Insurance
Finance 437 Advanced Topics in Insurance Fall 2013
Final Paper Assignment (20% of Final Grade)
Complete One Question. HARD Limit of Four Double Spaced Pages + Source Page(s)
Note that four pages is relatively short so you should answer efficiently and not simply include less information. Use research, lectures from Farmers professionals, your book and other info to support your answer.
1) Consider a business strategy for the perfect P&C personal lines company. What do you think a company needs to succeed in 2013 and beyond? Perhaps pointing to something you like or don’t like about a particular company might be helpful. This is not about your preferences—this about accomplishing goals.
2) Consider all of the risks and external forces acting on a P&C insurer’s financial management and the tools to manage those risks and forces. List five of the most important risks and/or forces (there are no exact five, but regulators would certainly be one) and explain how each one would affect the financial management of the company.
3) Think about how an insurance company chooses its risks (both assets and liabilities). Explain the underwriting process and how insurers and banks operate in similar ways in taking risks in search of profit. This is not an easy question to answer completely in four pages so be careful.
No more than 4 pages.
Course
Lecturer
Date
Underwriting
Insurance is a risk taking business. Each single day companies have the task of defining what good risks to take (assets) are and which simply (liabilities) aren't. An insurance company chooses its risks through the underwriting process with the help of an underwriter either a person or an automated one. Financial institutions, be it a bank, insurance company, or an investment company, use an underwriting process to determine whether a client is legible to receive a loan or a mortgage or credit as the financial product. It is a way of assessing whether the risk is worth taking or not.
The process of underwriting involves a variety of steps which include the following;
* Information Development
* Exposure Analysis
* Pricing to Exposure and
* Documentation
First is Information Development, before one decides to underwrite, good quality and quantity of information should be gathered and analyzed before a proper decision is made. Both objective and subjective information is required. In gathering this information, many aspects of an entity are scrutinized in determining what would be a good investment opportunity and what simply wouldn't be. Some of the aspects of an entity to be looked at may include;
* The financial status of each of the business owners at a personal level, and with this includes their returns on IRS (Internal Revenue System) tax forms.
* Credit and bank information of an individual, a group or a business entity
* The resumes of the main business partners in a business
* Contract schedules to check to check ability for completion of project stages.
* Financial position of the entity through balance sheets check , quality of these statements in relation with the project at hand
* The business plan of a business venture
Such information forms the backbone of the underwriting process hence should be verified always before being factored in the decision. The key factors should be objective, as already mentioned, related to likely cost of providing coverage, easy for administration practices and applicable within the legislation under which it is applied.
Second is Exposure Analysis which is used to assess the company's exposure to risk accrued from an applicant depending on policy being applied for, according to the coverage they will receive, in case of an insurance company or loan /credit/ mortgage type in financial or banking institutions.
Third is pricing to exposure is a step that evaluates that the premium issued on an policy will commensurate the exposure presented by the policy that has been suggested will be sufficient in the administration of the policy and sufficient for provision of the service under that premium. Lastly each and every case/ entity that has to be evaluated or has been evaluated must be properly documented and reasons for its acceptance or denial clearly depicted in the documentation and supporting documents added. Key issues like risk pricing, risk aggregation, history of the client at hand, transaction processing and lines of approval for the premium.
All steps in the underwriting process sh...