LOMA 290's Insurance Company Operations - My key takeaways

Module 1: Company Organization and Governance (Chapters: 1, 2)

Chapter 1: Organization and Operations

Question:

What are some of the traditional ways that insurers organize the operation?

Answer:

Organization by Function: the company's structure is based on the functions performed by each unit.

• Advantages: The simple corporate design allows insurers to focus on developing managerial and technical skills in each functional area.?
• Disadvantages:?This design suits small companies with few product lines and well-defined customer groups. Organizing by function becomes less effective as the company grows and expands its business lines.

Organization by Product: company’s structure is based on different lines of insurance products.

• Advantages: Enable the company to focus on and compare the performance of different product lines more easily.
• Disadvantages (depend):?Work well when an organization pursues a decentralized approach because this structure allows decision-making made by those who work closely with the product.

Organization by Territory: the company’s structure is organized based on its operational territory.

• Work well for global companies that operate in multiple countries.?
• Insurers can have separate divisions customized for each country and further divide their operation into regions or districts.?
• This structure accommodates different regulatory requirements in different countries.

Organization by the Distributed System: The company’s structure is organized based on how it distributes its products to the customer.

Organization by Customer: The company’s structure is based on customer groups.

Chapter 2: Corporate Governance, Ethics, and Control

Question:?

What are the three primary types of control mechanisms in an insurance company? Identify examples of each type.

Answer:?

Control functions include all management activities that ensure an organization's mission and strategic plans are accomplished effectively, efficiently, and by good governance.

Steering Controls (Feedforward Control):

• Steering controls are applied before the business process begins to establish efficient procedures and utilize company resources effectively.
• The objective is to anticipate and prevent problems in advance.
• Example: an insurance company may assign less experienced claim analysts to handle smaller face amount claims, while more experienced analysts handle higher face amount claims.

Concurrent controls:?

• Concurrent controls are applied during the business process to determine whether the process should proceed, require corrective action, or be stopped.
• Enable the company to detect and address problems immediately.
• Example: a pop-up error message that appears if out-of-range values are entered into the system.

Feedback controls:

• Gathering and evaluating feedback for future improvement in the same business or related processes.
• Enable insurers to compare actual performance with established standards
• Example: audit, account reconciliation, customer survey, etc.?

Please note that the examples provided are general illustrations and may vary depending on an insurance company's specific practices and procedures.

Module 2: Support Functions (Chapters: 3, 4, 5)

Chapter 3: Legal and Compliance

Question:?

How does the insurer's legal function differ from its compliance function?

Answer:

• Legal function: The area of an insurer’s operation that handles legal matters- such as contracts and legal disputes. It involves providing legal advice, drafting and reviewing contracts, representing the insurer in limitation, and ensuring compliance with relevant laws and regulations.
• Compliance function: A wide range of tasks that ensure company operation adhere to regulatory policies and procedures of all jurisdiction in which the company does business. It involves establishing and maintaining policies, procedures, and internal control to mitigate legal and regulatory risks.?

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Question:

What are some typical ways insurers organize the legal and compliance department?

Answer:

Due to resource constraints, smaller companies tend to combine legal and compliance functions into one department. In such cases, the department may be headed by a General Counsel overseeing legal and compliance matters.?

Larger companies have separate legal and compliance departments to accommodate their extensive operation and compliance requirements. In this case, a General Counsel typically leads the legal department, and the compliance department is headed by a Chief Compliance Officer (CCO).

The general Counsel - sometimes also acted as Chief Compliance Officer (CCO) - is the executive in charge of the insurance company's legal department.

Chief Compliance Officer (CCO): responsible for overseeing and managing the company's compliance with regulatory requirements and internal policies and procedures.

The CCO will report to the CEO or General Counsel if the CCO is a separate function.

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Question:

What is the litigation process, and what are the legal department’s responsibilities during the litigation?

Answer:?

The litigation process begins when a party initiates a lawsuit against the insurance company. A lawsuit is an action brought before a court of law by a party claiming that another party has harmed them in some way.?

Litigation is the process of presenting the dispute to a court of law for a resolution. In this case, either the legal department will represent the insurer or arrange an independent law firm (outside counsel) to represent the insurer in front of the court.

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Question:?

What are two alternative dispute resolution (ADR) methods the legal department uses to settle legal disputes?

Answer:

The legal department often uses the ADR method to settle legal disputes outside traditional court proceedings.?

Alternative dispute resolution (ADR) methods: Formal or informal negotiations between parties to resolve the dispute without turning to the court.?

Two common ADR methods are:?

• Meditation: an independent party (mediator) will facilitate negotiation between the parties and aim to create a mutually agreeable resolution for the dispute.?
• Arbitration: If mediation fails, parties can turn to an arbitrator. An arbitrator is also an independent party that uses facts and makes the final decision without the disputant’s intervention in the outcome.

Chapter 4: Human Resources Management

Question:?

How are human resources (HR) departments typically organized, and what are their primary responsibilities?

Answer:?

A vice president executive typically leads the HR department. If a company has a Chief Operating Officer (COO), the HR vice president often reports to the COO. Otherwise, the HR vice president reports directly to the CEO.

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Question:?

Describe the performance evaluation process and identify different types of performance evaluation tools used in performance evaluation.

Answer:?

The performance evaluation (performance appraisal) process is a formal process of reviewing and documenting an employee’s job performance; the goal is to:

1. Ensuring adequate performance?
2. Continually improve performance?
3. Determining whether an employee qualifies for an increase in compensation or promotion

Evaluation tools are used to measure employee behavior and accomplishment.

Common evaluation tools include:

1. Graphic Rating Scale: For example, rating ‘Hard work’ as 5 means excellent, or rating ‘Team player’ as 3 means adequate.?
2. Behaviorally Anchored Rating Scale (BARS): Similar to graphic rating scale but more specific to the job and less subjective.
3. Essay Appraisal: The supervisor writes a description of an employee’s job performance during the evaluation process. This tool is often used with more structured tools such as BARS.?
4. Critical Incident Evaluation: supervisor lists examples of positive and negative employee behavior in the workplace.
5. Ranking: The supervisors compare employees with one another and rank them.?
6. Management by Objective (MBO): The supervisor and employee work together to set goals during the evaluation period. Both evaluate the employee’s success in meeting those goals.
7. 360-Degree Feedback: supervisor, co-workers, and customers provide an evaluation of the employee’s performance.

Chapter 5: Information and Technology

Question:?

What are the key job positions in an information technology (IT) department?

Answer:?

The IT department is often headed by a Chief Information Officer (CIO) who provides leadership, vision, and direction to ensure IT practices support the business strategy.

• If a company has a Chief Operating Officer (COO), the CIO may report to the COO. Otherwise, the CIO reports directly to the CEO.
• Larger insurance companies may also employ a Chief Technology Officer (CTO). In this case, the CIO may report to the CTO and is responsible for developing and implementing the technology strategy for the entire organization.
• While some insurers centralize all IT staff in one department, others may do the same for some work processes and also place business analysts or IT staff in various functional departments.

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Question:?

What are the main elements in information management, including a database, a database management system, a data warehouse, a document management system, and a workflow management system???

Answer:?

Data: raw fact

Information: Meaningful collection of data that can be used to draw insights and support business objectives.?

Characteristic of valuable information:

1. Accurate
2. Complete?
3. Concise
4. Relevant
5. Clear?
6. Timely?
7. Accessible?
8. Usable
9. Economical
10. Secure

Databases are an organized collection of internal and external data and information.

• Database Management Systems (DBMS) are computer programs that organize data in a database and allow efficient access to necessary information.
• A Data Warehouse (DW) serves as the central repository for data that a company collects from its existing databases, internal administrative systems, and external sources outside the company. The DW data is cleaned and usually specific to a functional operation or a particular business line, such as individual life or individual disability.
• An Enterprise Data Warehouse integrates data across all business and functional operations lines.
• Data mining is analyzing an extensive data set to discover previously unknown trends, patterns, and relationships.

A Document Management System (DMS) is a technology that captures, stores, organizes, and retrieves documents created electronically or converted from paper to digital form (PDF, image, etc.).

• A Content Management System (CMS) allows users to create, edit, store, and publish corporate electronic data and information.

Workflow Management Systems are technologies that allow an insurer to control the documents and work activities associated with a business process. They work in conjunction with DMS and CMS. For example, an address change may be directed to one team, while policy loan requests could be directed to a different team.

Module 3: Financial Functions (Chapters: 6, 7, 8)

Chapter 6: Financial Management

Question:?

How do insurers organize their financial operations??

Answer:?

Financial management aims to ensure that insurance companies effectively manage their resources to meet their financial goals, particularly the overall objectives of solvency and profitability.

Members of the board of directors handle financial management. The insurance company's board typically has two standing committees that oversee the entire company's financial operations.

• The investment committee establishes the company's investment policy and oversees its operations.
• The audit/risk committee directs internal audit activities and the control function.

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Question:?

What are the core functions involved in financial management in a life insurance company??

Answer:?

Accounting and Financial Reporting:

• The controller typically serves as the head of the accounting and financial reporting function. In some companies, the Chief Financial Officer (CFO) also holds the controller position.
• The core responsibilities of this department include:?
• Recording, tracking, and reporting on financial transactions.
• Coordinating the budget process and overseeing expense analysis.
• Preparing financial statements and reports for external stakeholders.
• Gathering, recording, analyzing, and distributing financial information to managers.

Treasury Operations:

• Treasurer directs all treasury activities and typically reports to the CEO. The Treasurer is responsible for maintaining and managing records and reports related to the insurer's cash flow activities. This includes cash management, bank relations and account administration, bank reconciliation, short-term credit activities, cash forecasting, and liquidity management.

Investment Operations:

• The investment committee directs investment activities for the insurer. This committee establishes the insurer's investment policies, which serve as guidelines outlining the insurer's long-term investment strategies.
• The Chief Investment Officer (CIO) manages the investment operations and reports directly to the CFO and CEO, as well as to the investment committee. The CIO is typically tasked with devising and executing investment plans, ensuring that investment decisions align with the overall investment policy and regulatory requirements. Additionally, the CIO communicates with the accounting and actuarial functions regarding the expected rate of return.

Audit and Internal control?

• Chief Auditor manages audit and internal control functions. It is crucial for auditing to operate independently from other financial operations to ensure that auditors report unbiased results. However, from an organizational standpoint, auditing can be a part of an insurer's accounting or compliance function.
• The audit committee monitors internal control over financial operations and supervises internal auditors’ activities.

Interdepartmental Responsibility:?

• Since financial management impacts almost all other functions within insurers, various units within financial management collaborate with other departments, such as actuarial, IT, and risk management in insurance companies.

Chapter 7: Accounting, Treasury Operations, and Auditing

Question:?

How is the organization of accounting, treasury operations, and auditing based on the principle of segregation of duties?

Answer:

Segregation of duties (dual control) is an internal control mechanism where more than one person shares a responsibility. For example, if an employee in the treasury function receives cash, an employee in the accounting function will record the receipt of that cash.

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Question:?

What are the differences between financial accounting and management accounting?

Answer:

Financial accounting is the process of reporting a company's financial information to meet the needs of the company's external stakeholders, such as regulators, investors, and rating agencies.

Management accounting, on the other hand, is the process of analyzing and communicating financial information to the company's internal stakeholders, such as the company’s board of directors, executives, and employees.

Chapter 8: Investment Management

Question:?

What are the necessary elements in an insurer investment policy??

Answer:

Long-term investing is the responsibility of investment operation?

Short-term investing is typically the responsibility of treasury operation

Investment policies include:

• Insurer investment objectives include creating an investment portfolio with cashflow properties consistent with the insurer’s asset/liability management strategy, meeting obligations to policy owners, and contributing to the growth of insurer earnings.
• Types of investment needed to achieve the insurer's investment objective.
• Minimum safety standard for the principal invested and the investment earning level.
• Type of risk that investment staff can not assume.?
• The maximum amount of funds that each level of investment staff is authorized to invest without seeking approval from higher-level executives.
• Regulatory requirements on the insurer investment activities.

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Question:?

Explain asset-liability management (ALM) and the difference between buy-and-hold and active management strategies.

Answer:

Asset-liability management (ALM) involves managing an insurer's assets and cash flow to minimize the risk of financial insufficiency in meeting the company’s liabilities while still earning an adequate return.

Investment strategy:

• Buy-and-hold strategy:? Insurers hold onto investments for a long period until they mature, are prepaid, or default. The portfolio composition is expected to remain relatively constant.
• Active management strategy: Investments in the portfolio can be actively traded if sufficient evidence exists for an overall increase in the total portfolio value. The portfolio composition can be changed as needed.

In reality, most insurers' investment strategies fall somewhere between the two extremes of the buy-and-hold strategy and active management strategy.

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Question:?

What are an insurer general account and a separate account?

Answer:

Insurance company assets are maintained in two primary types of investment portfolios:

Module 4: Marketing, Product Development, and Distribution (Chapters: 9, 10, 11)

Chapter 9: Marketing

Question:?

How does an insurer organize its home office and agency marketing operation?

Answer:

A Vice President or an Executive Vice President is typically responsible for overseeing the marketing operations of an insurer.

In cases where an insurer's product distribution primarily involves producers, the marketing operations may be divided into two areas: corporate marketing and agency operations. In such situations, the two departments are led by Executive Vice Presidents who directly report to the CEO.

• Corporate Marketing is responsible for managing companywide marketing campaigns targeted at external customers.
• Agency Marketing, on the other hand, focuses on regional or local marketing plans directed toward producers and sometimes external customers. The activities of the agency marketing function must align with the overall corporate marketing objectives.

However, some companies combine corporate and agency marketing into a single marketing function.

Chapter 10: Product Development

Question:?

What are the steps in the product development process??

Answer:

1. Product Planning?

• Idea generation: New product ideas must be consistent with the insurer's long-term objectives and serve the needs of its target market.
• Screening involves determining if the idea aligns with the insurer's goals, existing systems, and distribution channels. Further consideration involves investigating a product-market fit and if the product can generate new sales.
• Concept testing: This stage involves conducting a series of market research activities, such as focus groups and online surveys, to gather feedback and assess the viability of the product concept.

2. Comprehensive Business Analysis?

A series of activities are conducted to determine the feasibility and marketability of a product. These activities include analyzing the target market, creating product design guidelines, and devising a marketing plan.

3. Technical Design?

• Using established computer models, actuaries create the financial design of the new product. These products are then tested through computer simulations that simulate real-world financial processes under various circumstances, including extremely unfavorable conditions.?
• The simulation generates valuable information that actuaries use to determine the new product's premium rates, producer commission rates, reinsurance strategies, and more.
• Once all functional areas within the company reach a consensus on the product design, the product development team presents it to top management for the final decision.

4. Product Implementation

This stage involves three concurrent activities after the management team approves the product design:

• Obtaining regulatory approval.
• Designing promotion and training materials.
• Establishing information systems and procedures for marketing and administering the product.

5. Performance Monitoring and Review

• Insurers evaluate the early performance of a product to determine if any necessary changes are required.?
• Initially, sales may grow slowly, but an investigation is warranted if they significantly fall below expectations.?
• Insurers can withdraw poorly performing products, but existing contracts remain serviced.

6. Product Development Process Review

Insurers review feedback after completing the product development process. This helps them assess the process's effectiveness and make any necessary improvements.

Chapter 11: Product Distribution

Question:?

Distinguish and identify product distribution systems and channels.

Answer:

Distribution systems refer to a company's methods to make its products available for sale to the public.?

Distribution channels are the specific people, institutions, or communication methods that companies utilize to connect with customers.

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Question:?

What factors does an insurer consider when deciding which distribution systems and channels to use?

Answer:

• Cost: Insurers evaluate the costs associated with different distribution systems. Personal selling distribution systems using career agents tend to be the most expensive, while options like broker systems or third-party institutions may be more cost-effective for newly formed insurers.
• Control: Insurers assess the level of control they have over the distribution system. Affiliated agents and direct response distribution systems often give insurers more control.
• Expertise: Insurers consider the sales experience and general knowledge about insurance products that different distribution channels possess. Career agents, multiple-line agents, and brokers typically have high expertise in selling insurance products.
• Customer Characteristics: Insurers take into account the characteristics of their target customers. For example, a direct response distribution system may be suitable for customers who prefer to compare products and prices on the internet.
• External Marketing Environment: Changes in the economy, technology, laws, and competitive pressures can influence the choice of distribution method for insurers. They adapt their distribution systems to align with the evolving marketing environment.

Module 5: Product Administration Functions (Chapters: 12, 13, 14)

Chapter 12: Underwriting

Question:?

Define underwriting and explain the relationship between new business processing and underwriting.?

Answer:

Underwriting is a critical process in the insurance industry that involves (1) assessing and classifying the degree of risk associated with a proposed insured or a group insured and (2) deciding to accept or decline the risk. Effective underwriting ensures that individuals or entities pay insurance premiums proportionate to the risk they represent.

An underwriter is an employee of an insurance company who carries out underwriting activities. They analyze information, evaluate risks, and make decisions regarding policy acceptance.

Underwriting is a vital component of the new business processing, encompassing all activities necessary to process new applications, evaluate associated risks, and issue new policies. It ensures that insurance companies effectively evaluate risks and make informed decisions about policy acceptance.

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Question:

Describe the organization of the new business and underwriting operation.

Answer:

Some insurance companies organize their underwriting operations as part of the new business department, while others integrate them within the underwriting department. In either case, the vice president of these departments reports to the CEO, or the COO if applicable. The underwriting operations may be led by the Chief Underwriter, who could either be in a separate position reporting to the underwriting VP or the underwriting operation's leader.

Regardless of the department structure, the new business and underwriting operations are typically responsible for the following:

• Assessing the level of risk associated with a proposed insured.
• Assigning the risk to an appropriate risk class.
• Issuing a policy if the risk is insurable.

These responsibilities ensure that the insurance company evaluates and classifies risks accurately and provides appropriate policies to insured individuals or entities.

Chapter 13: Claim and Annuity Benefit Administration

Question:?

Describe the claim department's organization and the various authority levels for claim department staff.?

Answer:

The claim department is responsible for the administration of insurance claims. Typically, a vice president leads this department and reports to the CEO, or the COO if applicable.

In larger insurance companies, claim managers within each product line report to the vice president of that specific line of business. On the other hand, smaller life insurers may have a single Chief Claim Officer who oversees all claim administration operations across different lines of business.?

Some companies assign Customer Service Representatives within the claim department administration or the company's call center to handle general customer questions related to policy claims.

Claim analysts play a crucial role in claim administration activities. They are insurance company employees who review proposed claims and determine the insurer's liability under each claim. They assess the validity of claims and ensure that the insurer appropriately fulfills its obligations.?

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Question:?

Why is effective claim administration essential to the success of an insurance company?

Answer:

Claim administration is an essential insurance function that involves evaluating, processing, and paying valid claims for the contractual benefits that policy owners represent. It is a crucial and complex process performed by life insurance companies.

Effective claim administration is important for several reasons:

• Fulfilling Core Responsibility: Claim administration fulfills the insurer's core responsibility to its policy owners, ensuring they receive the benefits they are entitled to.
• Customer Loyalty and Reputation: The claim process significantly impacts customer loyalty and retention. A smooth and efficient claims experience enhances customer satisfaction and strengthens the insurer's reputation.
• Data Utilization: Data obtained from the claim process is valuable for various applications, such as evaluating the accuracy of underwriting decisions or designing new insurance products.
• Fraud Control: By minimizing claim fraud, insurers can control expenses and maintain the financial stability of their operations.

Effective claim administration must balance two somewhat contradictory objectives:

1. Speed: Valid claims should be processed as quickly as possible, considering the immediate financial needs of beneficiaries.
2. Accuracy: However, processing claims too quickly may result in the payment of fraudulent claims.?

Because of this, effective claim processing strives to strike the right balance between accuracy and speed.

Chapter 14: Customer Service

Question:?

Describe the organization of the customer service department

Answer:

The department responsible for customer service activities in an insurance company may be referred to by different names, such as customer services, policyowner services, or client services. For group insurance products, it is often called member services.

Insurers often organize customer service employees into separate work teams. These teams involve two or more individuals collaborating regularly to coordinate activities and achieve common goals.

A customer contact center, also known as a customer care center, provides customers with various communication channels to interact with the company, including telephone, fax, email, internet chat, and traditional mail. Some customer contact centers handle routine customer inquiries and direct other customer requests to specialized processing centers.

Source: Insurance Company Operations, Third Edition?(LOMA, 2012)

ISBN 978-1-57974-380-2