
- Formed by a group of people from the same industry/profession
- Eg: Pharmacists, dentists, engineers, etc.
Service Providers - ANSWER-- Offer benefits in return for payment of premiums
- Packaged into various plans
- Those who purchase plans are known as "suscribers"
- Eg: HMO/PPO
Reciprocal Insurers - ANSWER-- Unincorporated groups of individual members
- Provide insurance for other members through indemnity contracts
- Each member acts as both insurer and insured
- Managed by Attorney in Fact
Reinsurers - ANSWER-- Make arrangements with other insurance companies
- Arrangements made for purpose of transferring a portion of their risk to the
reinsurer
- Company transferring the risk: "Ceding Company"
- Company assuming the risk: "Reinsurer"
Captive Insurer - ANSWER-- Established and owned by the parent company
- Insures the parent company's loss exposure
Self Insurers - ANSWER-- Retain risks and must have a large number of similar risks
and enough capital to pay claims
- May save money if loss experience is lower than expected costs
- Not a method of transferring risk
- Establish own, self-funded plan to cover potential losses
PRINCIPLES REVIEW EXAM Q&A
Reserves - ANSWER-- The accounting measurement of an insurer's future
obligations to its policyholders
- Classified as liabilities on the insurance companies accounting statements since
they must be settled at a future date
- Set aside by insurance companies and designated for the payment of future claims
Liquidity - ANSWER-- Insurer's ability to make unpredictable payouts to policyowners
Guaranty Associations - ANSWER-- Established by all states for purpose of
supporting insurers and protect consumers in case an insurer becomes insolvent
- State life and health guarantee associations provide a safety net for all member life,
health, and annuities insurers in a particular state
- Protect insureds in the event of insurance insolvency or inability to pay claims up to
a certain limit
Independent Rating Services - ANSWER-- Credit rating agencies that rate (or
"grade") the financial strength and stability of insurers
- Nationally Recognized Statistical Rating Organizations: A.M.Best, Moody's,
Standard and Poor's, Fitch Ratings
- Each rating service has own rating system, but most use an A to F letter grading
system
Commercial Insurers (aka Private Insurance Companies) - ANSWER-- Sell for profit
- Multi-Line Insurer
- Two main groups: Stock and Mutual
Stock Companies - ANSWER-- Incorporated under state laws
- Purpose: Make a profit for stockholder
- Called "Nonparticipating Insurers"
- Stocked dividends are paid to stockholders
- Dividends are subject to taxation
Mutual Companies - ANSWER-- Owned by Policyholders
- Called "Participating Insurers"
- Mutual Company Dividends are payed to policyholders
- Dividends are NOT subject to taxation
- Accumulated interest on dividends is taxable
Mutualization - ANSWER-Stock --> Mutual Insurer
Demutualization - ANSWER-Mutual --> Stock Insurer
Mixed Insurer - ANSWER-- Operates as both a participating and non-participating
insurer
- Dividends are NEVER guaranteed
, Strong Assessment Mutual Companies - ANSWER-Classified by the way premiums
are charged:
Pure Assessment Mutual Company
- Based on loss sharing
- No premium payable in advance
- Each member assessed an individual portion of losses that occur
Advance Premium Assessment Mutual Company
- Charges premium at beginning of policy period
- Any surplus is returned to policyholders as dividends
- Additional assessments levied against members if total premiums aren't enough to
meet losses
- Amount of assessment levied is limited either by state-law or insurer's by-laws,
normally
Fraternal Benefit Societies - ANSWER-- Type of Mutual Company, nonprofit
religious, ethnic or charitable organizations
- Provide insurance solely to their members
- Fraternal must be formed for reasons other than obtaining insurance
Risk Retention Groups - ANSWER-- Type of Mutual Company
- Formed by a group of people from the same industry/profession
- Eg: Pharmacists, dentists, engineers, etc.
Service Providers - ANSWER-- Offer benefits in return for payment of premiums
- Packaged into various plans
- Those who purchase plans are known as "suscribers"
- Eg: HMO/PPO
Reciprocal Insurers - ANSWER-- Unincorporated groups of individual members
- Provide insurance for other members through indemnity contracts
- Each member acts as both insurer and insured
- Managed by Attorney in Fact
Reinsurers - ANSWER-- Make arrangements with other insurance companies
- Arrangements made for purpose of transferring a portion of their risk to the
reinsurer
- Company transferring the risk: "Ceding Company"
- Company assuming the risk: "Reinsurer"
Captive Insurer - ANSWER-- Established and owned by the parent company
- Insures the parent company's loss exposure
Self Insurers - ANSWER-- Retain risks and must have a large number of similar risks
and enough capital to pay claims
- May save money if loss experience is lower than expected costs
- Not a method of transferring risk
- Establish own, self-funded plan to cover potential losses
