insurance-operations Flashcards
Insurance Companies: Internal Operations
Insurance companies have two separate parts: insurance underwriting business and investment of funds paid by insureds.
Understanding the internal operations of insurance companies is important for individuals acting as risk managers or on behalf of businesses.
Insurance jobs involve more than just sales positions.
Insurance Operations: Marketing,
Underwriting, and Administration
Marketing activities in the insurance industry involve selling insurance through agents, brokers, or directly from the insurer.
Agents represent the company, while brokers represent the buyer and may also represent the insurer in some states.
Underwriting is a major aspect of insurance operations and involves assessing risks and determining premiums.
Administration involves managing policy issuance, premium collection, and customer service.
Insurance Operations: Actuarial Analysis and Investments
Actuarial analysis is crucial for insurance companies to assess risks, calculate premiums, and ensure financial stability.
Investments play a significant role as insurance companies invest the funds collected from insureds to generate returns.
Insurance Operations: Reinsurance, Legal and Regulatory Issues, Claims Adjusting, and Management
Reinsurance is the process of transferring risks from primary insurers to reinsurers, allowing insurers to manage their exposure.
Legal and regulatory issues impact insurance operations, including licensing, compliance, and consumer protection.
Claims adjusting involves investigating and settling claims made by policyholders.
Management oversees the overall operations of insurance companies and ensures profitability and compliance.
Marketing in Life/Health Insurance
Life/health insurance is predominantly sold through agents, brokers, or producers who earn commissions.
Agents represent the insurer, while brokers represent the buyer and sometimes the insurer.
Different marketing systems exist, such as the general agency system and the managerial (branch office) system.
Marketing in Property/Casualty Insurance
Property/casualty insurance is primarily sold through agents and brokers who earn commissions.
The independent (American) agency system allows agents to represent multiple companies and make independent decisions.
Direct writers market insurance through exclusive agents who represent only their company or an affiliated group.
Brokers act as the insured’s legal agent when placing business with insurers and may provide additional services.
Professionalism in Marketing
Experience and Educational Qualifications:
Designations:
Professionalism in Marketing
Experience and Educational Qualifications: A professional marketing agent in the insurance industry should have several years of experience and relevant educational qualifications. This includes extensive study in insurance, finance, and related subjects. The agent’s experience and qualifications are important factors to consider when seeking advice on complicated insurance matters.
Designations: Various professional designations are available for agents in different areas of insurance. For life/health agents, the Chartered Life Underwriter (CLU) designation is highly regarded. It signifies expertise in life and health insurance. Another alternative designation of interest to life/health agents is the Chartered Financial Consultant (ChFC) designation from the American College. Property/casualty agents can gain a good background by earning the Chartered Property and Casualty Underwriter (CPCU) designation granted by the American Institute for Property and Liability Underwriters. The Certified Financial Planner (CFP) designation, awarded by the Certified Financial Planner Board of Standards, also has applications to insurance.
Underwriting:
Individual Underwriting:
Underwriting: Underwriting is the process of classifying potential insureds into appropriate risk classifications to determine the appropriate rate for insurance coverage. Underwriters evaluate risks, select which risks to accept, and identify potential adverse selection. Group underwriting and individual underwriting involve separate procedures. In group underwriting, characteristics, demographics, and past losses of the group are considered, while individual underwriting requires the insured to provide evidence of insurability or specific details about the property and automobiles for property/casualty lines of business.
Individual Underwriting: Individual underwriting involves a thorough evaluation of the individual applicant for insurance. The life insurance company underwriter assesses the insurability of the applicant, which can be a lengthy process. Applicants may need to provide information about lifestyle, smoking habits, medical history, and the medical status of close family members. For large amounts of life insurance, a medical examination may be required.
Premium Determination:
Controversies in Underwriting:
Credit Rating in Underwriting: Credit scores legislation in several states.
Premium Determination: Once the underwriter determines that insurance can be issued, the next step is to apply the proper premium rate. Premium rates are determined by the actuarial department for different classes of insureds. The underwriter’s role is to decide which risk class is appropriate for each insured. Discrimination is inherent in the insurance business to prevent adverse selection and make insurance available. Factors such as gender, race, age, and other characteristics are often considered in underwriting and rating practices, although there are debates about which factors should be included.
Controversies in Underwriting: Over the years, certain factors used in underwriting decisions have become controversial from a public policy standpoint. Factors like marital status, living arrangements, and geographical location have played a role in underwriting decisions. Concerns have been raised about redlining, where insurers choose not to provide insurance or offer it at substantially higher prices in certain geographical areas, often affecting low-income inner-city dwellers. The use of genetic testing in underwriting is another emerging controversy. While some argue that certain factors are predictive of losses and expenses, others advocate for excluding characteristics that are beyond an individual’s control.
Credit Rating in Underwriting: Credit scores have gained significance in underwriting decisions, including for insurance coverage. Insurers use credit data to assess the likelihood of filing a claim and set premiums accordingly. The rationale is that there is a correlation between credit scores and behavior patterns that could affect insurance risk. Consumer advocates argue that using credit scores in underwriting is discriminatory and inflexible. This issue has led to discussions, regulations, and legislation in several states.
summarize the key aspects of administration and service in the insurance industry, highlighting the essential tasks and services involved in managing insurance policies and meeting customer needs.
Administration:
Record Management:
Premium Collection:
Customer Inquiries: They provide prompt and courteous responses to address customer concerns.
Accounting:
Information Systems: They ensure the smooth flow of information within the organization.
Office Administration:
Customer Service: satisfaction throughout the policy lifecycle.
Personnel Management: employee benefits administration.
Administration:
Record Management: After insurance is sold and approved, proper records need to be established to keep track of policyholders, premiums collected, and other important information.
Premium Collection: Administration involves collecting premiums from policyholders on a regular basis and ensuring accurate accounting of these payments.
Customer Inquiries: Administrators handle customer inquiries regarding insurance policies, changes in policy details, address changes, and other routine matters. They provide prompt and courteous responses to address customer concerns.
Accounting: Administration includes financial management tasks such as bookkeeping, financial reporting, and ensuring compliance with accounting standards and regulations.
Information Systems: Administrators manage the information systems used for policy management, premium calculations, customer databases, and other operational functions. They ensure the smooth flow of information within the organization.
Office Administration: This aspect of administration involves overseeing day-to-day office operations, including managing office supplies, coordinating meetings, maintaining records, and supporting other staff members.
Customer Service: Administrators play a crucial role in providing excellent customer service by addressing customer needs, resolving complaints, and ensuring customer satisfaction throughout the policy lifecycle.
Personnel Management: This involves managing the human resources within the insurance company, including recruitment, training, performance evaluation, and employee benefits administration.
summarize the key aspects of administration and service in the insurance industry, highlighting the essential tasks and services involved in managing insurance policies and meeting customer needs.
Service:
Agent and Broker Services:
Claim Practices:
Policy Inquiries:
Engineering and Loss Control:
Risk Management:
Cost Containment:
Quality Indicator: T
Selection of Insurer:
Service:
Agent and Broker Services: The advice and assistance provided by agents and brokers are vital services for individuals and businesses seeking insurance. They help clients navigate the insurance market, understand policy options, and make informed decisions.
Claim Practices: Insurer’s claim practices determine how efficiently and effectively they handle claims. Prompt and fair claim settlement is a critical service that policyholders expect from their insurance company.
Policy Inquiries: Prompt and courteous responses to inquiries regarding policy changes, additional insurance options, address changes, and other routine matters contribute to excellent service.
Engineering and Loss Control: Some insurers offer engineering and loss control services, particularly to commercial clients. These services focus on preventing and reducing losses through economically feasible methods. Insurers may conduct these activities themselves or under their direction.
Risk Management: Insurers play a role in risk management by offering services that help businesses identify and mitigate risks. This can include advice on risk prevention measures, safety protocols, and loss control strategies.
Cost Containment: In health insurance, cost containment measures, such as managed care and wellness techniques, are employed to control healthcare costs. Insurers may provide services and programs aimed at promoting healthier lifestyles and preventing unnecessary medical expenses.
Quality Indicator: The level of service provided by an insurance company is a crucial indicator of its overall quality. Service excellence builds trust and satisfaction among policyholders, leading to long-term customer relationships.
Selection of Insurer: The availability and quality of services, including engineering and loss control efforts, are important factors to consider when selecting an insurer. The success of a risk manager often depends on these services.
Actuarial analysis is a specialized mathematical analysis that deals with the financial and risk aspects of insurance. It involves using past losses to project future losses, determining reserves needed by insurers, and setting appropriate rates.
Actuarial analysis is essential for insurance operations as it helps insurers make informed financial decisions and manage risks effectively.
Actuaries play a crucial role in the insurance industry by determining proper rates and reserves, certifying financial statements, participating in product development, and assisting in overall management planning.
Actuaries utilize various tools and techniques to perform their work:
They rely on sophisticated mathematical models, statistical analysis, and data mining tools to analyze past losses and forecast future losses.
Regression analysis is one of the modern techniques used by actuaries to estimate expected claim payments and calculate rates.
Actuaries also use loss triangles, which represent historical data on past claim payments, to forecast future losses.
Investments of insurers, or investment income, are an integral part of insurance operations:
Insurers are holders of large asset portfolios, and they invest the premiums they collect to generate investment income.
Investment income helps insurers offset their underwriting expenses and generate profits.
Actuaries may also be involved in analyzing investment options and managing the investment portfolios of insurers.
Estimating prices and reserves is a crucial aspect of insurance operations:
Rates or premiums for insurance are based on past experience of losses. Actuaries use various procedures and techniques, including regression analysis and data mining, to calculate rates.
Insurers must estimate future payments and set aside reserves to cover pending or outstanding losses.
Long-tail lines of insurance require estimating future payments for claims that may take years or even decades to settle. Actuaries use statistical analysis and sophisticated techniques to estimate loss reserves for such cases.
