Insurance Company Operations
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Read this section. ±en, read Chapter 6 in your textbook.
±e insurance industry involves much more than just an overview of who o²ers what types of coverage. ±ere are many specialized functions and
operations that an insurer undertakes to make everything progress.
±is section will provide insight into rate making, underwriting, production, claim settlements, reinsurance, and investments. All of these are very
important to the functions of the insurance industry and provide knowledge into why insurance is the way it is.
Marketing and sales are other important functions that the section covers, as insurers must be able to reach out, educate, and ³nd clients.
±e operations that an insurance agency conducts fall under the following categories:
Rate making
Underwriting
Production
Claims settlement
Reinsurance
Investments
Rate making
refers to the pricing of insurance and the calculation of insurance premiums. A rate is a price per unit of insurance. ±e exposure
unit is a measurement used for insurance pricing, varying by type.
When the insured pays the premium as a result of multiplying a rate by the total of exposure units purchased, and when the premium is adjusted
based on a variety of rating factors, it's known as rating.
±is is calculated as:
Premium = rate × exposure units
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An actuary
decides the rates and premiums that are charged in the insurance industry. An actuary is a professional with
considerable experience in mathematics and statistics. Actuaries are involved in all the phases of the insurance ³rms'
operations, such as planning pricing, expense allocation, research, and putting together statistics for both the
management team and regulatory agencies.
Underwriting
is the insurance process in which insurance is selected, classi³ed, and priced for prospective applicants. ±e underwriter
is the
individual who is responsible for making the insurance decision. An important part of underwriting is having a statement of underwriting policy.
±is is a clear statement from management that guides the company's mission and goals. ±ese statements include the following:
±e lines of insurance to sell
±e classes of business that are acceptable, borderline, or prohibited to insure
±e decision to write a large volume of business with low-pro³t margins, or a smaller amount with a larger pro³t margin
±e amounts of insurance that will be written and retained
Geographical areas to be developed
Forms and rating plans that will be used
Insurance ³rms will likely have an underwriting guide that will provide the policies for an underwriter to follow when making important decisions
for the process.
±ere are three basic principles of the underwriting process to remember.
Attain the underwriting pro³t. For the ³rm to be successful, it needs to make money.
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Be selective for insured prospects that are in line with the underwriting policies or pick those individuals who will accept what your
business values.
Have equity among the di²erent policyholders. Rates should be equitable and in line with the rates that they should pay, such as a 30-
year-old versus a 70-year-old paying the same premium in life insurance.
Once an underwriting policy is completed, insurers must communicate the policy to their sales force. ±is starts with the agent in the ³eld and is
known as ±eld underwriting.
±e agent receives the standards from the company that wants to sell insurance and must follow those policies. For
example, the insurance company may choose not to provide insurance to any driver who has a DUI conviction.
Some of the information coming to the corporate underwriter includes the following:
Applications – ±e basic information of what's going to be insured
Agent's report – A standard evaluation report the agent ³lls out on the prospective property or individual to be insured
Inspection report – An inspection that an outside agency completes if the underwriter feels there may be a moral hazard
Physical inspection – ±e underwriter requires a physical inspection of the item to be insured before approving an application
Physical examination – Common for life insurance; an exam for the prospective insured to ³nd any underlying medical conditions
before the application's approval
±ere are three basic options for making an underwriting decision:
1. Accepting the application and providing coverage
2. Accepting the application subject to certain restriction or modi³cations
3. Rejecting the application due to any number of reasons
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Production
refers to the sales and marketing activities of the insurance company. Agents who sell insurance are often classi³ed as producers
because they need to sell a policy and gain customers to make a pro³t. ±e sales force is a very important factor in the ³nancial success of the ³rm.
±e sales department for the insurance ³rm takes care of recruiting and training new agents, as well as the supervision for general agents, branch
o´ce managers, and local agents. Some agencies, primarily in property and casualty insurance, have marketing departments. Highly specialized
agents can be appointed to provide technical help and assistance to the ³eld o´ces. Marketing helps insurance agencies de³ne new markets and
gain customers.
±e insurance agents' duties as producers require them to have a very high degree of technical knowledge and emotional intelligence to place
clients' needs ³rst. ±e sale is just one part of the production process, and agents will provide many follow-up services to their clients. Another
important factor is following a code of ethics. ±ere are numerous organizations that help keep the professional levels in insurance high, such as
Chartered Life Underwriter ® and Certi³ed Financial Planner ®. Agents who receive these certi³cations show their clients that they're taking the
steps to show that their professionalism has been recognized through rigorous studies and exams.
A claims settlement
involves adjusting or settling claims once a loss takes place. ±is includes various steps in the claim-settlement process.
An insurer looks at three basic goals when settling claims:
Verify that losses are covered. To avoid fraud or waste, have proof that the loss occurred and the policy covers it.
Pay the claim promptly and fairly. Standards for processing claims should be set by the organization as part of their mission. Make
sure customers receive equitable treatment when claims are decided.
Provide personal help to the customer. ±e insured has experienced a loss, and the insurance agent must make sure the insured
understands the whole process. ±e agent's professional knowledge must ease the loss for the insured.
Some laws prohibit unfair claims practices, such as the following:
Refusing to pay claims without conducting a reasonable investigation
Not attempting to provide prompt, fair, and equitable settlements
O²ering lower settlements to compel insureds to institute lawsuits that will recover amounts due
±e following are generally involved in a claim settlement:
Agents – In most cases, they can settle small ³rst-party claims, which are usually set at a limit.
Sta² claims representatives – ±e sta² adjuster, or a salaried employee of the insurance agency, will compile details of the claim,
³gure out the loss amount, and arrange for payments.
Independent adjusters – Other professionals who adjust claims are included in this group. ±ey don't belong to the insurance
company, and they charge fees to settle the claims. ±is is common for property and casualty insurers.
Public Adjusters – ±ese adjusters represent the insured rather than the insurance company. ±ey're compensated with a fee of the
claim settlement.
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Settling a claim involves the following steps:
e insured provides timely notice that loss occurs.
±ose insured must provide timely notice that the loss occurred, which is
usually within 30 days or as the policy states.
e insurer investigates the claim, collaborating with the insured.
Facts and evidence are gathered to determine the amount that
will be paid. ±ese include questions, photographs, on-site inspections, and other methods.
e insured provides any proof or evidence that the loss occurred.
Proof of loss is the insured's sworn statement that legally binds
them to the loss occurred and includes pertinent facts.
A decision is made by the insurer for payment of the claim.
Decisions include that the claim is paid as submitted, the claim is
denied, and the claim is valid, but a dispute is raised over the amount. ±is may come under the value of the damaged property, and
two di²erent appraisers may come up with conµicting ³gures. In this case, the court would appoint an independent appraiser to ³nd
the true value of a loss.
Reinsurance
is an arrangement where the primary insurer who initially wrote the insurance policy transfers the policy to another insurer
(reinsurer), including either part or all of any potential losses. Within this, the ceding company is the primary insurer that initially wrote the
insurance policy. A reinsurer accepts either part or all of the insurance from the ceding company. If the ceding company retains part of the
insurance, it's known as retention limit or net retention. ±e amount of insured transferred to the reinsurer is the cession. If for some reason the
reinsurer decides to reinsure part of the insurance with another insurer, it's known as retrocession.
Reinsurance may be used for a variety of reasons, including the following:
Increasing underwriting capacity – Reinsurance helps increase capacity for the business to grow.
Stabilizing pro³t – Insurers may use reinsurance to help avoid large µuctuations in their annual ³nancial performance.
Reducing the unearned premium reserve – It can be used to reduce unearned premium reserves, which is a liability item on the
insurer's balance sheet that stands for the unearned portion of gross premiums on all outstanding policies at the time of valuation.
Sometimes an insurer's ability to grow can be limited because of the premium reserve requirement. Reinsurance can limit the levels
of unearned premium reserves and increase the insurer's surplus position.
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Providing protection against catastrophic losses –±e ceding company receives protection, as the reinsurer pays part or all of the
losses.
Providing an insurer with the ability to retire from an area or close the business
Obtaining underwriting advice from the reinsurer
±ere are two types of reinsurance:
Facultative Reinsurance – Optional and case-by-case method used when ceding companies get applications that exceed the retention
limits
Treaty Reinsurance – An agreement where the primary insurer must automatically cede to the reinsurer when a business is in a
certain category, and the reinsurer must accept the business
±ere are two basic methods of sharing losses:
Pro rata method – Pro rata is when the ceding company and reinsurer have agreed to share losses and premiums based on some
proportion.
Excess-of-loss method — In excess-of-loss, the reinsurer is responsible for paying when covered losses exceed a certain level.
Other methods for sharing losses are examples of both methods, including quote-share treaties, surplus-share treaties, excess-of-loss reinsurance,
and reinsurance pools.
Some insurers use the capital markets as an alternative to traditional reinsurance.
Securitization of risk
means that an insurable risk is transferred to the capital markets through the creation of a ³nancial instrument, such as a
catastrophe bond
or futures contract.
Catastrophe bonds are corporate bonds that permit the issuer of the bond to skip or reduce the interest payments if a catastrophic loss occurs.
Catastrophe bonds are growing in importance, and many consider them a standard supplement to traditional reinsurance.
Investment income is extremely important in reducing the cost of insurance to policyholders and o²setting unfavorable underwriting experience.
±e investment allows the placement of premiums in investment funds where they can grow until needed to pay claims and expenses.
±ose that invest in life insurance divide their assets into two accounts. ±e general account funds the contract obligations for guaranteed ³xed-
dollar bene³ts. ±e separate account funds the liabilities for investment-risk products, such as variable annuities, variable life insurance, and
private pension bene³ts.
Assets for the property and casualty insurance investments are invested into securities that can be quickly sold to pay any claims coming from a
major catastrophe. ±ese include high-quality bonds, stocks, and cash rather than real estate.
Insurers also perform functions such as providing information systems, accounting, legal, and loss-control services.
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Information systems are extremely important in the daily operations of insurers. Computers are widely used in many areas, including policy
processing, simulation studies, market analysis, and policyholder services.
±e accounting department prepares ³nancial statements and develops budgets.
In the legal department, attorneys are used for advanced underwriting and estate planning.
Property and liability insurers also provide many loss control services.
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Knowledge Check 01
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operations.
(a)
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Total estimated overhead costs are $312,000. Overhead cost allocated to the…
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The following information is available for Brownstone Products Company for the month of July:
Master
Actual
Budget
Units
3,500
4,000
Sales revenue
$ 54,300
$ 60,000
Variable manufacturing costs
10,000
16,000
Fixed manufacturing costs
13,000
14,000
Variable selling and administrative expenses
6,500
8,000
Fixed selling and administrative expenses
8,000
9,100
Required:
1. What was the master budget variance for July? Was this variance favorable or unfavorable?
es
2. Compute the July sales volume variance and the flexible-budget variance for the month, both in terms of contribution margin and in
terms of operating income.
4. Prepare pro-forma budgets for activities within its relevant range of…
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Chapter 5- Assignment
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2
points
eBook
Whirly Corporation's contribution format income statement for the most recent month is shown below:
Sales (8,100 units)
Variable expenses
Contribution margin
Fixed expenses
Net operating income
Total
$ 283,500
153,900
Per Unit
$ 35.00
19.00
129,600
$ 16.00
54,700
$ 74,900
Hint
Print
Required:
References
(Consider each case independently):
1. What would be the revised net operating income per month if the sales volume increases by 50 units?
2. What would be the revised net operating income per month if the sales volume decreases by 50 units?
3. What would be the revised net operating income per month if the sales volume is 7,100 units?
1. Revised net operating income
2. Revised net operating income
3. Revised net…
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Manufacturing cost data for Orlando Company, which uses a job order cost system, are presented below.
Indicate the missing amount for each letter. Assume that in alltases manufacturing overhead is applied on the basis of direct labor
cost and the rate is the same. (Round overhead rate to 2 decimal places, eg. 15.25 and final answers to 0 decimal places, eg. 5,275.)
Case A
Case B
Direct materials used
2$
(a)
$86,500
Direct labor
56,000
142,700
Manufacturing overhead applied
42,000
(d)
Total manufacturing costs
149,750
(e)
Work in process 1/1/20
(b)
25,200
Total cost of work in process
207,500
(f)
Work in process 12/31/20
(c)
13,800
Cost of goods manufactured…
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Discussion - What is the role of ethics in accounting?
Requirement:
Include Introduction, Body, and Conclusion.
Your initial Discussion posting should be at least 150 words in length.
9 Replies, 9 Unread
Be sure to include a related Title, at least two different citations and references to support your statement
Read and post brief responses to at least two of your classmates' postings (minimum 75 words).
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make a pivot table and pivot chart to assess the sum of raw materials quantity purchased by year.
make a slicer to interactively filter the pivot chart by state from which the products were ordered.
Adjust the pivot chart to show horizontal bar
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MAT-143-BD1.2023SP X CengageNOWv2 | On X
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Business Income & Ex
09
3-10
03-11
2.03-12
03-01 Algo
R.03-02
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eBook
Problem 3-3
Inventories (LO 3.2)
T
B
Lawrence owns a small candy store that sells one type of candy. His beginning inventory of candy was made up of 10,000 boxes costing $1.50 per
box ($15,000), and he made the following purchases of candy during the year:
March 11
August 15
November 20
Ending inventory.
Cost of goods sold
Feedback
At the end of
the year, Lawrence's inventory consisted of 16,000 boxes of candy.
a. Calculate Lawrence's ending inventory and cost of goods sold using the FIFO inventory valuation method.
6
10,000 boxes at $1.55
20,000 boxes at $1.65
10,000 boxes at $1.70
b. Calculate Lawrence's ending inventory and cost of goods sold…
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Bushard Company (buyer) and Schmidt, Inc. (seller), engaged in the following transactions during February 20X1:
Bushard Company
DATE
TRANSACTIONS
20X1
Feb. 10 Purchased merchandise for $6,800 from Schmidt, Inc., Invoice 1980, terms 1/10, n/30.
13 Received Credit Memorandum 230 from Schmidt, Inc., for damaged merchandise totaling $380 that was returned; the goods were
purchased on Invoice 1980, dated February 10.
19 Paid amount due to Schmidt, Inc., for Invoice 1980 of February 10, less the return of February 13 and less the cash
discount, Check 2010.
Schmidt, Inc.
DATE
TRANSACTIONS
20X1
Feb. 10 Sold merchandise for $6,800 on account to Bushard Company, Invoice 1980, terms 1/10, n/30. The cost of merchandise sold was
$3,900.
13 Issued…
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18. Using the following information, complete the income statement, statement of retained earnings, and balance sheet for RN Painting for the month of March 2018. The business
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E (Click the icon to view the account balances.)
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