Functions of Insurers 1. Ratemaking 2. Production 3. Underwriting 4. Loss Settlement 5. Investment

Basic Concepts in Ratemaking Rate Price charged per unit of protection Premium Determined by multiplying rate by units of protection purchased Gross Rate Composed of two parts, designed to pay losses and expenses Pure Premium Portion of the Gross Rate designed to pay losses Loading Portion of Gross Rate designed to cover expenses of operation

Pure Premium Total Losses . Exposure Units = Pure Premium $3,000,000 . 100,000 = $30

Converting Pure Premium to Gross Rate Expense part of the rate Expense Ratio: expressed as percentage of the final rate Permissible Loss Ratio: 1 minus expense ratio Pure Premium . Gross Rate: 1 _ expense ratio $ 30 = 30 = $50 1 - .40 .60

Underwriting 1. Basic purpose: avoid adverse selection 2. Relationship of underwriting to adequacy of rates 3. Exposure that is unacceptable at one rate may be acceptable at another

Sources of Underwriting Information 1. The application 2. Information from the agent or broker 3. Investigations 4. Information bureaus 5. Physical examinations or inspections

Postselection Underwriting 1. Postselection underwriting (or renewal underwriting) occurs when the insurer decides whether to continue insurance. 2. Insurer may decline to renew insurance or may offer narrower coverage. 3. Because cancellation or nonrenewal can impose hardship on insured, some states limit the insurer’s right to exercise these options. 4. When the option of postselection underwriting is limited, insurers may be more selective in initial underwriting.

Adjusters 1. Staff adjusters 2. Adjusting bureaus 3. Independent adjusters 4. Public adjusters

Adjustment Process 1. Notice 2. Investigation 3. Proof of loss 4. Payment or denial

Composition of Insurers’ Investments Life Property Type of Investment Insurers & Liability Corporate Stocks 20.6% 21.2% Corporate Bonds 41.0% 18.3% Government Bonds 17.1% 51.2% Mortgages 8.9% 0.4% Real Estate 2.1% 1.3% Policy Loans 4.3% Miscellaneous 6.0% 7.6% 100.0% 100.0%

Reinsurance 1. Nature of reinsurance 2. General approaches facultative treaty 3. Types of treaties automatic

Reinsurance in Property & Liability Insurance 1. Proportional reinsurance Quota-share Surplus-share 2. Excess-of-loss reinsurance

Reinsurance in Life Insurance Term insurance approach (reinsure difference between face value of policy and amount of reserves) 2. Coinsurance approach (quota share)

Functions of Reinsurance 1. Spreading of risk 2. Financing function - surplus relief

Miscellaneous Insurer Functions Legal Accounting Engineering