7.5: Introduction

The decision to seek coverage is only the first of many important choices you will have to make about insurance. Whether you are acting as your own personal risk manager or on behalf of your business, it will help you to know how insurance companies work. This chapter will explain the internal operations of an insurance company and will dispel the notion that insurance jobs are all sales positions. The marketing aspect of insurance is important, as it is for any business, but it is not the only aspect. An interesting and distinctive characteristic of insurance is that it is really a business with two separate parts, each equally important to the success of the operation. One part is the insurance underwriting business; the other is the investment of the funds paid by insureds.

In this chapter we cover the following:

1. Links
2. Insurance operations: marketing, underwriting, and administration
3. Insurance operations: actuarial analysis and investments
4. Insurance operations: reinsurance, legal and regulatory issues, claims adjusting, and management

Links

As we have done in each chapter, we first link the chapter to the complete picture of our holistic risk management. As consumers, it is our responsibility to know where our premium money is going and how it is being used. When we transfer risk to the insurance company and pay the premium, we get an intangible product in return and a contract. However, this contract is for future payments in case of losses. Only when or if we have a loss will we actually see a return on our purchase of insurance. Therefore, it is imperative that the insurance company be there when we need it. To complete the puzzle of ensuring that our holistic risk management process is appropriate, we also need to understand how our insurance company operates. Because the risks are not transferred to just one insurer, we must learn about the operations of a series of insurers—the reinsurers that insure the primary insurers. The descriptions provided in this chapter are typical of most insurers. However, variations should be expected. To grasp how we relate to the operations of a typical insurer, look at Figure \(\PageIndex{1}\). The figure describes the fluid process of the operations within an insurer. Each function is closely linked to all the other functions, and none is performed in a vacuum. It is like a circular chain in which each link is as strong as the next one. Because insurers operate in markets with major influences, especially catastrophes (both natural and human-made), the external conditions affecting the insurers form an important part of this chapter. The regulatory structure of insurers is shown in the second part of the link in Figure \(\PageIndex{1}\), which separates the industry’s institutions into those that are government-regulated and those that are non- or semiregulated. Regardless of regulation, however, insurers are subject to market conditions.

Figure \(\PageIndex{1}\): Links between the Holistic Risk Picture and Insurance Company Operations

Thus, when we select an insurer, we need to understand not only the organizational structure of that insurance firm, we also need to be able to benefit from the regulatory safety net that it offers for our protection. Also important is our clear understanding of insurance market conditions affecting the products and their pricing. Major rate increases for coverage do not happen in a vacuum. While past losses are important factors in setting rates, outside market conditions, availability, and affordability of products are also very important factors in the risk management decision.