Chapter 6 Outline

I. Basic Company Functions

A.Rate Making
B.Underwriting
C.Production
D.Claim Settlement
E. Reinsurance
F. Investments
G.Accounting
H.Legal Function
I. Loss Control Services
J. Electronic Data Processing

II. Rate Making

A.How Insurance Pricing Differs from Pricing of Other Products
B.Activities of Actuaries

III. Underwriting
A.Refers to the process of selecting and classifying applicants for insurance
B.Underwriting Policy
1. Importance of a clear statement of underwriting policy
2. Contents of the underwriting guide
 C.Basic Underwriting Principles
1. Selection of insureds according to the company’s underwriting standards
2. Proper balance of insureds within each rating classification
3. Equity among policyowners
D.Steps in Underwriting
1. Agent as the first underwriter
2. Sources of underwriting information
a. Application
b. Agent’s report
c. Inspection report
d. Physical inspection
e. Attending physician’s report and physical examination
f. Medical Information Bureau
3. Making an underwriting decision
E. Other Underwriting Considerations
1. Rate adequacy
2. Reinsurance and underwriting
3. Renewal underwriting

IV. Production
A.General Nature
B.Agency Department
 C.Professionalism in Selling
1. The professional’s approach
2. Professional designations—Chartered Life Underwriter (CLU), Chartered Property
Casualty Underwriter (CPCU), Chartered Financial Consultant (ChFC), Certified
Financial
Planner (CFP), Certified Insurance Counselor (CIC)

V. Claim Settlement
A.Basic Objectives
1. Verification that a covered loss has occurred
2. Fair and prompt payment of claims
3. Providing personal assistance to the insured
B.Types of Claims Adjustors
1. Agent—usually authorized to handle small first-party claims
2. Company adjustors—salaried employee of the company who handles the
investigation, negotiation, and payment of both first- and third-party claims
3. Independent adjustor—used in areas where a company does not have enough
volume to warrant setting up an office and also where special technical skills are
needed
4. Adjustment bureau—often used when a catastrophic loss produces a large number
of claims in a geographical area
5. Public adjustor—represents the insured
C.Steps in Settlement of a Claim
1. Notice of loss to the company
2. Investigation of the claim
3. Filing a proof of loss
4. Decision concerning payment

VI. Reinsurance
A.Key Definitions
 1. Reinsurance—primary insurer transfers to the reinsurer part or all of the potential
losses associated with such insurance
2. Ceding company—insurer that initially writes the business
3. Reinsurer—firm that accepts insurance from the ceding insurer
4. Net retention—the amount of insurance kept by the ceding company
5. Retrocession—reinsurer obtains reinsurance
B.Reasons for Reinsurance
1. To increase underwriting capacity
2. To stabilize profits
3. To reduce drain on surplus because of the unearned premium reserve
4. To protect against a catastrophic loss
C.Types of Reinsurance
1. Facultative reinsurance
2. Treaty reinsurance
a. Advantages
b. Types of automatic treaties
(1) Quota share
(2) Surplus share
(3) Excess of loss
(4) Reinsurance pool
D.Alternatives to Traditional Reinsurance
1. Securitization of risk
 2. Catastrophe bonds

VII. Investments
A.Life Insurance Investments
1. Primary objective is safety of principal.
2. Yield is also important because it lowers the cost of life insurance.
3. Investments have considerable economic and social impact on the economy.
B.Property and Casualty Insurance Investments
1. Liquidity is more important than in life insurance because the contract is for a
shorter period of time, and claims are settled quickly.
2. Investment income is important because it can offset any unfavorable underwriting
results.

VIII. Other Insurance Company Functions

A.Electronic Data Processing
B.Accounting
1. Internal controls
2. Preparation of reports to management
3. Preparation of tax returns
4. Preparation of financial statements for review by regulators
C.Legal Function
D.Loss Control Services