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Chapters 6 and 7
Insurers look at loss ratios as an important underwriting tool. They are easy to do. Annual Claims divided by Annual Premium. Example: Premium was $100,000 and Claims were $40,000 Loss Ratio is 40%.Most carriers/insurers want losses to be less than 40% and want three to five years of prior loss experience.
What is the loss ratio here:
Claims are $50,000 and Premium was $15,000
Loss ratio= $50,000/$15,000= 333.33%
Claims are $2,000 and Premium was $25,000
Loss ratio=$2,000/$25,000=8%
Claims are $12,500 and Premium was $75,000
$12,500/$75,000=16.67%
The loss ratio indicates the insurance firm’s performance from its core business by comparing claims and premiums received (Rejda, McNamara, and Rabel 140).
Insurers would rather have a client with one large loss rather than frequent losses. If a client had $75,000 in claims with one loss vs four claims totaling $75,000 claims, the underwriter would look at this risk very differently. Insurers look at severity of claims and frequency of claims, they are very adverse to risks having frequency issues. They can understand one large loss, often called a shock loss. Please answer the following, is this a frequency issue or severity issue or both or neither?
Client has two claims over five years for total of $4,000 in claims:
The claims are neither frequency issues nor severity issues because the two claims are spread over five years.
Client has a large property loss from lightening totaling $2mil in claims; it was there only loss in ten years.
The claim is a severity issue because the client only claimed $2 million for 10 years.
Client has 12 fender bender accidents over 3 years.
The high number of minor accidents over the last three years indicates the risks associated with frequency.
Client has 14 workers comp claims for severe back injuries from lifting over 3 years.
The client has frequency issues and severity issues due to a high number of severe back injuries over three years.
Underwriting a risk is done by the insurer. But an agent is an important part of the process. The book talks about agents being able to bind policies in the field, this is becoming less common but agents still play a part. An agent looks for the right risk to match an insurers appetite. They should try look to place policies that the insurer would want to write. Remember an AGENT is an agent of the insurer and has to follow their guidelines. Here are some examples, write yes, no or maybe to answer if the agent is doing the right thing. After your answer, give a brief reason. Also remember, insurance is not always black and white, there’s a lot of gray.
The insurer wants its agents to write contractors on Long Island but not in the five boroughs of NYC. The agent has a large contractor with great claims experience but does 10% of their work in Manhattan. Should this agent submit this risk? Yes, No or Maybe?
No, the contractor has a great claims experience, which exposes the insurer to higher risks. Rejda, McNamara, and Rabel (119-120) posit that insurance agents can settle small first-party claims, such as small theft loss. Manhattan is among one of NYC’s five boroughs, which may increase frequency issues in high-risk neighborhoods like in Manhattan.
The insurer wants its agents to submit large commercial auto risks, they required drivers that have good driving records and claim ratio of less than 40%.The agent has a risk that has 40 trucks, four suspended drivers and poor claims experience? Should the agent submit this risk?
The client’s loss experience is lower than the class average. Thus, the agent should submit to the risk based on the credibility factor because the client has poor claims experience (Rejda, McNamara, and Rabel 147). In other words, the firm will experience few frequency issues.
The insurer wants its agents to submit large real estate risks with great claims experience and the agent has a large real estate risk that had excellent claims but had one very large loss the past year that was well over 100% claims ratio. Should the agent submit this risk?
The insurer should not accept the real estate client due to high risk associated with claims experience and large loss during the previous year. The agent’s submission to the risk will expose the insurer to higher claims risk.
Reinsurance is important to an insurance carrier, it allows them a way to write more insurance and take on some risk. The most common types are facultative and treaty. In your own words, what are some similarities and what are some differences? List at least two of each.
The similarities between facultative reinsurance and reinsurance treaty include transferring risks to the reinsurer and reinsurance arrangements based on both “pro rata” and “excess of loss” basis. In contrast, in facultative reinsurance, the reinsurer retains the right to accept or reject the risks since each policy is evaluated as a single transaction. Facultative reinsurance is used in hazardous or high-end risks. On the other side, treaty reinsurance does not accept individual underwriting, and reinsurance arrangements are typically long-term., including non-written policies.
What are the three rate making methods? Please list them here.
The rate making methods in the insurance industry include class rating, judgment rating, and merit rating (Rejda, McNamara, and Rabel 135).
C.O.P. E. stands for construction, occupancy, protection, exposures and is a traditional and standard underwriting tool. Put a C O P or E next to each item to identify what it means under COPE.
The tenant of the building is a chemical manufacturer (O).
The building is an old, frame structure (C).
There is only well water available and the nearest fire dept if 15 miles away (E).
The building has a state of the art fire suppression system (P).
The neighboring building is a fireworks manufacturer (E)
The building has hurricane resistant windows (C)
The apartment building has fire doors between each unit (C)
Works Cited
Rejda, George, McNamara Michael, & Rabel William. Principles of risk management and insurance 14 ed. Hoboken: Pearson Education, Inc., 2020.