Study 2: Insurance Company Structure

Question 1

What is the purpose of insurance? (3)

Answer 1

• Peace of Mind
• Financial Security
• Encourage Prevention of losses (Risk Management)

Question 2

Operational Structure - What are the factors that determine the structure of an organization? (5)

Answer 2

• How power and control are distributed
• How well systems are integrated between depts
• How communication works
• How well services are coordinated
• Size of the company

Question 3

What are the three main operational structures that are apart of any company? (3)

Answer 3

• Administration
• Marketing
• Accounting and Finance

Question 4

What are the department that are common to all businesses? (5)

Answer 4

• Human Resources
• Information Technology
• Administration
• Marketing
• Accounting/Finance

Question 5

What are the department that are unique to insurers? (3)

Answer 5

• Actuarial
• Underwriting
• Claims

Question 6

What type of structures does an insurance company follow? (2) and what are the advantages/disadvantages?

Answer 6

• Pyramid structure, which is top down.
• -Advantages - Opportunity for promotion
• -Disadvantage - Time consuming to go through higher levels for approval
• Flat Structure, which includes a team that makes approvals and decisions
• -Disadvantage - Little opportunity for promotion
• -Advantage - Less time consuming to receive approval

Question 7

Human Resources - What is the human resources department responsible for? (11)

Answer 7

• Recruiting new staff
• Overseeing payroll and help manage staff
• Monitor Labour regulations
• Ensuring human rights laws are followed
• Keeping Employee records
• Develop and maintain survey and salary admin systems
• Monitor whistleblower accounts and exit interviews
• Administer employee benefits plan, and company pension plan
• Help develop education and training sessions
• Counselling employees/ providing career development
• Performance reviews for staff

Question 8

Human Resources - What is the span of control managerial principle? (1)

Answer 8

This principle asserts that limiting the number of employees reporting to an individual improves organization performance.

Question 9

Information Technology - What is the IT department responsible for? (2) What is procurement? (3)

Answer 9

• Handle Computer systems and management information
• Provide technical assistance and are charged with initiating innovative projects
• Procurement is the process of finding and agreeing to terms, and acquiring goods, services, or works from an external source.
• Used to ensure the buyer receives goods/services at best price.
• IT develops and maintains systems to collect and process info

Question 10

Information Technology - What are computer systems used for with respect to underwriting? Claims? (3)

Answer 10

Computer systems can be used as a tool to monitor performance measures.

For underwriting, this tech allows company to record or assess the following data: rate adequacy, risk selection, retention of business, # of submissions, profits and loss reports

For Claims, the following data is recorded: specific info of loss, reserve amounts, expenses, claims tags for reinsurance purposes, tags for larger reserve

Question 11

Administration - What is Admin department responsible for? (2)

Answer 11

• Ensuring appropriate levels of support are provided to the line functions
• Providing the premises, furniture, equipment, supplies, and services to keep the business running effectively. (Printing, mail, email sending, etc.)

Question 12

Marketing - What is the marketing department responsible for? (3)

Answer 12

• Goal of marketing department is to Institute plans that will respond to the needs of customers. (research customer needs and design products/services)
• Mediates relations between underwriters and producers
• Responsible for setting up and monitoring the original contract with broker and setting up annual budgets

Question 13

Finance and Accounting - What is the finance/accounting department responsible for? (8)

Answer 13

• Maintaining accounting records, producing financial statements, preparing income tax returns
• Handling accounts payable/accounts receivable
• Manage Cash flow
• Compliance with OSFI and PIPEDA
• Producing annual reports
• Reinsurance management
• Preparing reports for regulators
• Licensing for company provincially/federally

Question 14

Explain the level of authority and how it must be considered when organizing a department. (4)

Answer 14

• There should be a balance between authority levels and the functional processes of a department so that employees can posses appropriate autonomy.
• When employees can possess appropriate autonomy, they are empowered to handle the majority of the business themselves. And when their authority is limited, they are more likely not to develop as well.
• To some extent, certain limits to authority are required in any company. (Ex: head office must view manuscript wordings, since they need to be reviewed by companies legal dept)
• How authority is distributed reflects the company’s overall strategy.

Question 15

How is the underwriting department organized in an insurance company? (3)

Answer 15

Each company is different in the organization of its underwriting department.

• Some organize underwriting in departments of new business, renewals, endorsements, etc. Having specialists in each department.
• Some organize the department according to groups of brokers. This includes having a portfolio manager, senior, intermediate, and junior UW’s. (Senior may be responsible for new business, intermediate responsible for renewals, and junior responsible for MTA’s)

Question 16

Departments unique to insurers (Actuarial Function) - What are the two main types of Actuaries used within insurance companies? (2)

Answer 16

• Pricing Actuaries - responsible for analyzing data and performing calculations to determine pricing for insurance policies
• Reserving actuaries - Determine the amount of money to be held in bulk claims reserve. Responsible for monitoring insurers overall financial situation and alerting management if regulation requirements are not met.

Question 17

Departments unique to insurers (Underwriting) - What is the responsibility of the underwriting department? (3)

Answer 17

• Ensure that risks submitted to company meets company standards of acceptability and appropriate premium is charged
• Risk must fall within the target market that has been determined
• Minimize risks through loss prevention and control activities

Question 18

Compare and contrast Underwriting at head office (2) and Underwriting at Branch or region (2)

Answer 18

At head office - usually consists of upper management and highly technical UW’s.
-Upper management develops underwriting guidelines, and its the technical UW’s job to lend expertise to the field underwriting units.

At Branch or Region - Each office is run by branch manager.
-Department reports to branch manager, but may also report to head office. (there can be conflict within branch on who reports to who)

Question 19

What are the differences between organizing the Underwriting department by line of business (2) Vs by specialty lines? (1)

Answer 19

• Under line of business, underwriters are organized by what kind of business they write. (property, casualty, auto, etc)
• Risks that present low hazard and generate small premiums are often assessed against a template (Box approach). For these kinds of risks, companies may use call centers.

-Under Specialty lines of insurance, there is a higher degree of centralization. The unit assigned to underwrite specialty lines may be determined by who has most expertise. (They deal with more complex risks)

Question 20

Departments unique to insurers (Claims) - What are the responsibilities of the claims department? (3)

Answer 20

• Investigate and document the circumstances under claims occur.
• Determine policy coverage and set reserve and expected cost
• Initiate payment of the claims

Question 21

How can the claims department be organized? (6)

Answer 21

• Use a combination of strategies to organize the claims department.
• Can use local adjusters where highest frequency of claims occur, and independent adjusters in rural areas.
• Staff adjusters can handle routine claims, where as independent adjusters handle more complex ones.
• Can be organized by size (Small claims handle by one unit, larger ones handled by another)
• Can be organized under different sections (Accident benefits, bodily injury, property claims, auto claims, etc.)
• Special investigation units run parallel claims department to assist with fraud.

Question 22

What are the advantages/disadvantages of having staff adjusters? (2) independent adjusters?

Answer 22

Staff Adjusters

• Advantages: since policy wordings vary from company to company, they have advantage of concentrating only on the forms their company sells.
• -this can improve quality and consistency of decisions made
• -Disadvantage: Hiring, training, and supervising staff can be to great of a commitment of time for some companies.

Independent Adjusters
-Advantage: can be hire for more complex claims or if overloaded. (Have experience)
Disadvantage: Aren’t as familiar with policy wordings for insurers as they work with a number of different companies.

Question 23

Define corporate governance. (3)

Answer 23

• Signifies how a corporation directs itself and how control of this process is managed.
• Process, structure, and info used to manage a company.
• Board of directors and senior management are held accountable for their actions.

Question 24

Management Structure - What are the common things that are included in most insurers business plans? (7)

Answer 24

Usually, this plan is 3 to 5 years and includes the following:

• Reasons for taking a direction
• Analysis of target markets and opportunities
• Plans to address those markets and opportunities
• Lines and types of business the insurer plans to pursue
• Analysis of Competitors (threats and opportunities)
• Overall Strategy for achieving success
• Also include contingency plans that address worst case scenario

Question 25

Management Structure - Describe the degree of hierarchy within an insurance company? (2)

Answer 25

- Can very from strongly hierarchical - like a ladder, with lines of reporting going up and lines of command going down, to slightly hierarchical. (Almost flat structure, where employees have authority for responsibilities without need for approval) - Which degree of hierarchy company uses depends on the company themselves. Some prefer flatter structure, because its more efficient, others prefer vertical structure, because there's more chance of growth and promotion.

Question 26

Management Structure - How is workflow managed within an insurer? (3)

Answer 26

- The way that an insurer prefers to write business may affect the structure it chooses for each department. - Who does what. (Senior UW's responsible for new business, junior UW responsible for MTA, etc.) - Goal is to Promote efficient and effective processing of business

Question 27

Degree of Centralization - Compare and contrast a Centralized operation (1) Vs Decentralized operation. (2) What are the advantages/disadvantages of both? (1)

Answer 27

-A Centralized operation is where much of the business is conducted from one main location. (More hierarchal organizations tend to be centralized) - A Decentralized operation is where a large company has its head office in a large city, but there are branches in each province. - Each branch acts as its own head office *Refer to pg 2-19 exhibit for advantages/disadvantages

Question 28

Branch management - Explain what functions are performed at the branch level? (4)

Answer 28

- Many of the functions performed at head office of a company, may also be performed at branch level. Degree to which this occurs depends on whether company is centralized or decentralized. - In decentralized companies, operations primarily emphasize underwriting, claims, marketing, sales, and customer service. - In Centralized companies -operations restricts underwriting and claims authority, policy issuance, finance, and accounting to head office. Only sales and customer service presence at branches - Branches can be formed along two lines: by geography or by product line

Question 29

What are the benefits of having multiple companies under one insurer? (4)

Answer 29

- Provides flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria, and rating plans. - Allows organization to use independent distribution networks as well as direct sales force, which offer access to a broader policyholder base. - Allow for flexibility in the products offered, and can capture a larger population. - A company may choose to buy a shell company (company with licenses needed to operate but not much else) or an existing insurer with a book of viable business.

Question 30

What are the factors an insurer must consider when choosing to buy an additional company? (4)

Answer 30

- Fit with the purchaser - have to see how other companies culture matches your own. - Outstanding liabilities of acquired company - Integration of companies - Must develop strategies in order for smooth transition between both companies. - Computer system compatibility - systems may need upgrading when acquiring new company.

Question 31

What are the two main categories of insurance companies? (2)

Answer 31

Stock Company - operates for profit of the owners, either privately held or publicly traded. - --Shareholders have equitable interest in assets in hopes to make profits - --Private stock companies are responsible for much of the insurance written in Canada. - --Security to policyholders for assumed liability is represented by subscriber or paid up capital. - --Subscribed capital - amount of stock sold by a corporation - --Paid up capital - part of subscribed capital that has been paid in full by shareholders - --If premium does not cover losses, then contributed capital of the investors funds any shortfalls - --Shareholders anticipate returns on investment in the form of dividends Cooperative enterprise (Also known as mutual company) - Operates for benefit of its members. - --Owned by its policyholders - --Required to sign a premium note identifying the limit they would be responsible to pay if company suffers financial setback - --Policyholders share profits among themselves. Typically redistributed by reducing premiums. *Refer to chart on pg 2-21

Question 32

What is a board of directors? (1) and what are their responsibilities? (5)

Answer 32

- Group of individual chosen by shareholders to direct the company. - Once board is established, the group then selects and appoints its own chair (Person who will lead unit). - Responsible for hiring a CEO and president and other professional managers. - Board members each have their own responsibility they are in charge of to report to the chair of the board. (Ex: someone may be in charge of HR, other person may be in charge of Finance, etc.) - Ensure company complies with guiding legislation and corporate bylaws. - Board must also establish procedures to resolve any conflicts of interest.

Question 33

What does the Insurance Companies Act stipulate? (4)

Answer 33

- Stipulates that federally regulated insurance companies have both an audit committee and a conduct review committee. - Audit Committee - improve company’s financial reporting process - Conduct Review Committee - Mainly concerned with conflict of interest issues that include self-dealing. - other committees may also be formed by company boards as they see fit. (Executive, management committees) * Review Exhibit on pg 2-26

Question 34

Why are risk management controls put in place by insurers and the board of directors? (2)

Answer 34

- To mitigate risks of their business activities. | - Plans must be in place to ensure business can operate regardless of external events.

Question 35

What is multi layered goal setting? (4)

Answer 35

- Based on input from board of directors, senior management sets goals that filter down to various departments. - Company goal -> Department goal -> Unit goal -> Individual goal - In each department where the goals are set, individual goals are also formulated to meet the needs of each employee. - The goals that are set must be SMART (specific, measurable, attainable, relevant, time bound) *see examples pg 2-28/

Question 36

How is the board of directors composed? (3)

Answer 36

- Legislation limits how many directors on a board may be affiliated with the company. - 2/3rd of the directors on a board for insurance company must be resident Canadian. - half of directors on board of foreign institution subsidiary must be resident Canadians. (Have to physically reside in Canada)

Question 37

Directors as Fiduciaries - What is a fiduciary? (3)

Answer 37

- Fiduciary - person to whom the administration of something is entrusted for the benefit of another. Has a greater legal obligation than others to discharge duties honestly and diligently. - Directors are considered fiduciaries, they are in a special position of power that makes them subject to greater accountability. - law outlines duty of care required by directors and society has created legal safeguards to protect those who may be vulnerable. (Vulnerable people are ones who entrust their goods to a fiduciary)

Question 38

What rules and guidelines are the board of directors responsible for? (3)

Answer 38

Responsible for creating rules and guidelines for the following: - types of insurance to be sold - territory in which company will operate - underwriting policy, agency policy, investment policy

Question 39

What is the role of a senior compliance officer? (2)

Answer 39

- Responsible for operating, guiding, and monitoring the company's compliance program. - Federally regulated P&C companies must have a senior compliance officer, and his/her name must be filled with OSFI annually.