Insurance Operations
Underwriting, Claims, and Distribution
Insurance operations include underwriting (selecting and rating risks), claims (handling and settling), actuarial (pricing and reserving), and distribution (agents, brokers, direct). Underwriting evaluates loss exposure, applies rating manuals, and may use credit-based insurance scores where permitted. Claims process involves notice, investigation, evaluation, negotiation, and settlement. Reserves (case and IBNR) ensure funds for future claims. Reinsurance transfers risk to other insurers. Distribution systems: exclusive agency, independent agency, direct writer, and brokers. Producer licensing and fiduciary duties apply.
Traps
Questions often test claims handling steps and reserving methods. Another trap is confusing reinsurance types: treaty (automatic) vs. facultative (case-by-case); pro rata vs. excess of loss. Combined ratio = loss ratio + expense ratio; under 100% indicates underwriting profit. IBNR (incurred but not reported) reserves are crucial. Unfair claims practices include delaying without cause or failing to investigate.
Worked Example
An insurer has written premiums $1,000,000, incurred losses $600,000, and expenses $300,000. Loss ratio = 600,000/1,000,000 = 60%; expense ratio = 300,000/1,000,000 = 30%; combined ratio = 90% (underwriting profit of 10%).
Rule of Thumb
Combined ratio < 100% = underwriting profit; > 100% = underwriting loss. Use this to assess insurer performance.
Regulation and Ethics
Insurance Regulation
Insurance is regulated primarily by states through insurance departments, led by a commissioner. Key laws: McCarran-Ferguson Act (1945) grants states primary authority; Gramm-Leach-Bliley Act (1999) allows banks and insurers to affiliate and includes privacy provisions. NAIC (National Association of Insurance Commissioners) drafts model laws and coordinates. Producer licensing requires exams, continuing education, and appointments. Market conduct exams ensure fair treatment. Solvency regulation includes risk-based capital (RBC) and guaranty associations. Rate regulation must be adequate, not excessive, not unfairly discriminatory.
Ethics
Ethical duties include fiduciary responsibility (handling premiums), utmost good faith, full disclosure, and fair dealing. Twisting (misrepresentation to induce policy replacement), rebating (offering inducements not in policy), and commingling (mixing client funds with personal) are prohibited. Privacy rules under GLBA and state laws require safeguarding nonpublic personal information.
Traps
Questions often test state vs. federal authority (McCarran-Ferguson) and prohibited practices like rebating and twisting. Another trap: fiduciary vs. ordinary duty. Continuing education requirements vary by state. Unfair trade practices include misrepresentation, false advertising, and boycott.
Worked Example
An agent offers a $50 gift card to a prospect for buying a policy. This is rebating, illegal in most states, because it induces purchase with something not specified in the policy.
Rule of Thumb
If an inducement is not in the policy and not available to all similarly situated buyers, it's likely illegal rebating.