Learning Objectives :

Understand

1. Type of Insurance Organizations 2. Organizational Structure of Insurance Companies3. Functions of Insurers

Structure :1.1 Type of Insurance Organizations1.2 Organizational Structures of Insurance Companies 1.3 Functions of Insurers1.4 Key Terms1.5 Activity1.6 Summary1.7 Suggested Readings

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.

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.

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.

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

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].

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.

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.

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 MutualsThese are primarily social organizationsThey serve particular religion, nationality or labour groups.

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.

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.

•

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.

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.

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.

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.

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.

Organizational Structure of Insurance Companies :

Must coincide with business model of the insurer. It depends on parameters like

coveragelocationstock or mutuallevel of authoritylegal restrictions

Board of Directors is in overall charge of the company and provides all policy decisions.

Organizational Structure of Insurance Companies :

The Board of Directors is assisted by several officers like

General Manager.Company Secretary.Head Management ServicesInvestment Committee or ManagerHR Manager

It has offices at HQ, Regions, Main & Sub branches whose number depend upon size and geographic coverage of operations.

Organizational Structure of Insurance Companies :

The Board of Directors is further assisted by several heads of functions like

Actuary.Agency.LegalFinanceAdvertising.Medical.Accounting.Underwriting.

and other important functions.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Key terms :

Assessment Mutuals. Farm Mutuals.

Advance Premium Mutuals Factory Mutuals.

Perpetual Mutuals. Fraternal Mutuals

Reciprocal Exchanges. Lloyd’s of London

Organization Structure. Insurer Functions

Activity :

Visit nearby office of an insurance company to find out the organization structure with emphasis on

its different departments.their activitiesdesignations of senior managers.

- On return draw organization chart of that company.

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

Suggested ReadingFundamentals 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.

The End !

Next Chapter TwoProduct Design &

Development

Good Luck!

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