homework

FIN 3610

1. a. Briefly explain the basic principles of underwriting.

There are several important underwriting principles:

(1) Attaining an underwriting project

(2) Selecting insureds according to the company’s underwriting standards

(3) Providing equity among policyholders

b. Identify the major sources of information available to underwriters

In determining whether to accept or reject an applicant for insurance, underwriters have several sources of information. They include the application, agent’s report, inspection report, physical inspection, physical examination, attending physician’s report, and a Medical Information Bureau (MIB ) report.

2. The regulation of the insurance industry is structured differently from the regulation of many industries.

a. Explain three key reasons why the insurance industry is regulated.

(a) To maintain insurer solvency

(b) To compensate for inadequate consumer knowledge

(c) To ensure reasonable rates

(d) To make insurance available

b. Discuss the most significant need for insurance regulation. Need answer

3. Discuss and summarize the main outcome of each of the following cases or laws with respect to insurance regulation:

a. Paul v. Virginia

In Paul V. Virginia, the court held that insurance was not interstate commerce and that the states rather than the federal government had the right to regulate the insurance industry. This decision stood for about 75 years until the Supreme Court reversed it in 1944.

b. South-Eastern Underwriters Association Case

In the South-Eastern Underwriters Association Case in 1944, the Supreme Court ruled that insurance was interstate commerce when conducted across state lines and was subject to federal regulation.

c. McCarran-Ferguson Act

To resolve the confusion and doubt that existed after the South-Eastern Underwriters decision, Congress passed the McCarran-Ferguson Act (Public Law 15) in 1945. The McCarran Act states that continued regulation and taxation of the insurance industry by the states are in the public interest and that federal antitrust laws apply to insurance only to the extent that the insurance industry is not regulated by state law.

d. Financial Modernization Act of 1999

The Financial Modernization Act of 1999 (also called the Gramm-Leach-Bliley Act) had a significant impact on insurance regulation. The legislation changed federal law that earlier prevented banks, insurers, and investment firms from competing fully in other financial markets outside their core area. As a result, insurers can now buy banks, banks can underwrite insurance and sell securities, brokerage firms can sell insurance, and a company that wants to provide insurance, banking, and investment services through a single entity can form a new holding company for that purpose.

4. Delta Insurance is a property insurer that entered into a surplus-share reinsurance treaty with Eversafe Re. Delta has a retention limit of $200,000 on any single building, and up to nine lines of insurance may be ceded to Eversafe Re. a building valued at $1,600,00 is insured with Delta. Shortly after the policy was issued, a severe windstorm caused $800,000 loss to the building.

a. How much of the loss will Delta pay?

The total amount of insurance in force is $1,600,000. Delta Insurance has a retention limit of $200,000, or 1/8 of the total amount. Delta Insurance will pay 1/8 of the $800,000 loss, or $100,000.

b. How much of the loss will Eversafe Re pay?

Delta Insurance has a retention limit of $200,000. Eversafe Re takes the remaining amount of $1,400,000, or 7/8 of the total amount. Thus, Eversafe Re will pay 7/8 of the $800,000 loss or $700,000.

c. What is the maximum amount of insurance that Delta can write on a single building under the reinsurance agreement? Explain your answer.

Delta Insurance has a retention limit of $200,000. Nine lines of insurance, or $1,800,000, are ceded to the reinsurer. Delta can write a maximum of $2,000,000 on any single building.

5. For each of the following situations, indicate the type of reinsurance plan or arrangement that the ceding insurer should use, and explain the reasons for your answer. Need answer

a. Company A is an established insurer and is primarily interested in having protection against a catastrophic loss arising out of a single occurrence.

b. Company B is a rapidly growing new company and desires a plan of reinsurance that will reduce the drain on its surplus because of the expense of writing a large volume of new business.

c. Company C has received an application to write a $50 million life insurance policy on the life of the chief executive officer of a major corporation. Before the policy is issued, the underwriter wants to make certain that adequate reinsurance is available.

d. Company D would like to increase its underwriting capacity to underwrite new business.

6. Explain the difference between rebating and twisting as they relate to the insurance industry.

(a) Twisting is the inducement of a policyholder to drop an existing policy in another company because of misrepresentation or incomplete information by the agent. Twisting laws apply primarily to life insurance policies. The objective is to prevent policyholders from being financially harmed by replacing one life insurance policy with another.

(b) Rebating is giving a premium reduction or some other financial advantage not stated in the policy as an inducement to purchase the policy. An example is rebating part of the agent’s commission to the policyholder. Rebating is illegal in the vast majority of states.