Introduction to Insurance Domain / Industry

Insurance is a complicated and intricate mechanism where risks are transferred from one individual to a group and loss is shared on equitable basis by all members of the group. This blog discusses in brief about few core functions / operations related to Insurance industry.

Insurance Types
There are in general two types of insurance (1) Life Insurance (2) General Insurance.
Life Insurance can be divided into two classes - (a) provide pure life insurance protection, called term insurance (b) includes a saving or investment element

Few of the common General insurances are - Motor Insurance, Property Insurance, Personal Accident Insurance, Medical and Health Insurance, Travel Insurance, Credit Insurance, Third Party Insurance, Liability Insurance.

Key Insurance Functions
It is always better to know some unique facets of insurance company operations. The unique nature of insurance sector requires below specialized functions that do not exist in other businesses.

Ratemaking / Insurance Pricing

• The process of predicting future losses and future expenses and allocating these costs among large mass of insured is called ratemaking. The price of insurance is always based on prediction(s)
• A major part of Ratemaking is to identify all characteristics that can predict future losses and accordingly adjust premiums to different risk groups
• Insurance rates are subjected to government regulation. It must not be excessive, discriminatory and should be fairly stable over a period of time
• Rate of insurance and Premium paid by insured are two different things. Usually premium income of the insurer is sufficient to cover future losses and expenses
• Important terms or formulas to understand - pure premium, gross premium, gross rate, loading, expected loss ratio
• There are two types of rates - (a) class rates (b) Individual rates. Class rates are common and applied across large number of people in an area whereas Individual rates are applied for an individual on basis of Judgement, Schedule, Experience and / or Retrospective rates

Production

• It is related to sales and marketing department of insurance. Agent who sells insurance are frequently referred to as producers
• It is the responsibility of this department to select and appoint agents and assists in sales. It renders technical assistance to agents

Underwriting

• It is the process of selecting, classifying and pricing applicants for insurance
• The ratemaking function is performed by actuaries. Actuaries set the insurance rate based on specific variable(s), while underwriters decide which variables apply to a specific insurance applicant
• In the life insurance field, applicants may be classified as standard, preferred, substandard, and uninsurable
• The primary objective of underwriting is to attain an underwriting profit. The objective is to produce a profitable books of business

Claim Settlement

• Basic objectives of any claim settlement are - (a) verification of a covered loss (b) fair and prompt payment of claims (c) personal assistance to the insured
• Adjuster are individuals who investigates losses. They determine the liability and the amount of payment to be made
• Pay or Contest are the two basic options company have when confronted with a claim
• Claim settlement procedure follows simple steps like, (1) Notice of loss (2) Investigation (3) Proof of Loss (4) Payment or denial of claim

Miscellaneous other functions in insurance domain are Investment, Legal, Accounting, Billing, etc.

Methods of insurance

• Co-insurance – risks shared between insurers
• Dual insurance – risks having two or more policies with same coverage (Both the individual policies would not pay separately- a concept named contribution, and would contribute together to make up the policyholder's losses. However, in case of contingency insurances like Life insurance, dual payment is allowed)
• Self-insurance – situations where risk is not transferred to insurance companies and solely retained by the entities or individuals themselves
• Reinsurance – situations when Insurer passes some part of or all risks to another Insurer called Reinsurer

References

1. Insurance Company Operations - By Marya Sholevar
2. Rate Making: How Insurance Premiums Are Set
3. Fundamentals of Risk and Insurance, 11th Edition (Book) - By Therese M. Vaughan