Principles of Risk Management and Insurance 12th Edition Geoge E. Rejda & Michael j. McNamara - Ebook download as PDF File .pdf), Text File .txt) or read . Study Principles of Risk Management and Insurance (12th Edition) (Pearson Series in Finance) discussion and chapter questions and find Principles of Risk. Principles of Risk Management and Insurance, Twelfth Edition B. Subjective Probability—a personal estimate of the chance of loss. It need not coincide with.
|Language:||English, Spanish, Hindi|
|Distribution:||Free* [*Registration needed]|
Principles of Risk Management and Insurance, 12th Edition. George E. Rejda, Emeritus; University of Nebraska. Michael McNamara, Washington State. Pre Order Download Principles of Risk Management and Insurance (12th Edition ) (Pearson Series in Finance) For Ipad Download Now Click to. Principles of Risk Management and Insurance (12th Edition) (Pearson Series in Finance) [George E. Rejda, Michael McNamara] on chausifetonis.cf *FREE*.
This means that a risk is transferred to another party other than an insurance company. For example, the risk of a defective television set can be shifted or transferred to the retailer by the download of a service contract by which the retailer is responsible for all repairs after the warranty expires. An auto insurance policy can be downloadd covering the negligent operation of an automobile.
Objective risk is the relative variation of actual loss from expected loss. Although the chance of loss may be identical for two different groups, the relative variation of actual from expected loss may be quite different. For example, if a company has a fleet of trucks, the expected number of collision losses each year may be However, actual losses may vary each year from 25 to In contrast, another fleet of trucks may have the same number of expected losses 30 , but the annual variation may be considerably higher, such as 20 to Thus, objective risk is greater for the second fleet.
The insured rarely profits if his or her house is damaged in a fire.
You usually do not profit if you are totally disabled. Profit or loss is possible. Life insurance can also be used, which reduces or eliminates the financial consequences to surviving family members if a family head dies prematurely.
Retention can also be used by downloading the policy with a deductible. Retention can also be used by downloading the policy with a deductible for collision losses. The insured can also drive defensively, which is a form of risk control. Auto liability insurance should be downloadd to deal with the exposure. The surgeon could also use risk control to reduce the possibility of injuring a patient.
Andrew has three noninsurance options. Andrew can avoid the risk of burglary or robbery by going into a different line of business. Legal Function I. Loss Control Services J. Information Technology II. Rate Making A. Activities of Actuaries III.
Underwriting A. Chapter 6 Insurance Company Operations 31 B. Underwriting Policy 1. Importance of a clear statement of underwriting policy 2. Underwriting policy followed spelled out in the underwriting guide C. Basic Underwriting Principles 1. Seeking an underwriting profit 2.
Providing equity among policyholders D. Steps in Underwriting 1. Agent as the first underwriter 2. Sources of underwriting information a. Application b. Inspection report d.
Physical inspection e. Making an underwriting decision E.
Other Underwriting Considerations 1. Rate adequacy 2. Reinsurance and underwriting 3. Renewal underwriting IV. Production A. General Nature B. Agency Department C. Professionalism in Selling 1. Claims Settlement A. Basic Objectives 1. Verification that a covered loss has occurred 2. Fair and prompt payment of claims 3. Providing personal assistance to the insured B.
Types of Claims Adjustors 1. Agent—usually authorized to handle small first-party claims 2. Company adjustor—salaried employee of the company who handles the investigation, negotiation, and payment of both first- and third-party claims 3.
Public adjustor—represents the insured C. Steps in Settlement of a Claim 1. Notice of loss to the company 2. Investigation of the claim 3. Filing a proof of loss 4.
Decision concerning payment VI. Reinsurance A. Key Definitions 1. Reinsurance—primary insurer transfers to the reinsurer part or all of the potential losses associated with such insurance 2. Ceding company—insurer that initially writes the business 3. Reinsurer—firm that accepts insurance from the ceding insurer 4. Net retention—the amount of insurance kept by the ceding company 5. Retrocession—reinsurer obtains reinsurance B. Reasons for Reinsurance 1.
To increase underwriting capacity 2. To stabilize profits 3. To reduce drain on surplus because of the unearned premium reserve 4. To protect against a catastrophic loss C. Types of Reinsurance 1. Facultative reinsurance 2. Treaty reinsurance a. Advantages b. Alternatives to Traditional Reinsurance 1. Securitization of risk 2. Catastrophe bonds VII. Investments A. Life Insurance Investments 1. Primary objective is safety of principal.
Yield is also important because it lowers the cost of life insurance. Investments have considerable economic and social impact on the economy. Property and Casualty Insurance Investments 1. Liquidity is more important than in life insurance because the contract is for a shorter period of time and claims are settled quickly.
Investment income is important because it can offset any unfavorable underwriting results. Other Insurance Company Functions A. Information Systems B. Accounting 1. Internal controls 2.
Preparation of reports to management 3. Preparation of tax returns 4. Preparation of financial statements for review by regulators C. Legal Function D. An excess-of-loss treaty can be used to provide protection against a catastrophic loss. The reinsurer pays losses in excess of the retention limit up to some maximum limit.
The excess-of-loss treaty can be written to cover a single exposure, or it can apply to a single occurrence, such as a catastrophic loss from a tornado or hurricane. A quota share treaty can be used. The ceding company and reinsurer agree to share premiums and losses based on some proportion. Premiums and losses are then shared based on this percentage.
However, the reinsurer pays a ceding commission to the primary company to help compensate for the first-year acquisition expenses in writing the business. The major advantage of quota-share reinsurance is that the unearned premium reserve is reduced. Thus, for smaller companies and rapidly growing companies that wish to reduce a surplus drain, a quota-share treaty can be especially effective.
Facultative reinsurance can be used. The primary company shops around for reinsurance before the life insurance policy becomes effective. If a willing reinsurer can be found, the primary company and reinsurer can then enter into a valid contract. An example of surplus-share reinsurance can be found in Chapter 6 of the text. Ratemaking differs from the pricing of other products. When other products are sold, the company generally knows in advance what its costs of production are, so that a price can be established to cover all costs and yield a profit.
However, an insurer does not know in advance what its actual costs are going to be. The premium may be inadequate for paying all claims and expenses during the policy period. It is only after the period of protection has expired that an insurer can determine its actual losses and expenses. Production refers to the sales and marketing activities of insurers.
Agents who sell insurance are frequently referred to as producers. Several steps are involved in settling a claim: After notice of the loss is received, the company adjustor will investigate the claim, determine the amount of loss, and arrange for payment. An independent adjuster may be used when a catastrophic loss occurs. An insurer may also use an independent adjustor in certain geographical areas where the volume of claims is too low to justify a branch office with a staff of full-time employees.
A public adjustor may be employed by the insured in a complex loss situation and in those cases where the insured and insurer cannot resolve a claim dispute. Chapter 6 8. Insurance Company Operations 35 c Securitization of risk means that an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a catastrophe bond, futures contract, options contract, or other financial instrument.
These financial instruments are used as alternatives to traditional reinsurance. Facultative reinsurance is an optional, case-by-case method used when the ceding company receives an insurance application that exceeds its retention limit.
Reinsurance is not automatic. The primary insurer negotiates a separate contract with a reinsurer for each loss exposure for which reinsurance is desired. However, the primary insurer is under no obligation to cede insurance and the reinsurer is under no obligation to accept the insurance. If a willing reinsurer is found, the primary insurer and reinsurer can then enter into a valid contract. Premiums are also shared based on the same agreed-on percentages.
However, the reinsurer pays a ceding commission to the primary insurer to help compensate for the expenses incurred in writing the business. The primary insurer and reinsurer then share premiums and losses based on the fraction of total insurance retained by each party. Premiums are also shared based on the fraction of total insurance retained by each party. However, the reinsurer pays a ceding commission to the primary insurer to help compensate for the acquisition expenses incurred in acquiring the business.
Pools are formed because a single insurer alone may not have the financial capacity to write large amounts of insurance; the insurers as a group, however, can combine their financial resources to obtain the necessary capacity. Each pool member agrees to pay a certain percentage of every loss. Another arrangement is similar to the excess-of-loss reinsurance treaty.
Pool members are responsible for their own losses below a certain amount. Losses exceeding that amount are shared by all pool members. Computers are used in accounting, policy processing, premium notices, information retrieval, telecommunications, simulation studies, market analysis, forecasting sales, and training and education.
Information can be obtained quickly with respect to premium volume, claims, loss ratios, investments, and underwriting results. Accountants also prepare state and federal income tax returns and file an annual convention statement for review by state regulatory officials. The attorneys may serve as defense counsel for the company if claims are litigated.
In life insurance, attorneys are widely used in advanced underwriting and estate planning. Attorneys also review insurance contracts before they are marketed to the public, provide testimony at rate hearings, and provide general legal advice concerning taxation, marketing, investments, and insurance laws.
Finally, attorneys lobby for legislation favorable to the insurance industry. Loss-control services include advice on alarm systems, automatic sprinklers, fire prevention, occupational safety and health, reduction of occupational exposures, prevention of boiler explosions, and other loss-prevention activities. Also, the loss control department can provide valuable advice on the construction of a new building or plant to make it safer and more resistant to damage.
Statutory accounting rules require the entire gross premium to be placed in the unearned premium reserve. However, the insurer incurs relatively heavy first-year acquisitions expenses because of commissions, state premium taxes, underwriting expenses, and other expenses in issuing the policy. In determining the size of the unearned premium reserve, there is no allowance for these first-year acquisition expenses, and the insurer must pay them out of its surplus.
As a result, a rapidly growing company may experience a surplus drain, and its ability to write new business may eventually be impaired. Felix should ask the following questions before the claim is approved: Does the policy cover the peril that caused the loss? Does the policy cover the property destroyed or damaged in the loss? Is the claimant entitled to recover? Did the loss occur at an insured location?
Is the type of loss covered? Is the claim fraudulent? This chapter begins with an overview of insurance company financial statements and then discusses rate making in property and casualty insurance. Life insurance rate making is discussed in greater detail in the appendix to Chapter As the first endnote in the chapter indicates, the goal of this chapter is not to make a student an expert on the intricacies of statutory accounting, or on generally accepted accounting principles, as they apply to insurance companies.
Rather, the goal is to introduce students to the financial operations of insurance companies in general terms. Property and Casualty Insurance Companies A. Balance Sheet 1. Assets 2. Liabilities 3. Income and Expense Statement 1. Revenues 2. Expenses 3. Net Income C. Measuring Profit or Loss D. Recent Underwriting Results II. Life Insurance Companies A.
Income 2. Net Gain from Operations C. Measuring Profitability III. Objectives in Rate Making 1. Regulatory Objectives 2. Business Objectives B. Basic Rate Making Definitions C. Rate Making Methods 1. Judgment Rating 2. Class Rating 3. Merit Rating a.
Schedule Rating b. Experience Rating c. Retrospective Rating IV. Rock Solid may have written more insurance coverage in the prior year than in this year. So in this year, the premiums earned may be more than the premiums written by Rock Solid.
Lonnie must remember that insurers have two major sources of income: The company was required to pay taxes on this gain. The pure premium is the expected claim costs divided by the number of exposure units. The gross rate is equal to the premium divided by one minus the expense ratio.
Assets are items of value that the company owns. Liabilities are what the business owes. An insurance company invests premium dollars and retained earnings. Specific assets held include bonds, common stock, preferred stock, real estate, and mortgage-backed securities.
Two additional asset categories for life insurance companies are life insurance policy loans and separate account assets. Loss reserves are an estimated value, but the actual loss experience could be different from the expected loss experience. The loss ratio is calculated by dividing the sum of losses and loss adjustment expenses by premiums earned. The expense ratio is calculated by dividing underwriting expenses by premiums written.
The combined ratio measures underwriting profitability. If the ratio exceeds 1 or percent , the insurer has lost money from its underwriting activities. If the combined ratio is less than 1 or percent , it means that the insurer has made money from its underwriting activities. Insurance companies have a second source of revenues: An insurance company can lose money on its underwriting activities, but still be profitable overall if its investment income offsets the underwriting loss.
Although the assets of a life insurance company are quite similar to the assets of a property and casualty insurance company, there are three important differences. First, an important asset for many life insurance companies is policy loans. Policyholders who own cash-value life insurance products may borrow the cash value from the insurer. Life insurance policy loans are an interest-earning asset for a life insurance company.
Life insurers tend to invest with a longer time horizon, matching the maturity of the contracts offered with the investments backing the contracts.
Some insurers sell products that are interest-sensitive e. In life insurance, a policy reserve is defined as the difference between the present value of future benefits and the present value of future net premiums. The major expenses for a life insurance company are benefits paid death benefits, health benefits, annuity benefits, matured endowments, and policy surrenders , claims expenses, commissions, premium taxes, and general insurance expenses.
The gross rate, in turn, is the pure premium plus the loading for expenses, profit, and other contingencies. The pure premium can be determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units. A loading for expenses is then added to the pure premium to determine the gross premium. The actual loss ratio is the ratio of incurred losses and lossadjustment expenses to earned premiums.
The expected loss ratio is the percentage of the premium that is expected to be used to pay losses. The gain from operations before dividends and taxes equals total revenues minus total expenses. Chapter 7 Financial Operations of Insurers 41 and annuity benefits paid. The pure premium is that portion of the gross rate needed to pay losses and loss-adjustment expenses. The pure premium is determined by dividing the dollar amount of incurred losses and loss-adjustment expenses by the number of exposure units.
The number of exposure units is , cars insured for one year. The loss ratio is the ratio of incurred losses and loss-adjustment expenses to earned premiums. The expense ratio is the ratio of expenses incurred to written premiums. The combined ratio is the sum of the loss ratio and the expense ratio 0. A loss reserve is the estimated cost of settling claims that have already occurred but have not been paid as of the valuation date. Most specifically, the loss reserve is an estimated amount for: This method is used when the number of claims in a particular line of insurance is too small or the variation in claims is too large to assign an average value to each claim.
This method is used when the number of claims is large, the average amount of each claim is relatively small, and the claims are quickly settled. The loss reserve is called the tabular reserve because the duration of the benefit period is based on data derived from mortality, morbidity, and remarriage tables.
As of a specified date, such as December 31, a certain number of claims have already occurred but have not yet been reported to the insurer.
Two timely and controversial issues should also be discussed: Finally, the use of credit-based insurance scores in auto and homeowners insurance should be of interest to students. Reasons for Insurance Regulation A. Maintain Insurer Solvency 1. Premiums are paid in advance but protection extends into the future.
Policyholders are exposed to financial insecurity if insurers become insolvent and claims are unpaid. Compensate for Inadequate Consumer Knowledge 1. Insurance contracts are complex legal documents. It is difficult to compare and determine the monetary value of insurance contracts. Protection is needed against unethical agents. Ensure Reasonable Rates D.
Make Insurance Available II. Historical Development of Insurance Regulation A. Early Regulatory Efforts 1. State-chartered companies 2. State insurance commissions B. Paul v. Virginia 1. Ruled that insurance was not interstate commerce 2. The states rather than the federal government had the right to regulate the insurance industry C. South-Eastern Underwriters Association Case 1. Reversed the Paul v. Virginia decision—court ruled that insurance was interstate commerce when conducted across state lines and was subject to federal regulation 2.
The decision cast doubt on the legality of private rating bureaus and the power of the states to regulate and tax the insurance industry. Chapter 8 Government Regulation of Insurance 43 D.
The McCarran-Ferguson Act states that continued regulation and taxation of the insurance industry by the states are in the public interest 2. It also states that federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state law E.
Financial Modernization Act of 1. Allows banks, insurers, investment firms, and other financial services firms to compete in financial markets outside their core area 2. Both state and federal regulatory authorities are now involved in insurance regulation III. Methods for Regulating Insurers A. Legislation 1.
State laws—formation of insurance companies; licensing of agents and brokers; solvency regulation; rates; sales practices and claims practices; taxation; rehabilitation or liquidation of insurers; protection of consumer rights 2. Federal laws—mail-order sales; advertising; sale of variable annuities; private pension plans B. Courts 1. Constitutionality of state insurance laws 2. Interpretation of policy clauses and provisions 3.
Legality of administrative actions by state departments C. State Insurance Departments IV. Areas That Are Regulated A. Formation and Licensing of Insurers B. Solvency Regulation 1. Admitted assets 2. Reserves 3. Surplus 4. Risk-based capital 5. Investments 6. Dividend policy 7. Reports and examinations 8. Liquidation of insurers C. Rate Regulation 1. Prior-approval law 2. Modified prior-approval law 3. File-and-use law 4. Use-and-file law 5.
Flex-rating law 6. State-made rates 7. No filing required D. Sales Practices and Consumer Protection 1.
Licensing of agents and brokers 2. Unfair trade practices 3. Twisting 4. Rebating 5. Complaint division 6. Publications and brochures F. Taxation of insurers State versus Federal Regulation A. Advantages of Federal Regulation 1. Uniform state laws and regulations 2.
More effective negotiation of international insurance agreements 3. More effective treatment of systemic risk 4. Greater efficiency of insurers B.
Advantages of State Regulation 1. Quicker response to local insurance problems 2. Increased costs from dual regulation 3. Poor quality of federal regulation 4. Promotion of uniform laws by the NAIC 5. Greater opportunity for innovation 6. Unknown consequences of federal regulation C. Shortcomings of State Regulation 1. Inadequate protection of consumers 2. Improvements needed in handling complaints 3. Inadequate market conduct examinations 4.
Insurance availability studies conducted only in a minority of states 5. Regulators overly responsive to the insurance industry D. Modernizing Insurance Regulation A. Need for modernization B. Dodd-Frank Act and insurance regulation C. Creation of Federal Insurance Office D. Optional federal charter VII.
Insolvency of Insurers A.
Reasons for insolvencies B. Credit Based Insurance Scores A. Arguments for insurance scores B. The risk-based capital requirements have increased the minimum amount of capital for many insurers and decreased the chance that a failing insurer will exhaust its capital before it can be seized by regulators. The company has a risk-based capital ratio of 75 percent, which is at the company action level. The company must file a plan with regulators to increase its risk-based capital.
The ratio has fallen below the mandatory control level of 35 percent. Regulators are required to seize the company and place it under regulatory control. Common stocks are riskier than bonds. All things equal, the sale of stocks with the proceeds invested in government bonds will improve the risk-based capital ratio of Mutual Insurance. The insurance industry is regulated for the following reasons: Virginia, the court held that insurance was not interstate commerce and that the states rather than the federal government had the right to regulate the insurance industry.
This decision stood for about 75 years until the Supreme Court reversed it in The McCarran Act states that continued regulation and taxation of the insurance industry by the states are in the public interest and that federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state law.
The legislation changed federal law that earlier prevented banks, insurers, and investment firms from competing fully in other financial markets outside their core area. As a result, insurers can now download banks, banks can underwrite insurance and sell securities, brokerage firms can sell insurance, and a company that wants to provide insurance, banking, and investment services through a single entity can form a new holding company for that purpose.
Three principal methods are used to regulate the insurance industry: The principal areas that are regulated include the following: In most states, if the rates are not disapproved within a certain period, such as 30 or 60 days, they are deemed to be approved. However, if the rate change is based on a change in rate classifications or expense relationships, then prior approval of the rates is necessary i. Under this law, insurers can put any rate changes into effect immediately, but the rates must be filed with the regulatory authorities within a certain period after first being used, such as 15 to 60 days.
Twisting laws apply primarily to life insurance policies. The objective is to prevent policyholders from being financially harmed by replacing one life insurance policy with another. Rebating is illegal in the vast majority of states.
Advocates of federal regulation present the following arguments in support of their position: Chapter 8 Government Regulation of Insurance 47 3 Poor quality of federal regulation 4 Promotion of uniform laws by NAIC 5 Greater opportunity for innovation b Critics claim that state regulation has several shortcomings, which include the following: To ensure solvency, insurers must meet certain risk-based capital requirements based on the riskiness of their investments and insurance operations.
Insurers are also periodically examined by insurance examiners, annual financial statements must be submitted, and there are restrictions on the types of investments that insurers can download. You can change your ad preferences anytime. Upcoming SlideShare. Like this presentation? Why not share! Embed Size px. Start on. Show related SlideShares at end. WordPress Shortcode. Published in: Full Name Comment goes here. Are you sure you want to Yes No. Be the first to like this.
No Downloads. Views Total views.