Finance 431: Property-Liability Insurance Lecture 2: Overview of Insurance Operations

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Finance 431Property-Liability
InsuranceLecture 2 Overview of Insurance
Operations
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Registering Your i-clicker

• Go to www.iclicker.com (as listed on the back of
  your i-clicker)
• Click on Register (on left side of page)
• Input your name as requested
• Your Student ID is your Net id (your U of I
  e-mail address before the _at_) Do not input your
  UIN
• Input your Clicker ID which is listed on the back
  of your i-clicker
• Type in the verification word as indicated
• Click Enter

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Overview of Insurance Operations

• Types of Insurers
• Risk Transfer Process
• Objectives of Insurers
• Constraints of Achieving Objectives
• Measurement of Insurer Performance
• Functions Required to Meet Needs
• Interdependence Among Functions

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Types of Insurers

• Legal Form of Ownership
• Proprietary Insurers
• Stock Insurance Companies
• Lloyds
• Insurance Exchanges
• Cooperative Insurers
• Mutual Insurance Corporations
• Reciprocal Exchanges
• Captive Insurers
• Risk Retention Groups and Purchasing Groups
• Fraternal Organizations

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Types of Insurers

• Other Insurers
• Health Maintenance Organizations (HMOs)
• Blue Cross-Blue Shield
• Banks
• Pools and Associations
• Governmental Insurers
• Workers Compensation
• Mine Subsidence
• Federal Insurance Programs

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What Type of Insurer is State Farm?

• A) Stock insurance company
• B) Mutual insurance company
• C) Reciprocal exchange
• D) Captive insurer
• E) None of the above

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What Type of Insurer is Allstate?

• A) Stock insurance company
• B) Mutual insurance company
• C) Reciprocal exchange
• D) Captive insurer
• E) None of the above

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What Type of Insurer is CNA?

• A) Stock insurance company
• B) Mutual insurance company
• C) Reciprocal exchange
• D) Captive insurer
• E) None of the above

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Place of Incorporation and Licensing Status

• Domestic - incorporated in that state
• Foreign - incorporated in another state
• Alien - incorporated in another country
• Admitted - licensed to provide insurance in a
  state
• Nonadmitted - operating without a license
• Surplus lines brokers can place business with
  nonadmitted insurers if admitted insurers will
  not write the coverage

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For Illinois Policyholders What Type of Company
is Sun Life of Canada?

• A) Domestic
• B) Foreign
• C) Alien
• D) Extraterrestrial
• E) None of the above

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Principal Steps in Risk Management

• Identify loss exposures
• Measure loss exposures
• Evaluate the different methods for handling the
  risk
• Risk assumption
• Risk transfer
• Risk reduction
• Select a method
• Monitor results and implement necessary changes

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What step in the risk management process would
involve estimating that the chance of getting
into an automobile accident over the next year is
10?

• A) Identify loss exposures
• B) Measure loss exposures
• C) Evaluate the different methods for handling
  the risk
• D) Select a method
• E) Monitor results and implement necessary
  changes

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What step in the risk management process would
involve obtaining a quote for auto insurance?

• A) Identify loss exposures
• B) Measure loss exposures
• C) Evaluate the different methods for handling
  the risk
• D) Select a method
• E) Monitor results and implement necessary
  changes

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Risk Transfer Process

• Risk Manager
• Consultants
• Insurance Agents and Brokers
• Insurers

• Insurance Functions
• Policy contract development
• Pricing
• Marketing
• Underwriting
• Loss adjustment
• Loss control
• Reinsurance
• Investments

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Objectives of Insurers

• Profit Objective
• Customer Needs Objective
• Determinants of Insurance Cost
• 1. Losses
• 2. Expenses
• 3. Profit
• Legal Requirement Objective
• Humanitarian and Societal Objectives
• Contributions
• Employee benefits

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Constraints on Achieving Objectives

• Internal
• Efficiency
• Expertise
• Size
• Financial Resources
• Miscellaneous
• Market recognition
• Poor reputation

• External
• Regulation
• Public Opinion
• Competition
• Economic Conditions
• Recession
• Inflation
• Investment results
• Distribution Systems
• Miscellaneous
• Catastrophes

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Measurement of Insurer Performance

• Profit Measurement
• Problems in Measuring Profitability
• Catastrophes
• Loss Reserve Inaccuracy
• Premium Volume
• Impact of Growth

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Components of Profit Measurement

• Expense Ratio
• Loss Adjustment Expenses/Earned Premium
• Other Expenses/Written Premium
• Loss Ratio
• Incurred Losses/Earned Premium

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Components of Profit Measurement

• Combined Ratio
• Statutory
• Incurred Losses LAE Incurred Expenses
• Earned Premiums Earned Premiums
• Trade Basis
• Incurred Losses LAE Incurred Expenses
• Earned Premiums Written Premiums

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Combined Ratio Example

• Written Premium 100 million
• Earned Premium 95
• Incurred Losses and LAE 76
• Underwriting Expenses 19
• Statutory Combined Ratio
• 76 19 100
• 95 95
• Trade Basis Combined Ratio
• 76 19 99
• 95 100

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Components of Profit Measurement

• Investment Earnings
• Investment Income
• Interest
• Dividends
• Rents
• Realized Capital Gains or Losses
• Unrealized Capital Gains or Losses
• Operating Ratio
• Combined Ratio (Investment Earnings/Earned
  Premium)

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Property-Liability Industry Profitability

• Combined Operating
• Year Ratio NII/EP Ratio
• 1996 105.8 14.4 91.4
• 1997 101.6 15.3 86.3
• 1998 106.0 14.6 91.4
• 1999 108.0 14.0 94.0
• 2000 110.4 14.0 96.4
• 2001 115.9 12.2 103.7
• 2002 107.4 11.2 96.2
• 2003 100.1 10.2 89.9
• 2004 98.9 9.7 89.2
• 2005 101.2 12.0 89.2
• 2006 92.6 12.3 80.4
• Source Bests Aggregates and Averages
  Property/Casualty Edition 2007 U.S. Industry
  Ratios pp. 90-92

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What elements of investment income are omitted in
the operating ratio calculation on the prior
exhibit?

• A) Realized capital gains and losses
• B) Unrealized capital gains and losses
• C) All capital gains and losses
• D) Expenses associated with investments
• E) None of the above

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Measurement of Insurer Performance

• Meeting Customers Needs
• Meeting Legal Requirements
• Meeting Social Responsibilities

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Functions Required to Meet Needs

• Marketing
• Underwriting
• Claims
• Loss Control
• Premium Auditing
• Reinsurance
• Actuarial
• Investments

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Interdependence Among Functions

• Marketing and Underwriting
• Underwriting and Loss Control
• Loss Control and Marketing
• Claims and Other Departments
• Actuarial and Other Departments