Insurer Operations

Insurance companies are complex organizations with many specialized departments. Understanding how insurers operate helps you understand the product you're selling and the process applications go through.

Key Departments in an Insurance Company

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Underwriting Department

The underwriting department evaluates applications and decides which risks to accept, reject, or accept with modifications.

The Underwriting Process

1. Receive application — Review submitted information
2. Gather information — Order medical exams, reports as needed
3. Evaluate risk — Assess the applicant's risk factors
4. Classify the risk — Determine the appropriate rating class
5. Make a decision — Approve, decline, or counter-offer

Sources of Underwriting Information

Medical Information Bureau (MIB)

The MIB is a nonprofit organization that maintains a database of health information from previous insurance applications. Key points:

• Only member insurance companies can access MIB data
• Contains coded information about significant health conditions
• Helps detect fraud and misrepresentation
• Applicants must be informed that MIB may be used
• Applicants have the right to request and correct their MIB records

Risk Classification

Underwriters classify applicants into risk categories:

Underwriting Actions

When reviewing an application, the underwriter may:

• Accept as applied — Issue the policy at standard rates
• Rate up — Accept with higher premiums due to additional risk
• Add exclusions — Accept but exclude certain conditions
• Postpone — Delay decision pending additional information
• Decline — Refuse to issue coverage

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Actuarial Department

Actuaries are mathematical specialists who use statistics, probability, and financial theory to analyze risk and set rates.

Actuarial Functions

Key Actuarial Concepts

Mortality Tables

• Statistical tables showing death rates by age
• Used to calculate life insurance premiums
• Updated periodically based on population data

Morbidity Tables

• Statistical tables showing rates of sickness and disability
• Used to calculate health and disability insurance premiums

Reserves

• Funds set aside to pay future claims
• Required by law to ensure company solvency
• Represent company's obligations to policyholders

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Claims Department

The claims department investigates, processes, and pays (or denies) claims submitted by policyholders or beneficiaries.

Claims Process

1. Notice of claim — Beneficiary or insured reports the claim
2. Claim forms — Insurer provides required forms
3. Proof of loss — Documentation submitted (death certificate, medical records, etc.)
4. Investigation — Claims examiner reviews the case
5. Decision — Claim approved, denied, or compromised
6. Payment — If approved, benefits are paid

Claims Investigation

For life insurance death claims, the investigation may include:

• Verifying the death certificate
• Confirming the policy was in force
• Checking for policy exclusions (suicide, war, etc.)
• Investigating if death occurred within the contestable period
• Verifying beneficiary information

Contestable Period

The contestable period is typically the first two years of a policy during which:

• The insurer can investigate and deny claims for misrepresentation
• After this period, the policy is generally incontestable
• Fraud is an exception—policies can be voided for fraud at any time

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Marketing and Sales Department

The marketing department develops strategies to sell insurance products and supports the field force (agents and brokers).

Marketing Functions

• Developing advertising and promotional materials
• Recruiting and training agents
• Creating sales tools and support materials
• Analyzing market trends and competition
• Setting sales goals and compensation structures

Distribution Systems

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Investment Department

Insurance companies collect premiums long before they pay claims. The investment department manages these funds to generate returns.

Investment Goals

1. Safety — Preserve principal; avoid losses
2. Liquidity — Maintain funds to pay claims
3. Yield — Generate returns to reduce premium costs
4. Diversification — Spread risk across investments

Types of Investments

General vs. Separate Accounts

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Legal and Compliance Department

The legal department ensures the company operates within all applicable laws and regulations.

Compliance Functions

• Ensuring policies meet state requirements
• Maintaining proper licenses and filings
• Monitoring agent conduct and licensing
• Responding to regulatory inquiries
• Handling litigation and legal disputes

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Key Takeaways

• Underwriting evaluates risks and decides which applications to accept
• The MIB helps insurers detect fraud by sharing information about past applications
• Actuaries calculate rates and reserves using statistical analysis
• The claims department investigates and pays valid claims
• The contestable period (usually 2 years) allows insurers to investigate misrepresentation
• General accounts hold fixed product assets; separate accounts hold variable product assets
• Insurance companies must maintain reserves to pay future claims