Insurance business operations

Dr Neelam Khanna
Assistant Professor
M.M. Institute of management

Maharsihi Markandeshwar University (Deemed to be

University) Mullana, Ambala
Insurance Business Operations
 Insurance is a financial arrangement where individuals or
entities transfer risk to an insurance company in exchange
for a premium. The insurer provides compensation or
coverage in case a specified loss or event occurs. Insurance
business operations encompass all the activities and
processes involved in providing insurance services, from
designing insurance products to managing claims.
Objectives of Insurance Business Operations

 The primary objective of insurance business operations is to manage

risk and provide financial protection. Key objectives include:
 Risk Transfer: Shifting the financial burden of potential losses from the
policyholder to the insurer.
 Pooling of Risks: Insurance companies collect premiums from a large
number of policyholders, creating a pool that can be used to pay claims
when losses occur.
 Financial Stability: Helping individuals and organizations maintain
financial stability by compensating for losses due to unexpected events
(e.g., accidents, natural disasters).
 Profitability: For insurers, ensuring that the business remains
profitable by carefully balancing the risks they accept with the
premiums they charge.
Importance of Insurance in the
Economy
Insurance plays a critical role in the broader economy by:
 Encouraging Savings and Investment: Life insurance and

retirement products encourage individuals to save for the future.

 Protecting Assets: Property, liability, and health insurance

protect individuals and businesses from financial ruin in case of

losses or damage.
 Risk Management for Businesses: Businesses rely on insurance

to mitigate risks like property damage, liability claims, and loss of

key personnel.
 Capital Generation: Insurance companies invest the premiums

they collect, contributing to the economy by financing businesses

and infrastructure projects.
components of insurance business operations
1. Underwriting
 Underwriting is the process through which insurance companies
assess the risk of insuring a person, property, or organization and
determine the terms and premiums of the insurance policy. The goal
of underwriting is to ensure that the risk accepted by the insurer
aligns with the premium charged.
 Key Activities in Underwriting:
◦ Risk Assessment: Evaluates the potential risk associated with the applicant.
This involves analyzing the applicant’s background, past claims history, and
any factors that might affect the likelihood of a claim.
◦ Risk Classification: Once assessed, the applicant is placed into risk
categories (standard, substandard, preferred) based on their likelihood of filing
claims.
◦ Premium Determination: Underwriters calculate the appropriate premium
by balancing the risk taken with the need to remain competitive.
◦ Policy Approval/Denial: After analyzing the data, underwriters decide
whether to approve or deny coverage. Sometimes, they may request
 2. Claims Management
 Claims management refers to the process of handling insurance claims made
by policyholders. This function ensures that legitimate claims are processed
efficiently, while fraudulent or exaggerated claims are identified and denied.
 Claims Process Steps:
◦ Claim Notification: The insured party reports a claim to the insurer. This is the initial
step, and it includes providing necessary documentation and details about the incident.
◦ Claims Assessment: The insurance company investigates the claim to verify its validity
and to estimate the financial loss. Claims adjusters may visit the site of the incident,
assess damages, and interview the parties involved.
◦ Claims Settlement: Once validated, the claim is processed, and the compensation is
paid out according to the policy terms. Payment can be in the form of repair costs,
replacement, or a monetary payout.
◦ Fraud Detection: Insurers have teams that use advanced techniques like data analytics
and machine learning to identify fraudulent claims. Identifying fraud helps insurers
manage losses and protect the integrity of their operations.

 3. Premium Collection
 Premium collection refers to the process of collecting payments from
policyholders. The premium is the price paid by the policyholder for
coverage, and it must be collected regularly to ensure that the policy
remains in force.
 Premium Structures:
◦ Flat Premium: A fixed amount paid periodically by the policyholder (monthly,
quarterly, annually).
◦ Experience-Based Premium: For corporate or group insurance, the premium
might be adjusted based on the claims history and loss experience of the
policyholder.
◦ Variable Premiums: Some policies, like investment-linked life insurance, have
premiums that vary depending on the performance of the underlying assets.
 Payment Methods:
◦ Policyholders can pay premiums through various methods including electronic
transfers, checks, or credit cards. Timely collection of premiums ensures the
insurance company has funds to meet future claims.
 4. Reinsurance
 Reinsurance is the practice where an insurance company (the
"ceding" company) transfers a portion of its risk to another insurance
company (the "reinsurer"). This helps insurance companies manage
their risk exposure and protect themselves from catastrophic losses.
 Types of Reinsurance:
◦ Proportional Reinsurance: The ceding company shares a proportional
amount of both premiums and losses with the reinsurer.
◦ Non-Proportional Reinsurance: The reinsurer only pays when the losses
exceed a certain threshold. This is often used to protect against high-severity,
low-frequency events like natural disasters.
 Benefits of Reinsurance:
◦ Reduces the ceding company’s exposure to large losses.
◦ Stabilizes financial performance by smoothing out the effects of large claims.
◦ Helps companies underwrite policies that they might otherwise not be able to
cover on their own.
 5. Product Development and Marketing
 The development of insurance products is a key operational
function. Insurers must develop products that meet customer
needs while managing risk and ensuring profitability.
 Product Development:
◦ Market Research: Insurance companies conduct research to understand
customer preferences, market trends, and regulatory requirements.
◦ Actuarial Analysis: Actuaries use statistical models to predict future
claims and set premium rates accordingly.
◦ Product Design: Products are designed to address specific risks (e.g., life
insurance for income protection, property insurance for disaster protection)
and must balance coverage with cost.
 Marketing and Distribution:
◦ Insurance companies use various marketing strategies, such as advertising
and direct sales, to promote their products. They distribute products
through multiple channels, including agents, brokers, and digital platforms.
 6. Policy Servicing
 Policy servicing includes the ongoing management and
support provided to policyholders after the initial sale of a
policy. This ensures that customers remain satisfied and
that policies are maintained properly throughout their term.
 Core Services:

◦ Renewals: Insurers must manage policy renewals, often offering

incentives or updated products to retain customers.
◦ Policy Amendments: Sometimes, policyholders may need to
modify their coverage (e.g., add a beneficiary, increase coverage
limits), which requires administrative processing.
◦ Customer Support: Insurers maintain customer service teams to
answer questions, help with claims, and provide ongoing support to
policyholders.
7. Regulatory Compliance
 Insurance is a heavily regulated industry, with operations
governed by various laws and regulations designed to
protect policyholders and maintain the solvency of insurers.
 Compliance Functions:

◦ Regulatory Reporting: Insurers are required to submit financial

reports to regulatory bodies, such as the Insurance Regulatory and
Development Authority of India (IRDAI) or other national bodies, to
demonstrate solvency and financial health.
◦ Maintaining Reserves: Insurers must maintain sufficient reserves
to ensure they can meet future claims obligations. Actuarial
analysis is used to determine reserve levels.
◦ Licensing and Registration: Insurance companies must obtain
the necessary licenses to operate in specific markets, and
insurance agents or brokers also need to be licensed.
 8. Risk Management
 Risk management within the insurance business involves
identifying, analyzing, and controlling potential risks that
could lead to financial losses.
 Risk Management Process:

◦ Risk Identification: Identifying the risks that the insurance

company faces in its operations, including underwriting risks,
market risks, and operational risks.
◦ Risk Quantification: Actuaries and risk managers quantify the
potential impact of identified risks using statistical models.
◦ Risk Mitigation: Strategies are put in place to reduce the impact
of risks. These can include reinsurance, diversification of
portfolios, and hedging.
 9. Financial Management
 Insurance companies manage large pools of funds from the
premiums they collect. Effective financial management is crucial
to ensure solvency, profitability, and the ability to pay future
claims.
 Key Financial Activities:
◦ Investment of Premiums: Insurers invest premiums in various financial
instruments such as bonds, stocks, and real estate to earn returns. These
returns help offset future claims payments and operational costs.
◦ Reserves Management: Insurers must maintain reserves to cover future
liabilities. This requires careful planning and investment to ensure
reserves are both sufficient and liquid.
◦ Profitability Analysis: Insurance companies analyze profitability using
key ratios like the loss ratio (claims paid divided by premiums earned) and
the combined ratio (losses plus expenses divided by premiums).
 10. Ethical Considerations
 Ethical behavior is fundamental to maintaining trust in
the insurance industry. Insurers must operate fairly and
transparently to protect policyholders and maintain their
reputation.
 Common Ethical Issues:

◦ Fair Claims Settlement: Insurers must treat claims fairly and

avoid unjustly denying or delaying valid claims.
◦ Transparency: Insurance products must be clearly explained to
customers, ensuring they understand the coverage and any
exclusions.
◦ Conflict of Interest: Agents and brokers must act in the best
interests of their clients, avoiding situations where their
recommendations are influenced by personal gain.