CIC- Insurance Company Operations In-class activity

CIC- Insurance Company Operations In-class activity Describe the ways in which a company may be structured and identify the characteristics of each - 1. Stock Insurance Company • Capitalization - owned by investors - objective to make profit for stockholders • Access to capital markets • Mergers and Acquisitions (M&A) - less difficult • Reach is greater with regard to brand • Primary responsibility is to stockholders not policyholders • Pressure on topline growth at the expense of profit 2. Mutual insurance company • Less pressure on the day to day results - owned by policyholders • Growth or expansion of company • Mergers and Acquisitions - more difficult • There are no stockholders • Often seen as very stable • Longevity in the market 3. Reciprocal • Insureds are also the insurers • Often specific for niche or single line of business • Managed by Attorney-in-Fact • Premium deposits • Ease of entry to market • Less profit pressure • Easier to capitalize - spread out the cost of assets that have a long lifespan over a period of time • May be more difficult to raise capital - regulation by states - subscribers insure one another purpose of the board of directors - to make certain the investors and/or owners interests are protected 3 obligations of board members - - duty of care (being prudent, ask questions, use due diligence) - duty of loyalty (keeping interests of company above their own) - duty of obedience (following bylaws, stated purpose of company, laws) 4 types of committees to be considered in a board of directors - - audit - nominating - governance - finance (investment and compensation) 3 investment factors for consideration - 1. portfolio must comply with requirements/expectations by the NAIC (national association of insurance commissioners), DOI's (departments of insurance), and rating agencies 2. must ladder maturities in accordance with expected need for funds to pay claims 3. affected by reinsurance company culture - - its personality 1. values statement - principles and ethics the company adheres to regardless - guide the behavior of the company, leadership, and employees - must be communicated in writing 2. vision statement - declaration of the company long range goals (where the company is going and how is the company going to get there) - foundation for the strategic plan and affects decision making - focuses efforts on strategic opportunities 3. mission statement - short statement of the company core purpose and overall goal (why the company does what it does) - identifies the goal of its operations (markets served, products, geographic operation) - communicates purpose and direction (employees, customers, venders, stakeholders) two approaches to developing company culture - active approach - leadership makes it happen - intentional - clearly defined values provide a framework for management and frontline employee decision making passive approach - happens over time by employees observing behavior and values - is based on the behavior of management, which does not necessarily reflect the written values company risk appetite - - how much risk they are willing to assume - may not have the same risk appetite in all lines of business, jurisdictions, geographic territories - management controls involves underwriting authority and claims settlement authority - willingness and ability to purchase reinsurance (catastrophe and non-catastrophe) - desired objective of premium to surplus, loss ratios, expense ratios, and combined ratios (regulation, competition, distribution, rating agencies, economic conditions, reinsurance) constraints that affect product decisions - internal constraints - size, expertise, financial resources, branding, technology external constraints - regulation, competition, distribution, rating agencies, economic conditions, reinsurance, distribution methods why does a company select a particular geographical location - 1. primary influences - due diligence on market need - receptivity by agents to new insurance company - state environments 2. success in one state does not guarantee success in another state - some may choose to take the challenges of a difficult state - when able to navigate the challenges successfully the environment of the state may then serve as a perceived barrier to entry for competitors 3. balancing spread of risk vs expanding beyond core competencies 4. accounting pressures - cost of expanding - how will it be done? (planned expansion over time and through acquisition 5. the wider the geographic area, the more diverse the skill set required - creates the risk of damaging efficiency - skill set needed to manage (50 states with a 2 million in premium per state vs single state with 100 million in premium) centralized vs decentralized - 1. The more decentralized an organization, the higher the risk that actions will not meet expectations across the organization - compliance risk 2. The more centralized the organization, the higher the risk of bureaucracy and silos, which can lead to inertia and stagnation 3. There will be some variation in actions/behaviors from geographic area to geographic area - necessary to adequately address specific individual market needs methods of distributing insurance products - 1. independent agency system - good for entering into a new territory, when expanding strategically within an existing territory - challenges include competition with multiple insurance companies represented and may create additional costs 2. exclusive agents - good for non competition with other insurance companies and requires broad enough offering of products and competitive pricing for its agents - challenges include sales force turnover and may occur when rate action is taken that severely damages the competitive nature of the product 3. insurance company employees/direct marketing - characteristics include it requires a product with broad appeal or a means of preselecting customers and a significant time must be spent in properly screening prospects - can also be expensive because many costs are fixed 4. online distribution - characteristics include It is excellent for pricing, researching products, and learning about the insurance company - customers may be uncomfortable purchasing insurance in a fully online process