Overview of Insurance Operations

1
Overview of Insurance Operations

• RMI 4700
• Insurance Operations
• Robert Klein

8/14/09
2
Outline

• Insurance Concepts Principles
• Types of Insurers
• Risk Transfer Process
• Objectives of Insurers

• Constraints
• Measuring Performance
• Insurer Functions

3
Concepts Principles

• Risk Aversion Risk Premium
• Moral Hazard
• Adverse Selection
• Indemnity
• Conditions for Insurability
• Cost of Capital

4
Industry Sectors Markets

• Property-Casualty
• Personal Lines
• Auto
• Homeowners
• Umbrella Liability
• Commercial Lines
• Multi-peril
• Property
• Liability
• Workers Compensation
• Other

• Life-Health
• Life
• Term, Whole Life, Universal
• Annuities
• Hybrid Products
• Health
• Major Medical
• Disability Income
• Long-Term Care

5
Organizational Structure
Managers
Insurer
Owners
Customers
6
Principal Forms
7
Significant Dimensions

• Managerial Discretion
• Autonomy of managers
• Owner ability to monitor/control managers
• Principal-agent conflicts
• Risk Bearing Capacity
• Ways to raise capital
• Efficiency of capital raising
• Appetite for risk
• Firm Objectives
• Profits
• Survival and growth
• Policyholder value

8
Stocks vs. Mutuals

• Ownership?
• Firm Objectives?
• Managerial Discretion?
• Sources Cost of Capital?
• Appetite for Risk?

9
Insurer Organizational Forms
10
Other Risk-Bearing Entities

• Pools Self-Insured Groups
• Captives
• Risk Retention Groups
• HMOs/PSOs
• Government Insurers
• Investors in Insurance Securitization

11
Other Insurance Service Providers

• Agents
• Brokers
• Financial Planners
• Loss Control Providers
• Third-Party Administrators/Claims
• Internet Marketplaces
• Risk Information Assessment
• e.g., ChoicePoint

12
Risk Transfer Process

• Risk transfer as one element of risk management.
• What is risk transfer?
• Important elements
• layer of risk being transferred
• exclusions
• basis of loss settlement
• conditions
• bundled services

13
Insurer Objectives

• Profits Firm Value
• Solvency/Limit Financial Risk
• Customer Needs
• Legal Requirements
• Social

14
Constraints on Achieving Objectives

• Internal
• efficiency
• expertise
• size/capacity
• financial

• External
• regulation
• public opinion
• economic conditions
• distribution systems

15
Measuring Insurer PerformanceProfitability

• Profit Measures
• Loss Ratio
• Expense Ratio
• Combined Ratio
• Operating Ratio
• Profits on Insurance Transactions
• Return on Equity

• Elements
• Premiums
• Investment Income
• Losses
• Expenses

16
Industry Performance
17
Insurer Functions

• Product Design
• Marketing Distribution
• Underwriting Pricing
• Claims Adjustment
• Loss Control
• Reinsurance
• Investment

18
Coordination and Bundling

• Insurer functions are interdependent and should
  be coordinated to achieve objectives.
• Bundling and unbundling of functions in insurance
  contracts is an important element in meeting
  customer needs efficiently and being competitive.

19
The Game Plan

• Examine Insurer Functions.
• Explore External Environment.
• Study Financial Risk, Financial Analysis
  Financial Management.
• Integrate These Elements in Developing Firm
  Strategy.