Principles and Practices – Study 4

Types of Insurers

Government insurers examples; Workers’ Compensation board, Provincial medical plans, Unemployment insurance plan, Automobile insurance plans in some provinces and certain types of coverages relating to trade and export.

Private industry has many different types of insurers:

• Captive insurance companies – insurance companies set up by the insured. Fronting is an arrangement where one insurer gets paid a fee for allowing another insurer to use its name.

• Co-operative organizations – owned by its members, true co-op’s are rare today. More common is mutual companies  which are owned by the policyholders. There are four types of mutual companies; assessment mutuals, stock mutuals, co-operative stock mutuals and factory mutuals.

• Reciprocal insurance exchanges – are owned by a group of insured’s, similar to a captive insurance company. The exchange is based solely on the reciprocal agreement between members.

• Stock companies – are owned by the shareholders and run by a board of directors. Insured pay a fixed premium to cover losses and expenses if funds are not sufficient the money is taken from investment income.  Sources of revenue are; underwriting gains and investment income.

• Insurance Pools – owned by a group of insurers to insure risks no insurer will take on individually. Examples are: Nuclear Insurance Association of Canada (NIAC) and the Pollution Liability Association.

Unearned Premium – is the portion of premium which has not yet been earned on each policy.

Insurance Company Organization

In most insurance companies the majority of these departments operate at two levels; the head office and branch office level.  A typical departmental structure for an insurance company:

Administration – including, human resources, a legal and government liason unit, systems and facilities.

Finance, Accounting and Investment – bookkeeping, producing financial statements, income tax returns etc.

Actuarial – analyze data and develop rates and monitoring reserves to meet regulatory requirements.

Marketing, Agency or Production – develops new products, liason between the brokers and head office.

Underwriting – business rules are developed, individual policies underwritten and technical services.

Claims – the overall responsibility for administration of claims services to insureds. Some companies have SIU unit to investigate suspicious claims.

The Office of the Superintendent of Financial Institutions (OFSI) is responsible for regulating insurance companies through the Insurance Companies Act established in 1991.  The legislation is primarily concerned with the management of company funds.

The Insurance companies act contains provisions for: the establishment of an insurance company, prerequisites to operation, supervision during operation. Foreign insurance companies must adhere to these plus additional regulations. Provincially chartered insurance companies are regulated the same way as federally chartered companies and have to submit the same documents.

Lloyd’s of London is not an insurance company. It is an insurance market.

• About 220 Brokers can bring business to “the room” where Lloyd’s underwriters sitting at ‘boxes’ negotiate with them.

• Each underwriter represents a syndicate which can have one hundred to several thousand members. Syndicate members can be individuals or corporations and have unlimited liability.
• Managing agents run the syndicates and employ the underwriter and his staff. The managing agent is also responsible for ensuring all business is conducted in accordance with the Lloyd’s Act.

• Brokers will put all relevant risk information on a “slip” then approach an underwriter. If the underwriter decides the risk is viable they will sign a line and agree to take a portion of the risk. The broker will then negotiate with other underwriters until the risk is fully covered.

• Most claims are paid through a centralized Lloyd’s Claim Service office.

• An individual member of Lloyd’s will have unlimited personal liability for business written on their behalf. There are many financial qualifications that must be met to be a member. Corporations maybe members as well but with limited liability.  MAPA’s are a recent mechanism used to reduce uncertainty of investment returns for members.

• The Council of Lloyd’s the market board and the regulatory board, govern all aspects of Lloyd’s. The central fund exists to protect policyholders should members be unable to meet their financial obligations.

Sample Exam Questions – Principles and Practices

Multiple Choice Questions

December 2001

1. Which of the following is known for its support of sophisticated fire and research engineering?

1. factory mutuals
2. farm co-operatives
3. fraternal societies
4. government insurance organizations

2. A mutual insurance company

1. cannot insure anyone who is not a member of the community
2. insures mostly its shareholders
3. is owned by its policy holders
4. is owned by its shareholders

3.     Which of the following is responsible for monitoring federally licensed insurance companies to ensure

        they are solvent?

1. The Minister of Finance
2. The Office of the Superintendent of Financial Institutions
3. The President and Board of Directors for each individual insurance company
4. The Superintendent of Insurance of the province in which the insurance companies head office is located.

3. Lloyd’s of London is

1. a co-operative association
2. a group of underwriting members
3. a mutual insurance organization
4. the world’s largest insurance broker

July 2001

4. The Chief Executive Officer of a stock insurance company is primarily responsible to the

1. Superintendent of Insurance
2. Board of Directors
3. President
4. Shareholders

5. An insurance pool is

1. a central rating organization
2. a joint underwriting arrangement for high hazard risks
3. a reinsurance arrangement
4. the reserve fund set up by an insurance company to pay for future losses

6. An SIU is a

1. Lloyd’s of London underwriting pool
2. Special Investigation Unit
3. Stock Insurance Underwriting unit in an insurance company
4. Supervisory insurance unit set up by OFSI

7. Lloyd’s of London is

1.  A group of underwriting members
2.  a reinsurance organization
3.  a type of mutual insurer
4.  the world’s largest insurance broker

April 2001

8. Which of the following is known for its support of sophisticated fire and research engineering?

1. factory mutuals
2. farm co-operatives
3. fraternal societies
4. government insurance organizations

9. Insurance company income comes from

1. investment income and dividends
2. premiums and investment income
3. reserves
4. all of the above

10. Insurance companies that operate through the independent brokerage system

1. appoint independent agents and brokers to bring clients to them
2. contract with a general agent who has the authority to manage all of their business.
3. Employ agents to secure contracts for their employers in contractual matters
4. Hire, train and license their own employees to be their sales force.

December 2000

11. A mutual insurance company

1. cannot insure anyone who is not a member of the community
2. insures mostly its shareholders
3. is owned by its policyholders
4. is owned by its shareholders

12. Which of the following is NOT true of the supervision of foreign insurance companies?

1. Notice must be given of any change of Chief Agency or Head Office
2. The assets cannot be released until ten years after the end of operation
3. The assets must be vested in trust in a Canadian financial institution
4. The Minister of Financial Institutions must be satisfied that the home jurisdiction provides treatment that is equally favourable to Canadian companies.

13. Which of the following is true of Lloyd’s of London

1. It is made up of syndicates
2. It is a commodity exchange (including insurance)
3. It is owned by its syndicates
4. It only deals in Marine insurance

14. The Board of Directors of a stock insurance company would report to the:

1. Chairman of the Board
2. President
3. Chief Executive Officer
4. Shareholders

15. An insurance pool is:

1. the reserve fund set up by the insurance company to pay for future losses
2. a reinsurance arrangement
3. a joint underwriting arrangement for high hazard risks
4. a central rating organization

April 2000

16. An insurance pool is:

5. the reserve fund set up by the insurance company to pay for future losses
6. a reinsurance arrangement
7. a joint underwriting arrangement for high hazard risks
8. a central rating organization

Essay Questions

December 2001

4.     (a)     The Federal and Provincial government are major sellers of insurance. Identify FOUR (4) types of

   insurance that are sold by these governments. (4 marks)

1. With respect to insurance pools:

1. Why do they exist?
2. How do they work?
3. Give TWO (2) examples of existing insurance pools.

December 2000

1. Briefly explain the characteristic structure of FOUR (4) of the following types of organization?

1. Captive insurance companies
2. Mutual Insurance companies
3. Reciprocal insurance exchanges
4. Stock insurance companies
5. Lloyd’s of London (5 marks each)