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Welcome To The IEI-Sponsored

Insurance WorkshopMTSU

June 4-6, 2007

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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)

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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

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Overview of Insurance Operations (con’t)

Classification Type

Legal FormOf

Ownership

—

Place Of

Incorporation

StockMutualOther

—DomesticForeignAlien

Classifications and Types of Insurers

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Overview of Insurance Operations (con’t)

Earn a Profit Meet Consumer Needs Comply with Legal Requirements Fulfill Duty to Society

Goals of Insurance Companies

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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

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Overview of Insurance Operations (con’t)

Measuring ProfitsPremiumsExpense RatioLoss RatioCombined RatioOperating Profit or Loss

Measuring Insurance Performance

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Overview of Insurance Operations (con’t)Measurement of Profits

Property-Casualty Insurance Combined Ratio, 1996 to 2001

Year Combined Ratio1996 106.1

1997 101.9

1998 106.0

1999 107.8

2000 110.3

2001 115.9

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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 Investment Operating 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

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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

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Insurance Marketing

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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

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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

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Insurance Marketing (cont’d)Independent Agency System

Independent Contractor Represents Many Companies Owns Policy Expirations Compensation Methods

Commission Contingent Commissions Bonuses Fees Combination

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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

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Underwriting

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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

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Underwriting (cont’d)

Line Staff

Types of Underwriters

Underwriting Results

Financial Measures Non-financial Measures

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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

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The Claim Function

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The Claim Function

Comply With the Contractual Promise Support the Insurer’s Profit Goal

Goals

Types of Adjusters Staff Independent Public Producers

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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

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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

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Actuarial Function

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Duties Make Rates Determine Reserves

Actuarial Function

Ratemaking Goals Be Stable Be Responsive Provide for Contingencies Promote Loss Control Be Simple

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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

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Reinsurance

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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

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Types of Reinsurance Facultative Treaty

Reinsurance (cont’d)

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Conclusions