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

2. 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

3. 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

4. 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

5. 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

6. Principal Steps in Risk Management
Identify and analyze loss exposure
Select technique(s) to handle loss exposure
Implement the chosen technique(s)
Monitor results and implement necessary changes

7. 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

8. 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

9. 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

10. Measurement of Insurer Performance
Profit Measurement
Problems in Measuring Profitability
Catastrophes
Loss Reserve Inaccuracy
Premium Volume
Impact of Growth

11. Components of Profit Measurement
Expense Ratio
Loss Adjustment Expenses/Earned Premium
Other Expenses/Written Premium
Loss Ratio
Incurred Losses/Earned Premium

12. Components of Profit Measurement
Combined Ratio
Statutory
Incurred Losses + LAE + Incurred Expenses
Earned Premiums Earned Premiums
Trade Basis
Earned Premiums Written Premiums

13. Combined Ratio Example
Written Premium $100 million
Earned Premium “
Incurred Losses and LAE “
Underwriting Expenses “
Statutory Combined Ratio
= 100%
Trade Basis Combined Ratio
= %

14. 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

15. Property-Liability Industry Profitability
Combined Operating
Year Ratio NII/EP Ratio
Source: Best’s Aggregates and Averages Property/Casualty Edition U.S. Industry Ratios pp

16. Measurement of Insurer Performance
Meeting Customers’ Needs
Meeting Legal Requirements
Meeting Social Responsibilities

17. Functions Required to Meet Needs
Marketing
Underwriting
Claims
Loss Control
Reinsurance
Actuarial
Investments

18. Interdependence Among Functions
Marketing and Underwriting
Underwriting and Loss Control
Loss Control and Marketing
Claims and Other Departments
Actuarial and Other Departments