Overview of Insurance Operations

1. 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

2. 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

3. 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

4. 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

5. 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

6. Risk Manager Consultants Insurance Agents and Brokers Insurers Insurance Functions Policy contract development Pricing Marketing Underwriting Loss adjustment Loss control Reinsurance Investments Risk Transfer Process

7. 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

8. 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 Constraints on Achieving Objectives

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

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

11. 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

12. 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

13. 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

14. Property-Liability Industry Profitability Combined Operating Year Ratio NII/EP Ratio 1991 108.8 15.4 93.4 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 15.3 86.3 1998 106.0 14.6 91.4

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

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

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