C. Insurers (Part 2)

4. Operating Divisions

Insurance companies operate with many different departments and divisions. Among them are four principal departments responsible for the major functions: Marketing or Sales, Underwriting, Claims, and Actuarial. These departments each have a specific purpose within the structure of an insurer, and each can have an impact, positive or negative, on the profitability of the company.

Marketing and Sales

The marketing department is responsible for advertising, promoting, and distributing an insurer's products to the public. This department also sells the products, trains the producers, and develops any materials related to the marketing process. Agents are field representatives of the marketing department, responsible for putting the company's products and services in the hands of clients. Monitoring compliance with the various laws relating to the conduct of agents and the transacting of contracts may also be handled within the marketing department. The marketing department is also responsible for watching consumer trends, and then researching and developing or modifying products and services to meet the needs or demands of the marketplace.

Underwriting

The underwriting department is responsible for receiving applications for insurance and then evaluating them according to established guidelines. Applications are either approved or declined. Those that are declined do not meet the company's guidelines, but not all approved applicants are equal either. Many present risks that, although the company is willing to insure them, are greater than average risks the company expects to insure, and will be classified as substandard. There will also be some applicants whose risks are more favorable than average, and those will be classified as preferred.

The underwriting department's main objective is to prevent adverse selection, which is an imbalance of risks or the selection of poor risks: too many substandard compared to preferred and standard risks. If the underwriting department approves too many poor risks, the statistical predictions of the actuaries may not hold up, and the company will not have the level of profit it expected, or could even suffer a loss.

Claims

The claims department is responsible for receiving claim requests, evaluating them in light of the actual contract, paying those claims which are covered by the terms of the contract, and rejecting those which are not. The claims department may employ or contract with adjusters or other investigators to assist in the evaluation of claims, or to seek evidence of false or fraudulent claims. If the claims department does not settle claims promptly or fairly, or makes payments for claims that are not actually covered by the contract, the profitability of the company can be affected.

Actuarial

The actuarial department is where the science of statistics is put into practice. Insurance company actuaries are persons who study mortality and morbidity statistics, the nature of claims and actual claims experience — even factoring in the potential for fraudulent claims and the financial impact of those claims, including investigating fraudulent claims and payments. The actuaries must also account for the ordinary expenses of doing business, including the payment of claims, as well as make a conservative estimate of earnings from invested reserves (premiums received by the company but not currently needed to pay expenses). After all the analyses and calculations have been made, the actuaries publish the rates that must be charged for each line of business the company insures, with the intent of achieving profitability.

5. Insurer's Qualifications

According to California Insurance Code 150, any person capable of making a contract may be an insurer, subject to the Code's restrictions. In order to become an admitted insurer (legally entitled to transact insurance in this state), there are many financial, technical, and legal qualifications that a company must meet. The Code regulation is in place to prevent unqualified persons from offering insurance to the public.

The term person is used in the law to refer to any entity that is legally capable of performing legal acts, such as making contracts, on its own behalf. In California, a person may, therefore, be either a natural person at least age 18 who is legally competent, or any of the following entities:

• Association;
• Organization;
• Partnership;
• Business trust;
• Limited liability company; or
• Corporation.

Any person may be an insurer by meeting the following guidelines of the California Insurance Code:

• Submitting all forms, products, premiums, and advertising for approval prior to use;
• Using only licensed agents and brokers;
• Using acceptable D.B.A. ("Doing Business As") names; and
• Maintaining required financial reserves.

6. Reinsurance

Reinsurance is insurance purchased by a primary insurer to protect itself against the catastrophe of a comparatively large single loss, or a large number of small losses caused by a single occurrence. The reinsurance contract is between two parties:

1. Reinsurer: the company that, in consideration of the premium paid, assumes a part of the risk over an amount retained by the primary insurer, known as the net line.
2. Primary insurer: the insurer covering losses on a first-dollar basis (sometimes subject to a deductible), who issues the policy over which reinsurance is purchased. In the reinsurance contract, the primary insurer may also be called the ceding company.

The contract between the reinsurer and the primary insurer is called a treaty. There are 2 types of reinsurance treaties:

1. Automatic treaty: The reinsurer agrees, in advance, to accept a portion of the gross line of the primary company's risks that meet the reinsurer's underwriting rules.
2. Facultative treaty: Each risk is considered individually by both parties. A risk is submitted to the reinsurer for acceptance or rejection. If the risk is accepted, the primary insurer may accept or reject the rates and terms of the offer.

When a reinsurance company reinsures risks with other reinsurance companies, this is known as retrocession.

7. Insolvent Insurers

Insolvency means either of the following:

• Any impairment of minimum paid-in capital required of an insurer by the provisions of the Insurance Code for the class, or classes, of insurance that it transacts anywhere; or
• An inability of the insurer to meet its financial obligations when they are due.

Even if the insurer is able to provide for all its liabilities and for reinsurance of all outstanding risks, it cannot escape the condition of insolvency unless it has additional assets equivalent to the aggregate paid-in capital as established by state regulation.

Paid-in Capital

Paid-in capital or capital paid-in means the following:

• In the case of a foreign mutual insurer not issuing or having outstanding capital stock, the value of its assets in excess of the sum of its liabilities for losses reported, expenses, taxes, and all other indebtedness and reinsurance of outstanding risks as provided by law. Foreign mutual insurers cannot be admitted unless their paid-in capital is composed of available cash assets amounting to at least $200,000.
• In the case of a foreign joint stock and mutual insurer, its paid-in capital may be computed by the insurer according to the Insurance Code provisions for foreign mutual insurers.
• In the case of all other insurers, the lower of the following amounts: the value of its assets in excess of the sum of its liabilities for losses reported, expenses, taxes, and all other indebtedness and reinsurance of outstanding risks as provided by law; or the aggregate par value of its issued shares of stock.

For the purpose of computing paid-in capital or capital paid-in, shares of stock are not taken as liabilities.

Refusal to Issue Information

Whenever it appears to the Commissioner that irreparable loss and injury to the property and business of a person has occurred or may occur unless the Commissioner takes action, the Commissioner, without notice and before applying to the court for any order, can take possession of the property, business, books, records, and accounts of the person and the person's office. Refusal to deliver any books, records, or assets to the Commissioner once such a seizure order has been issued is a misdemeanor.