Assignment

Please answer each of the following and all parts of your answers must be in your own words. Any plagiarism will result in a grade of zero for all students involved. Please use your own words even if you are using the textbook for answers and provide a citation for all of your answers.

1. Reinsurance can be used by an insurer to solve several problems. Assume you are an insurance consultant who is asked to give recommendations concerning the type of reinsurance plan or arrangement to use. 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.

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.

2.

a. Define the meaning of underwriting.
b. Briefly explain the basic principles of underwriting.
c. Identify the major sources of information available to underwriters.

3. Briefly describe the following types of claims adjustors:

a. Agent
b. Company adjustor
c. Independent adjustor
d. Public adjustor

4. Liability Insurance Company (LIC) writes a substantial amount of commercial liability insurance. A large construction company requests $100 million of liability insurance to cover its business operations. LIC has a reinsurance contract with Bermuda Re that enables the coverage to be written immediately. Under the terms of the contract, LIC pays 25 percent of the premium. Bermuda Re pays 75 percent of the losses and receives 75 percent of the premium, less a ceding commission that is paid to LIC. Based on the preceding, answer the following questions:

a. What type of reinsurance contract best describes the reinsurance arrangement that Liability Insurance has with Bermuda Re?
b. If a $50 million covered loss occurs, how much will Bermuda Re have to pay? Explain your answer.
c. Why does Bermuda Re pay a ceding commission to LIC?

5. Briefly explain the significance of the following legal cases and legislative acts with respect to insurance regulation:

a. Paul v. Virginia
b. South-Eastern Underwriters Association Case
c. McCarran-Ferguson Act
d. Financial Modernization Act of 1999

6. Explain four reasons the insurance industry is regulated. After reading the chapter and lecture notes, what do you think is the key reason for regulation in the insurance industry? Explain.