The most important insurance company operations consist of the following: Insurance also engage in other operations, such as accounting, legal services, loss control, and data processing. the sections that follow discuss each of these functional areas in some detail.
RATE MAKING- Its refers to the pricing of insurance. insurance pricing differs considerably from the pricing of other products. when other products are sold , the company generally knows in advance what its costs of producing those products are , so that prices can be established to cover all costs and yield a profit. the insurance company does not know in advance what its actual costs are going to be. Actuaries in property and casualty insurance also determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and for state regulatory officials.
UNDERWRITING- its refers to the process of selecting, classifying, and pricing applicants for insurance. the underwriter is the person who decides to accept or reject an application. the fundamental objective of underwriting is to produce a profitable book of business. the underwriter constantly strives to select certain types of a applicants and to reject others so as to obtain a profitable portfolio of business.
1) STATEMENT OF UNDERWRITING POLICY- An insurer must establish an underwriting policy that is consistent with company objectives. the objective may be a large volume of business with a low profit margin or a smaller volume with a larger margin of profit. the insurer’s underwriting policy is determined by top-level management in charge of underwriting. the underwriting policy is stated in detail in an underwriting guide that specifies the lines of insurance to be written.
2) BASIC UNDERWRITING PRINCIPLES- There are some three important principles are as follows. the first principle is that the underwriter must select prospective insured according to the company’s underwriting standards , second is underwriting principle is to have a proper balance within each rate classification. and the third is underwriting principle is equity among the policy owners.
3) STEPS IN UNDERWRITING- After the insurer’s underwriting policy is established, it must be communicated to the sales force. initial underwriting starts with the agent in the field. Agent as first underwriter this step is often called field underwriting. the agent is told what types of applicants are acceptable, borderline, or prohibited. sources of underwriting information the type of information varies by type of insurance. the application is a basic source of underwriting information. an agent’s report is another source of information. and an another source of information most companies require the agent to give an evaluation of the prospective insured. a physical inspection may also be required before an application for property and liability insurance is approved.
making an underwriting decision there are three basic underwriting decisions with respect to an initial application for insurance, accept the application ,accept the application subject to certain restrictions or modifications and the reject the application.
4) MAKING AN UNDERWRITING DECISION- after the underwriter evaluates the information, an underwriting decision must be made. there are three basic underwriting decisions with respect to an initial application for insurance. first is accept the application, accept the application subject to certain restrictions or modifications and reject the application. many insurance now use computerized underwriting for certain personal lines of insurance that can be standardized.
PRODUCTION- The term production refers to the sales and marketing activities of insurers. agents who sell insurance are frequently referred to as producers. this word is used because an insurance company can be legally chartered , personnel can be hired, and policy forms printed but no business is produced until a policy is sold.
agency department life insurance have an agency or sales department. agency department is responsible for recruiting and training new agents and for the supervision of general agents. professionalism in selling the marketing of insurance has been characterized by a distinct trend toward professionalism in recent years. its means that the modern agent should be a competent professional. and henceforth brokers are play’ up an important role today .
CLAIM SETTLEMENT- Every insurance company has a claims division or department for adjusting claims. the different types of claims- settlement process.
1) BASIC OBJECTIVE IN CLAIMS SETTLEMENT- the first objective in settling claims is to verify that a covered loss has occurred. and the second objective is the fair and prompt payment of claims. and the third objective is to provide personal assistance to the insured after a covered loss occurs.
2) TYPES OF CLAIMS ADJUSTORS- the persons who adjusts a claim is known as a claims adjustor. An insured’s officer agent often has authority to settle small first party claims up to some maximum limit. A company adjustor can settle a claim up to 20,000. the adjustor is usually a salaried employee who represents only one company. An independent adjustor can also be used to settle claims. An adjustment bureau can be used to settle claims. and A public adjustor can be involved in settling a claim. a public adjustor, however represent the insured rather than the insurance company and is paid a fee based on the amount of the claim settlement.
3) STEPS IN SETTLEMENT OF A CLAIM- There are several important steps in settling a claim. notice of loss is the first step is notify the insurer of a loss. a provision concerning notice of loss is usually stated in the policy. after notice is received the next step is to investigate the claim an adjustor must also determine the amount of the loss. An adjustor may require a proof of loss before the claim is paid. A proof of loss is a sworn statement by the insured that substantiates the loss. after the claim is investigated, the adjustor must make a decision concerning payment.
REINSURANCE- Reinsurance is another important insurance operation . this section discusses the meaning of reinsurance, the reasons for reinsurance, and the different types of reinsurance contracts. Reinsurance is an arrangement by which the primary insurer that initially writes the insurance transfers to another insurer part or all of the potential losses associated with such insurance.
1) REASONS FOR REINSURANCE
Reinsurance is used for several reasons. the most important reasons include the following:
A) INCREASE UNDERWRITING CAPACITY- reinsurance can be used to increase the insurance company’s underwriting capacity to write new business. the company may be asked to assume liability for losses in excess of its retention limit.
B) STABILIZE PROFITS- reinsurance is used to stabilize profits. an insurance may wish to avoid large fluctuations in annual financial results. the reinsurer then agrees to reimburse the ceding insurer for part or all the losses in excess of 70 percent up to some maximum limit.
C) REDUCE THE UNEARNED PREMIUM RESERVE- reinsurance can be used to reduce the unearned premium reserve. the unearned premium reserve is a liability item on the insurer’s balance sheet that represents the unearned portion of gross premiums on all outstanding policies at the time of valuation. reinsurance reduces the level of the unearned premium reserve required by law and temporarily increases the insurer’s surplus position.
D) PROVIDE PROTECTION AGAINST A CATASTROPHIC LOSS- Reinsurance also provides financial protection against a catastrophic loss. insurers often experience catastrophic losses because of hurricanes and other natural disasters, air line disaster and similar events.
2) TYPES OF REINSURANCE
There are two principle forms of reinsurance:
A) FACULTATIVE REINSURANCE- Its is an optional , case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limit. facultative reinsurance has the advantage of flexibility because a reinsurance contract can be arranged to fit any kind of case.
B) TREATY REINSURANCE- its means the primary insurer has agreed to cede insurance to the reinsure, and the reinsurer has agreed to accept the business. treaty reinsurance has several advantages to the primary insurer. it could be unprofitable to the reinsurer. there are several types of reinsurance treaties and arrangements,
QUOTE SHARE TREATY- under a quota-share treaty, the ceding insurance and reinsurer agree to share premiums and losses based on some proportion. the ceding insurer’s retention limit is stated as a percentage rather than as a dollar amount. for smaller insurers and other insurers that wish to reduce the drain on surplus.
SURPLUS SHARE TREATY- under surplus – share treaty the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit up to some maximum amount. the principal ex. of surplus –share treaty is that the primary insurer’s underwriting capacity on any single exposure is increased.
EXCESS OF TREATY REINSURANCE POOL-An excess-of –loss treaty is designed largely for catastrophic protection. the excess of loss treaty can be written to cover , a single exposure, a single occurrence, such as a catastrophic loss from a tornado, excess losses when the primary insurer cumulative losses exceed a certain amount during some stated time period , such as a tear.
ALTERNATIVES TO TRADITIONAL REINSURANCE : Some insurers and reinsurers are now using the capital markets as an alternative to traditional reinsurance. the financial capacity of the property and casualty industry to pay catastrophic losses from hurricanes, earthquakes, and other natural disasters is limited. There is an increasing use of the securitization of risk to obtain funds to pay for a catastrophe loss. securitization means that an insurable risk is transferred to the capital markets through the creation of a financial instruments such as a catastrophe bond futures contract options contract, or other financial instrument. catastrophe bonds are an excellent example of the securitization of risk. its is a corporate bonds that permit the issuer of the bond to skip or reduce scheduled interest payments if a catastrophic loss occurs. casualty insurers finance catastrophic losses in a number of ways.
INVESTMENTS- The investment function is extremely important in the overall operations of insurance companies because premiums are paid in advance they can be invested until needed to pay claims and expenses. life insurance investments A insurer divides its assets into two accounts. the assets in the general account support the contractual obligations for guaranteed fixed dollar benefits, such as life insurance death benefits. life insurance premiums also are an important source of capital funds to the economy. two important points must be stressed when the investments of property and casually insurers are analyzed. first , in contrast to life insurance, property insurance contracts generally are short-term in nature. second investment income is extremely important in offsetting unfavorable underwriting experience.
OTHER INSURANCE COMPANY FUNCTIONS
insurance also perform other functions. they include electronic data processing, accounting, legal, and loss- control services.
An important functional area is electronic data processing . have revolutionized the insurance industry by speeding up the processing and storage of information and by eliminating many routine tasks. The accounting department is responsible for the financial accounting operations of an insurer. accounts prepare financial statements, develop budgets, analyze the company’s financial operations and keep track of the millions of dollars that flow into and out of a typical company each year.
Another important function of insurance companies is the legal function. in life insurance attorneys are widely used in advanced underwriting and estate planning. Attorneys must keep up with current court cases and precedents. loss control services is an important part of risk management, and a typical property and casualty insurer provides numerous loss control services. these services include advice on alarm systems, automatic sprinkler systems, fire prevention, occupational safety and health, and loss prevention.