Insurance Operations and the Insurance Value Chain
The value chain
Work moves from product development (market research, actuarial design, regulatory filings) through marketing and distribution (exclusive/captive agents, independent agents, brokers, direct and affinity channels) to underwriting (gather information, evaluate, select, classify, rate), policy administration (issuance, endorsements, billing, premium collection), claims, reinsurance, and investment of reserves. Support functions - actuarial, IT, human resources, legal, compliance, customer service - cut across every link.
Claims and underwriting
Claim handling: notice, acknowledge, verify coverage, investigate, proof of loss, evaluate and negotiate, pay, pursue salvage and subrogation, set reserves, close. Underwriting is where adverse selection is controlled; producers may hold express, implied, or apparent binding authority.
Reinsurance
Treaty versus facultative; pro rata (quota share, surplus share) versus excess of loss; a ceding commission reimburses the ceding insurer for acquisition costs.
Financial yardsticks
Loss ratio = incurred losses ÷ earned premium; expense ratio = underwriting expenses ÷ written premium; combined ratio = the two added. Reserves include the unearned premium reserve and loss reserves, including IBNR (incurred but not reported).
Traps
The favorite: the combined ratio excludes investment income, so a 104% combined ratio can still produce an overall profit. Also remember that a ceding commission flows to the ceding company, and that reserves are liabilities, not surplus.
Worked example
Written premium $10M, incurred losses $6.5M, underwriting expenses $2.8M. Loss ratio = 65%, expense ratio = 28%, combined ratio = 93% - an underwriting gain of roughly 7 cents per premium dollar, to which investment income is added. Rule of thumb: combined ratio below 100 means an underwriting profit.