legal form of ownership
place of incorporation
Property-Casualty Insurer
Classifications:
Legal Form of Ownership
Proprietary Insurers
Stock Insurers
Proprietary Insurers (SALE)
American Lloyd's
Proprietary Insurers (SALE)
Licensing status
insurance distribution
systems
Proprietary Insurers
Cooperative insurers
other insurers
primary goal is to earn profit for owners
SALE
Stock insurers
American Lloyd's
Lloyd's of London
Insurance Exchange
owner by stock holders
most common type of proprietary
insurer
stockholders expect to receive
dividends, increased stock value
or both
most associations are
domiciled in Texas
members are not liable
beyond their investment in
the association

Lloyd's of London
Proprietary Insurers (SALE)
not actually insurer
insurance marketplace - like stock
exchange
members are investors
provides coverage for many unusual or
difficult loss exposures

similar to Llyod's of London

Insurance Exchanges
Proprietary Insurers (SALE)
because it acts as an insurance
marketplace
members underwrite any insurance
or reinsurance purchased on the
exchange

primary goal is to provide insurance to

policyholders/owners
FROM
Cooperative owners Fraternal Organizations
Reciprocal Insurance Exchanges
Other Cooperatives
Mutual Insurers

combine a lodge or social

Fraternal Organizations function with their insurance
function
Cooperative owners (FROM) write primarily health and life
insurance

private contracts in which

Reciprocal Insurance members insure each other
Exchanges each member is an insured and an
insurer
attorney-in-fact manges the
Cooperative owners (FROM)
reciprocal
 Other Cooperatives captive insurers, risk
retention groups and
Cooperative owners (FROM) purchasing groups

organization forms a
Captive subsidiary to provide all or
parts of its insurance

organized so a limited group

Risk Retention Group and or type of insured is eligible
Purchasing Groups to purchase insurance for
them

owned by policyholders
most common type of cooperative insurance
Mutual Insurers provide lost-cost insurance to policyholders
policyholders have voting rights similar to those
of a stock company's shareholders
Cooperative owners (FROM) some profit is retained to increase surplus and
excess profit is usually returned to policyholders
as dividends

pools and government

Other Insurers
insurers
 consist of several insurers joining
together to insure exposure
Pools individual insurers are unwilling to
insure
many are required by law

federal and state government

provide insurance
Government Insurers National Flood insurance
program
FAIR plans

Domestic Insurer (formed under laws of

state it is doing business in)
Foreign Insurer (licensed to do business
Places of Incorporation in states other than its domicilied state)
Alien Insurer (incorporated in another
country)

admitted insurer (granted a license to

operating in a particular state)
non-admitted insurer (not been granted a
Licensing Status license)
producers for primary insurance are licensed
to place business only with admitted insurers
(exception for surplus lines brokers)

Direct writer marketing system

independent agency marketing
Distribution Systems and
system
Channels exclusive agency marketing
system
 internet
call centers
Common distribution
direct response
channells
group marketing
financial insitutions

Earning a profit
meet customer needs
Insurer Goals comply with legal requirements
diversify risk
fulfill duty to society

commonly associated with propriety insurers - can

attract capital only if profits are the same as or better
with similar insurers
Cooperatives can obtain capital from premiums and
Earn a profit surplus growth from underwriting operations - can
obtain additional capital by borrowings funds using
surplus notes
insurers invest portion of premium that is not needed
to pay operating expenses

expect prompt service and timely responses

to inquires
requires well-trained, customer-focused
Meet Customer Needs personnel and automated support systems.
can often conflict with profit goal
providing training and maintaining current
information technology can be costly

one of the greatest responsibilities is to

comply with state regulations
Comply with Legal
expenses associated with compliance
Requiremetns can be substantial
lack of compliance can lead to fines
 emerging goal for property-casualty
insurers
high concentration of losses in a
Diversify Risk geographic area highly need to spread
risk
complements goals of earning profit
and fulfilling duty to society

obligation to promote well-being

Fulfill their Duty to Society
of society
at minimum should avoid causing
public harm
many contribute funds and
volunteer time to charity

Efficiency
Expertise
Size (economies of scale)
Internal Constraints Financial Resources - when this
becomes strained insurers are unable to
effectively train staff, make capital
investments or reach new markets

Regulation
Public Opinion (Bad PO does not serve the public best
interest)
Rating Agencies (require higher capital to handle high
catastrophe risk better)
External Constraints Competition (hard vs. soft cycle)
Economic Conditions inflation affects losses more
quickly than premiums)
Insurance Marketing and Distribution (each system has
pros and cons)

profitability goals
customer needs
Measuring Performance
legal requirements
social responsibilites

Meeting Profitability Goals
Ratios to Measure
Underwriting Performance
Retention Ratio
Lapse Ratio
How to determine Insurers
success or failure in meeting
legal requirements
Premiums and Investment (premium growth is not always
a positive indicator of an insurer's success - could
indicate lax underwriting standards)
Underwriting Performance (net underwriting gain/loss -
ignores investment income)
Overall Operating performance (underwriting
performance + investment income)
Estimation of Loss Reserves
Loss Ratio
Expense Ratio
Combined Ratio
percentage of expiring
insurance policies an insurer
renews
number of policies lapsing during a
period divided by the number of
policies written at the beginning of the
period
state insurance departments
monitor teams of insureds
and over see insurers
operational areas
Financial rating agencies
 Marketing and Distribution
Core Functions of an Insurer Underwriting
Claims

determining what products

Marketing and Distribution
and services customers want

determining whether and

under what conditions the
Underwriting insurers is willing to provide
insurance to potential
customers

fulfills insurers promise to

make a payment on behalf
Claims
of the insured if a covered
event occurs

Risk Control
Premium Auditing
Supporting functions Actuarial
Reinsurance
Information Technology
 provides information to the
underwriting function to
Risk Control
assist in selecting and rating
risks

Premium for some lines of

insurance cannot be
Premium Auditing precisely calculated until
after the end of the policy
period

calculating insurance rates

Actuarial
and estimating loss reserves

transferring all or part of a

Reinsurance
risk to other insurers

provides the infrastructure

that supports all of an
Information Technology
insurers internal and
external communications
 Investments
Accounting and Finance
Customer Service
Other Common Functions Legal Compliance
Human Resources
Special Investigation Units

investment income enables

Investments the insurer to reduce
premiums

fairly and fully discloses the

Accounting and Finance financial position of the
insurer

could apply to specific

Customer Service function or to the entire
organization

ensures that the statutory

Legal Compliance and administrative
requirements are met
 involves the selection
Human Resources training and dismissal of
employees

Special Investigative Units combats insurance fraud

plans provide property

insurance to certain property
Fair Access to Insurance
owners unable to obtain
Requirements
coverage in the standard
market

Diversifying profit fulfilling a duty to society

complements the goals of and earning a profit

entered into a lengthy soft

cycle during the 1980's and
Insurance Industry 1990's. overall there has been
a decline in the number of
insurers
 have high ratings because of
Highly-rated insurers capitalization levels above
minimum requirements

regulatory action which can

Customer Complaints = limit insurers ability to meet
profit goals

Biggest problem in
arises from errors in
measuring insurer
estimating loss reserves
profitability

sum of the expense ratio

and the loss ratio
Combined Ratio
combined ratio greater than
100% = underwriting loss

Incurred Losses and LAE/

Loss Ratio
Earned Premium
 Underwriting Expenses /
Expense Ratio
Written Premium

Combined Ratio - investment

Operating Ratio
income ratio

support more long-term

Liability insurance policies investments such as
corporate bonds