AF 323: INSURANCE MANAGEMENT

TOPIC NO ONE: FUNCTIONS AND ORGANIZATION OF INSURERS

Tips in the topic

 The concept and definition of insurance

 Components of the distribution system of life insurance companies in the country,
 Role of agents in the life insurance sector,
 Important activities carried out in a life insurance organization

INSURANCE

There are no certainties or guarantees in life. There is no guarantee that the business will not
suffer an unexpected loss or damages. So while we cannot protect our interests against all risks,
we can opt for some insurance. Let us take a look at concepts of insurance and functions of an
insurance company.

Insurance is defined as a contract, which is called a policy, in which an individual or

organization receives financial protection and reimbursement of damages from the insurer or the
insurance company. At a very basic level, it is some form of protection from any possible
financial losses.

Insurance is a financial product that legally binds the insurance company to pay losses of the
policyholder when a specific event occurs. The insurer accepts the risk that the event will occur
in exchange for a fee, the premium.

The basic principle of insurance is that an entity will choose to spend small periodic amounts of
money against a possibility of a huge unexpected loss. Basically, all the policyholder pool their
risks together. Any loss that they suffer will be paid out of their premiums which they pay.

Functions of an Insurance Company

1] Provides Reliability

The main function of insurance is that eliminates the uncertainty of an unexpected and sudden
financial loss. This is one of the biggest worries of a business. Instead of this uncertainty, it
provides the certainty of regular payment i.e. the premium to be paid.

2] Protection

Insurance does not reduce the risk of loss or damage that a company may suffer. But it provides
a protection against such loss that a company may suffer. So at least the organisation does not
suffer financial losses that debilitate their daily functioning.

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3] Pooling of Risk

In insurance, all the policyholders pool their risks together. They all pay their premiums and if
one of them suffers financial losses, then the payout comes from this fund. So the risk is shared
between all of them.

4] Legal Requirements

In a lot of cases getting some form of insurance is actually required by the law of the land. Like
for example when goods are in freight, or when you open a public space getting fire insurance
may be a mandatory requirement. So an insurance company will help us fulfil these
requirements.

5] Capital Formation

The pooled premiums of the policyholders help create a capital for the insurance company. This
capital can then be invested in productive purposes that generate income for the company.

Principles of Insurance

As we discussed before, insurance is actually a form of contract. Hence there are certain
principles that are important to ensure the validity of the contract. Both parties must abide by
these principles.

1] Utmost Good Faith

A contract of insurance must be made based on utmost good faith ( a contract of

uberrimate fidei). It is important that the insured disclose all relevant facts to the insurance
company. Any facts that would increase his premium amount, or would cause any prudent
insurer to reconsider the policy must be disclosed.

If it is later discovered that some such fact was hidden by the insured, the insurer will be within
his rights to void the insurance policy.

2] Insurable Interest

This means that the insurer must have some pecuniary interest in the subject matter of the
insurance. This means that the insurer need not necessarily be the owner of the insured property
but he must have some vested interest in it. If the property is damaged the insurer must suffer
from some financial losses.

3] Indemnity

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Insurances like fire and marine insurance are contracts of indemnity. Here the insurer undertakes
the responsibility of compensating the insured against any possible damage or loss that he may
or may not suffer. Life insurance is not a contract of indemnity.

4] Subrogation

This principle says that once the compensation has been paid, the right of ownership of the
property will shift from the insured to the insurer. So the insured will not be able to make a profit
from the damaged property or sell it.

5] Contribution

This principle applies if there are more than one insurers. In such a case, the insurer can ask the
other insurers to contribute their share of the compensation. If the insured claims full insurance
from one insurer he losses his right to claim any amount from the other insurers.

6] Proximate Cause

This principle states that the property is insured only against the incidents that are mentioned in
the policy. In case the loss is due to more than one such peril, the one that is most effective in
causing the damage is the cause to be considered.

Insurance distribution Channels:

Distribution is the process/means of delivering your products or services into your target
markets. Distribution channels are key to success for all insurance companies. They ensure that
products and services provided by insurers reach target customers in the most linear and cost-
efficient manner. A variety of distribution channels with various strategies and positions are
available in the market. Distribution channels are divided into the following two types:

1. Direct channels:

These channels make direct contact between insurers and customers. In the direct channel
total control over how the product is marketed and sold is in the hands of the insurer.

2. Indirect channels:

Indirect channels are those in which there is no direct contact between insurers and
customers. It includes insurance brokers, reinsurance brokers, financial organizations,
independent financial advisers, managing general agents, retail organizations, affinity
groups, peer-to-peer, broker networks, and aggregators.

In today’s world, Insurance companies have a lot of delivery methods for their products and
services. Digital marketing is substantially on the rise but along with this, we can’t undermine
the efforts of agents or brokers in insurance marketing. A variety of distribution channels are

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currently used in the marketplace, and some insurers utilize a combination of distribution
channels. The following are some distribution channels of insurance products in the US:

 Bank-led channel

The bank-led distribution channel is also known as ‘Bancassurance’. In this channel,

banks and insurance carriers join together to sell insurance products to consumers. The
passage of the Financial Modernization Act of 1999, was predicted for the U.S. market
which ensured the growth of the bank-led channel in the U.S. The channel utilizes the
strengths of both the insurance carriers and banks to not just distribute insurance policies
but also to increase customer satisfaction and maximize their own profits by minimizing
the costs. Banks with their expanded reach in the financial services market were the
perfect vehicle to assist the insurance carriers. Thus bancassurance channel appeared like
a boosting fuel for insurance companies.

 Peer to peer(P2P) groups

Peer to peer(P2P) group is a recent innovation in the insurance industry which attracts
many customers towards itself. P2P insurance is a risk-sharing network where a group of
people pools their premiums together to insure against a risk. Peer-to-Peer Insurance
reduces the conflict that inherently arises between a traditional insurer and a policyholder
when an insurer keeps the premiums and it doesn’t pay out in claims. The P2P insurance
pool is comprised of family members, friends, or individuals with similar interests who
team up to contribute to each other’s losses. This type of insurance may also be known as
“social insurance.”

 Direct response marketing

Direct response marketing may be defined as the use of mass media advertising to
generate inquiries directly to insurers. It does not involve the sale of insurance through
local agents. In direct response marketing, employees of the insurer deal with applicants
and customers through telephone, by personal meeting or more frequently via the
Internet. Direct selling continues to be the dominant channel of distribution for insurance
companies.

 The Internet channel

The Internet is likely to be the latest and important of the new forms of insurance
distribution channel. It is already apparent that customers are using new Internet
technology in almost all business fields. Web technology supports multiple marketing
channels, including agents, sales of insurance products and call centers. However,
insurers have been slow to get to this distribution channel.

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  Direct mail marketing

It means selling insurance products by dealing directly with consumers rather than
through intermediaries. Direct mail campaigns deliver better overall response than digital
channels. In this marketing channel, there is no need to share profit margins and the
insurer has complete control over the sales process.

Branch offices, one of the direct channels of insurance marketing, has also continued to be a key
element in the distribution systems of both life and non-life insurance companies. All insurance
companies have an agency-building distribution strategy under which they recruit, train, finance,
and oversee their agents/advisors. Through these offices, personal contact and relationship can be
established with the customers. The insurance industry is witnessing a growing trend in adopting
alternate channels of distribution to fuel business growth. An innovative idea of distribution is
the new mantra and insurers are aligning their business strategy in line with changing customer
requirements and preferences. It is imperative for them to strike the right balance between
traditional and modern models to survive for a longer period of time.

NB: Sometimes, insurance distribution channels may involve a number of entities – agencies,
Independent Marketing Organizations (IMOs) and Field Marketing Organizations (FMOs),
brokers (and their respective broker distribution channels), and aggregators – each play a slightly
different role. Understanding how these entities are regulated and what a mature tech stack can
do to help each begins with understanding their place in the distribution channel.

The quickest summary of a distribution channel is that insurance products are sold to consumers
by licensed agents who have been contracted with a carrier to sell their products. But, while this
is a common insurance distribution model, you will learn that it’s not quite as simple as the
example makes it seem.

The process of becoming properly licensed and contracted to sell a carrier’s products can be very
confusing since licensing rules and regulations vary based on the state and the insurance product
to be sold. AgentSync was built to take on and simplify the complexities that arise from these
variations in state rules.

Before we dive into how AgentSync simplifies the process, let’s first call out the different
players involved in the insurance sales distribution process.

Defining the insurance carrier role

The logical place to start in describing the parts of the distribution process is with insurance
carriers since they develop and offer insurance products that are ultimately purchased by

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consumers. Insurance carriers come in many sizes and offer products across the spectrum of
types of coverage. Most carriers specialize in a specific line of insurance or a couple of related
lines of insurance but there are always exceptions.

Most insurance carriers fall into the following types:

 Life insurance
 Health insurance
 Life and health insurance
 Life and annuity
 Property and casualty insurance
 Surplus lines

Within each of these standard lines, an insurance carrier may specialize in specific product types.
For example, some life insurance carriers may specialize in term insurance products only while
others may offer all types of life insurance products; term insurance, whole life, universal life,
etc. Some health insurance carriers may specialize in group coverage through employers while
others offer products directly to individuals.

It’s also important to note there are many other insurance lines outside of the lines listed, but
these ones represent the largest and most common in the market.

The Role of Insurance Intermediaries

As players with both broad knowledge of the insurance marketplace, including products,
prices and providers, and an acute sense of the needs of insurance purchasers,
intermediaries have a unique role – indeed many roles – to play in the insurance markets
in particular and, more generally, in the functioning of national and international
economies. Intermediary activity benefits the overall economy at both the national and
international
levels:
The role of insurance in the overall health of the economy is well-understood.
Without the protection from risk that insurance provides, commercial activities would
slow, perhaps grinding to a halt, thus stunting or eliminating economic growth and the
financial benefits to businesses and individuals that such growth provides.
The role of insurance intermediaries in the overall economy is, essentially, one of making
insurance – and other risk management products – widely available, thereby increasing
the positive effects of insurance generally – risk-taking, investment, provision of basic
societal needs and economic growth.

There are several factors that intermediaries bring to the insurance marketplace that help
to increase the availability of insurance generally:

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Innovative marketing
Insurance intermediaries bring innovative marketing practices to the insurance
marketplace. This deepens and broadens insurance markets by increasing consumers’
awareness of the protections offered by insurance, their awareness of the multitude of
insurance options, and their understanding as to how to purchase the insurance they need.

Dissemination of information to consumers

Intermediaries provide customers with the necessary information required to make

educated purchases/ informed decisions. Intermediaries can explain what a consumer
needs, and what the options are in terms of insurers, policies and prices. Faced with a
knowledgeable client base that has multiple choices, insurers will offer policies that fit
their customers’ needs at competitive prices.

Dissemination of information to the marketplace

Intermediaries gather and evaluate information regarding placements, premiums and

claims experience. When such knowledge is combined with an intermediary’s
understanding of the needs of its clients, the intermediary is well-positioned to encourage
and assist in the development of new and innovative insurance products and to create
markets where none have existed. In addition, dissemination of knowledge and expansion
of markets within a country and internationally can help to attract more direct investment
for the insurance sector and related industries.

Sound competition

Increased consumer knowledge ultimately helps increase the demand for insurance and
improve insurance take-up rates. Increased utilization of insurance allows producers of
goods and services to make the most of their risk management budgets and take
advantage of a more competitive financial climate, boosting economic growth.

Spread insurers’ risks

Quality of business is important to all insurers for a number of reasons including

profitability, regulatory compliance, and, ultimately, financial survival. Insurance
companies need to make sure the risks they cover are insurable – and spread these risks
appropriately – so they are not susceptible to catastrophic losses.
Intermediaries help insurers in the difficult task of spreading the risks in their portfolio.
Intermediaries work with multiple insurers, a variety of clients, and, in many cases, in a

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broad geographical spread. They help carriers spread the risks in their portfolios
according to industry, geography, volume, line of insurance and other factors. This helps
insurers from becoming over-exposed in a particular region or a particular type of risk,
thus freeing precious resources for use elsewhere.

Reducing costs

By helping to reduce costs for insurers, broker services also reduce the insurance costs of
all undertakings in a country or economy. Because insurance is an essential expense for
all businesses, a reduction in prices can have a large impact on the general economy,
improving the overall competitive position of the particular market.
Of course, the insurance cycle of “hard” and “soft” markets can have a significant impact
on the benefits – both good and bad – of increased availability. Generally, however,
increased availability benefits the consumer by leading to product competition, price
competition, and improved services. By reducing insurance costs across markets,
intermediaries make an important contribution to improving the economic conditions in a
country.