Bảo hiểm - Chapter 6: Insurance company operations

Chapter 6Insurance Company OperationsAgendaRating and RatemakingUnderwritingProductionClaim settlementReinsuranceInvestmentsRating and RatemakingRatemaking refers to the pricing of insurance and the calculation of insurance premiumsA rate is the price per unit of insuranceAn exposure unit is the unit of measurement used in insurance pricingTotal premiums charged must be adequate for paying all claims and expenses during the policy periodRates and premiums are determined by an actuary, using the company’s past loss experience and industry statisticsUnderwritingUnderwriting refers to the process of selecting, classifying, and pricing applicants for insuranceA statement of underwriting policy establishes policies that are consistent with the company’s objectives, such asAcceptable classes of businessAmounts of insurance that can be writtenA line underwriter makes daily decisions concerning the acceptance or rejection of businessUnderwritingImportant principles of underwriting:The primary objective of underwriting is to attain an underwriting profitThe second principle is to select prospective insureds according to the company’s underwriting standardsThe purpose of underwriting standards is to reduce adverse selection against the insurerAdverse selection is the tendency of people with a higher-than-average chance of loss to seek insurance at standard rates. If not controlled by underwriting, this will result in higher-than-expected loss levels.Underwriting should also maintain equity among the policyholdersOne group of policyholders should not unduly subsidize another groupUnderwritingUnderwriting starts with the agent in the fieldInformation for underwriting comes from:The applicationThe agent’s reportAn inspection reportPhysical inspectionA physical examination and attending physician’s reportMIB reportAfter reviewing the information, the underwriter can:Accept the applicationAccept the application subject to restrictions or modificationsReject the applicationProductionProduction refers to the sales and marketing activities of insurersAgents are often referred to as producersLife insurers have an agency or sales departmentProperty and liability insurers have marketing departmentsAn agent should be a competent professional with a high degree of technical knowledge in a particular area of insurance and who also places the needs of his or her clients firstClaim SettlementThe objectives of claims settlement include:Verification of a covered lossFair and prompt payment of claimsPersonal assistance to the insuredSome laws prohibit unfair claims practices, such as:Refusing to pay claims without conducting a reasonable investigationNot attempting to provide prompt, fair, and equitable settlements Offering lower settlements to compel insureds to institute lawsuits to recover amounts dueClaim SettlementThe claim process begins with a notice of lossNext, the claim is investigatedA claims adjustor determines if a covered loss has occurred and the amount of the lossThe adjustor may require a proof of loss before the claim is paidThe adjustor decides if the claim should be paid or deniedPolicy provisions address how disputes may be resolvedReinsuranceReinsurance 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 insuranceThe primary insurer is the ceding companyThe insurer that accepts the insurance from the ceding company is the reinsurerThe retention limit is the amount of insurance retained by the ceding companyThe amount of insurance ceded to the reinsurer is known as a cessionReinsuranceReinsurance is used to:Increase underwriting capacityStabilize profitsReduce the unearned premium reserveThe unearned premium reserve represents the unearned portion of gross premiums on all outstanding policies at the time of valuationProvide protection against a catastrophic lossRetire from business or from a line of insurance or territoryObtain underwriting advice on a line for which the insurer has little experienceTypes of Reinsurance AgreementsThere are two principal forms of reinsurance:Facultative reinsurance is an optional, case-by-case method that is used when the ceding company receives an application for insurance that exceeds its retention limitFacultative reinsurance is often used when the primary insurer has an application for a large amount of insuranceTreaty reinsurance means the primary insurer has agreed to cede insurance to the reinsurer, and the reinsurer has agreed to accept the businessAll business that falls within the scope of the agreement is automatically reinsured according to the terms of the treatyMethods for Sharing LossesThere are two basic methods for sharing losses:Under the Pro rata method, where the ceding company and reinsurer agree to share losses and premiums based on some proportionUnder the Excess method, where the reinsurer pays only when covered losses exceed aa certain levelUnder a quota-share treaty, the ceding insurer and the reinsurer agree to share premiums and losses based on some proportionUnder a surplus-share treaty, the reinsurer agrees to accept insurance in excess of the ceding insurer’s retention limit, up to some maximum amountAn excess-of-loss treaty is designed for catastrophic protection A reinsurance pool is an organization of insurers that underwrites insurance on a joint basis Reinsurance AlternativesSome insurers use the capital markets as an alternative to traditional reinsuranceSecuritization of risk means that an insurable risk is transferred to the capital markets through the creation of a financial instrument, such as a futures contractCatastrophe bonds are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs Catastrophe bonds are growing in importance and are now considered by many to be a standard supplement to traditional reinsurance.InvestmentsBecause premiums are paid in advance, they can be invested until needed to pay claims and expensesInvestment income is extremely important in reducing the cost of insurance to policyowners and offsetting unfavorable underwriting experienceLife insurance contracts are long-term; thus, safety of principal is a primary considerationIn contrast to life insurance, property insurance contracts are short-term in nature, and claim payments can vary widely depending on catastrophic losses, inflation, medical costs, etc Exhibit 6.1 Growth of Life Insurers’ Assets Exhibit 6.2 Asset Distribution of Life Insurers 2007Exhibit 6.3 Investments, Property/Casualty Insurers, 2007 Investments by TypeOther Insurance Company FunctionsThe electronic data processing area maintains information on premiums, claims, loss ratios, investments, and underwriting resultsThe accounting department prepares financial statements and develops budgetsIn the legal department, attorneys are used in advanced underwriting and estate planningProperty and liability insurers provide numerous loss control services