AAii 302 Insurance Operations & Finance cheat sheet

Underwriting is the risk-selection process: it classifies each submission, decides acceptance, and sets terms; pricing and policy issue follow from that decision.

The policy lifecycle runs quote, underwrite, bind, issue, endorse, renew, and cancel or non-renew; each step produces a record that must reconcile to the policy administration system.

Reinsurance ceded under a quota share reduces net retained premium and losses by the same percentage; under a surplus share, cession varies by subject premium relative to the retention line.

A claims file's lifecycle is FNOL, coverage verification, reserving, investigation, settlement or denial, payment, and recovery or subrogation; reserve adequacy is reviewed at each stage.

Straight-through processing requires clean, structured submission data; touchless rates above roughly 60-70% of eligible transactions are a common operational benchmark.

An endorsement changes an in-force policy; a cancellation ends it prospectively or, when permitted, flat or short-rate; a non-renewal ends it at expiry and is subject to notice rules.

Premium audit (workers' compensation, general liability) reconciles estimated exposure to actual payroll or sales; the resulting adjustment endorsement is the audited premium.

Loss ratio = incurred losses / earned premium; expense ratio = underwriting expenses / written premium; combined ratio = loss ratio + expense ratio, where below 100% indicates an underwriting profit.

A managing general agent (MGA) holds delegated underwriting or claims authority; the insurer retains ultimate risk and must monitor the MGA's binding authority and premium remittance.

Written premium is recognized when a policy is issued; earned premium is recognized over the coverage period, typically pro rata, so unearned premium reserve (UPR) equals the portion not yet earned.

Underwriting cash flow = premiums collected − losses paid − expenses paid; it differs from underwriting income, which uses incurred rather than paid amounts.

Combined ratio = loss ratio + expense ratio; a combined ratio of 105 means a 5-point underwriting loss before investment income.

Loss reserves are estimates of ultimate incurred losses for reported and unreported claims (IBNR); they are discounted only where permitted by accounting rules.

Statutory accounting (SAP) is conservative and solvency-oriented; GAAP defers acquisition costs and recognizes deferred tax, so the same book can show different results under each basis.

Risk-based capital (RBC) compares a company's total adjusted capital to an authorized control level derived from charges for asset, credit, underwriting, and business risk.

Investment income comes from the float - premiums held before claims are paid; duration and credit quality of the bond portfolio drive interest-rate and credit risk.

Cash flow testing projects asset and liability cash flows under interest-rate scenarios to confirm reserves and capital remain adequate; adverse scenarios stress lapse and claim timing.

Reinsurance recoverables are an asset, but collectibility and counterparty credit risk must be assessed; a reinsurer downgrade can require reserve strengthening.