1. Chapter 4: Insurance Company Operations
Insurance Company Functions
Underwriting
Reinsurance
Claims adjusting
Rate making
Investing
Other functions

2. 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

3. 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

4. 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

5. 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

6. 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.

7. Claims Process Details vary by line of insurance.
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.

8. 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

9. 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)

10. 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

11. 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

12. 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

13. 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

14. 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)

15. Other Insurer Functions
Legal
Actuarial
Public relations
Education and training
Accounting
Information technology
Personnel management
Purchasing

16. Self-Test Questions – Chapter 4
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.
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.