Chapter 7: insurance operations

mortality cost

-investment + expense charge +taxes +risk change +profit =gross premium charge 2 characteristics that greatly influence insurer practices and the nature of life insurance: -yearly probabilities of death rise with age -practical reasons, actuaries set at 1.0 the probability of death at an advanced age, such as 99. that is death is considered a certainty, even thought some people survive

Two dominant types of life/health insurance marketing systems

1) general agency 2) managerial (branch office)

Producer

Another name for both agents and brokers name given to create uniformity among types of distributions systems

Marketing

From a consumers pov, marketing is the first glimpse into the operations of an insurer Insurance may be bought through agents, brokers, or (in some cases) directly from the insurer (via personal contact or on the internet) An agent legally represents the company , whereas a broker represents the buyer and in half of the states, also represents the insurer because if state regulations Both agents and brokers are compensated by the insurer

personal producing general agent

Sells for one or more insurers, often with a higher than normal agents commission and seldom hires other agents This is desirable for consumers because a single insurer cannot have the best products for all needs To meet a clients insurance needs more completely, the agent needs to have flexibility to serve as a broker or a personal producing general agent for the insurer with the most desirable policy

administration

after insurance is sold and approved by the underwriter, records must be established , premiums collected, customer inquiries answered and many other admin jobs performed -includes accounting, info systems, office admin, customer service and personnel management

exclusive agents

agents permitted to represent only their company or in a company affiliated group of insurance companies -a group is a number of separate companies operation under common ownership and management -used by Allstate, Nationwide, and state-farm -agents are compensated lower than those paid to independent agents because the insurer absorbs some expenses that are borne directly by independent agents -insurer owns the x-date -customer is the insurers not the agents -not much independence as those who operate under the independence agency system -average operating expenses and premiums for personal lines of insurance tend to be lower than those in independent agency system

facultative agreement

agreement in which both the primary insurer and the reinsurer retain full decision making powers with respect to each insurance contract primary decides whether to not seek reinsurance, and reinsurer retains flexibility to accept or reject each application for reinsurance on case by case basis

treaty agreement

agreement in which the original insurer is obligated to automatically reinsure any new underlying insurance contract that meets the terms of a prearranged treaty, and the reinsurer is obligated to accept certain responsibilities for the specified insurance reinsurance is covered automatically for many policies

reinsurance

an arrangement by which an insurance company transfers all or portion of its risk under a contract (or contract) of insurance to another company three types treaty facultative and combo of two

independent adjuster a

an employee of an adjusting firms that works for several different insurers and receives a fee for each claim

company adjuster

an employee of the insurer who handles claims

managerial (branch office) system

branch office is an extension of the home office headed by the branch manager (a company employee who is compensated by a combination of salary ,bonus, and commissions related to the productivity of the office to which he or she is assigned) Branch managers employs and trains agents for the company by cannot employ an agent without consent of the company

combo approach (facultative agreement & treaty agreement)

can give the option to primary insurer and automatically require acceptance by the reinsurer on all contracts offered for reinsurance

direct writers

companies that market through exclusive agents

mortality curve

curve that illustrates relationship between age and the probability of death

actuary

determine the reserves, certifies financial statements, participates in product development and assists in overall management planning

independent agent

difference is the independence of the agent; the agent's bargaining position with the insurers he/she represents, and the fact that those who purchase insurance through the agent are considered by both insurers and agents to be the AGENTS customers rather than the insurers -usually represents several companies, pays all agency expenses, is compensated on a commission plus bonus basis and makes all decisions when a policy is due for renewal -an independent agent owns the x-date (he/she has the right to contact the customer when a policy is due for renewal) -the insured goes goes with the agent if the agent no longer sells for the insurance company -the ownership right can be sold to another agent, when the independent agent decides to retire or leave the agency, the right to contact numbers of customers creates a substantial market value for the agency

salaried reps

employees of the company -some direct write place business through salaried reps -compensation fr such employees may be salary and/or commission plus bonus related to amount and quality of business they secure -employees rather than agents

incurred but not reported (IBNR)

estimated losses that insureds did not claim yet but are expected to materialize in the future

financial planners

facilitates some insurance sales by serving as a consultant on financial matters primarily to high income clients -a fee only fp, knowledgeable in insurance , may direct you to a good quality, no load insurance products when they are priced lower than comparable products sold through agents -in some cases, it is appropriate for the fp to send you to an insurance agent

ceding commission

fee paid by reinsurer to the original insurer prespecified percentage

general agency system

general agent: an independent businessperson rather than an employee of the insurance company and is authorized by contract with the insurer to sell insurance in a specified territory Another major responsibility is the recruitment and training of sub agents -Sub agents usually are given the title of "AGENT" or "SPECIAL AGENT" -Typical are agents of the insurer rather than general agent -the GA has an exclusive franchise for his/her territory -primary focus: select, train, and supervise sub agents - GA provide office space and have admin responsibilities for come customer service activities

group and supplemental marketing

group life, health, and retirement plans are sold to employees by agents or by brokers -assisted by a sales rep supplemental insurance plans that provide life, health, and other benefits to employees through employer sponsorship and payroll deduction have become common -marketed by agents, brokers, and exclusive agents

catasprophe (CAT) modeling

help predict future occurrences of natural and human made disastrous events with large severity of losses relies on the use of computer technology to synthesize loss data, assess historical disaster statistics, incorporate risk features, and run event simulations as an aid in predicting future losses -natural disasters

actuarial analysis

highly specialized mathematic analysis that deals with the financial and risk aspects of insurance -takes past losses and projects them into the future to determine the reserves an insurer needs to keep and the rates to charge

equal credit opportunity act (ECOA)

law requiring that the creditor give you s notice that tells specific reasons your application was rejected or the fact that you have the right to learn reasons if you ask within the sixty days

engineering and loss control

methods of prevention and reduction of loss wherever the efforts required are economically feasible - applicable to workers comp and boiler and machinery exposures -cost containment

life/health insurance marketing

most life/health insurance is sold through agents, brokers, or (producers), who are compensated by commissions Some companies insist that their agents represent them exclusively, or at least that agents not submit applications to another insurer unless they themselves have refused to issue insurance at standard premium rates Others permit their agents to sell for other companies, though these agents usually have a primary affiliation with one company and devote most of their efforts to selling policies

property/casualty insurance marketing

most property/casualty insurance is sold through agents or brokers who are compensated on a commission basis, but some sold by salaried reps or by direct methods the independent (American) agency system and the exclusive agency system account for the bulk of the insurance sales

internet marketing

one can select an insurance product and compare price and coverage on the Internet (EX: someone interested in buying life insurance policy can click on Insweb.com. web site presents info and questionnaire to fill out. can send contact info to selected insurer and underwriting process determine insurability and insurance rates) -most companies set up their own web site to promote their products features

incurred losses

paid losses plus known, but not yet paid losses

agreggate reinsurance

policy that can be purchased for coverage against potentially catastrophic situations faced by the primary insurer

mortality tables

predicts the percentage of people in each age group who are expected to die each year used to estimate the required reserves and to compute life insurance rates based on 3 concepts: -pooling many exposures into a group -accumulating a fund paid for by contributions (premiums) from the members of the group -paying from this fund for losses of those who die each year

nonproportional reinsurance

reinsurance that obligates the reinsurer to pay losses when they exceed a designated threshold

professionalism in marketing

requirement for charted life underwriting (CLU) the charted financial consultant (ChFC)f from American college -property/casualty agents earn the charted property and casualty underwriter (CPCU) -cfp

excess-loss reinsurane

requires the reinsurer to accept amounts of insurance that exceed the ceding insurers retention limit

investment income

returns from all assets held by the insurers from both capital investments and premiums investment is a very important aspect of the other side of the insurance business -insurers invest the premiums they receive from insured until losses need to be paid -income from the investments is an offset in the premium calculations

investments

securing the best rate of return on the assets entrusted to the insurer by the policyholders seeking security investment income is the significant part of total income in most insurance companies -liabilities accounts must be maintained to cover future claims and other obligations such as taxes and premium services -assets must be maintained to cover the reserves and still leave the insurer with an adequate net worth in form of capital and surplus

proportional (pro rata) reinsurance

situation in which the reinsurer prespecified percentage of both premiums and losses expenese are also shared in accord with

brokers

solicits business from the insured and also acts as the insureds legal agent when the business is placed with an insurer -some states, brokers are required to be agents of the insurer -brokers do not have ongoing contracts with insurers-their sole obligation is to the client -brokers are more significant part of the marketing mechanism in commercial property, liability, employee benefits, and marine insurance THAN in personal lines of insurance -operate in local or regional basis, whereas others are national or international in their operations -brokers are always looking for unique product designs, but gaining access to innovative products and actually putting them into use are two diff things -each broker selects three fave insurers -the brokers concern is the underwriting standards of their insurers (EX: a broker would like to be able to place a client who takes Prozac with an insurer that covers such clients)

premium elements

the adjustments for various factors in life insurance premiums

loss development

the calculation of how amounts paid for losses increase (or mature) over time for the purpose of future projection

assuming insurer

the company taking over the risk in a reinsurance agreement

ceding insurer

the company transferring risk in a reinsurance agreement

rate calculations

the computation of how much to charge for insurance coverage once the ultimate level of loss is estimated plus factors for taxes, expenses, and returns on investments

capital and surplus

the equivalent of equity on the balance sheet of any firm-the net worth of the firm, or assets minus liabilities

claim adjuster

the person who represents the insurer when the policyholder presents a claim for payment -investigating the circumstances surrounding loss -determine whether the loss is covered or excluded under the terms of the contract - deciding how much should be paid if loss is covered -paying valid claims promptly -resisting invalid claims

underwriting

the process of classifying the potential insureds into the appropriate risk classification in order to charge the appropriate rate -An underwriter decides whether or not to insure exposures on which applications for insurance are submitted -group and individual underwriting -for group underwriting, the group characteristics , demographic, and past losses are judged -because individual insurability is not examined, even very sick people such as AIDS patients can obtain life insurance through group policy -for individual underwriting, the insured has to provide evidence of insurability in areas of life and health insurance or specific details about property and automobiles for property/casualty lines of business - an individual applicant for life insurance must be approved by the life insurance underwriter; sometimes lengthy -classifies insured into risk categories to determine appropriate rate -Two major controversies: the need for info (more or less info is a regulatory matter) and use of credit rating

clims adjusting

the process of paying insureds after they sustain losses

Prices and Reserves property/casualty lines- loss development

the rates or premiums for insurance are based first and foremost on the past experience of losses -calculate using various procedures and techniques -the most modern techniques include sophisticated regression analysis and data mining tools - in some insurance lines (long tail lines), claims are settled over a long period; company must estimate its future payments before it can determine losses -the payments still pending and will be paid in the future are held as a liability for the insurance company and are called loss reserves or pending (or outstanding) losses

mass merchandising

the selling of insurance by mail, telephone, tv, or by email -often involves a sponsoring org such as an employer, trade association, uni, or creditor -you are likely to be asked to respond directly to the insurer

service

the ultimate indicator on which the quality of the product provided by insurance depends -an agents or brokers advice and an insurers claim practices are the primary services that the typical individual or business needs -prompt responses to inquiries concerning changes in the policy, the availability of other types of insurance, changes of address and other routine matters

redlining

when an insurer designates a geographical area in which it chooses not to provide insurance or to provide it only at higher prices