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Functions of Insurers

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Premium Determined by multiplying rate by units of protection purchased ... facultative. automatic. 7-12. Reinsurance in Property & Liability Insurance ... – PowerPoint PPT presentation

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Title: Functions of Insurers


1
Functions of Insurers
  • 1. Ratemaking
  • 2. Production
  • 3. Underwriting
  • 4. Loss Settlement
  • 5. Investment

2
Basic Concepts in Ratemaking
  • Rate Price charged per unit of protection
  • Premium Determined by multiplying rate by units
    of protection purchased
  • Gross Rate Composed of two parts, designed to pay
    losses and expenses
  • Pure Premium Portion of the Gross Rate designed
    to pay losses
  • Loading Portion of Gross Rate designed to cover
    expenses of operation

3
Pure Premium
  • Total Losses . Exposure Units Pure
    Premium
  • 3,000,000 . 100,000 30

4
Converting Pure Premium to Gross Rate
  • Expense part of the rate Expense
    Ratio expressed as percentage of the final rate
  • Permissible Loss Ratio 1 minus expense ratio
  • Pure Premium . Gross Rate 1 _ expense
    ratio
  • 30 30
    50 1 - .40 .60

5
Underwriting
  • 1. Basic purpose avoid adverse selection
  • 2. Relationship of underwriting to adequacy of
    rates
  • 3. Exposure that is unacceptable at one rate may
    be acceptable at another

6
Sources of Underwriting Information
  • 1. The application
  • 2. Information from the agent or broker
  • 3. Investigations
  • 4. Information bureaus
  • 5. Physical examinations or inspections

7
Postselection Underwriting
  • 1. Postselection underwriting (or renewal
    underwriting) occurs when the insurer decides
    whether to continue insurance.
  • 2. Insurer may decline to renew insurance or may
    offer narrower coverage.
  • 3. Because cancellation or nonrenewal can impose
    hardship on insured, some states limit the
    insurers right to exercise these options.
  • 4. When the option of postselection underwriting
    is limited, insurers may be more selective in
    initial underwriting.

8
Adjusters
  • 1. Staff adjusters
  • 2. Adjusting bureaus
  • 3. Independent adjusters
  • 4. Public adjusters

9
Adjustment Process
  • 1. Notice
  • 2. Investigation
  • 3. Proof of loss
  • 4. Payment or denial

10
Composition of Insurers Investments
  • Life Property Type of Investment Insurers
    Liability
  • Corporate Stocks 20.6 21.2
  • Corporate Bonds 41.0 18.3
  • Government Bonds 17.1 51.2
  • Mortgages 8.9 0.4
  • Real Estate 2.1 1.3
  • Policy Loans 4.3
  • Miscellaneous 6.0 7.6
  • 100.0 100.0

11
Reinsurance
  • 1. Nature of reinsurance
  • 2. General approaches
  • facultative
  • treaty
  • 3. Types of treaties
  • facultative
  • automatic

12
Reinsurance in Property Liability Insurance
  • 1. Proportional reinsurance
  • Quota-share
  • Surplus-share
  • 2. Excess-of-loss reinsurance

13
Reinsurance in Life Insurance
  • Term insurance approach
  • (reinsure difference between face value of policy
    and amount of reserves)
  • 2. Coinsurance approach (quota share)

14
Functions of Reinsurance
  • 1. Spreading of risk
  • 2. Financing function - surplus relief

15
Miscellaneous Insurer Functions
  • Legal
  • Accounting
  • Engineering
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