1. 1 Welcome To The IEI-Sponsored Insurance Workshop MTSU June 4-6, 2007

2. 2 Overview of Insurance Operations Insurance Regulation Evaluation of Insurance Regulation Reasons for Insurance Regulation Insurance Regulators Regulatory Activities Unofficial Regulators McCarran-Ferguson Act (Public Law 15)

3. 3 Overview of Insurance Operations (con’t) Identify Loss Exposures Analyze Loss Exposures Examine the Feasibility of Risk Management Techniques Select the Most Appropriate Techniques Implement the Risk Management Techniques Monitor Results and Make Changes as Needed Risk Management Process

4. 4 Overview of Insurance Operations (con’t) Classification Type Legal Form Of Ownership — Place Of Incorporation Stock Mutual Other — Domestic Foreign Alien Classifications and Types of Insurers

5. 5 Overview of Insurance Operations (con’t) Earn a Profit Meet Consumer Needs Comply with Legal Requirements Fulfill Duty to Society Goals of Insurance Companies

6. 6 Overview of Insurance Operations (con’t) Constraints on Achieving Goals Internal Constraints  Efficiency  Expertise  Size  Financial Resources  Other Internal Constraints External Constraints  Regulation  Public Opinion  Competition  Economic Conditions  Marketing Systems  Other External Constraints

7. 7 Overview of Insurance Operations (con’t) Measuring Profits  Premiums  Expense Ratio  Loss Ratio  Combined Ratio  Operating Profit or Loss Measuring Insurance Performance

8. 8 Overview of Insurance Operations (con’t) Measurement of Profits Property-Casualty Insurance Combined Ratio, 1996 to 2001 YearCombined Ratio 1996 106.1 1997 101.9 1998 106.0 1999 107.8 2000 110.3 2001 115.9

9. 9 Overview of Insurance Operations (con’t) Measurement of Profits Property-Casualty Insurance Operating Ratio in the United States From 1992 to 2001 Year Combined Ratio Net InvestmentOperating Ratio Ratio 1992 115.7 14.9 100.8 1993 106.9 13.9 93.0 1994 108.4 13.8 94.6 1995 106.4 14.5 91.9 1996 105.8 14.4 91.4 1997 101.6 15.5 86.4 1998 105.6 14.6 91.3 1999 107.8 14.0 93.8 2000 110.1 14.1 96.2 2001 115.9 12.2 103.7

10. 10 Core Functions  Marketing  Underwriting  Claims  Actuarial Other Functions  Loss Control (and Premium Audit)  Reinsurance  Investments  Information Technology  Human Resources  Legal Services  Accounting Interdependence Among Functions Overview of Insurance Operations (con’t) Insurance Functions

11. 11 Insurance Marketing

12. 12 Insurance Marketing Legal Status of Agents Duties Owed to Customers The Marketing Plan  Product Proposal and Sales Goal  Situational Analysis  Marketing Goals  Marketing Strategies Unique Characteristics Overview of Insurance Product Marketing

13. 13 Independent Agency and Brokerage Marketing System Direct Writers Exclusive Agents Convergence of Traditional Marketing Systems Alternative Distribution Channels  Internet  Call Centers  Direct Response  Group Marketing  Financial Institutions Insurance Marketing (cont’d) Insurance Distribution Channels

14. 14 Insurance Marketing (cont’d) Independent Agency System Independent Contractor Represents Many Companies Owns Policy Expirations Compensation Methods  Commission  Contingent Commissions  Bonuses  Fees  Combination

15. 15 Independent Contractor Represents One Company Does Not Own Expirations Compensation Methods  Commissions (higher for new business)  Salary (while in training) Insurance Marketing (cont’d) Exclusive Agency System

16. 16 Underwriting

17. 17 Underwriting Profitable Book of Business Avoid Adverse Selection Purpose Underwriting Process Evaluating Loss Exposures Determining Underwriting Alternatives Selecting an Underwriting Alternative Determining the Appropriate Premium Implementing the Underwriting Decision Monitoring the Loss Exposures Owns Policy Expirations

18. 18 Underwriting (cont’d) Line Staff Types of Underwriters Underwriting Results Financial Measures Non-financial Measures

19. 19 Underwriting (cont’d) Accept the Submission As Is Reject the Submission Make a Counteroffer to Accept the Submission Subject to Certain Modifications Underwriting Alternatives Major Modifications Require Loss Control Measures Change Insurance Rates, Rating Plans, or Policy Limits Amend Policy Terms and Conditions Use Facultative Reinsurance

20. 20 The Claim Function

21. 21 The Claim Function Comply With the Contractual Promise Support the Insurer’s Profit Goal Goals Types of Adjusters Staff Independent Public Producers

22. 22 Claims Adjusting Process Determine Whether the Loss is Covered by the Applicable Policy Determine the Cause of Loss and Legal Liability, if Necessary. Determine the Amount of Damages or Extent of Loss Settle the Claim The Claim Function (cont’d) Determining Coverage Insuring Agreement Exclusions Conditions Response to Coverage Issues

23. 23 The Claim Function (cont’d) Determining Legal Liability Property Bodily Injury (Compensatory, Punitive) Sources  Torts  Contracts  Statutes Determining Amount of Damages Settlement Claims Reports Reserving

24. 24 Actuarial Function

25. 25 Duties Make Rates Determine Reserves Actuarial Function Ratemaking Goals Be Stable Be Responsive Provide for Contingencies Promote Loss Control Be Simple

26. 26 Rate Components Prospective Loss Costs (Pure Premium) Expenses Profit and Contingencies Actuarial Function (cont’d) Ratemaking Methods Pure Premium Method Loss Ratio Method Judgment Method

27. 27 Reinsurance

28. 28 Definitions Primary Insurer Reinsurer Ceding Commission Retrocession Reinsurance Reinsurance Functions Stabilize Loss Experience Improve Large-line Capacity Provide Catastrophe Protection Provide Surplus Relief Provide Underwriting Guidance Facilitate Withdrawal From a Territory or Type of Business

29. 29 Types of Reinsurance Facultative Treaty Reinsurance (cont’d)

30. 30 Conclusions