Overview of Insurance OperationsTypes of InsurersSlide 3Place of Incorporation and Licensing StatusPrincipal Steps in Risk ManagementRisk Transfer ProcessObjectives of InsurersConstraints on Achieving ObjectivesMeasurement of Insurer PerformanceComponents of Profit MeasurementSlide 11Combined Ratio ExampleSlide 13Property-Liability Industry ProfitabilitySlide 15Functions Required to Meet NeedsInterdependence Among FunctionsOverview of Insurance OperationsTypes of InsurersRisk Transfer ProcessObjectives of InsurersConstraints of Achieving ObjectivesMeasurement of Insurer PerformanceFunctions Required to Meet NeedsInterdependence Among FunctionsTypes of InsurersLegal Form of OwnershipProprietary InsurersStock Insurance CompaniesLloydsInsurance ExchangesCooperative InsurersMutual Insurance CorporationsReciprocal ExchangesCaptive InsurersRisk Retention Groups and Purchasing GroupsFraternal OrganizationsTypes of InsurersOther InsurersHealth Maintenance Organizations (HMOs)Blue Cross-Blue ShieldBanksPools and AssociationsGovernmental InsurersWorkers CompensationMine SubsidenceFederal Insurance ProgramsPlace of Incorporation and Licensing StatusDomestic - incorporated in that stateForeign - incorporated in another stateAlien - incorporated in another countryAdmitted - licensed to provide insurance in a stateNonadmitted - operating without a licenseSurplus lines brokers can place business with nonadmitted insurers if admitted insurers will not write the coveragePrincipal Steps in Risk ManagementIdentify and analyze loss exposureSelect technique(s) to handle loss exposureImplement the chosen technique(s)Monitor results and implement necessary changesRisk Transfer ProcessRisk ManagerConsultantsInsurance Agents and BrokersInsurersInsurance FunctionsPolicy contract developmentPricingMarketingUnderwritingLoss adjustmentLoss controlReinsuranceInvestmentsObjectives of InsurersProfit ObjectiveCustomer Needs ObjectiveDeterminants of Insurance Cost1. Losses2. Expenses3. ProfitLegal Requirement ObjectiveHumanitarian and Societal ObjectivesContributionsEmployee benefitsConstraints on Achieving ObjectivesInternalEfficiencyExpertiseSizeFinancial ResourcesMiscellaneousMarket recognitionPoor reputationExternalRegulationPublic OpinionCompetitionEconomic ConditionsRecessionInflationInvestment resultsDistribution SystemsMiscellaneousCatastrophesMeasurement of Insurer PerformanceProfit MeasurementProblems in Measuring ProfitabilityCatastrophesLoss Reserve InaccuracyPremium VolumeImpact of GrowthComponents of Profit MeasurementExpense RatioLoss Adjustment Expenses/Earned PremiumOther Expenses/Written PremiumLoss RatioIncurred Losses/Earned PremiumComponents of Profit MeasurementCombined RatioStatutoryIncurred Losses + LAE + Incurred Expenses Earned Premiums Earned PremiumsTrade BasisIncurred Losses + LAE + Incurred Expenses Earned Premiums Written PremiumsCombined Ratio ExampleWritten Premium $100 millionEarned Premium 95 “Incurred Losses and LAE 76 “Underwriting Expenses 19 “Statutory Combined Ratio76 + 19 = 100%95 95Trade Basis Combined Ratio76 + 19 = 99%95 100Components of Profit MeasurementInvestment EarningsInvestment IncomeInterestDividendsRentsRealized Capital Gains or LossesUnrealized Capital Gains or LossesOperating RatioCombined Ratio - Investment Earnings/Earned PremiumProperty-Liability Industry Profitability Combined OperatingYear Ratio NII/EP Ratio1991 108.8 15.4 93.41992 115.7 14.9 100.81993 106.9 13.9 93.01994 108.4 13.8 94.61995 106.4 14.5 91.91996 105.8 14.4 91.41997 101.6 15.3 86.31998 105.6 14.4 91.21999 107.8 13.8 94.02000 110.4 13.7 96.7Measurement of Insurer PerformanceMeeting Customers’ NeedsMeeting Legal RequirementsMeeting Social ResponsibilitiesFunctions Required to Meet NeedsMarketingUnderwritingClaimsLoss ControlReinsuranceActuarialInvestmentsInterdependence Among FunctionsMarketing and UnderwritingUnderwriting and Loss ControlLoss Control and MarketingClaims and Other DepartmentsActuarial and Other