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. Learning Objectives :
Understand
1. Type of Insurance Organizations
2. Organizational Structure of Insurance Companies
3. Functions of Insurers
Structure :
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. 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. 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. 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. 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. 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. 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. 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. 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. 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 the
legal 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 of
premiums by members or ii} sub-ordinated loans from
attorney-in-fact. He is paid a % of premiums.
11. Lloyd’s of London :
Lloyd’s of London is not a company but an
association and its members engage in
insurance. It is the largest & world’s best
known 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. Selecting the form of Organization :
Selection is governed by the laws of the
region.
In India insurer has to register under
Companies Act 1956 and obtain license from
“Insurance Regulatory & Development
Authority”
Various arguments exist favoring stock
insurer or mutuals as better form of
organization.
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. 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. Selecting the form of Organization :
Demutualization –
Sometimes mutual insurance company converts
itself into a stock insurance company. This
process is termed demutualization.
The rationale for demutualization –
1] tax advantages.
2] opportunity to raise funds from the
market and thus stabilize financial
strengths.
16. Selecting the form of Organization :
Demutualization – the rationale – contd.
3] secure flexibility in designing
capital structure.
4] scope for setting down stream
holding companies
The process faces problems related to legal,
cost, regulatory, tax and accounting
aspects.
Though demutualization of insurance
companies is not seen in India,
demutualization of stock exchanges is
visible.
17. Organizational Structure of Insurance Companies :
Must coincide with business model of the
insurer. It depends on parameters like
coverage
location
stock or mutual
level of authority
legal restrictions
Board of Directors is in overall charge of
the company and provides all policy
decisions.
18. Organizational Structure of Insurance Companies :
The Board of Directors is assisted by
several officers like
General Manager.
Company Secretary.
Head Management Services
Investment Committee or Manager
HR Manager
It has offices at HQ, Regions, Main & Sub
branches whose number depend upon size and
geographic coverage of operations.
19. Organizational Structure of Insurance Companies :
The Board of Directors is further assisted
by several heads of functions like
Actuary.
Agency.
Legal
Finance
Advertising.
Medical.
Accounting.
Underwriting.
and other important functions.
20. Organizational Structure of Insurance Companies :
Various arguments exist favoring centralized
or decentralized forms of organization
Centralized Organization
Advantages :
♣ Uniformity of Policy.
♣ Most economic use of mechanized methods.
♣ Branches relieved of routines & focus on
selling.
Disadvantages :
♣ Higher costs.
♣ Poor services as administration away from
policy holders.
21. Organizational Structure of Insurance Companies :
Various arguments exist favoring centralized
or decentralized forms of organization
Decentralized Organization
Advantages :
♣ Good local service provided.
♣ Local officials best understand local
conditions.
♣ Branch staff become more knowledgeable.
Disadvantages :
♣ Many experts required & hence high costs.
♣ Branches drowned in routine work.
22. Functions of Insurers :
Various tasks in insurance organization
♣ function, including sales, underwriting,
administration, claims etc.
♣ product, including life, property, and
liability, marine insurance etc.
♣ territory including local, regional,
national & international.
♣ customer type, including individuals,
commercial enterprises, private or
government institutions etc.
♣ specialists complementing insurance like
general counsel, actuarial, statistics,
engineering & administration.
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. 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. 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. Functions of Insurers :
Accounting
Insurance 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. 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. Functions of Insurers :
Legal
Insurance, 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. Functions of Insurers :
Claims
Handling 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. 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. 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.
33. Activity :
Visit nearby office of an insurance
company to find out the organization
structure with emphasis on
its different departments.
their activities
designations of senior managers.
- On return draw organization chart of that
company.
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. Suggested Reading
Fundamentals 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. The End !
Next Chapter Two
Product Design &
Development
Good Luck!
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