Functions and Organisations of Insurance


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In this presentation we will deal with Insurance organizations, their operational structure, insurer’s function and key business terms used in this sector.
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Functions and Organisations of Insurance

  1. 1. Learning Objectives : Understand 1. Type of Insurance Organizations 2. Organizational Structure of Insurance Companies 3. Functions of InsurersStructure : 1.1 Type of Insurance Organizations 1.2 Organizational Structures of Insurance Companies 1.3 Functions of Insurers 1.4 Key Terms 1.5 Activity 1.6 Summary 1.7 Suggested Readings
  2. 2. Types of Insurance Organizations :Insurance organizations are classified by basis of risk coverage – life, general [health, property, auto]. their agency system [independent, exclusive, direct selling] formation from legal point of view – stock or mutual.
  3. 3. Types of Insurance Organizations :Stock Companies owned & controlled by common stock holders. they appoint board of directors who in turn engage officers to run operations. profits distributed among stock holders. normally policy holders are eligible for benefit contracted but not dividends.
  4. 4. Types of Insurance Organizations :Mutual Companies normally non-profit organizations. owned by policy holders. initial contribution arranged by them or a financial intermediary which must be repaid. surplus generated is shared by paying dividends or reducing premiums.
  5. 5. Types of Mutual Companies :a] Assessment Mutuals - Policy holders may not pay a premium when policy begins. They are responsible for a premium based on their share of expenses & losses at the end of the period. If an exposure is based on product sales or payrolls, the exact exposure is not known at the start of the policy. Thus policy holders pay their fair share
  6. 6. Types of Mutual Companies :b] Advance Premium Mutuals – Policy holders pay a premium when policy begins. They are eligible for dividend at the end of the period. Their exposure is based on a stable product where exposure does not change during the life of the policy. Increased dividends accrue from less than expected expenses ; investment earnings [loss].
  7. 7. Types of Mutual Companies :c] Factory Mutuals – Factory mutuals provide substantial loss prevention services for insured premises. Those meeting strict safety and construction standards can qualify for coverage. Large up-front and multi year deposits are made which generally tie up funds. If companies qualify, the costs can be reasonable.
  8. 8. Types of Mutual Companies :d] Farm Mutuals – Farm mutuals serve insurance needs of local home owners, farm & other business operators. They are community based. Are owned by policy holders. And are run by a board of directors who are policy holders.
  9. 9. Types of Mutual Companies :e] Perpetual Mutuals – Perpetual mutuals charge a single large advance premium This premium earns enough investment income to cover all future losses and expenses.f] Fraternal Mutuals These are primarily social organizations They serve particular religion, nationality or labour groups.
  10. 10. Reciprocal or Inter-Insurance Exchanges :• This exchange is a not for profit,unincorporated association of individuals.• Its members exchange insurance.• An individual or a corporation is granted thelegal ability to transact business for the group.• This attorney-in-fact carries [and is paid for]all administrative services including underwriting &selling.• Initial capital is obtained from i} prepayment ofpremiums by members or ii} sub-ordinated loans fromattorney-in-fact. He is paid a % of premiums.
  11. 11. Lloyd’s of London :Lloyd’s of London is not a company but anassociation and its members engage ininsurance. It is the largest & world’s bestknown insurer. Because Its underwriters insure “unusual” exposures, which gives it a lot of publicity. It settles, even largest claims, fairly and promptly. It has financial capacity to handle large exposures. It has reputation for innovation & expertise in many technical areas.•
  12. 12. Selecting the form of Organization : Selection is governed by the laws of theregion. In India insurer has to register underCompanies Act 1956 and obtain license from“Insurance Regulatory & DevelopmentAuthority” Various arguments exist favoring stockinsurer or mutuals as better form oforganization.
  13. 13. Selecting the form of Organization : Arguments favoring stock insurer - 1] capital contribution by owners adds to the funds available to absorb unfavorable operations. 2] profit motive of stock companies makes operations effective. 3] independent agents carry operations in the interest of clients. 4] initial premiums tend to be lower.
  14. 14. Selecting the form of Organization : Arguments favoring mutuals - 1] being non profit organizations. They provide economic premiums in the long run. 2] policy holders share the results of favorable operations. 3] since dividends are not paid to “outsiders”, they provide insurance more cheaply.
  15. 15. Selecting the form of Organization : Demutualization –Sometimes mutual insurance company convertsitself into a stock insurance company. Thisprocess is termed demutualization.The rationale for demutualization – 1] tax advantages. 2] opportunity to raise funds from themarket and thus stabilize financialstrengths.
  16. 16. Selecting the form of Organization : Demutualization – the rationale – contd. 3] secure flexibility in designingcapital structure. 4] scope for setting down streamholding companiesThe process faces problems related to legal,cost, regulatory, tax and accountingaspects. Though demutualization of insurance companies is not seen in India, demutualization of stock exchanges is visible.
  17. 17. Organizational Structure of Insurance Companies : Must coincide with business model of theinsurer. It depends on parameters like coverage location stock or mutual level of authority legal restrictionsBoard of Directors is in overall charge ofthe company and provides all policydecisions.
  18. 18. Organizational Structure of Insurance Companies :The Board of Directors is assisted byseveral officers like General Manager. Company Secretary. Head Management Services Investment Committee or Manager HR ManagerIt has offices at HQ, Regions, Main & Subbranches whose number depend upon size andgeographic coverage of operations.
  19. 19. Organizational Structure of Insurance Companies :The Board of Directors is further assistedby several heads of functions like Actuary. Agency. Legal Finance Advertising. Medical. Accounting. Underwriting.and other important functions.
  20. 20. Organizational Structure of Insurance Companies :Various arguments exist favoring centralizedor decentralized forms of organization Centralized OrganizationAdvantages :♣ Uniformity of Policy.♣ Most economic use of mechanized methods.♣ Branches relieved of routines & focus on selling.Disadvantages :♣ Higher costs.♣ Poor services as administration away frompolicy holders.
  21. 21. Organizational Structure of Insurance Companies :Various arguments exist favoring centralizedor decentralized forms of organization Decentralized OrganizationAdvantages :♣ Good local service provided.♣ Local officials best understand localconditions.♣ Branch staff become more knowledgeable.Disadvantages :♣ Many experts required & hence high costs.♣ Branches drowned in routine work.
  22. 22. Functions of Insurers : Various tasks in insurance organization♣ function, including sales, underwriting,administration, claims etc.♣ product, including life, property, andliability, marine insurance etc.♣ territory including local, regional,national & international.♣ customer type, including individuals,commercial enterprises, private orgovernment institutions etc.♣ specialists complementing insurance likegeneral counsel, actuarial, statistics,engineering & administration.
  23. 23. Functions of Insurers : Following departments execute insurer’s functions.1. Actuarial. Is concerned with all the financial functions { calculation of premiums, policy reserves, non-forfeiture values and dividends] of life or health insurance and with rate making in property and liability insurance.
  24. 24. Functions of Insurers : Underwriting. This department is responsible for selecting, classifying and rating risks. The major goal of the function is to select a portfolio of risks that contributes to the profits & surplus of the insurer at an optimum level to achieve equity among policy holders.
  25. 25. Functions of Insurers : Sales & Marketing.Insurance business is a business of law of large numbers. Marketing function arranges to attract a sufficient number of exposures to allow credible ratio prediction.Insurance, being a service business, requires marketing department to play a key role in delivery.
  26. 26. Functions of Insurers : AccountingInsurance accounting is a complex function regulated by laws of the respective countries. The difficult job is to create “reserves for contingencies” which are probabilistic and hence difficult to predict.IRDA has issued formats in which financial statements are to be prepared by insurance companies.
  27. 27. Functions of Insurers : Investing & Financing.Insurance companies are referred to as “closed end investment trusts engaged in the underwriting of risks as a means of obtaining funds for investment.”Large size of investment portfolio provides vital importance to this function.It has to serve twin objectives of optimizing income and capital gains plus minimizing risks.
  28. 28. Functions of Insurers : LegalInsurance, being a contract essentially requires legal department in every assurance organization to maintain order in the multitude of conflicting statutes & court rulings.It is responsible for compliance of various laws including IRDA rules & regulations.
  29. 29. Functions of Insurers : ClaimsHandling claims is also a social responsibility of insurance company.In case of Life the job is not as complex as with property liability where losses are have higher frequency, predominance of partial losses and uncertainty of quantum of loss.
  30. 30. Functions of Insurers : Others – Engineering, Administration, Personnel, Statistical etc.The insurance engineer deals with loss control and prevention. Engineering services are required largely in property & liability insurance.The Administration Manger performs an array of functions from purchasing to mail rooms to storage, office routines to inventory, house keeping, property maintenance etc.
  31. 31. Functions of Insurers : Others – Engineering, Administration, Personnel, Statistical etc. The statistician is an important technician within the company, particularly in property & liability insurance. Their coding and statistical output are important to both actuary and underwriter.
  32. 32. Key terms :Assessment Mutuals. Farm Mutuals.Advance Premium Mutuals Factory Mutuals.Perpetual Mutuals. Fraternal MutualsReciprocal Exchanges. Lloyd’s of LondonOrganization Structure. Insurer Functions
  33. 33. Activity :Visit nearby office of an insurancecompany to find out the organizationstructure with emphasis on its different departments. their activities designations of senior managers.- On return draw organization chart of that company.
  34. 34. To conclude: Insurance organizations can assume varied types of structures. They can be stocks or mutuals. Local laws govern the selection. Mutuals are non-profit organizations owned by policy holders. A stock insurer is owned and controlled by stock holders on business lines. Mutuals offer better premiums in the long run while stock companies are commercial, have large expansion capabilities and are normally run efficiently
  35. 35. Suggested ReadingFundamentals of Insurance – by Mack S. Dorfman, Prentice-Hall, 2002.Perspectives of Insurance – by Irving Pfeffer and David R Klock, Prentice-Hall, 1974.Captive Insurance Companies; Establishment, Operational Management – by PA Bawcutt, Woodhead Falkner Ltd. 1982.
  36. 36. The End ! Next Chapter Two Product Design & Development Good Luck!
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