Insurance Company: Functions Chapter 7

Insurance related functions Ratemaking Production Underwriting Loss adjustment Investment Reinsurance Accounting, Compliance

Expense and loss ratios Expense ratio = underwriting expenses as a percent of premiums 1-expense ratio=permissible loss ratio Pure premium = expected loss payments Gross rate = pure premium/(1-expense ratio)

Classification of rating methods Class Individual –Judgment –Schedule (blue book approach) –Experience rating –Retrospective rating

Information used in underwriting The application External information –Information from broker/agent –Credit reports –Medical exam –Information bureaus Post selection underwriting –Legal restrictions

Loss Adjustment Problems in property-liability insurance –Coverage questions –Value of damages Adjusters –Staff adjuster –Independent adjuster –Public adjuster

Investments Restrictions in risk taking Tax considerations Combined ratio and cash flow underwriting –Conceptual treatment of investment income

Statutory Accounting More conservative than GAAP Market value for bonds and stock Admitted and non-admitted assets Reserves (liability accounts)

Reserves Unearned premium reserve Loss reserves –Incurred but not paid –IBNR Hidden equity in reserves

Reinsurance Ceding company and reinsurer Reinsurance as a “source” of capital Facultative and automatic Proportional reinsurance –Quota share (Co-insurance) –Surplus line Excess loss reinsurance (Deductible) Pooling

Alternatives to reinsurance Cat bonds Catastrophe futures and options Catex

Taxation State premium tax Income tax –Reserving –Tax-exempt bonds