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    Insurance Company Operations

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    Sanjeev Pradhan
    Insurance company functions include underwriting, reinsurance, claims adjusting, rate making, and investing. Underwriting involves selecting and classifying insurance applicants to minimize adverse selection and achieve homogeneity. Reinsurance transfers risk to another insurer, allowing the primary insurer to write higher limits. Claims adjusting determines liability and reaches agreement on payable amounts. Rate making sets prices to cover future losses plus expenses and profit. Investing provides income to lower premiums.

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    Insurance Company Operations

    Uploaded by

    Sanjeev Pradhan
    60 views16 pages
    Insurance company functions include underwriting, reinsurance, claims adjusting, rate making, and investing. Underwriting involves selecting and classifying insurance applicants to minimize adverse selection and achieve homogeneity. Reinsurance transfers risk to another insurer, allowing the primary insurer to write higher limits. Claims adjusting determines liability and reaches agreement on payable amounts. Rate making sets prices to cover future losses plus expenses and profit. Investing provides income to lower premiums.

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    Insurance company functions include underwriting, reinsurance, claims adjusting, rate making, and investing. Underwriting involves selecting and classifying insurance applicants to minimize adverse selection and achieve homogeneity. Reinsurance transfers risk to another insurer, allowing the primary insurer to write higher limits. Claims adjusting determines liability and reaches agreement on payable amounts. Rate making sets prices to cover future losses plus expenses and profit. Investing provides income to lower premiums.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    60 views16 pages

    Insurance Company Operations

    Uploaded by

    Sanjeev Pradhan
    Insurance company functions include underwriting, reinsurance, claims adjusting, rate making, and investing. Underwriting involves selecting and classifying insurance applicants to minimize adverse selection and achieve homogeneity. Reinsurance transfers risk to another insurer, allowing the primary insurer to write higher limits. Claims adjusting determines liability and reaches agreement on payable amounts. Rate making sets prices to cover future losses plus expenses and profit. Investing provides income to lower premiums.

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    of 16

    Chapter 4:

    Insurance Company Operations


    Insurance Company Functions
    • Underwriting
    • Reinsurance
    • Claims adjusting
    • Rate making
    • Investing
    • Other functions
    Underwriting
    • Selection, classification and pricing of insurance
    applications offered to an insurer
    • Accept applicants who will have loss experience
    comparable to insurer’s expected loss experience
    • Minimize adverse selection
    • Achieve mass (large numbers) and homogeneity
    • Agent is field underwriter – first step – face contact
    • Performed by employees in insurer’s home office
    Sources of Underwriting Information
    • Applicant- signed statements
    • Agent – signed statements
    – First Step in Underwriting (“A Field Underwriter”)

    • Insurer’s inspection or claims department


    • Insurer bureaus and associations (MIB)
    • Outside agencies - D&B, Credit Agencies, Motor
    Vehicle, Court records, Inspection companies,
    Medical companies (paramedical and medical
    exams)
    Most UW is by salaried EEs in Home
    Office
    Purposes of Reinsurance
    Reinsurance – transfer portion of all risk to another
    insurer
    – Primary company issues policy and pays
    claims
    • PRIMARY IS PAID BY REINSURURER
    – Usually transparent to policyowner (P/O DOES
    NOT HAVE TO BE NOTIFIED)
    • Primary insurer can write higher limits – retention
    limits – maximum on one life
    • Spreading losses enhances insurers’ financial
    strength and stabilizes mortality experience
    • Reinsurers provide technical advice and specialty
    risks
    Types of Reinsurance
    Treaty (Automatic) Reinsurance
    – Primary insurer agrees in advance to cede
    (transfer) a portion of some types of loss
    exposures covered by the primary insurer
    – Reinsurer agrees to accept them automatically

    Facultative Reinsurance
    – Optional for both primary insurer and reinsurer
    – Handled on case-by-case basis
    – Each party retains “faculty” or privilege of
    accepting or rejecting reinsurance
    Types of Insurance Adjusters
    • Insurance agents (property-liability for small losses)
    • Insurance company employees- staff adjuster,
    claims examiner or claims analyst
    • Independent adjusters
    – Work for INSURERS to handle claims
    • Public adjusters
    – Represent the policyowner for a fee. Help
    through process and defend policyowner
    interests.
    Claims Process
    1. Policyowner furnishes notice of loss

    2. Insurer investigates claim

    3. Policyowner files proof of loss

    4. Insurer pays, denies, negotiates

    Details vary by line of insurance.


    Rate vs. Premium
    Rate
    – Price charged for each unit of coverage (cost of
    insurance)
    – Establishing price to be charged for insurance based
    on prediction of future loss costs plus margins for
    expenses (loading) and profit
    Premium
    – Gross premium- Price charged for coverage provided
    by policy
    – Determined by multiplying rate times number of units
    of coverage
    – Net Premium - no expense loading - the amount
    needed to pay future claims
    Pure (Net) Rate
    • Portion of the rate that is designed to
    cover future losses (without loading for
    expenses, profit, etc.)

    Risk of
    Death

    AGE (yrs)
    Rate Making
    • Property and liability
    - Advisory Organization assists insurers by collecting
    loss statistics or submitting rating recommendations.
    Example: ISO- Insurance Services Office
    – Loss ratios - adjustment of premium for experience
    (actual losses vs. assumed losses. Losses/ premium

    • Life uses mortality tables and experience.

    • Health uses morbidity tables and experience


    Class Rate vs. Specific Rate
    • Class rate - group rate with average price
    that applies to each category of similar
    insureds
    – Example: personal auto insurance

    • Specific (schedule) rate - rate for specific


    situation based on schedule that evaluates
    unique hazards
    – Example: property insurance on factory building,
    World Trade Center
    Life Insurance Rate Making
    • Net single premium per $1000
    – Amount needed today to pay all claims within
    a class of insureds. Calculated by discounting
    timing and amount of assumed future claims
    and interest.
    • Net level annual premium per $1000
    – Net single premium spread over policy’s
    premium-paying period.
    – Gross premium adds loading for
    commissions, taxes, expenses,
    contingencies, and profit
    Investing
    Funds not immediately needed for operating
    expenses or claims are invested
    •Investment earnings lower the premiums
    •Generates profit for insurer
    •Provides competitive return for cash value life
    insurance policyowner
    •Investment objective is safety of principal and
    income.
    – Life insurers use long-term, highly rated
    government and corporate bonds.
    – Stocks about 32%. Table 4-1
    Insurance Company Investments
    (Table 4-1)
    • Life Insurers > Non-life Insurers
    • Non-life > Cash & Cash Equivalents (to
    pay frequent claims)
    • Non-Life > Bonds
    • Life > Stocks (longer time until claims
    paid)
    Other Insurer Functions
    • Legal
    • Actuarial
    • Public relations
    • Education and training
    • Accounting
    • Information technology
    • Personnel management
    • Purchasing
    Self-Test Questions – Chapter 4
    1. The purpose of underwriting is to select only those
    insureds who are expected to have no losses.
    2. Among other things, reinsurance can help insurers
    spread large losses and reduce the surplus drain
    associated with writing new business.
    3. Under facultative reinsurance, the insurer agrees in
    advance to transfer some types of risks, and the
    reinsurer agrees to accept those risks.
    4. The purpose of the claims settlement process is to
    determine the insurer’s liability for a given loss and to
    reach agreement with respect to the amount of loss or
    damage payable under the insurance contract.
    5. Most life insurance agents have their companies’
    authority to settle claims.

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