Insurance Company Operations
Domain overview
This domain tests how an insurer organizes its core operating functions - product development, distribution, underwriting, policy administration, claims, actuarial, finance, reinsurance, and compliance - and how those functions interact to produce profitable growth within regulatory limits. Expect questions on function responsibilities, handoffs, and performance measures.
Core functions and controls
- Product development: actuarial, legal, and marketing collaborate; files policy forms and rates with the regulator where required.
- Distribution: agents, brokers, direct, and bancassurance channels; licensing, compensation, and market-conduct rules apply.
- Underwriting: risk selection and pricing under published guidelines and authority limits, with file audits.
- Policy administration: issuance, billing, collections, endorsements, renewals, cancellations, and customer service.
- Claims: first notice of loss, investigation, coverage determination, settlement, subrogation, and fraud referral.
- Actuarial: pricing, loss reserving (including IBNR), capital modeling, and experience monitoring.
- Finance: invests premiums, allocates expenses, and prepares statutory and GAAP statements.
- Reinsurance: cedes risk through treaty (automatic portfolio) or facultative (case-by-case) agreements, proportional or excess of loss.
- Compliance: solvency, reporting, privacy, and segregation of duties.
Worked example
An insurer has $10M premium, $6.5M losses, and $2.5M expenses. Loss ratio = 65%, expense ratio = 25%, combined ratio = 90%, so underwriting profit = 10% of premium ($1M). It buys 40% quota-share reinsurance with a 25% ceding commission. Ceded premium = $4M; ceded losses = $2.6M; ceding commission = $1M. Net premium = $6M; net losses = $3.9M; net expenses = $2.5M − $1M = $1.5M; net underwriting profit = $0.6M. Reinsurance reduced both volatility and profit; the commission partly offsets acquisition cost.
Traps
- Mixing treaty and facultative reinsurance: treaty is automatic for a defined portfolio; facultative is individually negotiated.
- Forgetting that the combined ratio excludes investment income; underwriting profit is not total profit.
- Treating claims only as payment: reserving, recovery, and fraud referral are examinable.
- Assuming reinsurance always improves the combined ratio; ceding commission and expense treatment matter.
- Overlooking filing and market-conduct approvals when launching a product.
- Defining policy administration as only issuance; billing, collections, and endorsements are included.