FCIP F560 cheat sheet

Functional structure groups staff by activity (underwriting, claims, actuarial); divisional or matrix structures assign accountability by product, territory, or customer segment.

Line authority carries decision rights down the chain of command; staff authority (actuarial, legal, compliance) advises and reviews without commanding operating units.

Core operating cycle: product design, pricing, marketing and distribution, underwriting and issue, premium collection, claims, reinsurance, investment, and reporting.

Segregation of duties requires that the party authorizing a transaction, the party recording it, and the party holding the asset be different people.

Centralized underwriting concentrates technical authority and consistency; decentralized underwriting speeds turnaround but requires audit and referral thresholds.

Managing general agents and third-party administrators perform underwriting, claims, or policy administration for a carrier under written authority and oversight.

Span of control and layers of hierarchy determine supervisory cost; excessive layers slow decisions and dilute accountability for results.

Underwriting profit = earned premium − incurred losses − loss adjustment expenses − underwriting expenses; the combined ratio expresses the same result as a percentage of earned premium.

Adverse selection arises when applicants know more about their risk than the insurer; controls include application questions, inspections, and waiting periods.

Moral hazard is behavior change after coverage; underwriting tools include deductibles, coinsurance, and coverage exclusions.

Field underwriting by producers gathers accurate exposure data; the carrier's underwriter holds final acceptance authority under published guidelines.

Judgment rating applies individual underwriter evaluation; class rating uses pre-established rates; experience and retrospective plans adjust for actual loss results.

A declination or surcharge must rest on objective, documented criteria tied to expected loss cost to satisfy unfair-discrimination rules.

Reinsurance facultative placement can support acceptance of risks that exceed net retention capacity or fall outside treaty terms.

Claim lifecycle: notice and acknowledgment, coverage verification, investigation, damage evaluation, negotiation or defense, payment, subrogation and salvage, and file closure.

Indemnity payments cover the insured's loss; allocated loss adjustment expense (ALAE) covers defense and investigation tied to a specific claim; unallocated (ULAE) is overhead.

Reserves per claim: case reserves for reported claims, plus IBNR for incurred but not reported losses and development on known claims.

Bad faith exposure grows with unreasonable delay, failure to investigate, failure to communicate settlement offers, and failure to document the file.

Subrogation recovers from the liable third party; salvage is the insurer's right to the damaged property after paying a total loss.

Actual cash value = replacement cost − depreciation; replacement cost pays new-for-old without depreciation; valued policies pay an agreed amount.

Salvage and subrogation recoveries reduce gross paid losses and must be recorded consistently with the reserving basis.

Treaty reinsurance covers a defined class of business automatically; facultative reinsurance is negotiated risk by risk.

Pro rata (quota share, surplus share) shares premium and losses in fixed proportion; excess of loss responds only above a retention layer.

Ceding commission reimburses the cedent for acquisition and administration costs on ceded pro rata premium.

Risk transfer requires meaningful loss transfer; deposit accounting applies when reinsurance lacks substantial transfer of underwriting and timing risk.

Net retention = gross retained exposure after reinsurance; net cost of reinsurance equals ceded premium less ceded losses and ceding commission.

Reinstatement provisions define how much limit is restored after a loss and at what additional premium.

Reinsurer insolvency risk is managed through security requirements, collateral, rating standards, and diversification of counterparties.

Balance sheet: assets = liabilities + policyholders' surplus; surplus is the statutory net worth of the insurer.

Income statement: underwriting income plus net investment income plus other income, less income taxes, produces net income.

Statutory accounting is conservative (admitted assets, nonadmitted write-offs, immediate expense of acquisition costs); GAAP defers acquisition costs and permits deferred tax assets.

Loss and loss adjustment expense reserve is the largest liability for most property-casualty insurers; unearned premium reserve represents coverage not yet provided.

Combined ratio = loss and LAE ratio + expense ratio; a combined ratio above 100 indicates an underwriting loss.

Cash flow = premiums collected + investment income + recoveries − losses paid − expenses paid; underwriting cash flow can be positive while underwriting results are negative.

Risk-based capital and premium-to-surplus ratios are monitored to gauge capital adequacy and leverage.

Indicated rate change = (trended loss and LAE ratio × (1 + expense and profit load)) − 1; the loss ratio method adjusts current rates for experience deviation.

Pure premium = expected loss and LAE per exposure unit; it equals frequency × severity.

Loss development: reported losses develop to ultimate via age-to-age factors (link ratios) and a selected tail factor.

IBNR = ultimate losses − reported case reserves; methods include chain ladder, Bornhuetter-Ferguson, and expected loss ratio.

Credibility weights the insured's own experience against class experience; larger exposure and lower variance increase credibility.

Trend factors adjust historical losses for inflation and benefit or exposure changes to the future cost level.

Reserve adequacy testing compares carried reserves with actuarial central estimates and ranges; adverse development reduces surplus.

States regulate insurer solvency, market conduct, rate and form filing, producer licensing, and guaranty fund protection.

Prior approval requires filing before use; file-and-use permits use upon filing; use-and-file permits use with later filing, depending on state law.

Rates must be adequate, not excessive, and not unfairly discriminatory; supporting loss and expense data must be retained.

Market conduct examinations review claims practices, underwriting, rating, producer conduct, and complaint handling.

Producer licensing requires appointment by the insurer, continuing education, and adherence to fiduciary handling of premium.

Guaranty associations pay covered claims of insolvent insurers up to statutory limits, funded by assessments on insurers.

Privacy, anti-fraud reporting, and unfair claims settlement practice rules impose documentation and timeliness obligations.

Strategy formulation matches internal capabilities to external opportunities; SWOT and Porter's five forces are standard analytical frameworks.

Underwriting appetite statements translate strategy into explicit accept, refer, and decline criteria for producers and underwriters.

Key performance indicators include combined ratio, retention, new business volume, hit ratio, and expense ratio.

Ethical decision tests: legality, consistency with stated values, transparency if disclosed publicly, and effect on stakeholders.

Conflicts of interest are managed through disclosure, recusal, and independent review rather than reliance on individual judgment alone.

Change management requires clear sponsorship, communication of the rationale, training, and measurement of adoption.

Producer compensation arrangements must align incentives with profitable growth and be disclosed where required.

ERM cycle: identify risks, assess frequency and severity, measure aggregate and tail exposure, select treatment, monitor, and report.

Risk treatment options: avoid, reduce (controls), transfer (reinsurance), retain (deductibles, captives), and share.

Economic capital is the capital needed to absorb unexpected losses at a chosen confidence level over a horizon; it exceeds expected loss.

Diversification lowers required capital because imperfectly correlated risks produce lower aggregate volatility than the sum of standalone risks.

Risk appetite defines aggregate limits; risk tolerance sets acceptable variation; risk limits allocate appetite to units and lines.

Catastrophe modeling estimates exceedance probability curves used to size reinsurance layers and capital buffers.

Capital adequacy is assessed with RBC ratios, premium-to-surplus leverage, stress tests, and reinsurance recoverable credit risk.