section 1. overview of insurance operations

SECTION 1. OVERVIEW OF INSURANCE OPERATIONS

Topic 1: Classification of Insurers

Topic 2: Insurer Goals

Topic 3: Insurer Functional Performance

Topic 4: The Digitization of Insurance

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Topic 1: Classification of InsurersCPCU 520 Review Notes / Assignment 1. Overview of Insurance

Operations / EO 2

1.a. Structure: Types of Insurers

Legal Form of Ownership

Proprietary Insurers

Stock InsurersLloyd's of LondonAmerican LloydsInsurance Exchanges


Cooperative Insurers

Mutual InsurersReciprocal Insurance ExchangesFraternal OrganizationsOther Cooperatives


Other Insurers

PoolsGovernment Insurers

Place of Incorporation

A domestic insurer A foreign insurer An alien insurer

A domestic insurer A foreign insurer An alien insurer

Licensing Status

A licensed insurer (admitted insurer) An unlicensed insurer (nonadmitted insurer)A licensed insurer (admitted insurer) An unlicensed insurer (nonadmitted insurer)

Insurance Distribution Systems and Channels

Independent agency and brokerage marketing systemExclusive agency marketing systemDirect writer marketing system

Independent agency and brokerage marketing systemExclusive agency marketing systemDirect writer marketing system

Depending on how the insurer is called, it is necessary to distinguish which category it is. For example, a typical car insurer can be a stock insurer, a domestic insurer, or a licensed insurer. A stock insurer refers to a legal form of ownership, a domestic insurer refers to a place of incorporation, and a licensed insurer refers to a licensing status. Depending on how it is called, you can see what sort of distinction is applied.

SECTION 1. Overview of Insurance Operations

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1.b. Legal Form of Ownership

It is classified according to the purpose and legal status of the insurer (Legal Form of Ownership). (1) Proprietary Insurers are insurers for profit seeking, including Stock Insurers, Lloyd's of London, American Lloyds, and Insurance Exchanges. (2) Cooperative Insurers are not-for-profit insurers that provide low premiums and coverage to members, including Mutual Insurers, Reciprocal Insurance Exchanges, Fraternal Organizations, and Other Cooperatives. (3) Other insurers include government insurers, which are run by the government, and Pools, an association of insurers.

1.c. Stock Insurer, Mutual Insurer

A stock insurer is owned by shareholders (stockholders) who elect a board of directors to oversee operations. Dividends from the profits of the insurers are returned to the shareholders.

Mutual companies are belonging to policyholders who elect a board of directors. Benefits in addition to those normally returned to the surplus, which is returned to the policyholder as dividends. A mutual insurance company issues insurance to its members on a nonprofit basis. Examples of these associations include fraternal societies, unions, and employee membership groups.

Most proprietary insurers are stock insurers, and mutual insurers are the most common form of cooperative insurers. Much of the features of mutual insurers are similar to stock insurers. There is a board of directors in charge of daily management, and there are dividends to distribute profits. However, the shareholders, who are the owners of the stock insurers, are the people bought the stocks for investment purposes, and the policyholders, who are the owners of the mutual insurers, are the people bought the insurance for risk transfer.


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1.d. Lloyd's of London

Lloyd's of London is a marketplace of hundreds of underwriting syndicates, each in fact a mini insurer. Lloyd sets benchmarks for its members, but does not provide the policy itself. Each syndicate is managed by an underwriter, who decides which risk is to be accepted. In general, a number of syndicates are used to share a risk that is underwritten at Lloyd's.

Lloyd's of London is a profit-making corporation that owns buildings, facilities, manpower, and capital. However, it is not technically an insurance company because it does not directly write insurance coverages. Nonetheless, it is classified as a proprietary insurer because it supports insurance sales and is for profit purposes. Members of Lloyd's of London are investors seeking to profit from insurance operations. These members invest in syndicates, a mini-insurance company, through Lloyd's of London to earn money from insurance operations. Lloyd's of London recruits and reviews members who are investors. It also provides physical and procedural facilities for members to perform insurance operations.

A syndicate is a mini insurance company that has only underwriting units unlike general insurers. The reason why these syndicates can operate like a general insurance company is that Lloyd's of London (= Corporation of Lloyd's) supports non-underwriting tasks. Many brokers approved by Lloyd's of London conduct international business for syndicates. Financial management, IT infrastructure, investment attraction and investment business are supported by Lloyd's of London. Therefore, a syndicate composed of only underwriting organizations is granted a credit rating of A or higher from a credit rating agency, enabling international operations.


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1.e. Reciprocal Insurance Exchanges and Fraternal Organizations

The term "reciprocal" comes from the reciprocity of responsibility of all subscribers to each other. Each member of the reciprocal is both an insured and an insurer. A reciprocal Insurance Exchange is an unincorporated band of individuals or organizations (subscribers) that consent to pool risks with the intention of paying the cost of retained losses. Also referred to as reciprocal inter-insurance exchanges, they are managed by an attorney-in-fact. Subscribers have contingent liability (several and proportionate) for paying off the losses of the reciprocal.

Reciprocal Insurance Exchanges use the name "insurance exchanges" but they are not the concept of a shopping mall where consumers can buy insurance coverage. It is cooperative Insurers who do not pursue profits, and they are formed by private contracts between companies operating the business. Therefore, Reciprocal Insurance Exchanges are the only insurers that do not incorporate them legally. If the general consumer is inaccessible and uses the term subscribers or attorney-in-fact, you can choose Reciprocal Insurance Exchanges.

A Fraternal organization is an organized society of people associated together in an environment of companionship. They have group coverage for members of a fraternal association, usually on a nonprofit basis.

It is a way to distinguish between cooperative insurers. A typical consumer can join a mutual insurer as a member without qualification. Only a consumer eligible for a specific job, residence, etc. may be a member of a fraternal organization. A general consumer cannot join a reciprocal insurance exchange, and the company that runs the business becomes a member.


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1.f. Other Cooperatives

Cooperative insurers include captive insurers, risk retention groups, and purchasing groups. When a business organization or a group of affiliated organizations forms a subsidiary company to provide all or part of its insurance, the subsidiary is known as a captive insurer, or captive. This arrangement is sometimes referred to as "formalized self-insurance."

Legislation has also allowed risk retention groups and purchasing groups to form. These cooperatives can be stock companies, mutual insurers, or reciprocal exchanges. They are usually organized so that a limited group or type of insured is eligible to purchase insurance from them.

A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insureds (a company or a band of affiliated organizations). Its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits. Captive insurance is utilized by insureds that choose to put their own capital at risk by creating their own insurance company as a subsidiary, and working outside of the commercial insurance marketplace. A captive insurer looks like a mutual insurer or reciprocal insurance exchange in that it is controlled by policyholders (insureds), but the form of the corporation is a stock insurer.

1.g. Government insurers: Other insurers

Private insurers do not provide some types of insurance. Some loss exposures, such as catastrophic flooding, do not possess the characteristics that make them commercially insurable, but a significant need for protection against the potential losses still exists. Both the federal government and state governments have developed insurance programs to meet specific insurance needs of the public.

One of the largest property insurance programs the federal government offers is the National Flood Insurance Program (NFlP), which is administered by the Federal Insurance Administration under the Federal Emergency Management Agency (FEMA).

The federal government provides a government "backstop" insurance program through the original Terrorism Risk Insurance Act (TRIA) of 2002. In 2015, the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) extended the program for five years. TRIA ensures that commercial property owners can obtain reasonable and predictably priced terrorism coverage by specifying that the federal government will share the risk of loss from terrorist acts.

Fair Access to Insurance Requirements (FAIR) plan is a type of insurance pool operated by state governments, and offered to inner-city business owners who cannot purchase property insurance through conventional means.


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1.h. Pools: Other insurers

Pools consist of several insurers, not otherwise related, that join together to insure loss exposures that individual insurers are unwilling to insure. These loss exposures present the potential for losses that either occur too frequently or are too severe (catastrophic) for individual insurers to accept the risk. Pools can be formed either voluntarily or to meet statutory requirements. Many pools are required by law. Most states have pooling arrangements to provide auto liability insurance and workers compensation coverage.

In some cases, the government operates pools directly, but in many cases one of the insurance companies sharing the risk is selected and the company is in charge of the operation. A syndicate pool issues a joint (or syndicate) policy to the insured, listing all pool members and specifying the part of the insurance for which each member is responsible. Under a reinsurance pool, one member of the pool issues the policy to the insured, and the other pool members reinsure an agreed proportion of the policy's insured loss exposures.

The market in which pools operate is primarily a residual market. Residual markets are insurance market systems serve as a coverage source of last resort for the insured have been rejected by voluntary market insurers. The voluntary market is a general insurance market operated by private insurers. Private insurers participating in the voluntary market also participate pools in the residual market, voluntarily or to meet statutory requirements. The share of the residual market is determined by the market share in the voluntary market.

Categories of Insurtech Sartups [2021 개정: 추가]

Micro insurance

This includes firms offering insurance to economically disadvantaged and other traditionally underserved segments of the population that are united in risk pools whose members are connected to the insurer through web-enabled platforms on cell phones and other devices.

Peer-to-peer insurance

This includes organizations that use web-enabled platforms to facilitate the formation of self-selected risk pools whose members pool premiums and collectively pay for members' insured losses.

On-demand insurance

This startup category includes firms that use web-enabled customer interfaces and sensor technology to offer coverage that allows near-total customer customization.

Firms that facilitate the use of sensors, loT-enabled devices, and other data capture technology to help insurers and brokers more accurately assess and price individual risks.

Firms that facilitate the use of sensors, loT-enabled devices, and other data capture technology to help insurers and brokers more accurately assess and price individual risks.


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1.i. Place of Incorporation

(1) A domestic insurer is incorporated within a specific state. (2) A foreign insurer is insurance company whose domicile is within a state apart from the one in which the firm is writing business. (3) An alien insurer is created in accordance with the legal requirements of a foreign country.

Reciprocal insurance exchanges are the only unincorporated insurers permitted in most states. Insurance exchanges and Lloyd's organizations are permitted under law in only a few states.

The predominant trap used in the test is to describe a company as a domestic insurer that has been granted a license in a particular state. A domestic insurer is a company that established a corporation in a particular state, and a licensed insurer is a company that has been granted a business license in a particular state.

1.j. Licensing Status

An insurer's state license authorizes it selling insurance in the state. (1) A license shows that the insurer has met the state's minimum standards for financial strength, competence, and integrity. (2) Nonadmitted insurer (unlicensed insurer) is a company not licensed by a specific state to sell and service insurance policies within that state.

An unlicensed insurer is not an illegal insurer. If an insurer has established a corporation in A state and has a business license but is not granted a business license in state B, it will be a licensed insurer in state A and an unlicensed insurer in state B. For particularly dangerous risks, such as launching satellites, insurance coverage may not be met by insurers licensed to operate in the B state. In this case, a surplus line broker in the B state contacts an unlicensed insurer that is not licensed to operate in the B state to obtain additional coverage. This is why unlicensed insurers can do business in a particular state.

Surplus line broker (excess line broker) is an insurance producer that is licensed to do business with an insurance company that is not licensed to make transactions in the state of the resident of the broker. The excess line coverage must be unavailable by a company licensed in the broker's state.

1.k. Insurance Distribution Systems and Channels

According to (1) the independent agency and brokerage marketing system, one sales agent deals with the products of several insurers. According to (2) the exclusive agency marketing system, a sales agent deals only with the goods of an insurer. According to (3) the direct writer marketing system, the insurer's employees sell their own insurance products directly without a sales agent.


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1.1. Question: Forms of Ownership of Property-Casualty Insurers

Which of the following statements is true with regard to the various forms of ownership of property-casualty insurers?

I. Stock insurance and mutual insurance companies belong to policyholders.

II. The main reason that the cooperative insurers are formed would be to earn profits for their owners.

III. Lloyd’s and insurance exchanges are each samples of the insurance marketplace.

IV. Most pools are needed by law are underwritten by state governments.

V. Federal and state governments provide insurance for risks which might be important however, not commercially insurable.

(A) III only

(B) III and V

(C) I, II, and IV

(D) All of the above

AnswerI. Stock insurance companies are owned by the shareholders

(stockholders). II. The main reason that cooperative insurers are formed is to provide

insurance protection to its policyholders at minimum cost. IV. A syndicate pool issues a joint (or syndicate) policy to the insured,

listing all pool members and specifying the part of insurance in which each member is responsible. Inside a reinsurance pool, a pool member issues the policy to the insured, as well as other pool members reinsure an agreed proportion from the policy's insured loss exposures.

The correct answer is (C) III and V only.


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1.2. Question: Forms of Ownership of Property-Casualty Insurers

Which of the following statements is true with regard to the various forms of ownership of property-casualty insurers?

I. Federal and state governments provide insurance for exposures that are significant however, not commercially insurable.

II. Because Nancy has had many driving accidents as a result of her own carelessness, she has been unable to find private insurers prepared to provide her with automobile insurance. In most states, Nancy could possibly purchase high risk auto insurance through a fraternal organization.

III. Smith owns Smith's Guns that is in a high criminal activity area of his city. Smith has made an effort to obtain coverage through several insurers in his area but has been unsuccessful. He wants building and contents coverage. Smith has been advised that he should obtain coverage through a FAIR plan that is federally run plans with cost spread among private insurers in the state.

IV. Hyundai Chemical (Hyundai) has been unable to obtain liability coverage for its products. Insurers consider Hyundai to be uninsurable. Hyundai risk manager, Johanna, believes that their company can cover the losses and fund them. In this case, Johanna can be considering a captive for Hyundai.

(A) I and II only

(B) II and III only

(C) I and IV only

(D) III and IV only

AnswerII. In most states, Nancy would be able to purchase high risk auto

insurance through a residual market plan.III. FAIR plans are state-run plans with cost spread among private

insurers in the stateThe correct answer is (C) I and IV only.


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1.3. Question: Proprietary Insurers

Which of the following statements is incorrect regarding proprietary insurers?

I. Stock insurers are the most typical form of proprietary insurer in the United States. These insurers belong to their shareholders.

II. Lloyd's is not technically an insurer. However, it offers the physical and procedural facilities for its members to write insurance.

III. Lloyd’s of London is a marketplace, similar to a stock exchange. Members are investors who are aiming to profit from the insurance operations.

IV. An insurance exchange is actually a proprietary insurer comparable to Lloyd's since it works as an insurance marketplace.

V. The insurance exchange manager is referred to as an attorney-in-fact. Subscribers empower the attorney-in-fact to handle all the functions require to operate the insurance exchanges.

(A) I and II only

(B) IV only

(C) V only

(D) III, IV, and V only

AnswerV. The manager of reciprocal insurance exchanges is called an attorney-

in-fact. The subscribers empower the attorney-in-fact to manage all the functions necessary to operate the reciprocal.

The correct answer is (C) V only.


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1.4. Question: Proprietary Insurers

Which of the following statements is not true with regard to the Proprietary Insurers?

I. The only unincorporated insurers permitted in the majority of states are insurance exchanges.

II. Insurance pools do the job either in the form of syndicate or through reinsurance.

III. Reciprocal insurance exchanges comprise of a series of private contracts in which subscribers or members of the group agree to insure each other.

IV. Insurer LIG is a proprietary insurer that acts as an insurance marketplace. Its members underwrite any insurance or reinsurance purchased, and members are primarily partnerships or corporations with limited liability. Insurer LIG members belong to syndicates and delegate day-to-day operations to the syndicate manager. In cases like this, insurer A is an insurance exchange.

V. Because of the chance of an environmental pollution exposure resulting in extensive losses, several insurers in a particular state have joined together to insure the exposure because no single insurer was willing to insure the entire risk. This particular insurance arrangement is typical of a reciprocal exchange.

(A) I and III only

(B) I and V only

(C) II and III only

(D) II and IV only

AnswerI. The only unincorporated insurers permitted in most states are

reciprocal insurance exchanges.V. This insurance arrangement is typical of an insurance pool.The correct answer is (B) I and V only.


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1.5. Question: Cooperative Insurers

Which of the following statements is incorrect regarding cooperative insurers?

I. Mutual insurers would be the largest quantity of insurance cooperatives and offer low-cost insurance to their policyholders, who are the owners of the insurer.

II. It’s policyholders have voting rights comparable to those of a stock company's stockholders, and, they elect the insurer's board of directors that designates officers to control the business.

III. A reciprocal insurance exchange, commonly known as simply as a reciprocal, is made up of a series of private contracts in which subscribers, or members of the group, consent to insure each other.

IV. When a company or a band of affiliated organizations forms a subsidiary to supply all or part of its insurance, the subsidiary can be described as fraternal organization.

(A) I and III only

(B) II and IV only

(C) III only

(D) IV only

AnswerIV. The subsidiary is regarded as a captive insurer. Fraternal

organizations resemble mutual insurers, however they combine a social function making use of their insurance function. They mainly write life and health insurance.

The correct answer is (D) IV only.


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1.6. Question: Place of Incorporation & Licensing Status

Which of the following statements is true with regard to the place of incorporation or the licensing status?

I. A licensed insurer is incorporated within a specific state or, if they are not incorporated, is created under the laws of that state.

II. A foreign insurer is actually a domestic insurer which is licensed to do business in states apart from their resident state.

III. An unlicensed insurer is incorporated or formed out of the country.

IV. A domestic insurer is an insurer that has been attained a license to perform in a particular state.

V. An alien insurer hasn't been granted a license to work inside of a given state.

(A) II only

(B) III only

(C) I, IV, and V only


AnswerI. A domestic insurer is incorporated within a specific state or, if not

incorporated, is formed under the laws of that state.III. An alien insurer is incorporated or formed in another country.IV. A licensed insurer (admitted insurer) is an insurer that has been

granted a license to operate in a particular state.V. An unlicensed insurer (nonadmitted insurer) has not been granted a

license to operate in a given state.The correct answer is (A) II only.


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Topic 2: Insurer GoalsCPCU 520 Review Notes / Assignment 1. Overview of Insurance

Operations / EO 1

2.a. Structure: Major Goals of Insurer

Major Goals of Insurer

• Earn a Profit• Meet Customer Needs• Comply With Legal Requirements• Diversify Risk• Fulfill Their Duty to Society

2.b. Earn a Profit

The profit goal is most commonly associated with proprietary, or for-profit, insurers. Cooperative insurers also aim to earn a profit, but do not consider this goal to be the primary reason they are formed.

Proprietary insurers have two sources of profits: insurance and investment operations. Insurers generate income through charging policyholders a "premium" for the insurance coverages. Insurers invest the portion of the premiums that are not necessary to pay operating costs (called surplus). These investments generate income from interest (when investing in bonds), dividend (investing in stocks) and investment gains (due to the valuation change of or sales of investment assets). Return on investment generates additional revenue.

A proprietary insurer must earn a profit to provide a return on the investment made by its stockholders. This is important because a proprietary insurer can attract capital only as long as its profits are comparable to or better than similar insurers.

For cooperative insurers, one source of capital is funds from policyholders, usually in the form of premiums. Growth of surplus derived from underwriting operations is another. Profits are returned to policyholders in the form of dividends or are contributed to surplus to help ensure continued solvency and protect against unforeseen catastrophic losses.


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2.c. Meeting Customers' Needs

To attract customers, an insurer must provide the products and services those customers seek, and do so at a competitive price. This involves determining what customers need and what price is competitive and then finding the best way to satisfy those needs.

The insurer must provide quick and professional assistance, which requires well-trained, customer-focused personnel and automated support systems. Meeting customers' needs, however, may conflict with the profit goal. In some cases, offering high-quality insurance at a price that the customer can afford may not generate the profit that the insurer needs to attract and retain capital.

2.d. Comply With Legal Requirements

Compliance with state regulations is one of an insurer's greatest responsibilities. Unfortunately, compliance comes with expenses for filings, record keeping and accounting, and legal activities. Additional expenses are incurred for participation in assigned risk plans, Fair Access to Insurance Requirements (FAIR) plans, and government-required insolvency funds. To the extent that these expenses increase the cost of insurance, they create a conflict between the insurer's profit goal and the insurer's goal of Meeting customers' needs.

The insurance industry is highly regulated, and the expenses associated with compliance can be substantial. However, Legal compliance promotes good trustworthiness of the insurer in the market and the ability of the insurer to obtain capital and customers. Therefore, compliance management is not only essential for insurers, but also for long-term profit-seeking.

2.e. Diversify Risk

Diversifying risk is a goal for property-casualty insurers because of the potential for catastrophic losses. By spreading risk over a wider geographic area and multiple types of insurance business, insurers can help protect themselves from catastrophic losses. This goal complements the insurer's goals of earning a profit and fulfilling its duty to society.


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2.f. Fulfill Their Duty to Society.

All corporations are obligated to promote the well-being of society. Insurers who participate in philanthropic activities and build the employee benefit plans, enhances the work satisfaction and the emotional well-being of the employees. In addition, these activities play a role in employee retention and attract qualified candidates of these organizations. The minimum standards for the fulfillment of social duties of insurers are not harmful to the public.

2.g. Structure: Insurer Constraints

Internal Constraints External Constraints• Efficiency• Expertise• Size• Financial Resources• Other Internal

Constraints

• Regulation• Rating Agencies• Public Opinion• Competition• Economic Conditions• Insurance Marketing and

Distribution• Other External Constraints

2.h. Efficiency and Expertise: Internal Constraints

Lack of efficiency can be the result of poor management, insufficient capital, not enough IT (information technology), incapacity to alter to change, or other causes. Inefficiency, particularly in IT (information technology) and customer services, can prevent the insurer adequately meet the requirements of its customers.

Lack of expertise could prevent an insurer from making a profit or meeting customers’ needs, or it could ultimately lead to the insurer failing to achieve any of its goals.

Efficiency means high quality and speed of work and low cost. Since lack of efficiency is the opposite situation, it is difficult to achieve almost all insurer goals including the profit goal.

Lack of expertise means only a low quality of work. However, due to the knowledge industry characteristics of insurance, low work quality makes it difficult to achieve almost all insurer goals.


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2.i. Size and Financial Resources : Internal Constraints

Large insurers can engage in economies of scale and possibly convey more financial resources to update technology or reach other markets. An advantage on a small insurer would be that it can be more agile, letting it to respond quickly to a new trend or a change in external environment.

When financial resources become strained, insurers are unable to effectively train staff, make new capital investments, or reach new markets.

The size and financial resources corresponding to the internal constraints are similar. If the size of the company is large, it has the advantage of economies of scale, and if it is small, it has the advantage of agility. However, lack of financial resources always acts as a disadvantage.

2.j. Other Internal Constraints

A newly founded insurer might be lacking the name recognition necessary to reach its profit targets, even if it has the expertise and financial resources. Another internal constraint is a reputation that has been damaged by past problems. Overcoming a bad reputation requires work from all employees within the organization.

Certain insurers suffer from operating difficulties because they are not well known to the public or because of past events. This can be classified as other internal constraints. However, even if a single insurer makes a mistake, it is a nationwide event that leads to a public negative evaluation of the entire insurance industry. This may correspond to public opinion among external constraints.

2.k. Regulations: External Constraints

Regulation might be extended to insurance rates and forms. In the event the rate increases filed are not authorized by the regulator, the insurer probably won't achieve its profitability objectives. Policy form approval and time limitations linked to the filing procedure help keep an insurer to completely meet customer needs.

2.l. Rating Agencies and Public Opinion: External Constraints

Financial agencies such as A.M. Best Company, Standard & Poor's, and Moody's, rate insurers on the basis of financial strength as a reference to the ability of an insurer to meet policyholder obligations. The financial rating of an insurer may also be a potential constraint for insurers whose rating has declined. A decrease in customers often leads to a further decline in the financial ratings.

Public opinion about the insurance industry as a whole can serve as a constraint for individual insurers to achieve the goals. When the insurance industry is viewed negatively by the public, it contradicts the idea of serving in the interest of the public.


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2.m. Competition: External Constraints

Insurance industry underwriting cycles (or market cycles) are referred to as either hard cycles or soft cycles. Hard cycles are characterized by periods of reduced competition and rising rates that lead to increased profitability and high returns. Soft cycles are when prices are moderate or declining as the competition increases and eventually the profitability decreases. Excessive competition can lure some insurers to bend the rules so that the insurers are unable to achieve their legal and regulatory goals.

Excessive competition occurs in soft cycles. Most insurance companies lower the price of personal insurance and broaden their coverages. As a result, each insurer's products are less discriminating and consumers perceive insurance products as commodities. Due to the excessive competition, insurers can not achieve the profit goal and, in severe cases, can not achieve the legal compliance goal.

2.n. Insurance Marketing and Distribution: External Constraints

Insurers distribute their products through various sorts of distribution systems using several types of sales and distribution channels in promoting products and services and get in touch with existing and potential policyholders. Each distribution system or channel meets the demands of some customers, and each is unable to meet the needs of others.

2.o. Economic Conditions and Other External Constraints

Insurers' investments can be severely impaired by economic downturns. Insurers can also be adversely affected in the inflation cycles. Inflation influences the cost of insurance losses through increased medical costs, construction costs and other loss costs.

Other external constraints are natural or man-made disasters, disregard of law and order, especially in some larger cities, and legal changes affecting liability claims.

The situation since the financial crisis at the end of 2007 is summarized as a plunge in financial assets and a recession. At that time, insurers suffered both losses in investment and insurance operations due to the depreciation of their financial assets and the decline in insurance contracts due to the economic downturn.


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2.1. Question: Insurer Goals

Which of the following statements is incorrect with regard to an insurer’s goals?

I. The objective of diversifying risk would not often conflict with the goal of generating a profit.

II. A proprietary insurer must make competitive profits to get the capital necessary to operate.

III. The aim of meeting customers' needs often conflict with the objective of earning a profit.

IV. Expenses related to compliance with state insurance regulations are minimal. To the extent that these expenses increase the cost of insurance, they create a conflict between the insurer's profit goal and the insurer's goal of Meeting customers' needs.

V. All corporations have an obligation in promoting the well-being of society. At least, this obligation necessitates the insurer to stay away from causing any public harm.

(A) II only

(B) I and III only

(C) IV only

(D) None of the above

AnswerIV. The insurance business is highly regulated, and the expenses related

to compliance is usually substantial. The correct choice is (C) IV only.


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2.2. Question: Insurer Goals

Which of the following statements is most true with regard to an insurer’s goals?

I. Under certain situations, a cooperative insurer can acquire additional capital by borrowing funds using surplus notes. These notes normally can be repaid only from policyholder surplus.

II. As being a marketable product, insurance is an intangible product. The insurance customer receives an insurance policy, but what the customer actually purchases is really a transfer mechanism.

III. Diversifying risk is an emerging goal for property-casualty insurers as a consequence of the increase in catastrophe losses that have occurred over the past decade.

IV. Dongbu Insurance Company has recently contributed funds to their state insolvency fund and in addition paid expenses of numerous filings for their company. Dongbu's adhering to legal requirements goal presents a conflict between the profit goal and reducing operating expenses.

(A) I and II only

(B) II and III only

(C) III and IV only

(D) I and IV only

AnswerI. These notes can usually be repaid only from profits.IV. The insurance industry is highly regulated, and the expense

associated with compliance can be substantial. To the extent that these expenses increase the cost of insurance, they create a conflict between the insurer's profit goal and the insurer's goal of meeting customers' needs.

The correct answer is (B) II and III only.


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2.3. Question: Internal Constraints

Which of the following statements is not true with regard to internal constraints insurers face?

I. In extraordinary instances, the inefficiency can result in insolvency along with a consequent failure to meet legal and regulatory goals.

II. Lacking expertise could prevent an insurer from generating a profit or meet the needs of customers, or it may possibly force the insurer to do not achieve its goals.

III. The economic strain of the past decade, and particularly these tough economic times that began at the end of 2007, have caused some insurers to suffer financial resources reduced by underwriting losses, investment losses, or both.

IV. Newly created insurer may possibly not have the name recognition required to achieve its profitability targets, even though it has the expertise and financial resources to achieve this.

V. Each distribution system or channel meets the demands of some customers, and each is unable to meet the needs of others.

(A) II and III only

(B) I and IV only

(C) V only


AnswerV. Insurance marketing and distribution is external constraint. The correct answer is (C) V only


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2.4. Question: External Constraints

Which of the following statements is not true regarding external constraints insurers face?

I. Inflationary cycles throughout the economy usually are not proven to negatively affect insurers.

II. Large insurers could benefit economies of scale and may provide more financial resources to update technology or reach other markets.

III. The regulation imposes a significant constraint for insurers, requiring significant staff and financial resources that can inhibit the capability of the insurer to meet up with its profitability targets.

IV. Rating agencies now require insurers to boost their capital to take care of higher catastrophe risk.

V. Hard cycles are considered as periods of decreased competition and rising rates producing increased profitability.

(A) I and II only

(B) III and IV only

(C) V only


AnswerI. Insurers are usually adversely affected during inflationary cycles too.

Inflation affects the expense of insurance losses through increased medical costs, construction costs, and also other loss-related costs.

II. Size is internal constraint. The correct answer is (A) I and II only.


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2.5. Question: Insurer Constraints

Which of the following statements is not true with regard to constraints insurers face?

I. Rating agencies are adding new demands when assessing insurers' financial health. While many other exposures can impact solvency, no single exposure can affect policyholder security more instantaneously than catastrophes.

II. Insurance industry underwriting cycles are generally known as either hard cycles or soft cycles. Competition is motivated in personal insurance by highly standardized products that customers view as commodities.

III. Regulation is surely an external constraint that may prevent insurers from meeting their established goals.

IV. Insurer’s size is an internal constraint that may prevent an insurer from meeting nearly every one of its goals.

V. To uphold their current ratings, well-managed and highly rated insurers typically must maintain capitalization levels in excess of the minimum amounts required.

(A) I and II only

(B) II and IV only

(C) III and IV only

(D) III and V only

AnswerIII. The insurer's competition is an external constraint that may prevent

insurers from meeting their established goals.IV. Efficiency is an internal constraint that might prevent an insurer from

meeting all of its goals.The correct answer is (C) III and IV only.


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2.6. Question: Insurer Constraints

Which of the following statements is not true with regard to constraints insurers face?

I. Insurer Lotte is small but has a specialty insurance market for high-value vehicles. In rivaling a larger insurer with a broader market, insurer Lotte can be more nimble, permitting it to respond quickly to an emerging trend or change.

II. Meritz Insurance Company received national mass media coverage for its denial of claims during a recent hurricane. This demonstrates an internal constraint for meeting insurer goals.

III. Hanwha Insurance Company's website is not interactive and doesn't provide rate quotations on line. This situation shows an internal constraint of efficiency.

IV. MG Insurance Bank now markets insurance but is lacking in the brand recognition of their only insurance competitor, Green. This demonstrates an external constraint of public opinion.

V. An insurer develops a new policy specifically designed for the construction industry. The insurer is anxious to promote this product which will increase its writings and boost its profits. The policy form is not approved in time to meet the product's planned introduction date. This illustrates an external constraint of regulation.

(A) I and II only

(B) III and V only

(C) II and IV only

(D) I and V only

AnswerII. This illustrates an external constraint of public opinion. IV. A newly established insurer might lack the name recognition

necessary to achieve its profit goals even if it has the expertise and financial resources to do so. This is an example of other internal constraints.

The correct answer is (C) II and IV only.


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Topic 3: Insurer Functional PerformanceCPCU 520 Review Notes / Assignment 1. Overview of Insurance

Operations / EO 3, 4

3.a. Structure: Measuring Insurer Performance

Meeting Profitability Goals

Premium and Investment IncomeUnderwriting PerformanceOverall Operating PerformanceEstimation of Loss Reserves

Meeting Customer Needs

Complaints and PraiseCustomer Satisfaction DataInsurer's Retention Ratio and Lapse RatioInsurer-Producer RelationshipsState Insurance Department StatisticsConsumer Reports

Meeting Legal RequirementsMeeting Legal RequirementsMeeting Social ResponsibilitiesMeeting Social Responsibilities

Four items of Measuring Insurer Performance are consistent with insurer goals. Only the diversify goal was excluded. (1) Meeting Profitability Goals and (2) Meeting Customer Needs are comparatively quantifiable. However, (3) Meeting Legal Requirements can only be evaluated roughly, and (4) Meeting Social Responsibilities are difficult to evaluate.

3.b. Meeting Profitability Goals

Four items for measuring meeting profitability goals are (1) Premium and Investment Income, (2) Underwriting Performance, (3) Overall Operating Performance, and (4) Estimation of Loss Reserves.

Premiums are recognized as sales, then deducting costs, and adding additional profits to assess how much net profit is. Likewise, various investment incomes from investment assets are evaluated. (1) Premium and Investment Income mainly assesses the extent and causes of premium growth and the appropriateness of the investment income. (2) Underwriting Performance evaluates the net income from insurance operations. (3) Overall Operating Performance evaluates the company's net profit taking into account net profit from investment operations. (4) Estimation of Loss Reserves assesses whether estimates of costs arising from insurance operations are properly reflected.


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3.c. Premium and Investment Income

Premiums are the amounts that insurers charge insureds for insurance coverages. Insurers use rates based on the insured's loss exposures to determine the premium to charge for insurance policies. Insurers must charge premiums to have the funds necessary to make loss payments.

Premium growth, or lack thereof, should be evaluated considering current market conditions. An insurer must ask whether or not the growth is the result of a competitive advantage, relaxed underwriting, low insurance rates, or a mixture of these factors. Slower or rapider growth in comparison to the industry average and significantly beyond the industry average might point to problems.

Insurance operations generate substantial amounts of investable funds, primarily from loss reserves, loss adjustment expense reserves, and unearned premium reserves.


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3.d. Underwriting And Overall Operating Performance

The formula for calculating the gain or loss of underwriting is usually expressed as the following: the net underwriting gain or loss = earned premiums - (incurred losses + underwriting expenses).

Three specific ratios are widely used to evaluate the performance of the insurer's underwriting: the loss ratio (incurred loss / earned premiums), the expense ratio (underwriting expenses / written premiums), and the trade basis combined ratio (loss ratio + expense ratio).

The formula for overall gain or loss from operations is expressed the following: overall gain or loss from operations = net underwriting gain or loss + investment gain or loss. The investment income ratio, overall operating ratio, and return on equity tend to be more specific measures of an insurer's operational performance.

Earned premium: An earned premium is the amount of total premiums collected by an insurance company over a period that have been earned based on the ratio of the time passed on the policies to their effective life. This pro-rated amount of "paid in advance" premiums have been earned and now belong to the insurer.

Incurred losses: The total amount of paid claims and loss reserves connected with a particular time period, commonly a policy year. It also typically includes LAE (Loss adjustment expenses).

Underwriting expense: The costs incurred by the insurer in deciding if they should accept or reject a risk; can include meetings with insureds or brokers, actuarial study of the historical loss or physical inspections exhibitions.

For example, Apex insurer has Written premium of $ 300; Earned premium of $ 250; Underwriting expenses of $ 120; Incurred losses of $ 150; Loss adjustment expenses of $ 50.

In this case, the expense ratio (trade basis) = underwriting expenses / written premiums = 120/300 = 40%, loss ratio = incurred loss (incl. LAE) / earned premiums = (150 + 50)/250 = 80%, combined ratio = Loss ratio + expense ratio = 40% + 80% = 120%.

The investment income ratio is the same as return on investment (ROI). Investment income divided by investment assets. Therefore, Operating ratio = combined ratio - investment income ratio (or ROI). For example, if the Apex insurer has the combined ratio of 113% and the operating ratio is 103%, then the ROI = operating ratio - combined ratio = 10%.


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3.e. Meeting Customer Needs

The six items for evaluating the meeting customer needs are (1) Complaints and Praise, (2) Customer Satisfaction Data, (3) Insurer's Retention Ratio and Loss Ratio, (4) Insurer-Producer Relationships, Statistics, (5) State Insurance Department Statistics, and (6) Consumer Reports.

(1) Complaints and Praise are the reactions that insurance companies received directly from consumers. (2) Customer Satisfaction Data is the data that consumers responded to the satisfaction questionnaire created by insurance companies. (3) Insurer's Retention Ratio and Lapse Ratio indicate whether or not the existing customer is maintained. (4) Insurer-Producer Relationships sees producers as intermediaries connecting consumers to insurers, and estimates customer satisfaction based on the scope and type of relationships between insurers and producers. (5) State Insurance Department Statistics assesses the number and type of consumer complaints officially filed. (6) Consumer Reports are assessed by external consumer groups.

3.f. Insurer's Retention Ratio and Lapse Ratio

(1) Retention ratio is the percentage of expiring insurance policies that an insurer renews. The higher the retention ratio means the higher the customer satisfaction. Retention ratio = numbers of renewed policies / numbers of expiring policies.

(2) Lapse ratio (= cancellation ratio) is calculated by dividing how many policies that lapse throughout a period from the total number of policies written at the start of the period. The lower the lapse ratio means the higher the customer satisfaction. Lapse ratio = numbers of lapsed policies during the year / numbers of written policies at the beginning of the year.

3.g. Meeting Legal Requirements

Three sources to measure the success of an insurer to meet legal requirements are (1) the state insurance department's market conduct regulation, (2) state listings of regulatory actions taken against insurers, (3) summary information regarding insurer financial strength and financial ratings furnished by financial rating agencies, including any outstanding legal actions relating to the organization. The outcomes of these measurements are indicative of how an insurer matches its legal obligations.


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3.h. Meeting Social Responsibilities

No standards exist for judging an insurer's performance in this area, and little information on an individual insurer's performance is publicly available. Many insurers use their web sites to indicate their participation in home and workplace safety programs, support of community projects, and involvement in other social programs. Another possible indicator of social responsibility is the benefits that an insurer provides for its employees.

3.i. Structure: Insurer Functions

Core Functions Supporting Functions

Other Common Functional Areas

• Marketing and Distribution

• Underwriting• Claims

• Risk Control• Premium

Auditing• Actuarial• Reinsurance• Information

Technology

• Investments• Accounting and Finance• Customer Service• Legal and Compliance• Human Resources• Special Investigation

Units (SIUs)

Core functions of the insurer include (1) Marketing and Distribution, (2) Underwriting, and (3) Claims. The supporting functions of insurer are (1) Risk Control, (2) Premium Auditing, (3) Actuarial, (4) Reinsurance, and (5) Information Technology.

3.j. Marketing and Distribution

Marketing and distribution would be to figure out what products or services customers need and want, product advertising (communicating their value to clients), and deliver these to customers.

3.k. Underwriting

The underwriting function decides whether and under what conditions the insurer would prefer to supply insurance products and services to prospective customers. The aim of underwriting would be to write a profitable book of business for the insurer, which assists the goal of profit of the insurer.


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3.l. Claims

The objective of claims function would be the promise of the insurer to cover an amount to, or with respect to the insured if an insured event occurs. Claims function is operated by employees who definitely are competent in the skills needed to evaluate and settle claims and negotiate or litigate the settlement of claims by or up against the insured throughout the claims process.

3.m. Supporting Functions

To support the core functions of marketing and distribution, underwriting, and claims, insurers provide a variety of supporting functions, including risk control, premium auditing, actuarial functions, reinsurance, and information technology.

(1) Risk control: An insurer's risk control function provides information to the underwriting function to assist in selecting and rating risks. The risk control function also works with commercial insureds to help prevent losses and to reduce the effects of losses that cannot be prevented.

(2) Premium auditing: Although the premium for many types of insurance is known and guaranteed in advance, the premium is variable for some lines of insurance and cannot be precisely calculated until after the end of the policy period.

(3) Actuarial: Actuarial functions include calculating insurance rates, developing rating plans, estimating loss reserves, and providing predictive modeling services. The actuarial function also conducts sensitivity analysis to determine the financial security of the insurer.

(4) Reinsurance: When an insurer accepts a risk that is larger than it is willing or able to support, it can transfer all or part of that risk to other insurers through reinsurance transactions.

(5) Information technology: The information technology function provides the infrastructure that supports all of an insurer's internal and external communications.

3.n. Other Common Functional Areas

In addition to the core and supporting functions, insurers perform a host of other functions or outsource them to an external organization. Some common functions include these: (1) Investments, (2) Accounting and Finance, (3) Customer Service, (4) Legal and Compliance, (5) Human Resources, (6) Special Investigation Units (SIUs).

Special Investigation Units (SIUs) are positioned up to combat against insurance fraud, including any deliberate deception perpetrated against an insurer or insurance producer to be able to financial gain.


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3.1. Question: Performance Ratios

Which of the following statements is incorrect with regard to the insurer’s performance ratios?

I. Loss ratio = incurred loss / earned premiums

II. Expense ratio = expenses / written premiums

III. Trade basis combined ratio = loss ratio + expense ratio

IV. Retention ratio is the percentage of expiring insurance policies that an insurer renews.

V. Lapse ratio is calculated by dividing the number of policies that expire throughout a period by the final number of policies written at the outset of that period.

(A) I and II only

(B) III and IV only

(C) V only


AnswerThe correct answer is (D) All of the above


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3.2. Question: Ratio Calculation

Insurance company Apex and Hatch have the following year-end financial results:

Apex Hatch

Written premium $300 $200

Earned premium $250 $180

Underwriting expenses $120 $40

Incurred losses $150 $100

Loss adjustment expenses $50 $35

Which of the following statements is incorrect with regard to the performance ratios of Apex and Hatch?

I. Apex’s expense ratio on a trade basis is 40%

II. Apex’s loss ratio is 80%

III. Hatch’s expense ratio on a trade basis is 38%

IV. Hatch’s combined ratio (trade basis) is 95%

(A) I and II only

(B) III only

(C) IV only


AnswerApex: expense ratio (trade basis) = 120/300 = 40%, loss ratio = (150+50)/

250 = 80%, combined ratio = 40% + 80% = 120%Hatch: expense ratio (trade basis) = 40/200 = 20%, loss ratio = (100+35)/

180 = 75%, combined ratio = 20% + 75% = 95%The correct answer is (B) III only


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3.3. Question: Meeting Profitability Goals

Which of the following statements is incorrect with regard to the insurer’s profitability goals?

(A) The main difference between underwriting gain or loss and the gain or loss from operations is the fact that operating gain or loss includes investment income.

(B) In 2012, a property casualty insurer experienced a combined ratio of 113% after dividends, and a ratio of investment income by 10%. The insurer's operating ratio to the year 2001 is 103%.

(C) Rapid premium growth is usually a reliable indicator on the financial success of an insurer.

(D) To figure out profitability, an insurer should look into how its premium growth is achieved.

AnswerAn insurer should consider whether growth resulted from a competitive

advantage, relaxed underwriting, inadequate insurance rates, or a combination of these factors.

The correct answer is (C).


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3.4. Question: Measuring Insurer Performance

Which of the following statements is not true with regard to the Measuring Insurer Performance?

I. Probably the most telling measurements of customer satisfaction is retention ratio.

II. Perhaps the most difficult to evaluate insurer performance goal is meeting customer needs.

III. The more specific measures of an insurer's operational performance would be the investment income ratio, overall operating ratio, and the return on equity ratio.

IV. To figure out profitability, an insurer should consider whether growth resulted from rate increase on new policies. Insurers should be worried about growth due to aggressive advertising and marketing.

V. Illi's CEO Kim, is hoping investments of Illi will be helpful in making the company profitable with a loss ratio of 80 percent and underwriting expenses of 30 percent. Illi has produced a net investment income of $1,000,000 and earned premium of $10,000,000. Illi's overall operating ratio is 100%.

(A) I and III only

(B) II and IV only

(C) V only


AnswerII. One of the most difficult to evaluate insurer performance goal is

Meeting social responsibilitiesIV. Insurers should be concerned with growth due to inadequate

insurance ratesThe correct answer is (B) II and IV only.


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3.5. Question: Core Functions

Which of the following statements is true with regard to an insurer’s core function?

I. Marketing and distribution is to evaluate which products or services customers need and want, advertising the products, and delivering these to customers.

II. The goal of risk control is to write a profitable book of business for the insurer, which assists to the goal of profit of the insurer.

III. The goal of the claims function is to match the promise of the insurer in making a payment to, or on behalf of, the insured in case a covered event occurs.

IV. The underwriting function also works together with commercial insureds to assist prevent losses and to lessen the impact of losses that cannot be prevented.

(A) I and III only

(B) II and IV only

(C) II only

(D) IV only

AnswerII. The goal of underwriting is usually to write a money-making book of

business for the insurer, which assists to the insurer's profit goal. IV. The risk control function also works together commercial insureds to

assist prevent losses and to reduce the consequences of losses that cannot be prevented. Also, risk control is just not a core function but a supporting function.

The correct answer is (A) I and III only.


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3.6. Question: Insurer Functions

Which of the following statements is true with regard to an insurer functions?

I. Previously being notified of a suspicious loss, Welch is associated with investigating the unusual circumstances that resulted in a large insurance claim due to underreporting of payroll. Welch is noticing indicators that the insured is skewing the payroll numbers in order to obtain a lower premium. Welch most probably works in the insurer's legal and compliance department.

II. Producer Laura has recently received many requests for mobile phone coverage from auto insurance customers. She feels that this type of coverage could be inexpensive for the insurer to create but could possibly attract youthful policyholders. Laura should discuss her product innovation ideas with the insurer's underwriting department.

III. Heungkuk Insurance Company's CEO Adam is exploring Heungkuk's supporting functional areas for sources of additional income. He believes he can market functions his company performs as a separate product to businesses which are not policyholders. Risk control would be Adam’s targeting as a standalone product.

IV. Hyundai Insurance Company (Hyundai) writes both property and casualty policies including general liability. Lee, the investment manager for Hyundai ought to decide corporate bonds as investments to support Hyundai's general liability lines of business.

(A) I and II only

(B) I and III only

(C) II and IV only

(D) III and IV only

AnswerI. Welch most likely works in the insurer's special investigation unit.II. Laura should discuss her product innovation ideas with the insurer's

marketing and distribution department.The correct answer is (D) III and IV only.


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Topic 4: The Digitization of InsuranceCPCU 520 Review Notes / Assignment 1. Overview of Insurance

Operations / EO 5

4.a. Structure: The Digitization of Insurance

The three data-related activities that have been exponentially enhanced by technology are data capture, data storage, and data analysis.

Data Capture

The efficient capture of expansive data from and about customers is crucial to innovation in the finance and risk management and insurance industries because both industries are information based and rely on the exchange of accurate, secure, and often personal data. lnsurtech data capture is enabled primarily through smart products.

Data Storage

Though cloud computing enables users to store and share vast amounts of data, transaction-based businesses like finance and risk management and insurance are predicated on the use of accurate data insulated from corruption. The premise underlying the blockchain is that it is a means to ensure that data used for transactions and analysis is from a trusted source and independently verified without the intervention of an intermediary like a traditional financial institution or insurer.

Data Analysis

The collection, storage, and sharing of data has led to fintech and insurtech innovation rooted in the analysis of that data through methods that use artificial intelligence, such as machine learning and data modeling.Data-driven decision making: (1) Automating decision making for improved accuracy and efficiency (2) Detecting fraud (3) Organizing large volumes of new data (4) Discovering new relationships in data (5) Exploring new sources of data


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4.b. Data Capture: Expanding Data Sources

Data capture is enabled primarily by smart products that sense their environment, process data, and communicate with other smart products and smart operations through the Internet of Things (IoT). These interactions generate the data to which advanced analytics can be applied. The availability and sophistication of smart products and the IoT's continued growth have led to an explosion of risk management innovation.

Homes, cars, and businesses connected through the loT can immunize themselves from loss in a myriad of ways, which may significantly change customers' expectations of the insurance product itself. That's because the demand for insurance stems from fundamental uncertainty. In addition to leveraging loT-generated data to streamline data collection, underwriters can use it to develop more accurate rates.

While ratemaking and underwriting rely on the loT's data generation, an insurer's claims function can be transformed through its instantaneous communication. The loT likewise can make claims handling more efficient through its ability to facilitate instantaneous communication between objects and people.

4.c. Data Storage: The Blockchain

The decision-making value of data produced by smart products, the loT, and other data-capturing technology can be undermined by its volume, velocity, and veracity.

Think of the blockchain as a virtual distributed ledger that maintains a list of dynamically updated data records (blocks). These records are not actually recorded in the ledger, however, until the veracity of data within them is confirmed and verified through a consensus process called mining. This verification process removes intermediary validation and establishes trust without the use of a centralized authority. After a block is confirmed and the data within it is verified through mining, the block is timestamped and added to the preexisting blocks in the chain-hence the term "blockchain." The blockchain is encrypted and protected against tampering and revision.


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4.d. Examples of the Blockchain's Effects

These are some examples of the blockchain's effects on the insurance value chain:

Insurance products, pricing, and distribution

The use of smart contracts could alter the types of products insurers offer, such as parametric insurance or insurance that could be implanted in transactional purchases. Blockchain can also help make smaller insurance policies, covering specific days or actions, more efficient to offer, thereby increasing availability while decreasing costs.

Underwriting, risk management, and reinsurance

Risk registries and data-sharing capabilities could increase through blockchain-enabled peer-to-peer insurance models and the like. Shared industry ledgers could also come into play, allowing inter-insurer claims to be settled quickly.

Policyholder acquisition and servicing

Onboarding new customers and clientele could be much easier for insurers who adopt blockchain. With third-party requests for information removed from the process, new customer data would be verified almost immediately. The insurance life-cycle documents could be easily updated, and any repetition of data entry and verification would become avoidable.

Claims management

The use of smart contracts, reliant on triggering events rather than indemnification, could simplify the traditional claims management process.

Finance, payments, and accounting

Integrating blockchain into how an insurer works could make international payments easier to process, creating greater efficiency when dealing with matters of subrogation.

Insurance regulation and compliance

By giving regulators the ability to keep an eye on insurance variables throughout their jurisdictions, blockchain would help free resources for individual departments of insurance.


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4.e. Data Analytics: Advanced Analytics

Insurers are already using data analytics across various functions, including underwriting and claims. In the auto insurance field, telematics devices track driving habits; dashboard cameras detect distracted driving; and front-facing computer-vision technology identifies, analyzes, and then prevents risks. Data analytics has allowed underwriters to segment policies and rates based on attributes that might have once been considered obscure, such as geospatial data.

Workers compensation has been influenced by data analytics that enable the identification of which workers are likely to be injured, which injuries are likely to be expensive, and which claims are fraudulent. Techniques such as network analysis and clustering identify and prevent fraud. These methods allow claims departments to keep up with the ever-changing techniques of fraudsters rather than relying on traditional fraud indicators. And the ability to scan claims without manual human involvement saves time and resources. Automatic detection stops the fraud process before the insurer's money is lost.


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4.1. Question: The Digitization of Insurance

Which of the following statements is not true with regard to the Digitization of Insurance?

I. Independently verified, encrypted, and trusted source are qualities of the data storage and sharing medium known as the blockchain.

II. The abilities of devices connected to the Internet of Things lie at the heart of the ongoing shift in the insurance industry from risk transfer to risk prevention.

III. Claims departments use techniques such as network analysis and clustering to help them identify and prevent fraud.

IV. Claims function of an insurer can be transformed through the Internet of Things' ability to facilitate instantaneous communication.

V. The universal connectivity that allows people to interact with devices and for those devices to meaningfully interact with each other without human interaction is known as the Internet of Things.

(A) I and III only

(B) II and IV only

(C) V only


AnswerThe correct answer is (D) None of the above


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4.2. Question: The Digitization of Insurance

Which of the following statements is not true with regard to the Digitization of Insurance?

I. Insurers and risk managers can use the large volumes of data collected and organized through telematics to help improve results for Automobile insurance.

II. The consensus process by which the veracity of data is confirmed and verified is known as Mining.

III. Internet of Things is the network through which sensors and other smart products capture and transmit data.

IV. Closed-loop system has led to significant improvements in supply chain management by allowing for the immediate identification of discrepancies and interruptions as well as timely actions that can prevent or reduce losses.

V. Blockchain is a virtual ledger of data that has been verified, timestamped, encrypted, and protected against tampering.

(A) I and III only

(B) II and IV only

(C) V only


AnswerThe correct answer is (D) None of the above


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section 1. overview of insurance operations

Documents