Underwriting Of Insurance
If every application for life and health insurance were accepted by the insurer, two possible outcomes could result. First, the premiums charged might prove inadequate, causing the insurer to lose money and become insolvent because of greater than anticipated claims. Second, the cost of insurance might become so high for some individuals that they could not purchase it. The underwriting department has the responsibility of screening applications in order that the group of individuals insured corresponds to the group contemplated at the time the rates were established. The underwriter must establish guidelines for the selection of insureds in order to make certain that mortality experience is at least as good as that assumed by the actuary. Underwriters consider such factors as the current health, medical history, occupation, family history, age, and moral reputation of the applicant. These facts are gleaned from the application, the inspection report, medical bureau reports, results of physical examinations, and the insurance agent’s statement. Many times an insurance agent will feel that the underwriter is thwarting his sales efforts by refusing to insure applicants or increasing the rate. However, if the underwriter fails to do an adequate job of screening applications, the insurance agent may find himself without a company to represent. In fact, the insurance agent can be of invaluable assistance to the underwriter through what is called field underwriting (i.e., the careful qualification of prospective insureds and the accurate completion of the application and inspection report).
Claims
The payment of a life or health insurance claim is the fulfillment of the insurance contract. Many individuals will not see what they have purchased until a personal crisis such as a family death, disability, or sickness occurs. The improper or inefficient handling of a claim can create serious financial hardships for the insured or his heirs. Thus, prompt and efficient claims handling is vital to both the insured and the company’s reputation. Claims departments utilize the talents of lawyers, medical specialists, and investigators to insure that claims are administered promptly and fairly.
Actuarial
The insurance actuary is basically a mathematician who specializes in the mathematical functions which underly the operations of the insurer. The company’s profitability depends in part on the accuracy of his mathematical estimates because he calculates rates, dividends, and commission scales. He determines the reserves necessary to satisfy statutory requirements and the contingency reserves necessary to meet unexpected claims and expenses. He also calculates cash values, settlement options, and surrender value tables. With the increasing use of the computer, he is becoming more involved in research and in the development of new contracts, insurance agent compensation plans, and investment techniques.
Legal
While the actuary develops the mathematics necessary for the sale of insurance, the legal department is responsible for writing the contract in a manner which will not subject the insurance company to claims it did not intend to cover originally. The legal department also drafts insurance agents’ contracts and any other contracts entered into by the company. Aside from these other responsibilities the legal department has the job of ensuring that all the company’s activities are in compliance with various state and federal laws. Despite the fact that the legal function is highly specialized, it is related almost to every company activity from insurance agent recruitment to claims settlement.
Accounting and Auditing
Accounting departments in insurance companies are not unlike accounting departments in other types of businesses. The responsibilities of the department include calculating taxes and filing tax forms, processing premium payments and billing policyholders for premiums due, recording commission payments to insurance agents, processing the payroll for salaried employees, preparing budgets, and preparing reports required by the various state insurance departments.
The auditing portion of this function is concerned primarily with verifying that the financial records of the insurer are consistent with accepted accounting and regulatory standards and that they fairly and fully disclose the insurer’s condition.
Investment
Because of the efforts of the agency force the insurer receives a large and rather constant flow of premium dollars. The investment department assumes the responsibility of investing these funds in order to maximize the return to the company in light of the requirements imposed by solvency and investment regulations. In addition to the investment of new money there is the added task of reinvesting the funds made available from the sale or maturation of existing investments. In other words, the investment function is that of the creation, maintenance, and liquidation of a profitable investment portfolio.
Other
While there are other functions performed by insurers, the preceding presentation should provide an insight into the way life and health insurers are organized and carry out their responsibilities. However, because of the rapid changes taking place within the life and health insurance industry, a discussion of the present is always somewhat obsolete. Of the changes taking place one of the more important is the expansion of insurers into other businesses through the creation of holding companies. The holding company permits an insurer to expand either into related businesses such as mutual funds and finance companies or into unrelated businesses such as airlines, or construction. The possibilities for expansion are enormous. Thus, it is very possible that in a relatively short period of time the insurance agent will have to be reeducated in order to represent his company effectively. The computer also is making its influence felt and is redefining the functions of insurers. Accounting and auditing techniques are being changed radically as are many activities in the actuarial and investment areas. In short, the life and health insurance industry is undergoing profound change. While this change will cause a certain amount of pain, it will also create new challenges and exciting career opportunities.
Summary
1. The life and health insurance industry occupies a dual role in the American economy as a risk bearer and institutional investor.
2. There are several types of insurer organizations operating in this country. The most important are the stock and mutual insurers.
3. One of the most rapidly expanding insurer organizations is the federal government. The largest and most important governmental program is the Old Age, Survivors’, Disability, and Health Insurance.
4. Every insurer must perform certain functions or activities: marketing, underwriting, claims, actuarial, accounting and auditing, and investment.
5. Insurance marketing may be carried out through a general agency, branch office, direct writing, or direct reporting. In most cases a combination of systems is utilized.
6. An important change taking place in the life and health industry is its expansion into related areas such as mutual funds, variable annuities, and other financial services.