Insurance Company Organization
Whether an insurance company is mono-line or multi-line, whether it specializes in personal lines or commercial lines, it is made up of people who perform various functions. Many of them work in the background and do not have direct exposure to the general public. Yet they perform vital functions for the companies they work for.
Agents and Their Duties
Perhaps the first person most people think of when they think of insurance is the insurance agent. The agent, who represents the insurance company, is the most direct link between the company and its insureds. As such, the agent has many responsibilities.
An agent's primary duty is to sell insurance. This is the product of the insurance business. Companies need sales to have revenue to finance operations and pay claims. Agents need sales to earn the commissions that are their livelihood.
In most states, a resident agent's countersignature is required to validate the contract. Countersigning means the agent signs each new policy prepared by the company before delivering it to the insured.
An agent is often responsible for field underwriting risks. This means using pre-established criteria to seek out the type of business that is likely to be acceptable to the company. Although the company underwriter makes the final decision to accept a risk, the agent also has a responsibility to seek out quality business.
Before selling a policy, agents must obtain information on the prospect's particular exposures and review existing policies. The agent must analyze the prospect's coverage needs and make recommendations as to the amount and type of coverage appropriate for each exposure.
Agents often prepare a quotation that will show a prospect what the premium for the proposed coverage will be. And when the prospect buys, the agent must complete, or help the client complete, a detailed application. The application must be carefully, completely, and accurately filled out and submitted on a timely basis.
The agent must make sure that the client understands the type of coverage being purchased and what the insured's responsibilities are under the policy, as well as the services that will be provided by the agent and the insurance company. The agent can also be expected to deliver the policy.
Once a policy is in force, the agent has a continuing responsibility toward the insured. At least once a year, the agent should review the client's coverage and evaluate the adequacy of the coverage provided. The agent must also stay current with new coverages that might be appropriate for the client.
At any time during the policy year, the agent must be available to assist the insured with service needs, such as a name change or a change in the method of premium payment, and maintain accurate records of all such changes requested by the insured. The agent can also assist the insured in filing and following up on claims. Some companies give the agent authority to settle certain types of claims.
Not only does the insurance agent have a moral obligation to fulfill these duties, but there are legal obligations as well. Agents who are negligent in meeting their responsibilities can be liable for their inadvertent errors.
Errors and Omissions insurance (E&O coverage) is available for insurance agents to cover their liability for mistakes, but not for intentional actions or fraud.
Continuing Education Needs for Agents
The insurance business is constantly changing, so it's critical that insurance professionals maintain lifelong educational programs to keep their professional knowledge and skills up-to-date. Many states have continuing education laws that require agents to take a certain number of hours of insurance- related course work before their licenses can be renewed.
In states that do not have continuing education laws, insurance professionals must assess their own needs for continuing education and engage in ongoing improvement of their knowledge and skills. One way to do this is by earning professional designations from organizations such as The American Institute for Chartered Property Casualty Underwriters and the Insurance Institute of America.
These organizations have developed a variety of programs to meet the educational needs of insurance professionals. Some of the designations offered by these institutes include Chartered Property-Casualty Underwriter (CPCU), Accredited Adviser in Insurance (AAI), and Associate in Personal Insurance (API). Although not required, these designations add significantly to an agent's status and credibility.
Authority of Agents
An agency relationship exists when one party (an agent) is authorized to act on behalf of another (a principal). In the insurance business, the principal is the insurance company and the agent is a person authorized to act on the company's behalf. Principals grant certain powers, or authority, to their agents, and when agents act under these powers, their acts are considered to be the acts of the principal. These acts include making contracts and accepting money.
The "knowledge" of an agent is held to be the knowledge of the principal. For example, suppose that the applicant tells the agent something very important with regard to the applicant's insurability. According to the law of agency, even if the agent does not list this information on the application, the applicant is revealing the information to the insurance company through the "knowledge" of the agent.
There are three separate levels of an insurance agent's authority:
Express authority is the authority specifically given to an agent, either orally or in writing, by the principal. Written authority is usually provided through an agency agreement that allows the agent to countersign, issue, and deliver policies and provide other customary services on all contracts accepted by the insurer from the agent.
Implied authority is authority given by the insurance company to the agent that is not formally expressed or communicated. This implied authority allows the agent to perform all the usual and necessary tasks to sell and service insurance contracts and to fully exercise the agent's express authority. For example, if an agent has express authority to sell a certain coverage, he or she would have the implied authority to describe the coverage to prospective customers and make decisions regarding the appropriateness of the coverage for particular customers.
Apparent authority is a doctrine which holds that an agent can have whatever authority a reasonable person would assume he or she has. In the public's eye, an agent acting under apparent authority binds the company as fully as under expressed or implied authority. For example, an agent who has an insurer's logo on his or her business and business stationery and on the sign over his or her door has the apparent authority to represent that insurer to the public. Should the insurer revoke the agent's authority to represent it, but not take care to see that the company's logo is removed from the business card, stationery, and sign over the door, the insurer could still be bound by the agent's actions on its behalf.
The express authority of an insurance agent is the most legally determinable type of authority. The written agency agreement spells out which lines of insurance an agent is authorized to write, whether the agent has the authority to bind coverages, whether the agent can collect premiums, and whether the agent can settle small claims directly. These issues and other specific instructions given to the agent orally are clearly specified. Implied and apparent authority are not so clear-cut, and violations in these areas are usually determined by the courts.
Insurance Marketing Systems
Generally, there are four basic distribution systems used to market insurance:
Exclusive agency system
Direct writer system
Direct response system
Independent agency system
In an exclusive or captive agency system, the insurance company contracts with agencies, which are independent businesses, to represent and sell insurance on a commission basis only for that insurance company.
In the direct writer system, the insurance company's agents are employees of the insurance company. They can receive a salary or be paid by commission, or a combination of both.
In the direct response system, there are no agents. These companies sell through direct mail, over the phone, or through the Internet.
In the independent agency system, agencies that work independently contract with several different companies to represent and sell insurance for those companies. An agent who represents more than one company is called an independent or nonexclusive agent. Several companies can authorize the agent to sell insurance for them, but the agent remains an independent businessperson. The agent collects commissions on the policies sold, but collects no salary from the companies he or she represents.
In the exclusive agency, direct writer, and direct response systems, the insurance company owns and controls its accounts, policy records, and renewals. If the agency or employment relationship terminates, that person loses all rights and interest in company business and related commissions.
In the independent agency system, the agent owns and controls accounts, policy records, and renewals. If an independent agent's contract with a particular insurer terminates, that agent retains rights to active accounts and can place them with another insurer and continue to receive commissions.
Other Insurance Professionals
In addition to insurance agents, there are other classifications of insurance salespeople, such as solicitors, brokers, and excess or surplus lines agents. Although not every state recognizes these classifications, we'll explain briefly how these positions differ from that of a typical insurance agent.
A solicitor, like an agent, sells insurance and can even be authorized to collect premiums. However, a solicitor cannot issue or countersign policiesthis responsibility can only be handled by an agent. So a solicitor, who often works with or for an agent, has more limited authority than the agent.
Both agents and solicitors represent insurance companies. A broker, on the other hand, represents the insureds. A client who is seeking insurance could contact a broker, who in turn might contact several insurance companies to find the insurance that is best for the client.
Although a broker can sometimes appear to act as an agent of the insurer in certain activities such as policy delivery, legally a broker does not represent any insurer and does not have the authority to bind an insurer to an insurance contract.
Excess or surplus lines are highly specialized insurance coverages, such as auto racing liability insurance or tuition refund insurance, that are often not available from any company admitted to do business in a state. An excess or surplus lines agent is an agent licensed by the state to handle the placement of such coverages with nonadmitted companies (ones not authorized to conduct business in the state under ordinary circumstances).
Producer is a general term used to describe someone who sells insurance, including agents, brokers, and solicitors.
Another type of insurance professional you might encounter is an insurance consultant. A consultant is someone who, for a fee, offers advice on the benefits, advantages, and disadvantages of various insurance policies.
Consultants don't actually sell insurance; they sell advice.
Other Insurance Functions
Of course, agents would have nothing to sell if it weren't for the other functions taking place in the insurance companyat both its central, or "home" office and its regional or branch offices.
Underwriting is the process of selecting certain types of risks and rejecting others so that as a whole, the policies issued by the insurance company will produce the company's desired results. The underwriting department is usually made up of many individual underwriters who make the decisions about whether to accept or reject the applications sent in by agents based on the company's standards and their own judgment. They can also be called on to review loss experience, provide judgment rates, and specify the particular policy forms that are required to provide the coverages that applicants have requested.
Underwriters use the following three financial ratios to help them accomplish their task:
The loss ratio is used to compare the company's operations from year to year. It shows the percentage of losses the company incurred for every dollar of earned premium. It is calculated by dividing the amount of incurred losses by the amount of earned premium.
Earned premium is the premium that the company actually earned by providing insurance protection for the designated period of time.
Incurred losses include amounts paid on claims for covered losses and various expenses related to handling claims.
The expense ratio indicates the cost of doing business. It is calculated by dividing total underwriting expenses by total written premiums.
Underwriting expenses are the costs required to acquire and maintain a book of business. They include expenses for advertising, commissions, salaries, and other administrative costs, as well as regulatory costs such as taxes and licensing fees.
Written premium is the gross amount of premium income on the company's books. It includes both earned and unearned premiums. Premiums for new business, renewals, and policy endorsements make up written premium.
The combined ratio is simply the sum of the loss ratio and the expense ratio. Traditionally, 100% is considered to be the break-even point. A combined ratio of less than 100% indicates that the company had an underwriting profit; a ratio greater than 100% indicates a loss.
Policy Issue and Administration
After the underwriter has approved a new application or a change to a current policy, a whole series of events takes place. A policy analyst or screener checks the application to make sure that all information is correct and complete. It then goes to a rater who computes the premium to be charged. The policy forms can be printed by computer or assembled using preprinted forms with specific declarations and endorsements unique to that risk.
The claims department sees that the company's insureds are adequately indemnified for their losses. Claim adjusters or representatives are used to inspect a loss, determine whether there is coverage for the loss, estimate indemnification, and in some cases, pay for the loss immediately. Large companies have their own claim adjusters, whereas smaller companies might use the services of independent adjusters.
Actuarial and Statistical Department
The actuarial and statistical department is the "numbers" department. Using the tremendous amount of data generated by computer, together with statistics available from other companies, actuaries determine the rates to be charged for various types of insurance.
As with any profit-oriented business, the determination of financial condition is a very important function in an insurance company. However, insurance companies must place special emphasis in this area because their finances are closely regulated by the statesfor example, premiums must be credited to specific accounts, agents must be paid commissions, and proper reserves must be maintained. All these functions are handled by the accounting department.
The investment department oversees the funds the company needs to invest to make sure that adequate funds will be on hand to pay claims. The investment department attempts to maintain a healthy rate of return while maintaining the safety of the investment. Because money must be on hand to pay future obligations, highly speculative stocks are not appropriate, and at least some of the investments must be readily convertible to cash, as needed.
Because insurance policies are legal contracts, it is not surprising that insurance companies maintain a legal staff. This department interprets the various state insurance laws and helps the company keep its policies and practices in compliance. A key role is the department's involvement with court cases arising from claims. The legal department is instrumental in helping determine fair indemnification for insureds and is also involved in the company's other legal actions.
For certain insurance coverages, a premium is determined after or during the policy term, instead of at the beginning of the policy term. These "after-the-fact" premiums can be based on a number of factors such as payroll, number of employees, or amount of receipts. The audit department checks the accounting records of these insureds at the required intervals to obtain the necessary information used to determine these types of premium.
Loss Control Department
Whereas an insured is glad when insurance pays for a loss, he or she would rather have no loss at all. This is why prevention and control of losses are very important aspects of the insurance business. The loss control department, or "engineering department" as it might be called in some companies, inspects factories, certifies boilers, and makes recommendations to insureds as to how risks can be avoided or reduced.
Loss control is a vital function of the insurance business. Nobody wins when significant losses occur. The insurance companies would rather not have to pay large claims, and insureds who can be reimbursed for part of their loss often have to assume deductible amounts and suffer the inconvenience of disruptions resulting from the loss. Traditionally, loss control experts recommend the use of burglar alarms, sprinkler alarms, changes in operations, and other things that are designed to avoid or reduce losses.
This department works very closely with, and directs the operations of, the agents who represent the company. Its responsibilities include recruiting, appointing, and training, especially if an agent will be an exclusive agent. The department must monitor the sales and marketing efforts of these agents and make sure that the number and quality of agents are closely tuned to the market the company serves.
Closely related to the agency department, the marketing department helps determine the company's overall marketing strategy. It develops advertising and sales aides or works closely with a separate advertising department to accomplish these goals.
Insurance companies often purchase insurance to cover their own exposure to loss. This is called reinsurance. Reinsurance helps protect insurance companies from catastrophic losses and from wild fluctuations in underwriting results. This coverage can be obtained on a policy-by-policy basis or on the basis of a whole block of policies. The reinsurance can cover the initial insurer for losses above a certain amount or can call for losses to be shared on a pro rata basis.
Miscellaneous Support Departments
Like all other businesses, insurance companies have departments whose contributions help all other departments operate smoothly. They include personnel, training, management information systems (MIS), general administration, and building and maintenance departments.