Functions and Organisations of Insurance

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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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,

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
Kor benefit contracted but not

dividends.

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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.

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5. Types of Mutual Companies :

a] Assessment Mutuals -

=
u

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

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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].

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7. Types of Mutual Companies :

c] Factory Mutuals -

=~

=~
=~
u

Factory mutuals provide substantial
loss prevention services for insured
premises.

Those meeting siert 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.

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8. Types of Mutual Companies :
dj Farm Mutuals -

S 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 premiumaearns 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.

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10. Reciprocal or Inter-Insurance Exchanges :

<= This exchange is a not for profit,
unincorporated association of individuals.

+ Its members exchange insurance.

e 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.

e 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 :

3% Selection is governed by the laws of the
region.

3# In India insurer has to register under
Companies Act 1956 and obtain license from
“Insurance Regulatory & Development
Authority”

3%: Various arguments exist favoring stock
insurer or mutuals as better form of

organization.

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13. Selecting the form of Organization :

3% 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.

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14. Selecting the form of Organization :
3% 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 :
Los 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.

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16. Selecting the form of Organization :

Demutualization - the rationale - contd.
LoS
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 :

3% 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

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.

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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.

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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 :

y Following departments execute insurer’s

ls

functions.

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 tor

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
countries. The
“reserves for
probabilistic
predict.

IRDA has issued
statements are

companies.

laws of the respective
difficult job is to create
contingencies” which are
and hence difficult to

formats in which financial

to be prepared by insurance

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.

28. Functions of Insurers :

$ Legal

Insurance, being as 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

responsibilityeof 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.

32. Key terms :

Assessment Mutuals.
Advance Premium Mutuals
Perpetual Mutuals.
Reciprocal Exchanges.

Organization Structure.

Farm Mutuals.
Factory Mutuals.
Fraternal Mutuals
Lloyd’s of London

Insurer Functions

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

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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.

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36. The End !

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