C121 Advanced Underwriting

Chapter 1 Needs Analysis

Introduction Underwriter: insurance professionals who invest the capital of an insurer’s

shareholders by accepting or rejecting risk implementing an insurer’s strategic plan.

The Typical Risk No such thing as a typical risk

o Different exposureso Different levels of exposureo Cross bordero Small and large

Underwriting Skills Technical Skills: tools of trade- rating and ratemaking, computer skills, research

skill, knowledge of insurance products, loss control, and reinsurance. Analytical Skills: information must be sifted, ordered, weighted. Includes

financial analysis and risk analysis. Communication Skills: orally and in writing. Negotiations Organizational Skills: time management and be able to prioritize

Rating and Ratemaking Skills Rating: the process that underwriters use when they apply the information

developed by actuaries to the information that has been gathered about the risk to set a premium for a specific risk. Two approaches:

1. Class rating: is used when statistics can be gathered on a large number of risks that share common characteristics.

Same basic risk factors re either present or absent I.e. auto insurance Allows for statistical measurement of the claims

experience for each risk factor2. Schedule rating: available statistical data are too fragmented for class

rating. I.e. commercial property

Loadings: additional charges Deductions: credits

Actuaries Loss development factors (LDFs), to be applied to a risk’s past claims to project

final cost of settling themo Tool for projecting future loss ratio and the premium needed to make risk

profitable.o Also consider inflation, types of loss, changes in risk

Computer Skills Management by exception: underwriter establishes a set of acceptable boundaries

for the risk in his or her portfolio, then asks for reports only on risk that fall outside those boundaries. (Manage information overload)

Adapting to technological changeo Get acquainted with the new insurance systemso Get acquainted with the non-insurance toolso Lear about the insurer’s databaseo Become familiar with other database applicationso Learn about information available onlineo Find out where to get help when it is needed

Product Knowledge Important skill: ability to choose and perhaps modify coverage to address the

needs of an existing or prospective insured.o Rooted in knowledge or insurance products

Know competitors financial stability, (subscription policies) Can they authorize amount of insurance Understand policies offered through other departments

Manuscript Wordings Manuscript wordings: are unique wordings specifically drafted to accommodate

the unique needs of a particular risk.

Research Skills Library, telephone, computer, faxes and email Internet, websites, reinsures

Reinsurance Knowledge Consider needs of client with the insurer’s objectives Use capacity by a reinsurance treaty of buy facilitative reinsurance Reinsurance Treaty: automatically covers all risk written by the ceding company

that fall with the treat terms except exposures that are specifically excluded Facultative Reinsurance: covers and individual primary policy.

o Often on catastrophic or unusual risk exposureso Fill gaps in primary policy created by treaty exclusionso Certain hazardous operationso May be anticipated to develop significant losses

Knowledge of Loss Control Loss control department, one of greatest asset

o Help with the underwriting process, additional underwriting information, eliminate frequency of loss

o If underwriter is unable to visit, send loss control, produce report.

o Typically group hazards in four main categories1. Attitude to loss prevention on the part of the risk’s management

Moral hazard, especially if financial difficulties, poor attitude to loss prevention.

2. Physical hazards Might make a loss more likely

3. Housekeeping Physical and moral hazard, managements attitude to loss

prevention4. Neighborhood

External exposureFinancial Analysis Skills

Whether risk can accept deductibleso Candidate for self retention: amount of a potential loss that is not covered

by the insurance purchased by the insured from the insurero Deductible: reduces the amount of an insurer’s payment to or on behalf of

an insured in settlement of a loss. Has discontinued operations Specialized coverage Capital resources to implement and loss control plans

Risk Analysis Skills Exposures, perils, and hazards What perils does risk face? Has the risk suffered any unusual losses

o Cause or causes of the risk’s loss experience Are there physical hazards that can be reduced or eliminated Does the risk present a moral hazard Does the risk have high employee turnover

Communication Skills Underwriter should use his or her natural curiosity to good advantage

o Open ended questions, listen for more then content Good communication is not adversarial

o Avoids confrontation The telephone present is own set of problems

o No non verbal cueso Tone of voice importanto Avoid telephone discussions when not preparedo Anticipate all questions

If a language difficulty presents itself, the underwrite should be patient Written communication should be clear and free of idioms and colloquialisms Written communications includes what the underwriter commits to file

o Documentation convey underwriting intent

Case Study

Adequacy of current coverage Identifying sources of assistance Searching the internet Different classes of risk Broader coverage Builders Risk policy: covers building while in the course of construction, along

with property related to the constructiono Limits should match value of completed projecto Insured property should be defined under the builders risk policy to

include all property in the course of construction owned by the insured or for which he is responsible, along with the costs of installations, testing, and related expenses.

Chapter 2: Loss Analysis and Rating

Quantitative skills Look at 5 years of loss experience Loss Run: a summary or report of loss experience for a risk over a specified

period of time. What do loss runs tell the underwriter:

o Financial information: reserves, payments, used to determine profitability of risk

o Types and size of claim, account experienceo Acceptability of the account, needed premium and other terms and

conditions Date of Loss: when loss happened Date of Report: when it was reported

o Late reportingo Anomalies i.e. Loss coming to underwriters attention by TP

Type, Description, and Location of Losso Type expected from this risk, a certain type that is recurringo Moral hazardo Unexpected losses, what happenedo Loss Frequency compared to loss severity

Changes in expectations Risk management should be done

o Large Loss, will it occur againo Claim counts have changed

Changes in operating, deductibles Outstanding Reserves

o Open claims, insureds reserving philosophy and feel comfortable with reserve assigned

o Extent of loss reserving, longstanding claims with small reserves are unusual

Losses Incurred and claims Paido Information on this such as:

Reserves and payments include deductibles or are they net of them Changes in deductible level Include adjustment expense Split between settlement and adjustment expense, legal fees Does anything seem odd

Open and Closed Claimso How long does it take to close a claim for this risk

Qualitative Skills Situations in which using mathematics in statistical analysis might not yield

useful conclusions for the underwritero Insufficient statistical data

o Familiarity with the industryo Sufficient data but difficulty in comparing riskso Statistical improbability of loss that odes not rule out the possibility of it

Possibility is not the same as probabilityo An absence of loss yet an occurrence of some kind the underwriter should

still know about

Combining Quantitative and Qualitative Skills

Losses must be analyzed for patterns Look at root causes of claim Adjust the claim payments for inflation and then apply the deductible to

determine the impact it may have on claims No rule of thumb for deductibles

Putting Numbers into context

Undue pessimism: “never had a loss, they are due”o Look beneath the surface

Loss Development Factors (pg 15 to end of chapter-read for case study example-IMPORTANT)

IBNR: Incurred but not reported Undeveloped loss history: the incurred numbers as of today and have not had

development factors applied to reflect future changes in claims reported, claims reopened and additional case reserves

Incurred loss ratio: the ratio of incurred losses to earned premium Incurred-loss numbers can tell the underwriter immediately whether there is a

problem, should not be relied on to determine whether the account is profitableo Makes no allowance for the development of losses that may still be open,

losses incurred but not reported, or any expense of profit of the insurer.o Must apply a loss development factor

Loss Development Factor: number applied to losses evaluated at a certain time to project the amounts at which they will ultimately be settled.

o In practice, loss experience would need to be modified not only by loss development factors for incurred losses but also by such measure as trend factors to adjust closed claims for inflation and other factors to adjust open and closed claims for changes in statutory requirements such as accident benefits for the insured victims of automobile accidents

Loss Development Factors and the Loss Triangle Groups losses by year over successive time periods to show a history of change in

the amounts of all losses. -estimate future losses Accident year: matched all losses, regardless of when they were actually reported,

to the 12-month period in which they occurred.

Loss triangle illustrated loss developmento Losses develop over time in 2 different ways

1. All reported claims that are open at the end of each valuation interval have the potential to develop by increasing or decreasing until they are ultimately settled

2. There is the potential for new claims that were incurred in the accident period but not reported as of the end of the valuation interval

o Data is for one line of coverage only, limited to certain amount of loss per occurrence

o Created for reported losses, paid claims, claims countso Reported-loss triangle assumes consistency in claim reporting and

reserving philosophy for each loss periodo Paid-claim triangle assumes consistency in claim-payment pattern and

claim-settlement philosophyo Greatest benefit, allows for a more accurate loss the insurer’s loss

development patterns

The Loss Triangle at work Link-ratio or age-to-age factor: incremental development factor Losses can be considered fully developed once the link ratio reached 1.00 Look for consistency between link ratios and consistency Average link ratios are indicators of how losses have developed from one period

to another Industry wide data may be needed not only because the experience for the risk is

not enough on which to base reliable conclusions but also because previous accident years for the risk may still have some open claims that are therefore subject to further development.

o Help smooth results Cumulative factor or age-to-ultimate factor, applied to any evaluation period to

project the ultimate settlement value. Combined ratio: includes allowance for projected acquisition and overhead costs

and for profit What else can triangles tell us

o Changes in claim reporting patterns Are reserves stable Is there and explanation for these changes

o Claims taking longer to settle, o Change in exposure unitso Change in coverageo Could put claim counts in triangle o Identifying trends or issues

Rating

First need to consider the exposure base used to develop the premium

What makes rate profitable, developing insurance cost Pure premium rate: premium required to match incurred losses, with no allowance for

commissions, overhead, profit, or investment income We need to convert to current dollar Trend factor for inflation Median accident date: the date in the middle of a series to dates of loss, such that the

number odd dates of loss that precede the median date is the same as the number of dates of loss that follow it.

Trended pure premium: derived from the untrended pure premium rates for each accident year

Comparison with the Manual Rate Compare again manual rate, which is typically based on the average risk of its

class

Chapter 3: Other Common Lines of Insurance

Crime Insurance Covers theft, burglary, and other crime-related coverages Inside business: employee dishonesty, computer fraud, document forgery 3D policy: Comprehensive Dishonesty, Disappearance and Destruction. Conditions

o Policy holders’ duties after a losso Specified time after loss to reporto Overlapping coverage’s

Conditions unique to crimeo Stipulations on how to distribute any stolen property record after the claim

has been settledo Value of property under the policy tends to be the actual cash value at the

time of loss, unless the property has been used as a pledge or collateral, in which case the it is worth the amount agreed to at the time the loan was made

o Securities are stolen, valued at actual cash value at the close of business on the last business day before the discovery of loss.

Exclusions unique to Crimeo Damage to glass or damage to lettering, ornamentation, tapes, or foils on

the glasso Loss or damage to manuscripts, records, or account, except for their blank

valueo Loss or damage due to any criminal act to committed by the insured, his or

her partner, or an officer, employee, director, trustee, or insured’s authorized representative, whether acting alone or in collusion

Most Common Types of Crime insurance:o Church theft, loss caused to alms box, poor box, similar receptacle is

excludedo Damage to Building by Burglary or Robbery, includes vandalism or

malicious mischief if occurring at the same time, but excludes loss arising from fire.

o Insider/Outside Robbery, attempted robbery of a custodian on premises and included damages to the premises and theft form a window display while the premises are open

o Money and Securities, loss of money and securities by their actual destruction, disappearance, or unlawful removal form within the premises, damage to premise and property, also while being conveyed by custodian.

Exclusions Loss due to an accounting error or omission Loss of money contained in vending machines, unless the

deposits are recorded by a continuous recording instrument Loss due to unauthorized electronic transfer Potential income lost from interest or dividends

o Office/Store Burglary and Robbery, 1 of three combination of coverage: four-party, seven-park

package for office burglary and robbery or a seven-party package for store burglary and robbery.

Parts are: Inside Robbery Outside Robbery Sage Burglary/Burglary of Money and Securities Kidnapping Theft of Money and Securities in Night Depository or

Custodian’s Home Burglary of Stock in store Theft form Office Premises Damage to Property and Premises.

o Stock Burglary, loss or damage to stock and equipment cause by burglary or robbery of a watchman or by vandalism or malicious mischief committed on the same occasion. No coverage for furs, leather goods, or articles containing either when removed forma showcase or window display.

Crime insurance underwriter concerned with moral and physical hazard Look for an insured with a good reputation and a stable financial situation Physical hazards arise from physical elements surrounding property Certain business more susceptible to burglary, i.e. jewelers Cash on hand is a target Crime insurance is expensive for insurer by the added cost of inspecting risk;

therefore it can be profitable only by keeping loss ratio low.

Employee Dishonesty Insurance Often excluded by Crime policies, offer it to avoid disputes as to whether or not

loss caused by employee Protects an employer against the loss for money, securities, or other property

resulting form the dishonest acts of an employee 3D policy has employee dishonesty included Blanket form to cover employees Coverage offered in two ways

o Form A: applies when the amount of insurance is applied per occurrence independently of the number of employees involved.

o Form B: applies when the amount of insurance is applied per employee involved in the embezzlement.

Definition of employee is very broad, includes contract employees as well as director and officer if they are actively employed by company, employees who have left for 30 days, employees released from their job, insured excluded

Could be impossible to identify employee Trigger is the discovery of loss during the policy period, which creates 2

problems:o Loss occurring over a period of time

o May be discovered when policy is cancelled or non-reward by another carrier.

o To deal with this, policy have discovery period that extends coverage under the policy to losses discovered within a specified period of time after the policy has expired. 1 year on Form A, 2 on Form B

o Loss Under Prior Bond or Policy: allows for the recovery of the loss under the current policy on certain conditions:

Continuous coverage Coverage and exclusions on current policy are used Amount paid by the insurer for portion of the prior loss not exceed

limit of the prior policy Does not increase policy limits (read example on page 10)

When underwriting make sure business is well run, financial controls in place, cheques should be countersigned, audits and inventories should be carried out by regular and frequent intervals, normal checks an supervision that are part of sound business practice should be enforced. Well salaried employees

Business Interruption Insurance. Indemnifies the insured business against losses airing from its inability to

continue the normal operation and function of the business Triggered by the total or partial suspension of business operating due to the loss

or loss of use of or damage to all or part of the buildings, plan, machinery, equipment, other property

Attaching endorsement to direct damage property policy Rating is based on percentage of rate for the physical damage insurance Addressed two aspects of indirect loss:

o Reduction in earningo Necessary expensive incurred to reduce the BI loss

Coverage for interruption by civil authority, access to premise prohibited, 2 weeks, damage to neighboring property

Profits form and Gross Earning for, income-restoration coverages Extra Expense additional expenses American approach

o Gross Earningso Coverage from date of loss until repair or replacement have been

completed with due diligence and dispatch, once they can reopen British Approach

o Interrupting has ceased to affect the level of business incomeo Profits form

Adjusting these claims, have to deal with ambiguity of contract IBC forms, Business Income and Extended Business Costs, policies unto selves,

other forms still dominateProfits Gross EarningsBritish AmericanIndemnity period, business restored Indemnity, reopenNo Coinsurances, in effect 100%, Average 50% or 80 depending on option for

clause treatment of ordinary payrollNo exclusion for Stock Damage to stock is excludedBy laws include and delay No coverage for delay caused by by-laws

Adjustable Policies and the Stated Amount Clause

Negotiating BI requires accurate financial forecast Need to secure proper amount of insurance Must forecast for 2 years Amount of insurance suggested is a minimum amount, they should buy at least

this much Premium Adjustment clause: encourage an insured to buy more than its estimate

of the minimum amount of insurance to avoid underinsurance and the possibility of coinsurance penalty

Insured selects an amount of insuranceo Estimate used to calculate a deposit premium for BIo End of policy period, actual financial results are multiplied by the

premium rateo Pay/collect difference in premiums

Stated Amount Clause: the insurer and the insured agree before the inception of coverage on an appropriate amount of insurance, as long as insured has state amount of insurance in effect at time of loss, the insurer will pay the full amount of the loss up to the amount of insurance

o Insurer may delete premium adjustment

Contingent Business Interruption Insurance Other ways to suffer loss include loss of main customer, supplier

Extra Expense Insurance For some insured’s it may be important to keep in business after a loss has

occurred, ie newspaper Extra Expense insurance: does not pay for any loss of profits or earning, cover the

increase in costs. Extra expense form ends when the damage caused by a loss has been repaired and

the risk is able to resume operation Typical risks found in service sector No coinsurance requirement Monthly payments of percentages of amount insured ie 40%, 30% 20% then 10%

Boiler and Machinery Insurance

Under all risks, the following exclusion exist:o The explosion, bursting, or rupture of boilers and pressure vesselo Mechanical breakdowno Electric arcing

Boiler fills gap, may be some overlap, ie lightening damage to electrical equipment

Largest difference between property and boiler is frequency and severity. Great problems for Boiler is frequency Deductibles and waiting periods important Boiler and machinery policy covers loss from an accident to an object and any

resultant property damage Object: pressure vessels ect. Buy comprehensive policy don’t have to specify all property Includes a wide range of electronic equipment, Specialized equipment may be easier to underwrite because of literature and

information available.o Inspections, reduce risks

Protects against direct loss, resulting indirect loss is excluded and could far exceed the physical-damage claim. BI can be added by endorsement

Chapter 4: Important Supporting Lines

Suretyship Guarantees the debt or the performance of an obligation on one party to another Involves three parties

o Principal: the party whose obligation is guaranteedo Oblige: The beneficiary under the terms of the surety bondo Surety: The guarantor, who guarantees fulfillment of the principals

obligation Surety guarantee expressed in a bond Bond: a legally enforceable promise by a surety to an obligee that the principal of

the bond will carry out a specified obligation or else the surety will assume the principal’s obligations to the obligee.

Surety and Insurance compared

Insurance SuretyshipA two party contract A three party contractCarries a duty of utmost good faith Subject o ordinary contract law with

respect to disclosureIs cancelable Usually non-cancelableCalculates premium based on losses Presumes n loss will occur-fee charged for

serviceInvolves transfer of risk No risk transfer occursDoes not require reimbursement from the insured

Principal reimburses the surety

Miscellaneous bonds

Surety bonds not used in construction Sub categories

o License and permit bonds: guarantee obligation imposed by consumer protection acts and regulations

o Customs and excise bonds: satisfy compliance with respects to federal and provincials tax acts and regulations

o Court and fiduciary bonds are requited by the judiciary as security for court costs, to release liens, and to comply with probate and bankruptcy laws

o Lost document bonds are required by corporation that are asked to reissue securities, certificates, or other valuable documents and want some security in case the original should be presented payment later.

o Financial guarantee bond, repayment of loan, payment of rent, or similar commitment

Suretyship and the Construction Industry

Construction bonds: bid bonds, performance bonds, labour and material payment bonds, maintenance bonds

Quebec contractors need to provide bond to government Bid Bonds: required when responding to a tender call to supply a bid bond that

guarantees the quoted contract price to the project owner.o Bid bond will pay, subject to the limit of the bond, the difference between

the price the original contractor had guaranteed in its bid and the price the owner was force to accept instead from the next-lowest bidder.

Performance Bond: usually issued by same surety as the bid bondo Protects the project owner, up to the limit, should the contractor be unable

to complete the project and thus be in default of the construction contract.o Condition of receiving the contract.o Greatest risk to underwriters, commits to pay damages or complete project

should the contractor fail to perform its obligationso Obligation ends when owner has issued a certificate of acceptance and

once maintenance period is expired. Labour and Material Bond: guarantees that suppliers of material and labour to a

constructions project will be paid.o If contractor fails to do so, monies placed in trust for suppliers

Underwriting Surety Bonds

Background information on the contractor, history of company, type and magnitude of construction work done, geographical area covered, how many jobs, completion dates

Construction site visited, conditions inspected Principal: reputation and experience, subs provide references, past surety

arrangements, experience with surety Business: management, employees, business plan performance record, jobs in

progress, enough workers Review contract Financial element: important for underwriter to understand financial health, credit

record, financial statements, relationship with bank, accounting controls, billing figures.

o Confirm adequate working capital, and make sure that their will be recovery if needed

Builders Risk Insurance

Builders Risk: the exposure to risk of loss or damage to buildings in the course of construction

Structure, materials Contractors equipment and tools usually excluded, insured on equipment floaters Two forms: Builders Risk named Perils Form, and Builders Risk Broad form.

Issued to name both the owner and the general contractors and subcontractors (i.e. plumbers and electricians)

Might be issued on reporting basis to cover property in course of construction on all its various projects over the policy term. Provisional deposit charged, and then adjusted accordingly.

o Reports done each montho Best for contractors that construct lower value projects

Could be issued specifically for one project, because of higher limits-can be issued on reporting basis

Expiration coincide with completion date, provides automatic extension Surety obligation ends when owner take possession or once occupied

Builders Risk Broad Form Indemnity agreement-least of

o RCo Interest on Insured propertyo Amount on Dec. page

Property Insured: include property in course of construction like installation, landscaping ect.

Exclusions: loss or damage to contractors tools, including spare parts and accessories

Extensions of Coverage: part of amount of insurance-7 day removal clause, debris removal clause, Offsite Coverage clause

Cessation of Coverage: project used for purposes other then construction; habitation or installing or storing equipment or left unattended for more then 30 days.

Loss Adjustment: simplifies claim procedure, any claim is to be adjusted with the general contractor or wonder

Subrogation, insurer will not subrogate Amount of Insurance and Premium Adjustment: = estimated completion value Verification of Values: right to examine insured’s books at a reasonable time

during term or within a year after.

Underwriting Considerations

Background information for named insured and General contractor, construction manager, underlying coverage’s, previous claims

Assess potential exposureo Qualification and expertise of the policy holderso Natural features of the siteo Methods of constructiono Materials delivered or storedo Security measures

Wrap Up Insurance

General contractors are often responsible for site safety More complex project, the more their responsibilities increase Wrap up policy: exposure to liability for loss or damage to third parties on the

part of participants in a commercial constructing project Extends to include owners, project managers, contractor, subcontractors,

architects, engineers and their consultants Wording is standard liability, with amendments pertain to the named insured,

description or operations, and aggregate limits

Advantages and DisadvantagesOf one policy covering all participants

Eliminates disputes among the insurers Only one insurer administers the response to a claim, reduces loss adjusting

expenses Assures uniformity Ensure more appropriate limits for risk, minimum limits for each party, single

limit to projectDisadvantage

Builders risk reduces risk to a warp up, insurers will offer discount Wrap up may not be as broad as under a contractor liability policy Does not eliminate the need for parties maintain their own separate policies

for work unrelated to the project.

Underwriting the Wrap-Up Policy

May not want to insure wrap up but increase limit on existing liability policy Strict underwriting standards, detailed application Must have established record of financial and business competence Easier if they have GL, because familiar with risk Background information on named insured Questions

o Qualifications and expertise of policyholdero Who is architect, expertise, engineero Methods and type of constructiono Prior use of lando Loss control and exposureso Natural features of siteo Coverage available for workerso Any part of project to be occupied before completion

Warranty Insurance

Warranty: written guarantee or assurance that a product is fit for its intended use Extended warranty: continues to protect the purchaser after the manufacturer

basic warranty expires

o May be offered by manufacturer, most often by third party such as insurance company or dealer

More likely to call on extended warranty with age, greater risk of an extended warranty for an underwriter in prediction difficulty of predicting the future cost of claims.

Forms of Extended Warranty Insurance Two forms

o Financial guarantee: performance bond from insurer, bond obligates the insurer to pay any legitimate claims against the warranty if a financial failure present the party that issued the warranty from doing so, here performance bond constitutes extended warranty insurance

o Direct sale of extended warranty from insurer to product purchaser: insurer collects premium from the purchaser, and purchaser can claim against the insurer’s warranty for any defects, insurer itself that extended warranty insurance

Extended warranty is generally narrower then manufactures warranty, only protects against spontaneous mechanical breakdown

Exclusions

Wear and tear Misuse of the product Failure to maintain the product according he manufacture’s directions By-laws that increase the cost of repairing or replacing a damage covered item as

a result of a municipal ordinance Underwriting: products of proven quality, warranty provider history, make good

on warranties, have capital to cover obligations

Inland Marine Insurance

Generally refers to insurance covering loss, damage, or delays to property I transit, as well a multi-peril coverage on moveable property

Broad coverage on fixed property referred to as instrumentalities of transportation such as bridges, tunnels, dams, pipelines, power transmission

Types of Multi-Peril Insurance

Data processing Policy Jewelers Block Policy: stock usual to a jewelers business, including property of

others in custody for sale, repair, of approval or on consignmento Insurers against all risk, lengthy list of specialized exclusions

Furriers lock Policy: all risk insurance on the stock of retail and wholesale furrierso Extends anywhere in Canada and US

o Limit of insurance established for furs, similar stock, accessories on premise, unnamed sales agents, or processors premises, while in custody of employees or the insurer and in transit

Contractors Equipment Floater: cover power shovels, bulldozers, compressors, ravel crushers, portable asphalt…ECT.

Bailees Policies: i.e. dry cleaner

Inland Transportation Insurance

Covers merchandise in transit on land and includes what inland marine underwrites term transportation floaters, trip transit policies, truck cargo policies, express floaters

o Properties at various stages in motion

Other Special Policies

Parcel Post Insurance: covers shipment of merchandise by mail from the time they pass into custody of the post office until they arrive the stated address within Canada and the US

Registered Mail Insurance: designed primarily for banks, credit unions, trust companies, stock brokers, other financial institutions

o Coves shipments by registered mail of bonds coupons stock certificates, jewelry, and other valuables form the time they leave the sender’s premises unitil they are delivered

Armoured car an messenger insurance: covers shipment of currentyc and securities by armoured cars andn messengers

Travellers samples or salesmen floater: insure the owner of sample while such good are in the care or control of traveler or salesmen on the road

Chapter 5: Miscellaneous Lines of Insurance

Professional Liability Insurance

Usually, protects against negligence compared to reasonable person higher a duty of care

Liability arising out of negligent acts, errors, and omissions in the delivery of professional services or failure to deliver those services

Policies

Cover economic consequences Third party exposure Exclude liability arising out of BI and PD Need separate GL

o Should be same insured, avoid claim disputes Large part of cost is in investigating and defending a claim

o Defending repo Claims are more complex, involve experto Not unusual for multiple defendants

Claims made Retroactive date: corresponds to expiration date of the occurrence made policy Previously on occurrence Annual aggregate limit In all provinces except Quebec, defense within limits Special features, including fraud coverages

The Evolution of Professional Liability Insurance

Alternative risk transfers include captive insurance and reciprocal arrangements Professional unable to find sufficient coverage, lack of capacity Claim made was a response to limit capacity, shortened tail Tail: interval between the expiry of an occurrence-based liability policy and a

claim made for an occurrence during the policy term. Claims made allows for more underwriting confidence

o Complicated by ERPo Possibility of losses in ERP represents a IBNR commonly associated with

auto insurance

The Market for Professional Liability Insurance

Only specialized insures offero Need intensive Loss Control department

Many companies chose to have large SIR

o Expense coverageo More direct and immediate control of claimso Takes away threat of determining liabilityo Can buy excess for all lineso Gives the financial stake in resolution of claimso Incentive to practice loss preventiono Control of claims handling

Underwriting Professional Liability

Factors:o Name of applicant and all professionalso Total number of all employeeso Decline or non renew

Info on Appo Professional qualifications and experienceo Allegations of professional negligenceo Contract and contractual agreements

I.e. hold harmless

Risk Management Practices

Screen prospective new clients, secure background information Guidelines to avoid and resolve conflicts of interest Contract or letters of engagement used, state scope of the proposed work to be done

for client, document discussion, changes in scope of work Do contracts limit liability for damages Quality control procedures in place Designed to receive claims Protocols for claims handling Large SIR, staff for incident or claims Who are the lawyers Type of clients (public, private)

Rating Professional Liability Insurance

Number of professional staff Hazardous nature of business Severity of professional liability exposure Need figures for last three years

o Practice grown, lose or attract customers and whyo Professional concentration changed

Scale of project could be more difficult, more exposure More errors until they become more familiar

o Mix of clients changed

Head count, number professional employee, revenues

Directors and Officers Insurance

D&Os may be held personally liable for act or omission in managing the company’s affairs

Brought by employees wrongfully dismissed, shareholders, customers, creditors, competitors

Companies need indemnification agreement to attract good people

The Policy

Defend and indemnify its directors and officers for claims made against them May be imposed by statue or by-laws Claims made Covers D&Os for liability for their wrongful acts in discharging their legal duties

for their company Usually include actual or alleged misstatement or misleading statements and

breaches of duty Does not insure against fraudulent, dishonest, criminal acts Market has modest limits, large SIRs, co-participation clause Type of company, public, private, profit, non-profit Extensions:

o Prior acts for D&Oo Former D&Oo Legal proceeding, launched from outside Canadao Defense costs for criminal changes that are unsuccessful or withdrawn

later Exclusions:

o Proven deliberate dishonestyo Libel or slandero BI or PDo Failure to maintain adequate insuranceo Fines and penaltieso Pollution

Underwriting D&Os

Factors:o Financial strength

Annual report and current financially analysis Compare with industry, trends, TP report D&B

o Management Strength of risk management Length of service of D&Os Number of D drawn from within company

General business reputationo Industry Standing

Principal product and service How well accepted by public Attractiveness of acquisition Major customers

o General History Signs of trouble Stockholder litigation Fights for control of company Excessive management changes Accusation of price-fixing Anti-trust activities Other conflicts

Failure to pay dividends, multiple stock offerings, problems with LOC, lost key service providers, changes to lawyers, auditors, investment management

o Company By-Laws Commitment to indemnify D&Os

Directors and Officers Insurance for Non-Profit

Industry standing, financial strength, market share, sources of revenue, failure to pay dividends all relevant

Obligations to interested parties Mismanagement of the their interests Claims arise from

o Wrongful terminationo Discriminationo Mismanagement of fundso Inadequate training of volunteers or employees

Loss frequency and servierity lowerLess likely to have substantial resources on own to defend claims

Excess and Umbrella Liability Insurance

Excess policy follows form, additional limits Umbrella policy additional limits, broader coverage No standard wordings Minimum limits must be in primary coverage

Excess Liability Policies

Excess over on single underlying policy Some standalone with own distinct insuring agreements, definition, exclusions,

terms and conditions-issued for a risk no primary

o SIRo May want it to be more restrictive then underlying policy

Follow form require underlying insurance be maintainedo If canceled, excess canceledo Coverage for classes that are excluded by umbrella, i.e. PLo May not offer excess if they don’t carry primary-claims handling

Can be layered

Umbrella Liability Policies

Broader coverageo Drop down coverage, included defense costs, made subject to SIR

When aggregate limits primary have been exhausted Underlying be maintained, but my still respond but as if the

primary has been maintained Over a number of policies Arranged in layers Insures against liability for PI and PD.

o PI includes BI and disability, shock, fright, mental anguish, mental injury, false arrest, humiliation, discrimination, libel, and slander

Territory wider, world wide

Defense Expenses for Excess and Umbrella Policies

If primary limits are exhausted, Umbrella drops down, therefore providing defense expenses

In other circumstance, not intention of insured Intent challenged in decision of the Ontario Court of appeal in Alie v. Bertrand

(2002)o Policies that stand in excess of the primary policy must pay primary policy

must pay some share of the defense costs unless their language specifically excludes such costs

Underwriting Excess and Umbrella Policies

Obtain copies of underlying wordings Occurrence vs. claims made What are sub-limits, make for lower threshold Underlying insurance of acceptable quality (finally strong) Reputation of primary insurer (claims department, cooperate with excess or

umbrella insurers, defense lawyer good reputation and ability Risk do business in US

Rating Excess and Umbrella

Premium based on underlying premium, percentage

Make sure primary policy is reasonable Auto-dollar amount for vehicle.

Aviation Insurance

Aircraft hull and liability, products liability, airport liability, hangarkeeprs liability, nonowenerhship liability, baggage liability, cargo liability, satellites

Policies

Aircraft Hull and Liability policy combines insurance against physical damage and liability in one policy

o First-party coverage, damage to the hull All risk whether or not aircraft in flight (broadest) All risk coverage while the aircraft I not in motion (laid for

extended periods of time) All risk while aircraft not in flight (applies when in motion on

ground)o Third party coverage:

PD caused by accident BI to anyone other than the passengers BI to passengers, caused by an occurrence and arising out of the

ownership, maintenance, or use of the aircraft Separate limit for each, but usually one limit

Airport Liability: covers hazard associated with the operation of an airport including runway maintenance and the operation of snow-removal equipment

o Smaller privately owned airports Hangarkeepers Liability: Nonownership Liability covers liabilities arising from

the operation or aircraft not owned in whole or in part by the insured Cargo Liability: insured against damage, destruction, or loss of cargo during

shipmento Only purchased when incidental to insured’s operationso Others, inland marine

Products Liability: covers manufactures, dealers, service companies against liability arising from the sale, repair, or maintenance of an aircraft. I.e. manufacturer of parts

The Aviation market

Few insurance companies, groups, managing agencies and supplemented by a few American Insurers

DOT, Federal Department of Transport, is responsible for all matters relating to aviation safety in general, such as licensing personnel, issuing Air Navigation orders, certifying and licensing aircrafts

o Administering regulations governing the amount and form of liability insurance to be carried by owners and operations or private aircraft

NTA, National Transportation Agency is responsible for the regulation of commercial air carries

o Air Carrier Regulation, which dictate the amount and form of liability insurance to be carried by commercial air services

International requirements, travel around world, subject to various authorities. I.e. United States Department of Transport

Amount of liability insurance carried regulated by government of the county in which the air service is based

Some regulated by international agreements Tickets carry limitations to caries liability for injury to passenger of for damages

to or loss of baggage

Underwriting Aviation Insurance

Who Kind of aircraft, use Where its based Make and model, available accident statistics Age, purpose designed for, configuration Who will be flying aircraft, experience, training, what type is pilot licensed to

operate Will it carry passengers, cargo, what type Leased of rented to others, contracts Rated in individual merits Broad guidelines, rate published by DOT

Event Cancellation Insurance

Covers losses caused by the cancellation, curtailment, or postponement of an insured event

Losses arising from any cause beyond the control of the insured or the participants

Losses with a needo Nonrecoverable cost incurred before the event or before ht loss

I.e. cost of media advertising that has been paid before cancellationo Sums the inured is obliged by contract to pay others, whether event takes

place or not I.e. stadium rental

o Other Gross receipts on advance ticket sales Losses in revenue from planned advertising or sponsorship Television rights cannot be sold Any other revenues that might be secured contractually

Contingency Risk Insurance

Insurance policies that cover exposures that a relatively common to insured’s who may be completely different in other respects

General name given to insurance designed specifically for this group No standard form, contract of indemnity, cannot recover more then loss or limit

o Cancellation Insuranceo Nonappearance Insurance: failure of an individual participant to appear

(excluded on event cancellation, endorsed). Covers named individuals for their own lost income and for the liability they incur to the organizers or other for filing to appear when circumstances are beyond their control.

o Breakdown of Transmission Insurance: for companies that provide radio or TV signal, organizers of events may purchase breakdown of transmission insurance to recover its own costs and cover its liability to the event organizers if anything beyond the organizations control prevents the signals from being transmitted.

o Death and Disgrace Insurance: indemnifies an organization public figure acting as spokesperson suddenly dies of is disgraced.

o Prize Indemnity Insurance, possible but not expected…not available if their will definitely be a winner

Underwriting contingency Risks Insurance

Event Cancellationo Nature of event, name, location, date, durationo Details of contractual arrangements, contingency plans, organizers

expertise, organizers competence to stage events Prize Indemnity

o Planned the contest to preserve the element of chanceo Previous experienceo Reserves should be set

Crop Hail Insurance

Indemnifies the farmer against losing his or her crop because a hailstorm destroys it

Underwritten by various organizations: stock companies, cooperative, associations controlled by municipal or provincial government

Crucial to stability of agricultural industry, insurance premiums as exemption for Income tax purposes

Must have insurable interest in crop

Policies

Three main

Full Cover Policy, written at basic rate, does not pay for loss less then 5%, when loss exceeds threshold pays full amount

10% deductible, 75% of basic rate. Insured responsible for first 10% 25% deductible, insured responsible for first 25% of loss, good for high risk areas

Underwriting Crop Hail Insurance

Rates are determined for townships, based on experience of township Elevation and topographical features No reliable objective to measure value of crop, determine if estimate is reasonable Established limits per township, and per acre or section Record and monitor geographical accumulations of liability by township

Livestock Mortality Insurance

Protects insured’s against loss caused by the death of livestocko Purebred cattle, horses, llamas, ostriches, other breeding stock,

performance animals

Policy

Term life insurance for animals Insured indemnified for the actual cash value of the animal at time of death Covers all risks of mortality, results for accident, sickness, disease during policy

period and reported before policy expires Insured must provide reasonable standard of care Conditions: other insurance, bailees, subrogation, arbitration Unique cancellation condition, policy premium is considered fully earned after

nine months Covers performance animals in transit, but not animals being transported to

slaughter (purchased) Common endorsement

o Infertility coverage, become infertileo Semen Suitability Coverage: accident, sickness, or injury may render a

stud animal’s semen unsuitable for breedingo Economic slaughter Coverage: performance animal may suffer an

accident, injury, or illness that leaves it permanently unable to perform Exclusions

o Surgical operations, other then to save animals lifeo Administration of drugs or medications, except by Veterinariano Mysterious disappearance or escapeo Intentional slaughtero Malicious, willful, or intentional acts by insuredo Voluntary parting with title possessionso May cover animal with defect, excludes loss as a result of death caused or

related to defect.

Underwriting Livestock Mortality Insurance

Current certificate of health issued by a licensed veterinarian Applicant must be considered carefully, full application, previous loss experience,

time in business, proof of value or purchase price for animals Performance animal, performance record, prize winnings, race earnings. Value

claimed with sales price of similar animals, sale prices for offspring, prices at public auctions, independent appraisal of animal

Renewal time, need new veterinary certificate of health. May accept declaration of health for the insured.

Chapter 6: Financial Evaluation Skills

Introduction

Pay premiums Maintaining and improving equipment and premises Implementation loss-control measures Providing a quality product or service Attracting and retaining quality people

Financial Information

Risk is stable Able to pay premium Moral hazard Accept a deductible, how much SIR Where is revenue generated, plans to grow How does the risk employs people Risk has purchased new operation Risk discontinued operations

Financial Information and Underwriting Judgment

Business failure rate Sensitivity to fluctuations Location of business (support employment and demand) Any changes in legislation Analyzing market not just risk

Sources of Financial Information

Annual or quarterly reports to shareholders Credit reporting services, Standards and Poor, D&B, DBRS Public Affairs or Public Relations department Prospectus Business plan, pro forma financial statements

o Pro Forma: financial statements prepared so as to emphasize either current or projected figures

GAAP: Common set of accounting principles, standards and procedure that govern accounting practice in a particular jurisdiction

SWOT: strengths, weakness, Opportunities, threats

Financial Statements

Audited:

o Auditor’s standard report: states the purposes of the audit. “Fairly represent the company’s financial position and that the statements have been prepared in accordance with GAAP.

o Auditors non-standard Report: “watch for” A Qualified Opinion: fairly presented except for a matter in

question Adverse Opinion: are not fairly present because of a matter in

question Denial of Opinion: unable to express an opinion on whether they

are presented fairly Review Statements: auditors have reviewed to determine if they are plausible.

Do not test internal controls or statements Compilation: prepared form information supplied by the client. No guarantee.

Major Parts of Financial Statements

An independent auditor’s report Balance Sheet

o Assets: economic resourceso Liabilities: claim on the resources available to a company to satisfy and

obligation or debt that the company must payo Tangible: objectively valuedo Intangible: subjectively valueo ONLY liabilities with an objective value are shown on a balance sheeto Owners Equity, surplus, policy holders surplus

Income Statement (profit and loss statement)o Measure progress of company in producing satisfactory income n its

capital investmento A record of the company’s operating activities, showing where income

came from, expenses and what they were used for, earned profits and losses

o Tool for forecasting how the company might do in the future Statement of Cash Flow

o Sufficient funds available to pay liabilitieso Payment experience with creditors, amount owing, paying bills on timeo State of business’s AR, outstanding, how long does it take to collect

monieso Excessive fund tied up in Inventory

Seasonality, sign of lack of demand for producto Nearing the maximum amount of credit its creditors will extend, have they

borrowed moreo Funds coming from owners equity, cash infusion, operations. Funds as

revenues or credito Investing activities, Was their a return

Statement of Change

o Supplies any information that is missing from the financial statement. I.e. major cash sources and disposition, how the business generated funds, how its cash resource have been used over the reporting period

o Evaluate liquidity or solvency of a company by demonstrating the company’s ability to generate cash internally for the repayment of debts, for reinvesting, or for paying dividends.

Noteso Narratives used to explain important financial items that cannot be

adequately quantifies or even otherwise shown.o Presidents message

Indicators of Potential Problems

Cash strapped operation where earnings are small, debts are rising, quality is suffering

Losing key personnel, key suppliers, and key customerso Examine who has an insurable interest in analysis

Bad risks not clearly definedo Difference of how certain items are bookedo Accrual basis: revenue is recorded when the item or service is sold, even

though the cash may not have been received Can present deceptively optimistic picture of risk

o Infusion of Capital, why was it needed, without how to financial statements look

o Increased litigation, reserves?o Limited number of suppliers, customerso Face competitors with better product, can they adapto Have they changed auditors

Questions (Personal):o Source of revenueo Chance they could lose incomeo Stable industryo Stable companyo Easy to replace income if person lost jobo What might increase potential for such a loss of incomeo Could savings sustain himo Debt load

Financial Ratio Analysis

Compare business to industry Likelihood of a gap between short-term cash inflows and outflows, likelihood

business will default on obligations Measure how efficiently business and staff operate

Liquidity Ratios

Liquidity: measure of how readily an asset can be converted the degree to casho Ability to pay liabilitieso Current Ratio: CA/CL = CRo Working Capital: the difference between current assets and current

Liabilitieso QR: (Cash + Marketable Securities + Current Receivables) / CL

Activity Ratios

How well a company has been using its available resources AR Turnover: Sales/ Average AR

o Average AR = the AR outstanding a the beginning of an accounting period and the accounts receivable outstanding at the end of the period

(Beginning AR + Ending AR) / 2 Want AR to be a small percentage of sales for the period

Average Collection Period: inverts AR Turnover ratioo Average Collection Period = Average AR/Sales x 365 days

Inventory Turnover: Cost of Goods Sold/ Average Inventoryo Average Inventory = (Beginning Inventory + Ending Inventory) / 2o High ratio means that sales are generated quickly

Financial Leverage Ratio

Amounts made available by creditors with the amount of funds made available by that owners

Debt Ratio: Total Liabilities / Total Assetso High debt ratio the more likely to default of obligations

Profitability Ratios

Measure the overall effectiveness of company’s management Return on Assets: Net Income / Total Assets Return on Equity: Net Income / Owner’s Equity

o Should exceed the Return on available equivalent investment Must keep in mind for Profitability ratios

o Must have good understanding of what figures actually meano Prior terms figures are actually comparable.

Chapter 7: Alternative Risk Financing

Alternative Risk Financing: the name given to the set of methods by which an organization may retain its risk. It is a self-insurance arrangement that finances risk by means other than a transfer to a traditional commercial insurer.

Look at three:o Captive Insurance Companieso SIRo Reciprocals

The Growth of Alternative Markets

Growth since capacity crisis in mid 1980s Response to inability to buy insurance in the amounts to meet needs for exposures Cost of financing can be based on company’s own experience Can provide stability over the course of insurance markets Allows them to be less dependent on the commercial market – not concerned with

available limits Less concerned with financial health of insurer

The Decline of First Dollar Coverage

Does not make sense when that coverage is likely to be called on to pay for high frequency of smaller claims

First dollar coverage: represents coverage that the insured company enjoys in a t least the lowest of the several potential layers into which its risk might be divided.

Subjective because of deductibles and SIR

Trading Dollars

Relates to a company with high frequency of smaller claims that busy insurance Two fundamental characteristics of insurance:

o Mechanism for transferring risko Premium is not pure premium

High frequency, quite predictable, little or no need for insurance…premium matches losses

The Retention Alternative

Allows control over the cost of financing its risk and the adjustment of claims Must be prepared to take risk, have right risk management expertise, IT to

monitor claims Proper IT can alert risk mangers to problem with companies Pitfalls: inadequate risk management, insufficient funding of losses, lack of

understanding of the companies real exposure to loss

Captives

Captives: insurer owned and controlled by its insured or insured’s. Usually a special-purpose subsidiary created to insure the risk of its parent organization or organizations

4,500 worldwide Single –owner, single-parent captive: insures only the risks of the owner or the

owner’s subsidiary operations. Pure Captives Group or multi-parent captives: insure the risk of the multiple non-related

organizations that own them Association captives: similar to group captives. Insure the risk of companies in

the same or similar industries or organizations in the same area or areas of endeavor.

Agency captives are owned by insurance agencies and formed to insure the risk of the clients or insurance agencies.

Rent-a-captives: captives established by organization unrelated to he companies that use the captives. Allow organization make their captives for a fee to allow other organizations to enjoy the benefits of insuring their risk through captives without having to spend the time or money it would take them to establish their own captives.

Captive Domiciles

Established only in a jurisdiction that has passed legislation allowing the jurisdiction to be a domicile, in Canada-B.C.

Offshore: Bermuda, Bahamas, Barbados, Ireland, and Guernsey, Vermont in US. Engage in only reinsurance transactions Insure risks in other jurisdiction by approaching a local insurer to act as a front

o In Canada, captive with a foreign domicile must have paper issued by a licensed Canadian insurer in order to accept Canadian risks

o Ask front to issue the insurance policy. o Front company cedes premium and liabilityo Front company may retain some risk

Choice of domicile-tax implications, regulatory climate, time to set up, amount of surplus and capitalization reuqire3d

The Case for Captives

Why establish:o Insure the losses of the founding company or organization, broader

protection that might be available then in regular markets Unavailable, gap in coverage, additional limits, supplement

coverageo Provide and arrange risk management services tailored to the needs of the

founding company and organizationo Control cost of risk financing

o Predict losses with reasonable accuracy, homogeneous risk exposureso Provide stabilityo Save on expenseso Reduce friction costs

Frictional costs: the implicit and explicit costs associated with market transactions. In insurance, they include acquisition cost such as commission to broker and administrative cost

In addition to pure cost of financingo More accurately forecast financial reports

Financial benefits

Owners get financial benefit:o Retention of underwriting profito Investment income on loss reserves and unearned premium reserveso Tax reductionso Direct access to the reinsurance marketo Ceding commission from reinsures

Other Advantages and Disadvantages

Large time commitment of owners, large startup cost and capitalization requirements, must be able to tolerate certain amounts of risk

Best suited to certain types of exposures, non catastrophic, can be predicted with a certain degree of confidence, also need proper reinsurance program

Subs may have own deductibles, can have control of this Insurance can obscure true cost of risk Captive rate may better reflect cost of risk Transfer wealth to family, i.e. surplus of premiums go to inheritors Dis-capital outlay, this can be avoided in some jurisdiction or can use a rent a-

captive Dis.-depends to some extent on the effectiveness and commitment of its insured

in assessing and controlling risk, can miscalculate its risk and funds necessary

Underwriting the Captive

May be asked to fronto Adv. Fronting fee, might gain opportunity to insure parts of corporate

parent risk that is not assigned to captiveo Dis. Captive remains effective bearer of risk, insurer losses control if

there is a claimo Must do audit on underwriting standards and claims

Underwriting the Company with a Captive

Transferring part of its exposure to tradition commercial markets

o Restrictions to the captives license that prevents it from assuming risko Lack of expertiseo Lack of claims staff experienced with those claimso Volatility of the exposureo Readier availability or better pricing of coverageo Underwriting should treat this request as if it has been declined by other

insurer

Other Underwriting Considerations

Insurer that fronts, pays claims, then collects, risk captive may failo May require captive to post irrevocable letter of credit equal to its

liabilities Canadian regulations limit the percentage of a risk that can be ceded to an

unlicensed reinsurero Underwriter must watch for amount of risk ceded

As captive’s surplus grows, may lose some of that premium. Unbundlingo May still provide claims handling experience or loss control

Self Insured Retention

Insured take on claim handling…can pose problems Can save insured the administrative costs in setting up and running a captive Less premium (with deductible, still pay for claims handling) Can be financially draining, management program must be properly designed Considerations: level of SI, funding necessary for claim reserves, availability of

aggregate stop-loss insurance, cost of that insurance

Underwriting SIR

Similar to excess or umbrella Have little to say about management of losses in SIR, inherit consequences, need

to asses claims handling experience Protect against this:

o SIR client submit to the insurer any statement of claim is receiveso Report any fatality and certain types of injurieso Report any claims reserved for more then 50% or SIR

Claims department can look at claims guidelines and help client in establishing guidelines for future claims

Reciprocals

Reciprocal insurance Exchange: means of risk financing in which a number of subscribing organizations together appoint a central underwriter as attorney-in-fact for the purpose of sharing the cost of risk financing

Separate account for each subscriber, administrative expenses and losses apportioned against subscribes

Deficit, have to pay more, surpluses carry over

Reciprocals and Group Captives

Difference: captive can only establish in specific jurisdictions, must use fronting insurer, must be endowed by its owners, surplus must be a minimum amount, regulated with types of risk they can insure and reserving and investment practices

Reciprocal: no fronting, can be licensed in any jurisdiction, does not need to retain surplus

Other Advantages and Some Disadvantages

Adv. o Can issue own policies, broader coverage, can get coverage directly from

reinsurance market, know kinds of claims and subscriberso Can tailor coverage and loss control programs, may be too costly from

other insurerso Freedom to select adjusting and law firms, hold educational seminars,

lobbyingo Owned by subscribers often, governed by D&O, can quickly identify

needso Reduce frictional costs, tax advantages, unearned premium reserves will

earn interest that is tax exempt Dis.

o Time commitmento Agree in advance to subscribe for set number of yearso Must be levied to pay more premium if there is a bad loss historyo Incur start up costs and continuing costs for management

Underwriting The Reciprocal

Exceeds reciprocals retention What underwriting criteria does reciprocal use with its subscriber, do they all fall

into criteria, do some present unusual exposures Understand the structure of the reciprocal, pricing models, how an by who

actuarial reviews are done Loss experience, type of loss control for each subscriber, who do they retain to

handle claims Be familiar with exposures How broad is the coverage of the reciprocal Are they being asked to insure a risk that has been excluded, why? Asked to insure a line of coverage that the reciprocal wont cover

o Bad loss, financial strength, lack of experience, better pricing in commercial insurance

Changing limits of coverage, retention How long has the reciprocal been operating Financial strength

Chapter 8: International Business

Foreign exposure increasing common due to globalization Local conditions must dictate underwriting Property Exposure for international exposures tend to be treated as a more serious

exposure than liability insurance for such exposureso I.E. fire can be more obvious threat due to local building and protection

standard. Also natural exposures such as hurricanes, monsoon, earthquakes, volcanic eruption, other natural disasters

In some foreign jurisdiction, the broker is more active in controlling role in account

o Assign adjuster and direct handling of claimso Negotiate on behalf of insuredo Need to research this role

Resources:o Broker-cultural, economic and other considerationso Personal Resources-experience, knowledge

Cannot infer the extent or nature of foreign operations from a clients good reputation in North America

Libraries and Internet- insurance law, foreign economies, international Insurance regulations

o Features of international natural environmentso Websites

National Association of Insurance (NAIC) in U.S Centre for Risk and Insurance Studies in United Kingdom European Union, info on finance, economy, law, in Europe Word Trade Organizations-research, analysis, legal text,

documents about international trade Commercial resources such as LexisNexis, insurance related topic Major insurance brokers, post things Government of counties Insurance trade journals

Risk Manager

Large risks with foreign exposure more likely to have risk manager Valuable ally Extent to expertise is questionable, but will help

Reinsurer and Multinational Insurers

Important sources of information Local rules and regulations

Assessing the International Risk: Specific Considerations

The corporate Structure Foreign Insurance Regulations Legal considerations Exposures Administration Pricing Foreign Insurer Insolvency

The Insurer’s Corporate Structure

Insurer’s polices and procedures fro handling and account with foreign exposureo Process to quoteo Corporate underwriting department for approvalo Specified unit-centre of competency

Insurer has Parent companyo Policies governing where insurer can conduct business

Insurer’s parent company based in Canada or elsewhereo Don’t want to have competing subs

Relations between Insurer and parent company are cordial or strained Insurer can call on its parent or another sub or its parents licensed to operate in a

country where the insurer needs a front for one of its insured’s.o Front: an insurer that issues a policy with the intention of transferring most

or all of the exposure by reinsurance or other means to a reinsurer or other insurer not licensed in the jurisdiction of the fronting insurer.

Parent company itself an insurer or a conglomerate with subs in many different industries

Insurer’s ability to assume risk in certain countries my be affected by legal or political constraint on parent company

o CLINK in US-Cuba, Libya, Iran, Iraq, and North Koreao US does not deal with these, and reinsurance treated exclude liability

arising from loss in these countries when sanctioned by US.o Vary over time

Insurer’s reinsurance treated exclude coverage in area where client has foreign exposure

Foreign Insurance Regulations

Some allow private insurers, not matter where based to write in their countries Other require company to be licensed in the jurisdiction, with filed and approved

rates and policy forms Underwriter needs to know these questions:

o Legal requirement governing insurance in foreign countyo Original claim files need to stay in countryo Does premium for exposure in foreign country need to be booked there?o Are there special statistical reporting requirement for premium of claims

o Minimum limits required on certain coverageso Does the jurisdiction allow foreign, non-admitted insurers to offer

insurance on risk within its bored, or must they be provided by admitted insurers

Admitted insurer: an insurer licensed or approved by regulatory authorized to do business in a given jurisdiction.

Admitted paper: insurance written on locally approved policy forms issued by a licensed, registered, or authorized insurer.

o Does the jurisdiction require that insurance on risks within its boarders be written only on admitted paper

Fronting Insurer would act as a reinsurer and assume the fronting

carried the premium and liabilities, less a fronting fee Increases frictional costs Typically in countries currency

May require that countries national insure participate on risk If in country language, underwrite must be aware of implications

of contract Non-Admitted paper: insurance policy, that can be a foreign

insurer from a remote location Not necessarily subject to local insurance requirement,

which allows it to be more flexible with policy and coverage

Broker can help finding fronting company, can help simplify transaction

Foreign Law and Legal System

Insurance regulation and more general legal or social obstacles Implications of local laws, or absence of law, for insurance claims Cannot force risk to conform to Canadian Standards, but can require that they

conforms to local standards Can ensure insured complies with local laws by making sure that the broker has

experience with this sort of international exposure In some countries, insurers may not be allowed to restrict coverage If they need exclusion, must check local law and regulations Must be aware of inured exposure to environmental liability, make sure they are

aware and protectedo Disposal methods, chemicals being handled, contracts with hauler and

disposes

Assessing Foreign Exposures

Exposures are likely, nature Exposures from differing standards Inspections can be arranged from a source in the foreign location

Political climate: civil unrest, regimes change frequently, chance of embargos, cancellation of the insured’s license

Restrictions on hiring personnel

Administering Polices for Foreign Risks Practicalities of administering the policy Extra time and difficulty

Pricing the Foreign Exposures

Should rate be strictly actuarialo Should rate reflect prevailing market condition in Canada or countryo Insurers policy for rateo Impact of foreign country (could get more then you would in Canada)

In what currency?o Deal with fluctuation in exchange priceo Mitigated by fixing amounts in a certain currencyo Double limits, fixed in both Canadian currency and American

What is insurance cultureo Deductibles, limits

Foreign Insurers and the Risk of Insolvency

What if country’s national insurer and foreign insurer were unstable and became insolvent

o Drop down coverage?

Difference-in-conditions (DIC): coverage is coverage provided by a non-admitted international insurance policy for property or liability perils not covered in the foreign admitted policy. It is designed primarily to supplement coverage purchased in the foreign Country.

Chapter 9: Retention and Reinsurance

Introduction

Underwriter for reinsurance has same responsibilities Reinsurance does not change ht inherent nature of risk Difference most evident in treaty reinsurance

What is Reinsurance?

Reinsurance: the transfer to a reinsurer of all or part of an insurance risk from an insurer or alternative vehicle for risk financing.

Reinsurer: an insurance company that accepts risk from and on behalf of another insurance company or alternative vehicle for risk financing

Reinsurance Terms

Cedent or Ceding Company: The insurer or alternative vehicle for risk financing that transfer risk to a reinsurer

Ceding commission: The percentage of the reinsurer’s share of the original insurance premium that is paid to the cedent by the reinsurer. Usually cover all or part of the ceding company’s acquisition cost and allowance for the ceding company administrative cost

Cession: the transfer of risk to a reinsurer; the amount of frisk so ceded. Retention: the amount of risk that the insurer retains rather than cede it to a

reinsurer under a particular reinsurance arrangement. Retrocession: The transfer of all or part of a reinsurance risk from a reinsurer to

one or more other reinsurers. Retrocessionaire: a reinsurer that assumes risk from and on behalf of another

reinsurer.

Types and Method of Reinsurance

Facultative Reinsurance: is reinsurance place on an individual risk or policyo Proportional or non proportionalo Facultative refers to faculty-the right or ability- of each party to the

reinsurance transaction to accept or reject a specific risk Treat Reinsurance: an agreement between the insurer and the reinsurer to reinsure

a block or portfolio f business without the insurer’s having to submit each risk to the reinsurer

o Expense factor is lesso Proportional or non proportionalo Premium is percentage of the total book

Methods of Reinsurance

Proportional: percentage of the risk transferred, same percentage of original premium and loss

Non-Proportional: no proportional ceding, no proportional sharing of premium and losses.

o Retention, premium changed

Facultative and Treaty Reinsurance: A closer look

Facultative Reinsuranceo Can protect insurers treaty’s against adverse results, which keeps costs

low, protect insurero Buy facultative for a serious hazard, or new to underwritero Adverse effects-“burning” the reinsurerso Facultative insurers excluded risks from treaty, increased limits, more

difficult risks The Facultative Relationship

o May decide to cede to treaty Treaty capacity my open up, or underwriter more comfortable Short term relationship

o Want a long term one, to ensure a stable source of reinsurance for accounts

Underwriting Facultative Reinsuranceo Resources intensive, sig. loss potentialo Need expertise

Treaty Reinsuranceo Better spread of risk to reinsurer, pricing more favourableo More economical and easier to administero Save time, don’t need to negotiate each risk

The Treaty Relationshipo Long-termo Not usually effective for just one yearo Notice of cancellation would be issued by either reinsurer or insurer

Underwriting Treaty Reinsuranceo Underwriting the underwriteo Insurer will have authority to bind for reinsurero Assess insurer standing, reputation, financial position, experience, and

quality of staff.

Proportional and Non-proportional Reinsurance: A closer look

Proportional Reinsurance Facultative: same as described above Treaty

o Quota share Treaty: simplest form, used both for property and casualty.

o Insurer and reinsurer agree that the reinsurer will assume the same percentage of each risk in the portfolio of business

o Insurer obligated to cede every risk, reinsurer obligated accepto Net account: business that the insurer retainso Advantages:

Protect against frequency of losses as well as severity Provide a ceding commission to insurer, Protects insurer’s net retention Help with financial consideration

Reduce unearned premium reserve, relieve pressure of insurer’s surplus

Permits recovery on smaller losses, stabilizing results Increase capacity

o Disadvantages: Does not retain as much of premium and has less control over

claims handling May not have as much underwriting discretion

Surplus Treatyo Remains after insurer’s retentiono Percentage ceded is not fixed, one risk at a timeo Percentage of risk ceded is the same as percentage of premium and losso Maximum amount that can be transfer is express as a dollar amount or

multiple of insurer’s retention of botho Line: insurer’s retentiono Maybe expresses as 5 lineso Will not exceed certain dollar amounto Stipulates a minimum amount for retentiono Mainly for property riskso Helps stabilize underwriting results, greater capacity, minimizes insurer’s

exposure to large losses.Non-Proportional Reinsurance

Facultativeo Excess of loss basis

Treaty Reinsuranceo Excess of loss basiso Excess of loss structure is generally considered more for exposure to

severity then frequency Per Risk Excess of loss Treaty

o Property risko Applies to one risk, must define one risko Often purchased by an insurer to protect its retention under a quota share

treaty Catastrophe Excess of loss Treaty

o Per occurrence, based on principal that all losses from the same event will be taken into consideration and the excess reinsurer will be involved in the total of such losses exceeds the insurer’s retention

o Both property and casualtyo Ultimate net loss: amount of the loss that the insurer is called on to pay

after recovering amounts due from all other reinsurance Advantages of Non-Proportional Reinsurance

o Protect against severe losses by capping the amount paid by the insurer, stabilize results

o Keep larger portion of premiumo Allows for the possibility of more control over the way claims are handled

Disadvantageso Set its retention incorrectly is problem

Functions of Reinsurance

Capacityo Higher limitso Net line: a policy limit that is not augmented by reinsuranceo Gives smaller and medium sized insurance companies the ability to be

more competitive with larger ones Catastrophe Protection

o Sum of all individual losses from a catastrophe may be too largeo Protect against an accumulation of net retained losses resulting for single

evento Protect against major exposure to a single policy holder

Stabilization of Resultso Smooth out fluctuations in insurer’s results

Market Entrance or Exito Helps in time when achieving a critical premium volume necessary to

produce profitable loss ratioo Claims may distort the loss ratioo Helps spread risk, until the above can be achievedo Expertise in market, wording, market intelligence, pricing, ect.o Training, guidance in underwriting, claims practice, reserving,

investments, and operational reviewso Will also run off a book of business

Reinsurance Pricing

Non-proportional, based on various formula guidelineso Underwriters evaluation, primary ate, increase limit rates or factors,

market conditionso Funding approach: consider worst case over period of time, divide by

years to get premium or base premium (ones that penetrate excess layer)

Not actuarially accurateo Heavily driven by actuarial analyst, and model to project pure premium.

They need: History, both losses and paid claim Current rates and historical and prospective rate changes Historical and prospective premiums Historical and prospective policy counts and policy limit profiles

o Loadings added to pure premiumso It is important that underwrite not changed practices suddenlyo Tend not to authorize long layers, more difficult to calculate priceo Causality is usually non-proportionalo Reinsurer have own preference and specializations

Types of Reinsurer

Direct writers: deal directly wit the insurer Broker-market reinsurer: assume business through reinsurance brokers Reinsurance Department: primary insurers may assume reinsurance for other

insurer or reinsurers Licensed: granted when company is registered with the federal government or

provincial governmento Federal: write business nationally

Governed by Office of the Superintendent of Financial Institutions (OFSI)

o Provincial: only in province. Can make special application to federal authorities on a case-by-case basis and year-to year basis

o Governed by superintendent to province Unlicensed: not governed, limitations on insurers to how much they can reinsure

with unlicensed reinsurerso Reasons why? May lack the capital to post the surplus required, lower

taxed, avoid the obligation to file financial statements

Reinsuring the Reinsurers

Need protection for same reasons: catastrophic losses, accumulation of smaller losses, retrocessions stabilize their results, spread of risk

Reinsurance Regulation

Focuses on solvency Contracts vary, must be tailored to meet insurer’s needs Can have a number participating on a treaty, need lead Why their might be more then one:

o Provide capacityo Insurer might want to avoid relying on single reinsurer, in case they leave

market

Selecting Reinsurer

Are they licensed Lines of business, expertise Financial strength, specifically for long tail coverages Claim payment terms Accept cash calls

o Cash calls: waive the agreed payment term with the insurer and advance cash to the insurer to expedite the insurer's settlement of a large loss

o Bordereau: a regular, detailed report of reinsurance premiums and losses provided by the ceding company, then, depending on the reinsurance contract, the insurer might not receive payment from the reinsurer for 30 to 90 days

Provide assistance with underwriting, developing new products, claims, training ect.

Offer profit commission or reduced rates on renewal Are they in business for long term Do they control the claims and underwriting or just help with problems Are terms favourable

Selecting an Insurer

All aspects of underwriting operationso Experienceo Authority levelso Analysis, selection, and pricing of riskso Applicable underwriting guidelines

Type of Management reports Account department Claims department

o Leakage: some shortfall in the insurer’s result through poor procedures or practice, that could affect he profitability of the reinsurer

Overpayment of claims, late reserving ect. Financial Statements (cash flow) Collections department Who handle adjustable premium policies Agreement with other reinsurers, who control which recessions go to which

reinsurers

Reinsurance Contracts

Accurately reflect what is required

Facultative Certificates

Document it, with dec page. Facultative certificate includes:

o Name of the insurero Policy numbero Name of the insuredo Insurer’s policy periodo Reinsurance policy periodo Coverage reinsuredo Original policy limitso Insurer’s limitso Insurer’s retentiono Reinsurance limitso Minimum retained premiumo Premiumo Adjustment basiso Installment arrangements

General Conditionso Claims expense (within limits or outside)o Claims cooperationo How insolvency to be handled

Insolvency terminates a policy, but will still be obligated to pay Reinsurer can deduct any premium or other monies owed but not

collectedo Cancellation provisions

Notice, if underlying policy canceled, facultative certificate canceled

o How disputes are to be handled

Treaty Contracts

Preamble identifying the parties to the contract Class of business covered Exclusion Basis of coverage Ultimate net loss

o Gross less any recoveries from salvages, subrogation recoveries, and other reinsurance

Limits of the reinsurer Claims reporting procedures Commencement and termination of coverage Insolvency to be handles Disputes are handled