Finance 431:
Property-Liability Insurance
Lecture 2:
Overview of Insurance Operations
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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
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
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
What Type of Insurer is State
Farm?
A)
B)
C)
D)
E)
Stock insurance company
Mutual insurance company
Reciprocal exchange
Captive insurer
None of the above
What Type of Insurer is Allstate?
A)
B)
C)
D)
E)
Stock insurance company
Mutual insurance company
Reciprocal exchange
Captive insurer
None of the above
What Type of Insurer is CNA?
A)
B)
C)
D)
E)
Stock insurance company
Mutual insurance company
Reciprocal exchange
Captive insurer
None of the above
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
For Illinois Policyholders What
Type of Company is Sun Life of
Canada?
A)
B)
C)
D)
E)
Domestic
Foreign
Alien
Extraterrestrial
None of the above
Principal Steps in Risk Management
1. Identify loss exposures
2. Measure loss exposures
3. Evaluate the different methods for
handling the risk
•
•
•
Risk assumption
Risk transfer
Risk reduction
4. Select a method
5. Monitor results and implement necessary
changes
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
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
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
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
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
Measurement of Insurer
Performance
Profit Measurement
Problems in Measuring Profitability
Catastrophes
Loss Reserve Inaccuracy
Premium Volume
Impact of Growth
Components of Profit
Measurement
Expense Ratio
Loss Adjustment Expenses/Earned Premium
Other Expenses/Written Premium
Loss Ratio
Incurred Losses/Earned Premium
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
Combined Ratio Example
Written Premium
Earned Premium
Incurred Losses and LAE
Underwriting Expenses
Statutory Combined Ratio
76 + 19 = 100%
95
95
Trade Basis Combined Ratio
76 + 19 = 99%
95
100
$100 million
95 “
76
“
19
“
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)
Property-Liability Industry Profitability
Year
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
Combined
Ratio
105.8
101.6
106.0
108.0
110.4
115.9
107.4
100.1
98.9
101.2
92.6
Operating
NII/EP
14.4
15.3
14.6
14.0
14.0
12.2
11.2
10.2
9.7
12.0
12.3
Ratio
91.4
86.3
91.4
94.0
96.4
103.7
96.2
89.9
89.2
89.2
80.4
Source: Best’s Aggregates and Averages Property/Casualty Edition
2007 U.S. Industry Ratios pp. 90-92
What elements of investment
income are omitted in the
operating ratio calculation on the
prior exhibit?
A)
B)
C)
D)
E)
Realized capital gains and losses
Unrealized capital gains and losses
All capital gains and losses
Expenses associated with investments
None of the above
Measurement of Insurer
Performance
Meeting Customers’ Needs
Meeting Legal Requirements
Meeting Social Responsibilities
Functions Required to Meet
Needs
Marketing
Underwriting
Claims
Loss Control
Premium Auditing
Reinsurance
Actuarial
Investments
Interdependence Among
Functions
Marketing and Underwriting
Underwriting and Loss Control
Loss Control and Marketing
Claims and Other Departments
Actuarial and Other Departments