Study 3 Learning Objectives

Question 1

Learning Objective 1 Describe the different types of insurance providers.

Answer 1

Insurers may be divided into four basic groups:

1. Organizations operating for the profit of their owners—examples are stock companies and
   Lloyd’s underwriters.
2. Co-operative organizations operating for the benefit of their members—examples are mutuals and fraternal societies.
3. Government insurance organizations—examples are provincial workers’ compensation boards
   and Employment Insurance (EI).
4. Captive insurers—policyholders are usually limited to the parent company and its subsidiaries.

Question 2

Learning Objective 2 Compare and contrast how cash flow works for stock insurance companies versus mutual insurance companies.

Answer 2

• A stock insurance company has the same capital structure as any other capital
  enterprise:
  o Individuals/corporations (shareholders) subscribe and contribute capital to form the legal entity
  known as a corporation.
  o Shareholders have an equitable interest in the assets of the corporation and hope to make a
  reasonable profit on their investments.
• A mutual insurer is a co-operative enterprise owned by its policyholders (members): o They form an association to insure one another against the possibility of certain types of loss.
  o In its purest form, it operates on a premium note plan.

Question 3

Learning Objective 3 Describe the functions of insurance company departments at head office and branch levels.

Answer 3

• Structures of insurance companies vary based on factors such as size, marketing
philosophy, and ownership.
• Some functions are common to all companies, and some are unique to insurers.

Features of Operational Structures Diagram

1) Departments Common to all Companies:
- Accounting & Finance
- Administration
- Marketing

Departments Unique to Insurers

• Actuarial
• Claims
• Underwriting

Question 4

Learning Objective 4 Explain the purpose of reinsurance.

Answer 4

• Reinsurance is insurance for insurance companies.
  o When a company reinsures its liability with another, it cedes business; the amount ceded is called
  the cession; the amount an insurer keeps for its own account is its retention.

Reasons to Reinsure:

1. Increase capacity
2. Cease operations
3. Provide stability to fluctuating market
4. Reduce catastrophic loss effects
5. Maintain reserve/liability balance

Question 5

Learning Objective 5 Explain how facultative and treaty reinsurance may be written on a pro rata or excess of loss basis.

Answer 5

Reinsurance may be transacted in two ways:
1. Proportionally (pro rata)—reinsurer shares a proportional portion of the losses and premiums of
the ceding company.
2. Non-proportionally (excess of loss)—reinsurer pays all or part of the loss that exceeds the
priority up to a limit previously agreed to by the insurer and the reinsurer.

• There are 2 types of reinsurance:
  1. Treaty—the reinsurer provides reinsurance automatically based on an agreement with the insurer.
  2. Facultative—reinsurance is placed on an individual case basis.