Chapter 3: Organization of insurer

1-Organization of insurer
Consolidation means that the number of firms in the financial services industry has declined over time because of merger and acquisition.
Convergence means that financial institutions can now sell a wide variety of financial products that earlier were outside their core business area.
An effective organizational structure benefits a company by:
Responsibility
Authority
Accountability
Delegation
The Organization Chart :An organization chart also shows the company’s chain of command, or the structure of authority that flows downward in the organization from the higher levels to the lower levels.
Pyramidal Structure and Levels of Authority:The pyramidal structure illustrates that the authority in a company starts at the top with one person or a small group of people, Authority is then distributed through the chain of command to ever-larger numbers of people throughout out the company.

2- TYPES OF INSURERS ORGANIZATION
Insurance organizations are classified by basis of risk coverage [life, general,health, property, auto]. their agency system [independent, exclusive, direct selling]and formation from legal point of view – stock or mutual.
Stock insurers
Mutual insurers
Lloyd’s of London
Reciprocal exchanges

1. Chapter Three
Organization of insurer
By: Marya sholevar

2. OVERVIEW OF PRIVATE INSURANCE
IN THE FINANCIAL INDUSTRY
The financial services industry consists of thousands
of financial institutions that provide financial products
and services to the public.
The financial services industry is changing rapidly.
Two trends clearly stand out,consolidation and
convergence of financial products and services.

3. OVERVIEW OF PRIVATE INSURANCE
IN THE FINANCIAL INDUSTRY
●
Consolidation means that the number of
firms in the financial services industry has
declined over time because of merger and
acquisition.
●
Convergence means that financial
institutions can now sell a wide variety of
financial products that earlier were
outside their core business area.

4. Organizational of insurance
companies
An effective organizational structure benefits a
company by:
●
Responsibility
●
Authority
●
Accountability
●
Delegation

5. Organizational of insurance
companies
●
The Organization Chart :An organization chart
also shows the company’s chain of command, or the
structure of authority that flows downward in the
organization from the higher levels to the lower
levels.
●
Pyramidal Structure and Levels of Authority:The
pyramidal structure illustrates that the authority in a
company starts at the top with one person or a small
group of people, Authority is then distributed
through the chain of command to ever-larger
numbers of people throughout out the company.

6. TYPES OF INSURERS
ORGANIZATION
Insurance organizations are classified by basis of risk
coverage [life, general,health, property, auto]. their
agency system [independent, exclusive, direct
selling]and formation from legal point of view –
stock or mutual.
●
Stock insurers
●
Mutual insurers
●
Lloyd’s of London
●
Reciprocal exchanges

7. TYPES OF INSURERS
ORGANIZATION
●
Stock Insurers
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.
●
Mutual Insurers
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.

8. TYPES OF INSURERS
ORGANIZATION
●
Lloyd’s of London
Lloyd’s of London is not an insurer, but is the world’s
leading insurance market that provides ser- vices
and physical facilities for its members to write
specialized lines of insurance.
●
Reciprocal Exchange
A reciprocal exchange is another type of private
insurer. A reciprocal exchange (also called an
interinsurance exchange) can be defined as an
unincorporated organization in which insurance is
exchanged among the members (called subscribers).

9. Types of Mutual Insurers
●
Advance premium mutual 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.
●
Assessment mutual 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. An assessment
mutual has the right to assess policyholders an
additional amount if the insurer’s financial
operations are unfavorable.

10. Types of Mutual Insurers
●
Fraternal insurer provides life and health
insurance to members of a social or religious
organization. This type of insurer is also called a
“fraternal benefit society.”

11. Changing Corporate Structure of
Mutual Insurers
●
Increase in company mergers.Mergers occur because of
reducing operating costs and general overheadcosts or changing
the scale or field of business
●
Demutualization means that a mutual insurer is
converted into a stock insurer for the following reasons:
*The ability to raise new capital is increased.
*Stock insurers have greater flexibility to expand by acquiring
new companies or by diversification.
*Stock options can be offered to attract and retain key
executives and employees.
*Conversion to a stock insurer may provide tax advantages.

12. Changing Corporate Structure of
Mutual Insurers
●
Mutual holding company .A holding company is a
company that directly or indirectly controls an
authorized insurer. A mutual insurer is reorganized
as a hold ing company that owns or acquires control
of stock insurance companies that can issue common
stock.
Advantages:
●
Easier and less expensive way to raise new capital.
●
Easily entering to new areas of insurance business.
●
Stock options can be given to attract and retain key
executives and employees.
Disadvantage: The mutual holding structure could
result in a reduction of dividends and other financial
benefits to the policyholders.

13. Important characteristics
Lloyd’s of London
●
Lloyd’s technically is not an insurance company, but
is a society of members who underwrite insurance in
syndicates.
●
The insurance is written by the various syndicates
that belong to Lloyd’s.
●
Lloyd’s is licensed only in a small number of
jurisdictions in the United States. In the other states,
Lloyd’s must operate as a nonadmitted insurer.

14. Important characteristics
Lloyd’s of London
●
New individual members or Names who belong to
the various syndicates now have limited legal
liability.
●
Corporations with limited legal liability and limited
liability partnerships are also members of Lloyd's of
London.
●
Members must also meet stringent financial
requirements.

15. Reciprocal Exchange
●
In its basic form, insurance is exchanged among
themembers; each member of the reciprocal insures
the other members and, in turn, is insured by them.
●
Areciprocal is managed by an attorney-in-fact. The
attorney-in-fact is usually a corporation that is
authorized by the subscribers to perform
administrative duties such as seek new members,
pay losses, collect premiums...
●
Most reciprocals are account for only a small
percentage of the total property and casualty
insurance premiums written and limited number of
lines of insurance

16. Functions of Insurers
The functions of insurer necessarily depend on
The type of business it writes, the degree to which it has shifted
certain duties to others, the financial resources available, the size
and type of organization used, etc.
Functions:
●
Production
●
Underwriting
●
Rate making
●
Managing claims and losses
●
Investing and financing
●
Accounting and other recordkeeping
●
Providing miscellaneous other servicesn Such as legal advice,
marketing research, engineering, and personnel management

17. Centralized & Decentralized
Organizations
In a centralized organization, top management retains
most decision making authority for the entire
company. In a decentralized organization, Top
management shares decision making authority with
employees at lower Hierarchical levels.
Centralized organization
• Most decisions are made by upper-level management
• Lower subordinates possess little authority to make
decisions
Decentralized organization
• General policy is make by upper-level management,
but authority for many types of decisions is
delegated to lower-level subordinates
• Company maintains offices at regional level

18. Organizational structure of insurance
companies
Centralized organizations Advantages
• Policies and actions tend to be consistent
• Decisions are made by central authority
• Reduce certain administrative costs
Decentralized organizations Advantages
• Manager/staff can respond to situations quickly
• Increase manager’s/staff’s morale
• Provide with experience that is useful later in their
careers

19. Traditional Ways Insurers Organize
Work Activities
●
Organization by Function:
An insurance company that is organized by function
differentiates its major divisions by the work that the
divisions perform.
●
Organization by Product
A life insurance that is organized by product
distributes work according to the company’s line of
insurance products.
●
Organization by Territory
A company that is organized by territory determines
its major divisions according to the geographic areas
in which it operates.

20. Traditional Ways Insurers Organize
Work Activities
●
Organization by Profit Center or Strategic
Business Unit: A profit center is a line of business
that [1] is evaluated on its profitability, [2] is
responsible for its own revenues and expenses, and
[3] makes its own decisions regarding its operations.

21. Alternative Organizational Shapes
●
Hourglass Organization
●
Cluster Organization
●
Network Organization