Insurer Operations

Reasons for Premium Auditing

To determine correct premiums Collect ratemaking data To meet regulatory requirements To deter and detect fraud To reinforce confidence of insureds To obtain additional information

Predictive Analytics

Used to develop models that predict future events or behaviors

Hit Ratio

used to determine how well UW are meeting their sales goals

Marketing Information

1. Internal Accounting - Provides report and analysis capability based on transactions associated with sales activity 2. Marketing Monitoring System - provides intelligence about the external environment to inform senior management about information developments and changing condition

Product Development Steps

1. Opportunity Assessment 2. Development of Contract, Underwriting, and Pricing 3. Business Forecast 4. Regulatory Requirements 5. Distribution Requirements 6. Introduction to Marketplace

Market Development (Marketing Segment Selection Consideration)

Accessible Substantial Responsive

Importance of Accurate Premium Audits

An accurate audit provides may advantages to the insured and the insurer- such as account retention, financial positions, operational efficiency, goodwill and customer relations. Errors in audits can reduce the insureds confidence with the company and insurance mechanisms in general . This loss of confidence can reduce the insureds cooperation with the insurer and their perception of insurance as an appropriate risk management option.

Geographic Area

An insurer that chooses a regional area for operation can more narrowly focus its marketing intelligence to address customers insurance needs in the smaller area.

Constraints in Establishing Underwriting Policy

An insurers underwriting policy promotes the type of insurance anticipated to produce a growing and profitable book of business. However, various factors constrain what an underwriting policy can accomplish. * Financial Capacity *Reinsurance *Regulation *Personnel

Auditing the Books and Records

Auditor's expertise with classification questions can help underwriters maintain the proper classifications of the insured's operations and align the deposit premium with loss exposures covered by the policy. Deposit premium- the amount the primary insurer pays the reinsurer pending the determination of the actual reinsurance premium owed.

Premium Auditing Contributions

Auditors may be the only insurer representative to meet the insureds , see their operations, and review their financial records. This direct contact not only significantly influences the insured's impression of the insurer, but also provides a channel to communicate relevant information to other insurer functions such as : underwriting, marketing and sales, claims , risk control

Finding and Evaluating Books or Records

Auditors must decide which records provide the necessary information most efficiently and reliably. They must evaluate the accounting system to determine record accuracy and to identify any alternative sources to confirm the data. Premium Pay- a payroll system that increases the regular hourly wage rate for the night shift or other special conditions.

Determining Employment Relationships

Auditors must determine those employees covered by the types of insurance for which premiums are based on payroll. Employees payroll might constitute the premium base for both workers compensation and general liability, but the definition of "employee" is not necessarily the same for both coverages. The premium basis for wc include payroll for every person considered an employee under wc laws. Auditor must distinguish between employees and independent contractors.

Meet Regulatory Requirements/Deter & Detect Fraud

Audits are required to meet WC regulations. Insurers must audit records of insureds that meet certain criteria (such as size or type) within a certain time frame- usually 3 years. Fraud- insureds are less likely to submit false or misleading information to an insurer when they know the info might be checked and independently verified by a premium auditor.

MGA

Authorized agent of the primary insurer that manages all or part of the primary insurer's insurance activities, usually in a specific geographic area

Reviewing Operations - Auditing the Risk

Before they look at the books, auditors determine the nature of the operations insured; observe the nature of the operation and compare it to similar businesses, looking for classifications that might not be shown on the policy. May note any organizational changes and are always alert to other clues about the nature and direction of the insured's business. Auditing the risk rather then auditing the policy- by reviewing the operations, auditors note what exposures exist and report any changes or additional exposures, both new and not previously identified to the underwriter.

Fulfill Duty to Society

Companies benefit society by providing financial resources to help individuals and businesses recover from accidental losses. Preventing losses is preferable. Insurers have an ethical obligation to use their expertise wisely. By assisting insureds in preventing or reducing accidental losses, insurers pursue humanitarian goals and benefit society.

Planning

Companies cannot afford to audit every policy. In some cases, an insurer might determine that an audit is not worth the cost and elect to waive it. (regulation, size, prior endorsements, and prior audits are taken into account) Voluntary report- form that insured completes and returns to the audit department. Once the report is received, the company can chose to accept it (to perform a two-year audit at the end of the next policy period) or to initiate an immediate field audit to confirm the voluntary report. Field audit- examination of books and records at the insured's premises. Auditors must judge how long each audit will take and decide how to schedule appointments.

Reinforce Confidence of Insureds

Competent audits can contribute to the insureds confidence that they are receiving fair treatment. Insureds appreciate the due care exercised when collecting and verifying data. An insured with a favorable impression of the insurer is less likely to look for another insurer at renewal time or when the need for additional coverage arises. Having gained from the audit process a greater understanding of how the premium is determined , an insured might improve record keeping , especially when having properly organized records reduces the premium charges.

High Hit Ratio

Competition is easing Rates are inadequate Coverage is broader than other insurers Selection criteria are deteriorating Good relationship between between insurer and the producer

Low Hit Ratio

Competition is increasing Rates are high Coverages or forms are too restrictive Service is poor Poor relationship between the insurer and the producer

Risk Control Services

Conducting physical surveys- building construction (types), workers occupations, site diagrams, and fire protection systems. Performing risk analysis and improvement Developing safety management programs

Developing Safety Management Programs

Coordinated by senior risk control staff, who generally have the advanced technical and communication skills needed for in-depth consultation work. Begins with a complete evaluation of the insureds operations. A experienced risk control specialist assists the insured in establishing risk control goals, selecting appropriate risk control measures, organizing the resources necessary to implement the chosen risk control measures and establishing procedures to monitor the program.

Insurer Marketing Differentiations

Customer Focused Products and Services Size Geographic Area Distribution System

Risk Control Goals

Earn a profit Meet customer needs Comply with legal requirements Fulfill a duty to society

Unique Factors in Insurance Marketing

Economic Forces Regulatory Controls Demands for Technology-Ease of Use Underwriting Cycle Unanticipated Catastrophic Issues

Producers

Encourage the insureds risk control activities and coordinate the efforts of the insurer's risk control reps with the insured. Many large agencies and brokerage s maintain their own risk control departments, and some can furnish services equivalent to those offered by insurers.

Steps in the Underwriting Process

Evaluate the submission Develop underwriting alternatives Select an underwriting alternative Determine an appropriate premium Implement the underwriting decision Monitor underwriting decision

Factors Affecting Service Levels

Every insurer must decide what levels of risk control services to provide and to which insureds. Several factors influence insurers decisions. Line of insurance Commercial Insured Size- large premium generated by commercial lines and the increased values make it feasible to provide such insureds with risk control services. Types of Loss Exposures Insured Potential Legal Liability

Other distribution channels

Exclusive agency Direct writer marketing system Internet Call centers Direct response Group marketing

Monitoring UW Decisions

Final and ongoing step is monitoring the underwriting decisions. Substantive policy change requests Significant and unique loss exposures Risk control and safety inspection reports Premium audit results

Surplus Lines Broker

Have access to insurers that have the capacity to provide the needed insurance, which might not be available from insurers licensed to do business in the state. This provides a system for insuring specific customers or exposures: higher limits of insurance, unusually broad or specialized coverage, unique loss exposure, unfavorable loss ratio

Customer Focused

Improved through market intelligence

Distriubtion Systems

Independent Agency and Brokerage Marketing Systems Exclusive Agencies Direct Writer

P&C Customers

Individuals, Small Businesses, Middle Market, National Accounts

Collect Ratemaking Data

Insurance advisory organizations collect ratemaking data and project the costs of future losses, or loss costs. To these loss costs, insurers add their own expenses component to determine a final insurance rate. A detailed classification breakdown of exposure units obtained by a premium audit is necessary for the insurer's statistical report to rating bureaus as well as for billing purposes. When organizations has credible statistics - actuaries can calculate appropriate loss costs that are used to establish rates.

Reporting the Finding

No audit is complete until the results are submitted. The premium-related data should be recorded and the billing information clearly summarized so that the audit can be processed and billed immediately. In addition, auditors must show in their reports how they obtained the data to enable others to retrace their audit steps.

Analyzing and Verifying Premium-Related Data

Once premium auditors have obtained the data necessary for calculating the premium, they must decide whether the data are reasonable. These are some of the questions the premium auditor might ask: Are the data logical? Do the data seem complete? Do the data reflect enough detail for the insured's operations? Are the data consistent with industry averages? Can deviations from expected amounts be explained?

Implementing the UW Decision

Once the uw has evaluated the submission, selected and applied any modifications, and determined the premium, the next step is to implement the uw decisions. Decision is communicated to the producers Issuance of any required documents. Binder or certificate of insurance. Binder- temporary written or oral agreement to provide insurance coverage until a formal policy is issued. (oral or written/ doesn't guarantee coverage/ 90 days) Record data about the applicant and the policy for issuance, accounting, statistical, and monitoring purposes.

Products and Services

Personal or Commercial Lines Property & Liability Package Policies Specialty Lines

Premium Auditing Process

Planning Reviewing Operations Determining employment relationships Finding and evaluating books and records Auditing the books and records Analyzing and verifying premium-related data Reporting the findings

Sources of Information

Producers- usually prequalifies, or field-underwriters, applicants and often has firsthand knowledge of the applicants business operations and reputation. Applications Inspections Reports Government Reports Financial Rating Service Loss Data Premium Audit Report Claims Files

Marketing Planning

Product Proposal and Sales Goals SWOT Marketing Goals Marketing Strategies Projected Outcome

Functions of producers

Prospecting Risk management review Sales Policy issuance Premium collection Customer service Claim handling consulting

Purposes for Underwriting Guidelines

Provide for structured decisions Ensure uniformity and consistency Synthesize insights and experience Distinguish between routine and nonroutine decisions Avoid duplication of effort Ensure adherence to reinsurance treaties and planned rate levels Support policy preparation and compliance Provide a basis for predictive models

Financial Capacity

Refers to the relationship between premium written and the size of the policyholder's surplus, which is the insurers net worth.

Regulation

Regulation affects underwriting policy in several ways: 1. insurers must be licensed and to write insurance in each state they plan to market and sell their products 2. Rates, rules, and forms must be filed with state regulators 3. Some state specifically require underwriting guidelines to be filed. 4. If consumer groups believe that the insurance industry is not adequately served certain geographic areas, regulatory focus on insurance availability can lead to requirements to extend coverage to loss exposures that an insurer might otherwise not write

Marketing Activities

Research Development Information Planning Product Development Advertising and Promotion Customer and PR Sales Fulfillment

Earning a Profit

Risk control activities can help insurers reach their profit goals in several ways: Improving underwriting decisions- by inspecting the premises and operations of insurance applications. Improving premium volume- personnel often recommend risk control measures that can change a marginal account to an acceptable account, thereby increasing the insurer's premium volume while meeting underwriting guidelines. Encouraging insureds to improve risk control Reducing insured's losses Providing an additional revenue source Reducing errors and omissions claims

Cooperation between Risk Control and Insurer Functions

Risk control efforts are most effective when they complement the activities of its other departments and various external organizations. Cooperation between risk control rep and the reps of other functions can improve the quality of info available to an insurer and the services it offers. These are the principle opportunities for risk control cooperation: Underwriting Marketing and sales Premium auditing Claims Producers

Claims

Risk control needs claim experience to direct resources and efforts to crucial areas. The claims department relies on risk control for loss exposures data and background information that can support the loss adjusting process. Risk control staff can use this information for these purposes: Identifying areas for research Targeting loss exposures for additional attention Indentifying characteristics associated with particular types of losses Developing alternatives to control losses

Premium Auditing

Roles of the risk control rep and auditors are similar, because both visit the insured's premises and have direct insured contract. However, risk control reps typically visit the insured at the beginning of the policy period and as needed throughout the policy period, while premium auditors visit at the end of the policy period. During the auditing process, a new exposure or an increase in exposure that is discovered by an auditor can prompt risk control involvement.

Underwriting Alternatives cont.

Selecting an alternative involves weighing a submission's positive and negative features including loss exposures, risk control measures, and management commitment to loss prevention. These factors should also be considered before selecting an underwriting alternative: Underwriting authority Supporting business Mix of business- uw must consider whether accepting the submission supports the insurer's goal for mix of business. Producer relationship Regulatory restrictions

Broker

Sells insurance by representing customers rather than insurers. Representative of the carriers and typically cannot bind coverage Commission and profit sharing

Agents

Sells insurance for several carriers

Meet Customer Needs

Some insurers offer risk control activities in response to the needs of insurance customers- usually their commercial and industrial customers. These needs have resulted partly from the pressures of legislation such as the OSHA, Consumer Products Safety Act, etc. By providing risk control services, the insurer can also experience these additional benefits: Enhance its relationships with producers, staff and customers of the independent agency Increase its own market share as well as that of the agency Attract and retain higher-quality accounts Help the agency and its customers accomplish their goals

Comply with Legal Requirements

Some states require insurers to provide a minimum level of risk control service to commercial insurers. This requirement applies most often to workers compensation but may also exist for other lines of coverage.

Determine Correct Premium cont.

The insurer bears a responsibility to determine the premium correctly. Unless premiums are sufficient for the loss exposures covered, the insurer cannot operate profitably. If however, the insurer overcharges , they will encounter negative reactions when the error is discovered and will probably lose the business. A premium audit provides that accuracy. The insureds have the accounting info or other data that are used to determine the premium base, but they rarely understand insurance manual rules wells enough to present the info in the necessary form. A skilled auditor usually assembles info and determines the actual earned premium.

Determine Correct Premium

The primary reason for premium auditing is to determine the correct premium for the policy period. Some insurance policies have adjustable premiums. When entering a adjustable premium contract, the insured pays a standard premium, which is adjusted the following year based on the actual loss exposure. Adjustable premium policies include a clause that allows the insurer to perform premium audits to determine the actual amount of exposure units on which the premium will be based. Performed for workers compensation, general liability policies, and commercial auto policies. Most often involves liability insurance, some property insurance policies, such as those covering fluctuating inventory values.

Underwriting Alternatives

The second step in the underwriting process is developing underwriting alternatives. Such alternatives include accepting a submission as is, rejecting the submission, or making a counteroffer to accept the submission subject to certain modifications. Require risk control measures Change rates/plans or policy limits Amend policy terms and conditions Use reinsurance

Performing Risk Analysis and Improvement

To support the risk analysis and improvement effort, the insurer's risk control representatives can provide training, information, or counseling services such as : Coordinated safety programs Technical risk-control information resources Workers compensation risk management strategies Fire protection systems testing and evaluation Preconstruction counseling

Activities implemented during market development

Training Problem resolution Process documentation Technical assistance Funding assistance PR campaigns

Marketing Research

Typically done on a project basis

Underwriting Authority

Underwriting authority, insurers generally grant authority in these ways: Experience and positive results Profitability and contractual arrangements. Managing general agents (MGA) when appointed assume decentralized underwriting authority, which capitalizes on an MGA's familiarity with local conditions.

Purpose of Underwriting

Underwriting has multiple purposes. The primary purpose is to develop and maintain a profitable book of business for the insurer. Additional purposes include: Guarding against adverse selection Ensuring adequate policyholders surplus Enforcing underwriting guidelines

Guarding against adverse selection

Underwriting minimize the effects of adverse selection by carefully selecting the applicants whose loss exposures they are willing to insure, charging appropriate premiums for the applicants that they do accept with premiums that accurately reflect the loss exposures, and monitoring applications and books of business for unusual patterns of policy growth or loss.

Market Segmentation

Used to differentiate themselves from other providers - target/niche marketing

Physical Surveys

Walking tour Interview management to discover details that may not be apparent from the tour. Evaluates loss exposures and associated hazards relating to these factors: Fire, windstorm, water damage, burglary Legal liability Employee injuries Benefits: Underwriters gain a better understanding of the loss exposures Insureds can gain a better understanding of its loss exposures and steps that can be taken to prevent or reduce losses, comply with laws and provide a better working environment for employees Insured can be more confident of an adequate recovery if property valuation was a part of the survey

Personnel

companies require the talent of specialists to market their products effectively, underwrite specific lines of business, service their accounts, and pay claims for losses that occur.

Marketing/Sales

evaluating an applicant's premises and operations, interviewing management staff, and evaluating the nature of historical losses, risk control reps can help determine if an applicant's current risk controls are acceptable of if there are ways to improve an accepted applicants risk control. The evaluation can make the difference between an applicants acceptance or rejections

Return on equity

expressed as a percentage by dividing a company's net income by its net worth (book value). Depending on the context, net worth is sometimes called shareholders equity, owners equity, or policyholders surplus. net income/ average policyholder surplus or owners equity

Line underwriter

implementing the steps in the underwriting process. Evaluate new submissions and renewal underwriting. Work directly with insurance producers and applicants Select insureds Classify and price accounts Recommend or provide coverage Manage a book of business Support producers and insureds Coordinate with marketing efforts

Premium-to-surplus ratio or capacity ratio

indicates an insurer's financial strength by relating net written premium to policyholders surplus.

Staff underwriters

manage the risk selection process. Work with line underwriters and coordinate decisions with other departments to manage the insurance product, pricing and guidelines. Research the market Formulate underwriting policy Revise guidelines Evaluate loss experience Research and develop coverage forms Review and revise pricing plans Arrange treaty reinsurance Assist others with complex accounts Conduct underwriting audits Participate in industry associations Conduct education and training

Underwriting

risk control provides info to underwriters that enables them to make better underwriting decisions. This info consists primarily of field inspection reports on the premises and operations of new applicants and existing insureds renewing their policies. Can also help underwriters modify a new applicant's loss exposures to meet eligibility requirements. May be the primary communications link between the underwriter and the insured.

Reinsurance

the availability and cost of adequate reinsurance can influence underwriting policy. Reinsurance treaties may exclude certain types of insurance policies or classes.