marketing system underwriting reinsurance

marketing system, underwriting,reinsurance

Marketing Systems in Life Insurance: Agency Building System

                                           Marketing systems refer to how insurance is sold

                                          With agency building system, the insurer is responsible for its agency force

1. General agency system

o Independent contractors paid on commission who represents only one insurer

o General agent is responsible for recruiting, training, and motivating new agents

o Insurer may provide some financial assistance

2. Managerial system

o Branch offices are managed by employee of the company

o The branch manager is responsible for agent development

o Insurer pays expenses of the branch office

Marketing Systems in Life Insurance: Other

A nonbuilding agency system is when insurer contracts with established agents

       e.g., a personal-producing general agent

Under a direct response system, insurance is sold directly to customers without agents

     Web, TV, mail, or telephone

     Generally lower acquisition costs

Property and Liability Insurance Marketing Systems

Exclusive (captive) agents represent only one insurer

                                          Similar to general agents for life insurers

                Renewal commissions are typically lower than new business

Direct writers are where the salesperson is an employee of the insurer

           Employees are usually compensated on a “salary plus” arrangement

Independent agents represent several unrelated insurers

           Commissions vary widely by line of insurance

           Some larger agents may provide loss control and other services

Direct response insurers sells directly to the consumer by television or some other media

Many property and casualty insurers use multiple distribution systems

Underwriting

 Underwriters select, classify, and determine pricing for potential policyholders

          They make accept/reject decision for an applicant

 Different insurers have different underwriting philosophies

      Statement of underwriting policy establishes what is acceptable

Principles of Underwriting

1. Strive to attain underwriting profit

  Charge a premium sufficient to pay future claims

2. Selection of prospective insureds should meet company’s underwriting standards

  Protect insurer against adverse selection

3. Maintain equity among the policyholders

  No group should subsidize another

   Not much variation with in a “class”

Agent as the first underwriter

 In P/C insurance, agent can bind the company

 Based on underwriting standard of company, agent knows which applicants are:

  Acceptable

  Borderline (need company approval)

  Prohibited

 Agent may share in profitability of their business

Sources of Underwriting Information

 The application provides info on policyowner and/or insured property (with agent report)

 An external inspection report regarding the applicant

 Physical inspection of property

 A physical examination (life/health)

 Medical information bureau (MIB) report

Underwriting Decisions

 Accept at standard rates

 Accept subject to restrictions/modifications

 Reject the application

  Do not want to aggravate agents who brought the application

 Many decisions are quicker with computerized underwriting

Underwriting Issues

 Underwriting cycle is historical fluctuations in insurer profitability

   Underwriting is more conservative (stricter) when recent experience is “bad” (this is

                                                      called a “hard” market)

   Availability of reinsurance can aggravate this

 Renewal underwriting can allow insurer to cancel P/C policy

     Usually not in life insurance

Types of Claims Adjustors

 Determining claim amount is responsibility of an adjustor

 Agents often can settle small claims

 Company adjustors are insurer employees

  Claims offices are typically regional

 Independent adjustors and adjustment bureaus

  External professionals hired by insurers

  Used for specialized cases

 Public adjustors represent the insured

Claims Settlement Process

1. Begins with a notice of loss

2. Claim is investigated by the company

  Claims adjustor verifies the loss is covered and determines the amount of the loss

3. The adjustor may require a proof of loss before the claim is paid

4. The adjustor pays or denies the claim

  Policy describes resolution of disputes

Reinsurance Defined

 Insurance for insurance companies

 Two parties

   The primary (ceding) insurer is the initial insurance writer who wishes to transfer

                                                                    (excess) risk to

   A reinsurer who insures the experience of the primary company

 Amount of insurance kept by ceding company is the “retention limit”

Reasons for Reinsurance

 Increase underwriting capacity

 Stabilize profits by capping losses, especially in the event of catastrophes

 Obtain underwriting advice on a new line

 Retire from a line of insurance or territory

 Reduce the unearned premium reserve (UPR)

Forms of Reinsurance

 Facultative reinsurance is case-by-case reinsurance

   Used when application for insurance exceeds initial insurer’s desired retention

 Treaty reinsurance is a standing reinsurance relationship between the primary insurer and the

         reinsurer

  Reinsurer has no knowledge of individual applications

Reinsurance Arrangements

 Quota-share (pro rata) treaty

   Ceding insurer and reinsurer agree to share premiums and losses based on some

proportion

 Surplus-share treaty is a pro rata reinsurance on a per policy basis

   o First, amount of retention set by primary insurer (a “line”)

   o The maximum amount of reinsurance set by reinsurer (# of lines)

   o For each policy, premiums and losses are split

 Excess-of-loss (stop loss) has reinsurer pay for losses above ceding insurers retention

    o Stop loss could be per policy, per catastrophe, or aggregate annual loss

 A reinsurance pool underwrites insurance on a joint basis for large risks too big for one insurer

Reinsurance Alternatives

 Given its size, the capital markets have become an alternative to traditional reinsurance

 Securitization of risk means creating a financial security whose return is linked to insurer losses

 Catastrophe bonds are debt securities where investors forgive an insurer’s interest payments (or

principal) if catastrophic losses occur

o Losses typically tied to industry, not specific insurer