1. Functions of Insurers
1. Ratemaking
2. Production
3. Underwriting
4. Loss Settlement
5. Investment

2. Basic Concepts in Ratemaking
Rate Price charged per unit of protection
Premium Determined by multiplying rate by units of protection purchased
Gross Rate Composed of two parts, designed to pay losses and expenses
Pure Premium Portion of the Gross Rate designed to pay losses
Loading Portion of Gross Rate designed to cover expenses of operation

3. Pure Premium
Total Losses Exposure Units = Pure Premium
$3,000, ,000 = $30

4. Converting Pure Premium to Gross Rate
Expense part of the rate Expense Ratio: expressed as percentage of the final rate
Permissible Loss Ratio: 1 minus expense ratio
Pure Premium Gross Rate: 1 _ expense ratio
$ = = $

5. Underwriting
1. Basic purpose: avoid adverse selection
2. Relationship of underwriting to adequacy of rates
3. Exposure that is unacceptable at one rate may be acceptable at another

6. Sources of Underwriting Information
1. The application
2. Information from the agent or broker
3. Investigations
4. Information bureaus
5. Physical examinations or inspections

7. Postselection Underwriting
1. Postselection underwriting (or renewal underwriting) occurs when the insurer decides whether to continue insurance.
2. Insurer may decline to renew insurance or may offer narrower coverage.
3. Because cancellation or nonrenewal can impose hardship on insured, some states limit the insurer’s right to exercise these options.
4. When the option of postselection underwriting is limited, insurers may be more selective in initial underwriting.

8. Adjusters
1. Staff adjusters
2. Adjusting bureaus
3. Independent adjusters
4. Public adjusters

9. Adjustment Process
1. Notice
2. Investigation
3. Proof of loss
4. Payment or denial

10. Composition of Insurers’ Investments
Life Property Type of Investment Insurers & Liability
Corporate Stocks 20.6% 21.2%
Corporate Bonds 41.0% 18.3%
Government Bonds 17.1% 51.2%
Mortgages 8.9% 0.4%
Real Estate 2.1% 1.3%
Policy Loans 4.3%
Miscellaneous % %
100.0% 100.0%

11. Reinsurance
1. Nature of reinsurance
2. General approaches
facultative
treaty
3. Types of treaties
automatic

12. Reinsurance in Property & Liability Insurance
1. Proportional reinsurance
Quota-share
Surplus-share
2. Excess-of-loss reinsurance

13. Reinsurance in Life Insurance
Term insurance approach
(reinsure difference between face value of policy and amount of reserves)
2. Coinsurance approach (quota share)

14. Functions of Reinsurance
1. Spreading of risk
2. Financing function - surplus relief

15. Miscellaneous Insurer Functions
Legal
Accounting
Engineering