C16 Business of Insurance -Practice UPDATED ACTUA Questions and
CORRECT Answers
1. Explain the eco- pages 3-3 and 3-13. the economic theory of supply and demand proposes that
nomic laws of more resources will be allocated to a product that increases revenue. The law of
Supply and De- supply provides that the higher the price, then more will be supplied. the law of
mand, and ex- demand provides that, with all other factors equal, less will be demanded as the
plain why these price rises.
laws do not strict- For the insurance market, supply is represented by the capacity of the market,
ly apply to au- or the willingness of insurers to insure risks. The demand is represented by
tomobile insur- consumers' need for insurance coverage. In most cases consumers have some
ance. flexibility about the level of insurance they purchase, but they generally do not have
the freedom to choose not to purchase it. this is the case for automobile insurance,
which is mandated by law, and as a result demand remains fairly constant.
In addition, since auto insurance rate and availability are regulated, supply tends
to fluctuate less, even when prices are low. Insurers do not have the flexibility to
increase prices to where they want, nor do they have the freedom to choose not
to provide insurance.
In these ways, both the supply and demand of auto insurance is significantly
influenced by regulation, and less by market forces.
Rate peaks and valleys are mostly caused by problems with supply rather than a
change in demand. This is not so evident with automobile insurance, given that its
supply and price is regulated in most jurisdictions.
2. Your employer, 1. Product or service overview: what will be the features, pricing structure, distrib-
Reliable Insur- ution strategy, positioning, promotions and advertising that will be used to attract
ance Brokers, has customers. the products need to be responsive to consumer needs. Perhaps the
asked you to pre- insurer will offer complementary services and products.
pare a Market- 2. A marketing plan must include tracking and evaluating results. this can be done
ing Plan. Identify in various ways, including a tracking number or code, a promotion code, a survey
and describe two to evaluate customer satisfaction, evaluation of complaints.
of the key com- 3. Budget and resources description. All marketing budgets are limited, and need
ponents you will someone to be held accountable for it.
include in your
plan.
, C16 Business of Insurance -Practice UPDATED ACTUA Questions and
CORRECT Answers
3. Discuss the im- The investment markets have a significant impact on insurance companies because
pact of the stock they hold a significant amount of capital investments, and rely on investment
market on the in- returns to augment underwriting profits. The investment markets generally are in
surance industry. a bull market when there is a soft insurance market. this is because an insurer can
afford to compete more on premiums because they know they will make it up on
strong investment returns, and when investment returns wane, an insurer takes
steps to increase its underwriting profit by increasing prices and tightening up
policy terms and requirements, such as loss control.
Also, in economic downturns, insurance purchasers tend to be more cautious of
their assets, and rely more on insurance.
4. Identify and de- The Insurance Acts of Canada and the provinces and territories require insurer
fine the functions boards of directors to include two committees:
of the two board 1. Audit committee, which is responsible to improve the companies financial
of director com- reporting process.
mittees mandat- 2. Conduct Review committee, which is mainly responsible to handle conflict of
ed by law for interest issues, and prevent self-dealing.
all Canadian in-
surers.
5. List the main fac- Ultimately an insurer organizes itself in the way that allows it to operate as eflciently
tors that influ- as possible in producing profits, and is dependent on a number of factors:
ence how an in- 1. how power and control are distributed
surance compa- 2. how well systems are integrated between departments and others
ny organizes it- 3. how communication works
self. 4. how well services are coordinated
5. the size of the company
6. List and explain page 4-23. Outstanding claims reserve or claims liabilities, is an entry on an
the three ele- insurer's balance sheet and represents the gross claims reserves necessary to settle
ments an in- all claims due to claimants. It includes reserve estimates from:
surance com- 1. case reserves--all reserves for loss and claims expenses as posted and estimated
, C16 Business of Insurance -Practice UPDATED ACTUA Questions and
CORRECT Answers
pany considers by the claims department
when evaluating 2. Incurred but not reported--IBNR, which is calculated by actuaries, and repre-
its overall out- sents an estimate of claims that have occurred, but have not yet been reported. it
standing claims also includes provisions for PfAD, which is provision for adverse deviation, which is
reserve. where case reserves are insuflcient to settle the loss.
3. Bulk claims expense reserve estimated by actuaries for unallocated claims
expenses, such as the internal cost to manage and settle all claims the company
has that have not yet been settled.
7. Define mar- Market segmentation is the division of a market into segments which are sub-
ket segmentation groups of customers with similar needs, circumstances, and traits. This allows for
and explain how concentrated marketing efforts.
it is used in an in- The insurance industry uses segmentation by:
surance context. 1. Creating niche products to serve niche markets, such as collector car owners, or
RV owners.
2. Developing special pricing for specific groups, such as engineers or teachers.
3. Developing specific expertise in certain businesses, such as oil and gas, manu-
facturing, and con
8. An insurance this is a foreign insurer who will at minimum, need to set up a branch in Canada,
company based by application to OSFI. Once the insurer has satisfied federal requirements for a
in China has foreign insurer to set up a branch in canada, OSFI will grant it a licence to insure,
been offered a with the appropriate classes (property, liability, auto, etc), in Canada. With that
sizable industrial licence, the insurer would then need to apply to both regulators in SK and AB in
insurance order to be granted a licence to operate in each of those provinces.
portfolio in The following option is also a possible course of action, but unlikely. if you provided
Alberta and this answer in addition to the above, you would get extra marks:
Saskatchewan,
on the condition Alternatively, the insurer could choose to apply to OSFI to register a Canadian
that it obtains insurer as a subsidiary (not a branch), or to apply to SK or AB to register as an
the necessary insurer under the Insurance Acts of AB or SK. Once the insurer has satisfied federal
licences. Identify
CORRECT Answers
1. Explain the eco- pages 3-3 and 3-13. the economic theory of supply and demand proposes that
nomic laws of more resources will be allocated to a product that increases revenue. The law of
Supply and De- supply provides that the higher the price, then more will be supplied. the law of
mand, and ex- demand provides that, with all other factors equal, less will be demanded as the
plain why these price rises.
laws do not strict- For the insurance market, supply is represented by the capacity of the market,
ly apply to au- or the willingness of insurers to insure risks. The demand is represented by
tomobile insur- consumers' need for insurance coverage. In most cases consumers have some
ance. flexibility about the level of insurance they purchase, but they generally do not have
the freedom to choose not to purchase it. this is the case for automobile insurance,
which is mandated by law, and as a result demand remains fairly constant.
In addition, since auto insurance rate and availability are regulated, supply tends
to fluctuate less, even when prices are low. Insurers do not have the flexibility to
increase prices to where they want, nor do they have the freedom to choose not
to provide insurance.
In these ways, both the supply and demand of auto insurance is significantly
influenced by regulation, and less by market forces.
Rate peaks and valleys are mostly caused by problems with supply rather than a
change in demand. This is not so evident with automobile insurance, given that its
supply and price is regulated in most jurisdictions.
2. Your employer, 1. Product or service overview: what will be the features, pricing structure, distrib-
Reliable Insur- ution strategy, positioning, promotions and advertising that will be used to attract
ance Brokers, has customers. the products need to be responsive to consumer needs. Perhaps the
asked you to pre- insurer will offer complementary services and products.
pare a Market- 2. A marketing plan must include tracking and evaluating results. this can be done
ing Plan. Identify in various ways, including a tracking number or code, a promotion code, a survey
and describe two to evaluate customer satisfaction, evaluation of complaints.
of the key com- 3. Budget and resources description. All marketing budgets are limited, and need
ponents you will someone to be held accountable for it.
include in your
plan.
, C16 Business of Insurance -Practice UPDATED ACTUA Questions and
CORRECT Answers
3. Discuss the im- The investment markets have a significant impact on insurance companies because
pact of the stock they hold a significant amount of capital investments, and rely on investment
market on the in- returns to augment underwriting profits. The investment markets generally are in
surance industry. a bull market when there is a soft insurance market. this is because an insurer can
afford to compete more on premiums because they know they will make it up on
strong investment returns, and when investment returns wane, an insurer takes
steps to increase its underwriting profit by increasing prices and tightening up
policy terms and requirements, such as loss control.
Also, in economic downturns, insurance purchasers tend to be more cautious of
their assets, and rely more on insurance.
4. Identify and de- The Insurance Acts of Canada and the provinces and territories require insurer
fine the functions boards of directors to include two committees:
of the two board 1. Audit committee, which is responsible to improve the companies financial
of director com- reporting process.
mittees mandat- 2. Conduct Review committee, which is mainly responsible to handle conflict of
ed by law for interest issues, and prevent self-dealing.
all Canadian in-
surers.
5. List the main fac- Ultimately an insurer organizes itself in the way that allows it to operate as eflciently
tors that influ- as possible in producing profits, and is dependent on a number of factors:
ence how an in- 1. how power and control are distributed
surance compa- 2. how well systems are integrated between departments and others
ny organizes it- 3. how communication works
self. 4. how well services are coordinated
5. the size of the company
6. List and explain page 4-23. Outstanding claims reserve or claims liabilities, is an entry on an
the three ele- insurer's balance sheet and represents the gross claims reserves necessary to settle
ments an in- all claims due to claimants. It includes reserve estimates from:
surance com- 1. case reserves--all reserves for loss and claims expenses as posted and estimated
, C16 Business of Insurance -Practice UPDATED ACTUA Questions and
CORRECT Answers
pany considers by the claims department
when evaluating 2. Incurred but not reported--IBNR, which is calculated by actuaries, and repre-
its overall out- sents an estimate of claims that have occurred, but have not yet been reported. it
standing claims also includes provisions for PfAD, which is provision for adverse deviation, which is
reserve. where case reserves are insuflcient to settle the loss.
3. Bulk claims expense reserve estimated by actuaries for unallocated claims
expenses, such as the internal cost to manage and settle all claims the company
has that have not yet been settled.
7. Define mar- Market segmentation is the division of a market into segments which are sub-
ket segmentation groups of customers with similar needs, circumstances, and traits. This allows for
and explain how concentrated marketing efforts.
it is used in an in- The insurance industry uses segmentation by:
surance context. 1. Creating niche products to serve niche markets, such as collector car owners, or
RV owners.
2. Developing special pricing for specific groups, such as engineers or teachers.
3. Developing specific expertise in certain businesses, such as oil and gas, manu-
facturing, and con
8. An insurance this is a foreign insurer who will at minimum, need to set up a branch in Canada,
company based by application to OSFI. Once the insurer has satisfied federal requirements for a
in China has foreign insurer to set up a branch in canada, OSFI will grant it a licence to insure,
been offered a with the appropriate classes (property, liability, auto, etc), in Canada. With that
sizable industrial licence, the insurer would then need to apply to both regulators in SK and AB in
insurance order to be granted a licence to operate in each of those provinces.
portfolio in The following option is also a possible course of action, but unlikely. if you provided
Alberta and this answer in addition to the above, you would get extra marks:
Saskatchewan,
on the condition Alternatively, the insurer could choose to apply to OSFI to register a Canadian
that it obtains insurer as a subsidiary (not a branch), or to apply to SK or AB to register as an
the necessary insurer under the Insurance Acts of AB or SK. Once the insurer has satisfied federal
licences. Identify
