Rita and Roger Stanton have been married for fifteen years. They have two childr

Question

Rita and Roger Stanton have been married for fifteen years. They have two children, Ronald, 12, and Rhonda, 8. They have a four-year-old Labrador mix dog named Ruff. Rita is an administrative assistant for a large law office in the city. Roger is the principal at the local high school. He drives about four miles to and from work each day. He is also a full partner in a seasonal white water rafting business (Rowdy Rafters) with his brother Eddie. They are the only two full-time employees. Rowdy Rafters employs one part-time bookkeeper, Edna. Throughout the summer, Roger and Eddie take turns guiding rafting trips down a nearby river. With Rita’s legal background, she has always worried that a passenger might drown while on a guided raft tour but Roger loves his work so much she has decided not to ask him to give it up. Rowdy Rafters carries a $500 deductible on their property insurance policy that protect their property (rafts, equipment, building, and office contents) and $1,000,000 in general liability coverage. The rafting company conducts trips for individuals and groups, with a majority of their business coming from local schools and youth organizations, drawing participants between the ages of 6 and 18. Recently Roger has begun offering overnight rafting trips which include meals and one or more nights of camping by the river. This new offering seems to be very popular with families. Unfortunately Roger's business has had a few "incidents". The losses sustained and submitted include: · Theft of several rafts and equipment amounting to $15,500 in claim payment · Wind damage to their building requiring the replacement of the roof for a $25,275 claim payment · A liability claim in which they were found negligent for improper operation of a raft which resulted in bodily injury to several passengers was just settled for $750,000 in judgment payment · Roger has just been informed that one of the people that went on a recent rafting trip has filed suit against Rowdy Rafters alleging that Roger’s improper guidance of the raft caused it to strike a large rock, capsizing the craft. The claimant states that she broke her arm as a direct result of the capsizing and has also sustained “significant mental anguish” due to the ordeal. She is seeking damages in the amount of $500,000.

CASE SCENARIO #1 (Chapter 2) Due to the loss exposures and loss history listed above, Roger’s insurance carrier has informed him that they are contemplating increasing the rates and making coverage changes for his upcoming policy renewal term. Roger has some questions about this and has come to you for information.

1) Assume that the carrier is subject to flex rating laws. Explain to Roger how this will affect the carrier’s ratemaking procedure.

2) Explain to Roger how the three major criteria of rate regulation will apply to the carrier as they consider how to handle Roger’s rate increases

3) Explain how reinsurance might be used by Roger's primary insurer in this situation.

4) Roger is worried that his company might be treating him unfairly due to his claims. In the event that Roger's insurance carrier or agent made changes to his rates and or policy coverages that were deemed to be in violation of unfair trade practice laws, what penalties can be imposed in each of the following circumstances:

a. Roger's insurance agent engages in unfair trade practices

b. Roger's insurance company is guilty of unfair underwriting practices

CASE SCENARIO #2 (Chapter 3) Due to the fact that Roger's insurance carrier will be making coverage and rate changes, Roger has begun researching replacement insurance companies just to keep his options open. But he wants to make sure that the new company is financial stable. He has obtained financial data from several carriers and is beginning his analysis. Roger is unsure how to go about beginning his financial analysis of several insurance companies he is considering and has asked for your input. Using your knowledge gained from information in our textbook, help Roger answer the following:

5) Tamarado Insurance Company, a commercial property, liability, and workers compensation insurer, ended the past year with a combined ratio of 107% and an overall operating ratio of 88%. Help Roger to answer the following questions about Tamarado Insurance Company's profitability.

a. What do these ratios indicate about the insurance companies profitability for that year?

b. Suggest to actions that the insurance company might take to improve its profitability for the coming year.

6) All of the companies Roger is considering have list "policyholder surplus" on their financial statements. Roger wants to know if “policyholder surplus” means that this is extra money to be divided among customers who have a policy with that particular company. Explain what this is and why it is an important measure of the insurer’s financial well-being.

7) Overlan Insurance Company writes a high volume of business insurance throughout the United States. Because Overlan specializes in business insurance, it offers a lower premium than any other business insurer. Overlan is reviewing its loss ratio, expense ratio, and combined ratio to find ways to improve its combined ratio of 106%. The combined ratio was calculated using these figures: combined ratio = loss ratio + expense ratio 106% = 68% + 38% Evaluate whether each of these proposals, in absence of other proposals, could significantly improve Overlan's combined ratio, and explain your answer. a. Overlan will offer a 10% rate decrease for all of its new and existing policyholders. b. Overlan will implement a new cost-effective system that enables prospective insurers to submit an online application for insurance. The system evaluates the risk and provides a quote to be insured in two minutes or less. The system also enables insurers to accept the quote, renew their policy online, make online premium payments, and submit most policy changes to Overlan online.

8) Juniquote Insurance set a goal to improve its loss ratio by 15% over the next year. Analyze the following proposals and determine whether each would be likely to improve Juniquote's loss ratio.

a. Juniquote will offer loss control services for its commercial insurance that exceed the services offered by its competitors.

b. Juniquote will discontinue writing business insurance in two states that have the highest licensing fees (of those states where they write business insurance) and strict requirements for wording that must be used in business policy provisions and all policy related communications.

Explanation / Answer

1) Assume that the carrier is subject to flex rating laws. Explain to Roger how this will affect the carrier’s ratemaking procedure.

Answer: Flex-rating laws only require prior approval if the rate change is substantial, such as 10% to 25%. This allows insurance companies to respond more rapidly to changing conditions. So the carriers rates can be increased in the given scenario.

2) Explain to Roger how the three major criteria of rate regulation will apply to the carrier as they consider how to handle Roger’s rate increases.

Answer: Prior-approval laws are the most onerous for insurance companies. They are generally required to get approval for a rate change before they can change it, and, often, they are required to provide justification for the change in rate, particularly if it is for a big increase. In most states, the general procedure is that if a rate is not disapproved within a specific time, such as 30 or 60 days, then the rate is deemed approved.

3) Explain how reinsurance might be used by Roger's primary insurer in this situation.

Answer: Insurer can transfer his liability to some other insurance company for a fees. This is how they can re-insure their liablity.

4) Roger is worried that his company might be treating him unfairly due to his claims. In the event that Roger's insurance carrier or agent made changes to his rates and or policy coverages that were deemed to be in violation of unfair trade practice laws, what penalties can be imposed in each of the following circumstances:

a. Roger's insurance agent engages in unfair trade practices

Answer: they can be sued by the law.

b. Roger's insurance company is guilty of unfair underwriting practices

Answer: Cancellation of registration.

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