Insurance Company Operations

• Insurance is highly regulated
• Insurance companies must honor all valid claims within a reasonable timeframe and for the full contracted amount

Insurance Production Process

• The insurer arranges reinsurance contracts with other insurers to share risks and losses

Product Design / Risk Pricing

• Actuaries work with other professionals to design insurance products and price the risks the insurer covers

Production (Marketing & Distribution)

• Employees, agents, or brokers contact customers/insureds for new or renewal business

Underwriting

• Underwriters decide whether each new application or renewal is acceptable
• They assess if the risk is above/at/below average to levy an appropriate premium

Claims

• Claims adjusters investigate all claims and settle those covered by the policy

Accounting, Investment, IT, Legal/Regulatory Compliance

• These are all important factors for insurance companies

Ratemaking (= Pricing)

• Ratemaking is the "pricing of insurance and the calculation of insurance premiums"
• A rate represents the price per unit of insurance
• An exposure unit is the unit of measurement in insurance pricing
• The premium is calculated by multiplying a rate by the number of exposure units purchased, with adjustments for rating factors
• For instance, if a life insurer uses $1000 as the exposure unit for a term life insurance with a $100,000 death benefit, the premium equals the "rate" times 100 "exposure units"

Rating and Ratemaking

• Actuaries with mathematics and statistics expertise are essential for figuring rates, premiums, reserves, loss ratios, and other factors
• The actuary must compute premiums that allow the insurer to pay claims and expenses, compete effectively, and make a profit

Production (Marketing and Distribution)

• Refers to the marketing and distribution activities of insurers
• These are commonly performed by employees (marketing directly), agents, and brokers

Underwriting and Underwriters

• Underwriting involves selecting, classifying, and applying appropriate premium rates to coverage
• The underwriter makes those decisions and follows the underwriting policy, which specifies:
  • Acceptable, borderline, and prohibited classes of business
  • The insurance amounts that can be written (insurer's financial capacity)
  • Territories covered or to be developed
  • Insurance policy forms and rating plans
  • Businesses needing senior underwriter approval (e.g., coverage above a threshold)
• Basic principles of underwriting include attaining profit, selecting insureds by standards, reducing adverse selection, and providing equity
• One group of insureds should not unduly subsidize another group
• The agent or frontline employee starts the Underwriting Process
• Information sources for underwriting:
  • Insurance application
  • Physical inspection (property insurance)
  • Medical examination (life insurance)
  • Medical Information Bureau (MIB) report (healthcare)
  • Financial statements (business insurance)
• After review, the underwriter can accept, accept with restrictions/modifications, or reject the application

Claim Settlement

• Claims management is a critical area
• Objectives include verifying the covered loss, fair/prompt payment, assisting the insured
• Laws prohibit unfair claims practices, such as refusing to pay without investigation, not attempting fair settlements, or forcing unfair settlements

Types of Claim Adjusters

• Claim adjuster deals with claims investigation plus settlement
• Representatives of the insurer include:
  • Staff claims representatives (salaried employees)
  • Independent adjustors (individuals/companies offering services for a fee)
  • Agents authorized to settle small first-party claims up to a limit
• Representatives of the insured include:
  • Public adjustors paid a fee based on the claim settlement amount

Claim Settlement (Steps)

• Insured gives immediate/reasonable notice of loss
• The adjuster investigates; determines coverage and loss amount
• The insured files a proof of loss (a statement substantiating the loss)
• Decision concerning payment

Reinsurance

• The primary insurer transfers part or all of potential losses to another insurer
• The primary insurer is also called the ceding company
• The insurer accepting insurance from the ceding company is the reinsurer
• The retention limit is the amount of insurance the ceding company retains
• The amount ceded to the reinsurer is a cession

Reasons for Reinsurance

• Increase underwriting capacity (tapping into the reinsurer’s capital)
• Stabilize profits (sharing risks and losses)
• Reduce unearned premium reserves
• Protection against a catastrophic loss (reinsurers share the loss)
• Retire from business/line/territory (selling the entire risk portfolio)
• Get underwriting advice on a line with little experience (especially new, small, developing insurers)
• Retrocession takes place when a reinsurer insures part of or all of a risk with another insurer

Investment

• Investment is an important aspect of insurance operations
• Investment strategies are affected by economic conditions (e.g., low-interest environment), government actions (e.g., business shutdown orders), and insurance regulation
• Insurers are advised to invest in high-quality areas: investment-grade bonds and blue chips
• Insurers should not gamble for high investment income

Lines of Business

• Life insurance and some liability insurance contracts are long-term; safety of the principal is primary
• Property insurance contracts are short-term; claim payments depend on losses, inflation, medical costs, etc.
• Short- and long-term refers to the timeframe needed to conclude insurance claims

Other Functions

• Insurance companies require accounting, IT, and HR departments
• Information systems are important for operations
• Computers are used for policy processing, simulation, market analysis, and policyholder services
• The accounting department prepares financial statements and develops budgets
• Attorneys are used in underwriting and estate planning in the legal department