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Insurance Company Operations
Third Edition
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The LOMA 290 Course Portal, available online at www.LOMANET.org via your “My
Learning” page, includes numerous multi-media features designed to reinforce and
enhance your learning experience and help you prepare for the exam. Among these
features are numerous “Learning Aids” that illustrate key concepts presented in the
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Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

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ciation founded in 1924. LOMA is committed to a business partnership with
the worldwide members in the insurance and financial services industry to
improve their management and operations through quality employee develop-
ment, research, information sharing, and related products and services. Among
LOMA’s activities is the sponsorship of several self-study education programs
leading to professional designations. These programs include the Fellow, Life
Management Institute (FLMI) program and the Fellow, Financial Services Insti-
tute (FFSI) program. For more information on all of LOMA’s education programs,
please visit www.loma.org.
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Examinations described in the LOMA Education and Training Catalog are
designed solely to measure whether students have successfully completed the
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designations indicates only that all examinations in the given curriculum have
been successfully completed. In no way shall a student’s completion of a given
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expressly repudiates any attempt to so use the curriculum and examinations. Any
such assessment of student competence or industry standards of conduct should
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professional counsel.
www.loma.org Copyright © 2012 LL Global, Inc. All rights reserved.

Third Edition
LOMA Education and Training

Atlanta, Georgia
www.loma.org
Information in this text may have

changed or been updated since
its publication date. For current
updates visit www.loma.org.

LOMA 290 Course Project Team:
The LOMA 290 Insurance Company Operations course is based on this textbook
and includes a course portal with various learning aids and assessment products.
The LOMA 290 Course is the result of the collaborative efforts of a dedicated
project team of LOMA staff members and consultants who were responsible for
writing, editing, and revising the textbook’s content; developing learning aids and
study materials to accompany the textbook; and for overseeing the production of
the textbook and the course portal.
Authors: Jo Ann S. Appleton, FLMI, PCS, ALHC,

HIA, CEBS
Elizabeth A. Mulligan, FLMI, FLHC, PCS,
PAHM, AAPA, AIRC, ARA AIAA
Manuscript Editor: Sharon Allen-Peterson, FLMI, ACS, AIRC,
PAHM
Examinations Editor: Sean Schaeffer Gilley, FLMI, ACS, HIA, CEBS,
AIAA, MHP, AIRC, AAPA, ARA, FLHC
Permissions Coordinator: Steven R. Silver, J.D., FLMI, AFSI, ACS,
AIRC, AIAA
Project Manager: Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP
Copy Editor: Robert D. Land, FLMI, ACS
Indexer: Robert D. Land, FLMI, ACS
Text Production:
Figure Designer: Nick Desoutter, FLMI, AAPA, PCS
Typesetter: Allison Ayers-Molette
Production Coordinator: Amy Stailey, ACS, ALMI
Production Gatekeeper: Sharon Allen-Peterson, FLMI, ACS, AIRC,
PAHM
Marketing Manager: Paul Wilson
Product Marketing: Kathryn H. Brown, PCS
Lead Graphic Designer: Marlene McAuley
Portal Production:
Project management: Gene Stone, FLMI, ACS, CLU
Portal design: Stephen Hill
Marlene McAuley
Portal text editor: Gene Stone, FLMI, ACS, CLU
Videos: Bill Maura
Learning Aids: Kristen L. Falk, FLMI, FFSI, AAPA, ACS,
AIAA, AIRC, ARA
Sean Schaeffer Gilley, FLMI, ACS, HIA, CEBS,
AIAA, MHP, AIRC, AAPA, ARA, FLHC
Jennifer W. Herrod, FLMI, PCS, AIAA, PAHM,
ARA, AIRC
Sharon Allen-Peterson, FLMI, ACS, AIRC,
PAHM
Top Ten Tough Topics: Melanie R. Green, FLMI, ACS, AIAA
Vivian Heeden, FLMI, ALHC, ACS, PAHM
TPG online conversions: David A. Lewis, FLMI, ACS

TPG authors: Melanie R. Green, FLMI, ACS, AIAA
Vivian D. Heeden, FLMI, ALHC, ACS, PAHM
Elizabeth A. Mulligan, FLMI, FLHC, PCS,
PAHM, AAPA, AIRC, ARA AIAA
Martha Parker, FLMI, ACS, ALHC, AIAA
Workflow Coordinator: Kelly Neeley, FLMI, ALHC, ACS, AIAA, PAHM
Manager, Product Sourcing: Carol Wiessner, ACS
Administrative Support: Mamunah Carter
Copyright © 2012 LL Global, Inc. All rights reserved.
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This text, or any part thereof, may not be reproduced or transmitted in any form
or by any means, electronic or mechanical, including photocopying, recording,
storage in an information retrieval system, or otherwise, without the prior written
permission of the publisher.
While a great deal of care has been taken to provide accurate, current, and authori-
tative information in regard to the subject matter covered in this book, the ideas,
suggestions, general principles, conclusions, and any other information presented
here are for general educational purposes only. This text is sold with the under-
standing that it is neither designed nor intended to provide the reader with legal,
accounting, investment, marketing, or any other types of professional business
management advice. If legal advice or other expert assistance is required, the ser-
vices of a competent professional should be sought.
ISBN 978-1-57974-381-9

Insurance Company Operations Table of Contents CONT.1
Contents
Preface.................................................................................................PREF.1
Acknowledgments.............................................................................. PREF.13
Introduction.........................................................................................INTRO.1
Using the Test Preparation Guide........................................................INTRO.3
Learning Aids............................................................................LRN AID.1
Module 1: Company Organization and Governance
Chapter 1: Organization and Operations.................................. 1.1

Stakeholders in an Insurance Company...................................................1.3
Owners....................................................................................................1.5
Customers...............................................................................................1.5
Producers................................................................................................1.6
Employees...............................................................................................1.6
Regulators...............................................................................................1.6
Rating Agencies......................................................................................1.7
Reinsurers...............................................................................................1.8
Other Stakeholders..................................................................................1.8
Balancing Stakeholder Interests..............................................................1.8
Levels of Management................................................................................1.9
Board of Directors..................................................................................1.9
Senior-Level Managers.........................................................................1.10
Lower-Level Managers.........................................................................1.10
Management Functions.............................................................................1.10
Planning................................................................................................1.11
Organizing............................................................................................1.12
Organizing Insurance Operations...........................................................1.14
Introduction to the Value Chain............................................................1.14
Traditional Ways Insurers Organize Work Activities............................1.16
Profit Centers / Strategic Business Units (SBUs).................................1.19
Committees...........................................................................................1.20
Holding Company Systems.......................................................................1.22
Downstream and Upstream Holding Companies..................................1.23

2 Table of Contents
CONT.2 Insurance Company Operations
Chapter 2: Corporate Governance, Ethics, and Control..... 2.1

Corporate Governance................................................................................2.2
Directing.......................................................................................................2.3
Ethics and Ethical Conduct........................................................................2.4
A Code of Conduct.................................................................................2.5
An Ethics Office......................................................................................2.5
Education................................................................................................2.6
Training...................................................................................................2.7
Membership in Associations...................................................................2.8
Controlling...................................................................................................2.9
Types of Controls..................................................................................2.10
Establishing Performance Standards....................................................2.13
Measuring Performance........................................................................2.13
Module 2: Support Functions
Chapter 3: Legal and Compliance................................................. 3.1

Organization of Legal and Compliance Functions...................................3.2
Responsibilities of the Legal Department.................................................3.3
Responsibilities to the Board..................................................................3.3
Responsibilities to Internal Functions.....................................................3.5
Responsibilities to External Parties........................................................3.6
Responsibilities of the Compliance Department.......................................3.8
Prevention...............................................................................................3.9
Education and Training.........................................................................3.10
Monitoring............................................................................................3.10
Market Conduct Examinations in the United States............................. 3.11
Chapter 4: Human Resources Management............................ 4.1

Organization of the Human Resources Department................................4.2
Human Resources Planning.......................................................................4.3
Projecting Staffing Needs.......................................................................4.4
Estimating the Labor Supply..................................................................4.7
Recruitment.................................................................................................4.8
Internal Recruitment...............................................................................4.8
External Recruitment............................................................................4.10
Employee Selection....................................................................................4.10
Employment Applications and Screening Interviews...........................4.10
Pre-Employment Testing......................................................................4.12
Employment Interviews........................................................................4.12
Background Checks and Drug Testing.................................................4.13
Training and Development.......................................................................4.13
Performance Evaluation...........................................................................4.14
Establishing Performance Goals...........................................................4.14
Monitoring and Reviewing Employee Performance............................4.16
Performance Evaluation Programs.......................................................4.16
Compensation and Employee Benefits....................................................4.18
Compliance.................................................................................................4.19

Chapter 5: Information and Technology................................... 5.1

Responsibilities of the IT Department.......................................................5.2
Organization of the IT Department...........................................................5.3
Information Management...........................................................................5.5
Databases................................................................................................5.6
Database Management Systems..............................................................5.6
Document Management Systems............................................................5.9
Workflow Management Systems..........................................................5.10
Business Process Technology....................................................................5.10
Transaction Processing Systems...........................................................5.11
Business Intelligence............................................................................5.11
Outsourcing IT Operations...................................................................5.13
Telecommunications..................................................................................5.14
Networks...............................................................................................5.14
Computer Telephony Integration..........................................................5.17
Other Telecommunications Technologies.............................................5.18
IT Security and Disaster Recovery..........................................................5.18
Module 3: Financial Functions

Chapter 6: Financial Management................................................ 6.1
Organization of Financial Management....................................................6.2
Accounting and Financial Reporting......................................................6.4
Treasury Operations................................................................................6.5
Investment Operations............................................................................6.6
Audit and Internal Control......................................................................6.8
Interdepartmental Responsibilities.........................................................6.9
Responsibilities of Financial Management..............................................6.10
Setting Financial Strategy.....................................................................6.10
Managing Risk......................................................................................6.11
Managing Solvency and Profitability...................................................6.14
Managing Capital..................................................................................6.15
Managing Cash Flows..........................................................................6.16
Providing Information to Stakeholders.................................................6.17
Financial Compliance................................................................................6.20
Tools to Monitor Solvency...................................................................6.22
Chapter 7: Accounting, Treasury Operations,

and Auditing............................................................................................... 7.1
Organization of Accounting, Treasury Operations, and Auditing..........7.2
Accounting...................................................................................................7.3
Users of Accounting Information...........................................................7.4
Accounting Systems.....................................................................................7.5
Financial Accounting..............................................................................7.6
Management Accounting......................................................................7.10
Treasury Operations.................................................................................7.12
Cash Management.................................................................................7.13
Liquidity Management..........................................................................7.14
Auditing......................................................................................................7.15
Internal Controls...................................................................................7.16
4 Table of Contents
Chapter 8: Investment Management........................................... 8.1

Investment Policy........................................................................................8.2
Investment Risk...........................................................................................8.3
Risk and Return......................................................................................8.3
Diversification.........................................................................................8.4
Investment Operations................................................................................8.5
Evaluating an Investment........................................................................8.5
Buying and Selling Securities.................................................................8.6
Investment Portfolios..................................................................................8.7
The General Account..............................................................................8.8
Separate Accounts...................................................................................8.8
Types of Investments...................................................................................8.9
Bonds......................................................................................................8.9
Mortgages.............................................................................................8.13
Stocks....................................................................................................8.14
Real Estate............................................................................................8.15
Policy Loans.........................................................................................8.16
Module 4: Marketing, Product Development,

and Distribution
Chapter 9: Marketing.......................................................................... 9.1

Organization of Marketing.........................................................................9.2
The Marketing Plan....................................................................................9.4
Communicating the Marketing Plan.......................................................9.5
The Marketing Mix.....................................................................................9.6
Product....................................................................................................9.6
Price........................................................................................................9.6
Promotion................................................................................................9.7
Distribution.............................................................................................9.8
Positioning....................................................................................................9.8
Basic Insurance Marketing Activities........................................................9.9
Identifying Markets.....................................................................................9.9
Segmenting Markets...............................................................................9.9
Target Marketing...................................................................................9.11
Target Marketing Strategies..................................................................9.11
Marketing Information.............................................................................9.13
Internal Databases.................................................................................9.14
Website Traffic Analysis.......................................................................9.14
Competitive and Market Intelligence...................................................9.14
Marketing Research..............................................................................9.15
Marketing Environment........................................................................9.16
Marketing Controls...................................................................................9.16

Chapter 10: Product Development.............................................10.1

The Product Development Process..........................................................10.3
Product Planning...................................................................................10.4
Comprehensive Business Analysis.......................................................10.4
Technical Design...................................................................................10.7
Product Implementation........................................................................10.8
Performance Monitoring and Review.................................................10.10
Chapter 11: Product Distribution................................................11.1

Personal Selling Distribution Systems..................................................... 11.2
Agents...................................................................................................11.4
Agent Channel Support.........................................................................11.8
Methods of Personal Selling...............................................................11.13
Salaried Sales Representatives............................................................11.15
Financial Advisors..............................................................................11.16
Third-Party-Institution Distribution Systems...................................... 11.16
Broker-Dealers....................................................................................11.16
Banks and Other Depository Institutions............................................11.17
Insurance Companies..........................................................................11.18
Direct Response Distribution Systems................................................... 11.19
Distribution Decisions............................................................................. 11.19
Costs....................................................................................................11.19
Control................................................................................................11.21
Expertise.............................................................................................11.21
Customers’ Characteristics.................................................................11.22
Product Characteristics.......................................................................11.22
External Marketing Environment.......................................................11.22
Module 5: Product Administration Functions

Chapter 12: Underwriting...............................................................12.1
New Business Processing...........................................................................12.3
Processing Life Insurance Applications................................................12.4
Processing Annuity New Business.......................................................12.4
Organization of New Business and Underwriting Operations..............12.5
Purpose of Underwriting..........................................................................12.6
Underwriting Philosophy and Guidelines.............................................12.8
The Underwriting Process........................................................................12.9
Field Underwriting and Teleunderwriting..........................................12.11
Medical, Financial, and Personal Underwriting.................................12.12
The Underwriting Decision................................................................12.13
Applying the Premium Rate...............................................................12.15
Control Mechanisms for Underwriting Operations.............................12.17
Authority Levels.................................................................................12.17
Other Underwriting Controls..............................................................12.17
Company Interrelationships and Underwriting...................................12.18
Group Underwriting...............................................................................12.19
The Group Underwriting Process.......................................................12.19
Risk Factors for Group Life Insurance...............................................12.21
Regulatory Requirements.......................................................................12.21
6 Table of Contents
Chapter 13: Claim and Annuity Benefit Administration.13.1

Organization of the Claim Department...................................................13.3
Claim Philosophy and Claim Practices...................................................13.4
Life Insurance Claim Process...................................................................13.5
Determining If Benefits Are Payable....................................................13.6
Calculating the Amount Payable.........................................................13.11
Paying the Proceeds............................................................................13.13
Identifying the Proper Payee...............................................................13.14
Claim Investigation.................................................................................13.15
Claim Fraud........................................................................................13.15
Quality Control in Claim Processing.....................................................13.16
Regulatory Requirements.......................................................................13.17
Model Unfair Claims Settlement Practices Act..................................13.18
International Laws..............................................................................13.18
Annuity Administration..........................................................................13.18
Annuity Death Benefit Administration...............................................13.18
Annuity Payout Administration..........................................................13.19
Chapter 14: Customer Service.......................................................14.1

Organization of the Customer Service Department...............................14.3
Typical Customer Service Job Positions...............................................14.4
Customer Service Department Relationships.......................................14.4
Effective Customer Service.......................................................................14.4
Education and Training.........................................................................14.6
Technology............................................................................................14.7
Customer Relationship Management....................................................14.8
Customer Service Processes......................................................................14.9
Fulfilling Customer Requests................................................................14.9
Handling Customer Complaints..........................................................14.14
Conserving, Up-Selling, and Cross-Selling........................................14.15
Customer Service Processes for Group Products...............................14.17
Control Mechanisms for Customer Service..........................................14.18
Qualitative Performance Measurements.............................................14.20
Quantitative Performance Measurements...........................................14.20
Glossary............................................................................................. GLOS.1
Index.................................................................................................INDEX.1

Insurance Company Operations Preface PREF.1
Preface
Insurance Company Operations, Third Edition describes how life companies
operate: how they are organized, how they are managed, and the roles of func-
tional units in developing, distributing, issuing, and administering life insurance
and annuity products. Readers will learn how an individual job fits into the entire
scope of an insurance company, as well as the importance of each employee’s con-
tribution to overall organizational success. The text is divided into five modules:

Module 1: Company Organization and Governance (Chapters 1-2)

Module 2: Support Functions (Chapters 3-5)

Module 3: Financial Functions (Chapters 6-8)

Module 4: Marketing, Product Development, and Distribution
(Chapters 9-11)

Module 5: Product Administration Functions (Chapters 12-14)
Acknowledgments
Insurance Company Operations, Third Edition is the result of the combined efforts
of industry experts who served on a textbook development panel, LIMRA staff,
and LOMA staff and consultants. The LOMA 290 authors are extremely grateful
for the dedication, knowledge, expertise, and guidance provided by all of these
individuals throughout the writing of this textbook.
LOMA 290 Textbook Development Panel

On behalf of LLGlobal and its membership, we would like to thank all of the
LOMA 290 textbook reviewers and the companies that supported their efforts.
Text reviewers are busy industry professionals who care enough about the edu-
cational needs of current and future industry employees to volunteer their time
and expertise to review a text’s content. The LOMA 290 text reviewers made
many substantive comments, provided suggestions for additional content, submit-
ted relevant research materials, and answered numerous questions. While they are
responsible for the accuracy and clarity of the text, the authors take responsibility
for any errors.
The following individuals participated in every aspect of this textbook revision
project from reviewing the course outline to reviewing all textbook chapters:
Matthew J. Budenz, CPA, FLMI

Manager, Finance
Consumers Life Insurance Company
John R. Cronin, C.F.E.
Securities Director
Vermont Securities Division

2 Preface
PREF.2 Insurance Company Operations
Susan Devanny, MBA, FLMI

Life Sales Consultant
State Farm Insurance
Vance F. Howard, FLMI
President
Shakespeare, Associates
Sue Jacobson, FLMI, ACS
Manager, Consumer Products
CUNA Mutual Life Insurance Company
Johnny Jones, FLMI, AALU, CLU, ChFC
Underwriting Consultant
National Accounts, a division of the Crump Companies
David Marshall, FALU, FLMI, FFSI, PCS, AAPA, AIAA, AIRC, ARA
Senior Underwriting Associate
New York Life Insurance Company
Michelle Muirhead, FLMI, CIE, MCM, CCP, AIRC, AIAA, ACS, HCAFA, FLHC
Special Claims Coordinator, Special Services
Physicians Mutual Insurance Company
Amulya Nori, PMP, FLMI, FIII, ACS, ARA
Principal Business Analyst
Computer Sciences Corporation (CSC)
Denise DB Olivares, CLU, ChFC
Product Director, US Products Division
CIGNA
Kimberly Reynolds, FLMI, ACS, HIA
Second Vice President, Training and Development
Aflac
R. Maurice Stebbins, FLMI, FLHC, ACS, HIA, ARA, AIRC
Instructor, Medical Billing and Coding
Tucson College
Raymond E Vargus, AIAA, ACS, AIRC, FLHC
Client Services Consultant
MetLife
The following individuals reviewed portions of the text or provided expert
guidance or other assistance with this textbook revision project:
Sean Clark, MBA, FLMI, ACS, AFSI, AIAA, AIRC, ARA
Senior Accountant
Great American Financial Resources, Inc.
Tan Eng Bee, SRN, ANZIIF (Senior Associate), ACS, FLMI, FLHC, FAHM,
MBA, CFP CERT TM
Technical Advisor
Asia Assistance Network (M) Sdn Bhd

Insurance Company Operations Preface PREF.3
Ferny Espinoza, FLMI, FFSI, ACS

Director of IT Operations
Transamerica Life Insurance Co
Frea Errington, FLMI, FALU
Senior Underwriter
Transamerica Life Insurance Co
Gregory S. Jordan, CPA, CIA, FLMI
Vice President, Internal Audit
Nationwide Insurance
De Keimach, PCS, AIRC, AAPA
Senior Compliance Consultant
Sun Life Financial
Kevin Laskowski, FLMI, FFSI, AAPA, ARA, AIRC, AIAA, ACS, ChFC, CLU
Senior Applications Developer
Pacific Life Insurance Company
Melanie Raischel, CPA, FLMI
Supervisor, General Accounting
Modern Woodmen of America
Dave Rose, ChFC, FLMI/M
Assistant Vice President, Information Technology
Lincoln Financial Group
Adam Zambuto
Senior Marketing Research Consultant
MetLife
Jane Zhao, MBA, FLMI, ARA
Operations Analyst
Manulife Financial Corporation, Reinsurance Division
LIMRA
We thank the following LIMRA colleagues who provided expert guidance, sub-
mitted relevant research materials, and answered numerous questions during this
text’s development:
Thomas P. Caraher
Vice President, Compliance and Regulatory Services
Andy Khoo, MBA, CFP, FLMI, AIAA, ACS
Managing Director, The Centre for Professional Development
Patrick T. Leary
Assistant Vice President, Distribution Research
Lucian Lombardi
Vice President, Distribution Research
Laurence J. Niland, CLU
Senior Regulatory Advisor

4 Preface
PREF.4 Insurance Company Operations
LOMA Staff/Consultants
The authors wish to thank the LOMA 290 Course project team members for all
of their hard work. We also want to thank Gene Stone, FLMI, ACS, CLU, and
Miriam A. Orsina, FLMI, PCS, ARA, PAHM, who wrote the previous edition of
Insurance Company Operations, and upon which much of this edition is based. In
addition, we would be remiss if we didn’t thank other LOMA staff members who
graciously provided expert advice on a variety of topics: Susan Conant, FLMI,
HIA, CEBS; Harriett E. Jones, J.D., FLMI, ACS, AIRC; and Lisa M. Kozlowski,
FLMI, FFSI, CLU, ChFC, AIAA, AIRC, ARA, FLHC, AAPA, ACS.
And, finally, we extend a very special thank you to Julia K. Wooley, FLMI,
ACS, ALHC, HIA, MHP, Assistant Vice President, Learning Content Develop-
ment, who served as Project Manager and provided guidance and support through-
out the project; and Katherine C. Milligan, FLMI, ACS, ALHC, Vice President,
Education and Training Division, who provided leadership, guidance, resources,
and support for this project.
Jo Ann S. Appleton, FLMI, PCS, ALHC, HIA, CEBS

Elizabeth A. Mulligan, FLMI, FLHC, PCS, PAHM, AAPA, AIRC, ARA AIAA

Insurance Company Operations Introduction INTRO.1
Introduction
The purpose of Insurance Company Operations, Third Edition is to provide indus-
try employees with an overview of how insurance companies operate within
today’s global environment. To enhance your learning experience, LOMA makes
available for this course a Course Portal that is accessible upon course enrollment
in LOMANET. A LOMA Course Portal is an online resource from which learners
access everything they need to study and prepare for the course examination. The
Course Portal organizes the assigned text material into convenient Modules—
chapter clusters that help to focus the learning process by breaking up the course
content into meaningful sections. In addition to the assigned study materials, the
Course Portal provides access to an array of blended learning resources, including
multimedia features designed to enhance the learning experience. The LOMA 290
Course Portal provides access to

An introductory course video

Protected PDFs of the assigned text and Test Preparation Guide, which can be
printed or read online

The interactive version of the Test Preparation Guide’s Practice Questions and
Sample Exam

Review tools, including Learning Aids—animations of important concepts—
and a “Top Ten Tough Topics” tutorial

Recommended study plans to help you set goals and manage your learning
experience

Related links which help you apply the course instruction to the real world
LOMA 290 is part of the Associate, Life Management Institute (ALMI) and Fel-
low, Life Management Institute (FLMI) program. Students preparing to take
the examination for LOMA 290 will find that the assigned study materials—the
protected PDFs of the text and Test Preparation Guide—include many features
designed to help learners more easily understand the course content, organize
their study, and prepare for the examination. These features include lists of Learn-
ing Aid topics available on the Course Portal, chapter outlines, chapter learning
objectives, key terms, figures containing real-world examples of course content,
and a comprehensive glossary. As we describe each of these features, we give you
suggestions for studying the material.

Learning Aids and Top Ten Tough Topics. A list of Learning Aids is provided
in the protected PDF for the entire text as well as for each Module. Review
this list to become familiar with topics for which an animated learning aid is
available on the Course Portal. Viewing these Learning Aids allows you to see
topics in action or to view topics from a different perspective than from simply
reading about them in the text. Also included is a Top Ten Tough Topics tuto-
rial. This tutorial contains animations and study tips for topics that learners
often find difficult when answering questions on the examination. Both the
Learning Aids and the Top Ten Tough Topics tutorial enhance the learning
experience, appeal to a variety of learning styles, and offer a great way for
learners to advance their understanding and retention of course content.

2 Introduction
INTRO.2 Insurance Company Operations

Learning Objectives. The first page of each chapter contains a list of learning
objectives to help you focus your studies. Before reading each chapter, review
these learning objectives. Then, as you read the chapter, look for material that
will help you meet the learning objectives. The interactive version of the Test
Preparation Guide’s Practice Questions and Sample Exam questions (acces-
sible from the Course Portal) are linked to the learning objectives to give you
an idea of how the learning objective might be measured on an examination, as
well as to help you assess your mastery of the learning objectives.

Chapter Outline. Each chapter contains an outline of the chapter. Review this
outline to gain an overview of the major topics that will be covered; then scan
through the chapter to become familiar with how the information is presented.
By looking at the headings, you can gain a preview of how various subjects in
each chapter relate to each other.

Key Terms. This text explains key terms that apply to the text material and,
where appropriate, reviews key terms previously presented in LOMA courses.
Each key term is highlighted with bold italic type when the term is defined and
is included in a list of key terms at the end of each chapter. All key terms also
appear in a comprehensive glossary at the end of the protected PDF of the text.
As you read each chapter, pay special attention to the key terms.

Figures and Insights. We include figures and insights throughout the text to
illustrate and bring a real-world perspective to the text’s discussion of selected
topics. Information contained in figures and insights may be tested on the ex-
amination for the course.

Glossary. A comprehensive glossary that contains definitions of all key terms
appears at the end of the protected PDF of the text. Following each glossary
entry is a number in brackets that indicates the chapter in which the key term
is defined. The glossary also references important equivalent terms, acronyms,
and contrasting terms.
LOMA may periodically revise the assigned study materials for this course.
To ensure that you are studying from the correct materials, check the current
LOMA Education and Training Catalog available at www.loma.org or on the
Course Portal. Also be sure to visit the Announcements page on the Course
Portal to learn about important updates or corrections to the assigned study
materials.

Insurance Company Operations Introduction INTRO.3
Using the Test Preparation Guide

LOMA’s Test Preparation Guide for LOMA 290 (TPG) is assigned reading for
students preparing for the LOMA 290 examination. It contains Practice Ques-
tions organized by chapter and a full-scale Sample Exam. The TPG is available
in two versions, both accessible from the Course Portal: (1) a printable, protected
PDF that includes answer keys for all questions, and (2) an interactive version
that can be used online or downloaded for offline use. The interactive version has
the added advantage of answer-choice explanations for all Practice Questions and
Sample Exam questions. The TPG is designed to help you learn the course con-
tent and prepare for the examination. Used along with the assigned text, the TPG
will help you master the course material. Studies indicate that students who use
LOMA TPGs consistently perform significantly better on LOMA examina-
tions than students who do not use TPGs.

Insurance Company Operations Learning Aids LRN AID.1
Learning Aids
The LOMA 290 Course Portal, available online at www.LOMANET.org, includes
several Learning Aids designed to reinforce concepts covered in the assigned
text. If you are not already using the online Course Portal but would like access to
the Learning Aids for this course, please follow the log-in instructions provided
in your enrollment confirmation email, or call 1-800-ASK-LOMA or email edu-
cation@loma.org for assistance. PLEASE NOTE: Examination questions will be
based only on content presented in the assigned text.
Module 1 - Company Organization and

Governance
99 Insurance Stakeholders
99 The Four Functions of Management
99 Line and Support Functions
99 Upstream and Downstream Holding Companies
99 Ethical Conduct
99 Types of Controls
99 Measuring Performance
Module 2 - Support Functions

99 Compliance Activities
99 Lawsuits and Legal Proceedings
99 Market Conduct Exam
99 The Selection Process
99 Pre-Employment Tests
99 Performance Tools
99 Training Approaches
99 Characteristics of Valuable Information
99 Networks
99 Internet Business Applications

2 Learning Aids
LRN AID.2 Insurance Company Operations
Module 3 - Financial Functions

99 Organization of Financial Management
99 Risks Insurers Manage
99 Internal-External Audits
99 Financial Accounting vs. Management Accounting
99 Accounting Standards
99 General Account and Separate Accounts
99 Understanding Bond Values
Module 4 - Marketing, Product

Development, and Distribution
99 The Marketing Plan
99 Types of Promotion
99 Target Marketing Strategies
99 The Product Development Process
99 Types of Sales Materials
99 Distribution Decisions
99 Unfair Sales Practices
Module 5 - Product Administration Functions

99 Underwriting Classes
99 The Underwriting Process
99 Types of Medical Underwriting Reports
99 Claim Processing
99 Calculating the Benefit Amount
99 Settlement Options
99 Effective Customer Service
99 Qualitative and Quantitative Performance Measurements
99 Control Mechanisms

Insurance Company Operations Chapter 1: Organization and Operations 1.1
Chapter 1
Organization and Operations
Objectives
After studying this chapter, you should be able to
 Identify and describe stakeholder groups associated with an insurance
company
 Distinguish between external and internal customers
 Distinguish between solvency laws and market conduct laws
 Describe the basic levels of management and list the four functions of
management
 Describe organizational concepts such as authority, responsibility,
accountability, chain of command, delegation, centralized organizations,
and decentralized organizations
 Recognize typical functional areas for insurance operations and classify
functional units as line functions or support functions
 Explain how companies can use a value chain to identify competitive
advantages in operations
 Describe traditional ways that insurers organize operations
 Identify the primary characteristics of a profit center and a strategic
business unit (SBU)
 Identify different types of committees and describe the role that
committees play in a company’s operations
 Explain the holding company structure and list four advantages to
insurers of creating such structures

1.2 Chapter 1: Organization and Operations Insurance Company Operations
Outline
Stakeholders in an Insurance Management Functions
Company  Planning
 Owners  Organizing
 Customers
Organizing Insurance Operations
 Producers
 Introduction to the Value Chain
 Employees
 Traditional Ways Insurers Organize
 Regulators
Work Activities
 Rating Agencies
 Profit Centers / Strategic Business
 Reinsurers
Units (SBUs)
 Other Stakeholders
 Committees
 Balancing Stakeholder Interests
Holding Company Systems
Levels of Management
 Board of Directors  Downstream and Upstream Holding
Companies
 Senior-Level Managers
 Lower-Level Managers
I’m new to the insurance industry. Well . . .

actually, this is my first job so I guess I’m pretty
much new to every industry. I have a lot of
questions about how things work around here.
I worked in the accounting department of a

manufacturing company in my last job. I know
a bit about how companies operate but I
don’t know anything about insurance or how
insurance companies operate.
I
f you are new to the workplace or new to the insurance industry, you might
not fully understand how an insurance company operates. You may have heard
about underwriters or actuaries, but don’t understand what they do. You might
be uncertain about how all of the different areas in your company work together.
This course explains how life insurance companies operate. You will learn what
insurers do and how they do it. You’ll also see more clearly how your individual
efforts affect your company’s overall performance.
How is an insurance company like any other

company?
Just like any company, insurance companies operate to accomplish a purpose

or a mission. A company’s mission is outlined in its mission statement, a formal
written statement of the company’s fundamental purpose or reason for being. An
insurance company’s mission is to provide individuals with products that protect

them from financial losses associated with certain risks. Three broad categories of
insurance companies include: life insurance companies, health insurance compa-
nies, and property and casualty insurance companies. Life insurance companies
primarily issue and sell products that insure against financial losses associated
with the risk of death. A family or business with adequate life insurance coverage
may have less of a financial burden if the person whose life is covered under the
policy, the insured, was to die. Common uses for life insurance benefits include
Paying final expenses or debts after an insured’s death
Establishing a cash reserve for an insured’s survivors
Maintaining a standard of living for an insured’s survivors
Paying off a mortgage or paying rent
Paying estate and inheritance taxes
Funding a gift to a charitable organization
Helping a business continue operations after an insured’s death
Establishing an education fund for an insured’s children
Providing supplemental retirement income for a surviving spouse

Many life insurance companies also sell annuities. Through the sale of annui-
ties, insurance companies provide another form of financial security. Annuities
can be thought of as the opposite of life insurance. An annuity can protect against
the financial risk of outliving one’s savings or financial resources. Some life insur-
ance companies also sell medical insurance and disability products that provide
benefits to individuals when they are sick or disabled. However, other companies—
health insurance companies—sell only medical insurance or disability products.
Property and casualty insurance companies issue and sell insurance products that
provide financial protection against property damage or theft of personal property.
Property and casualty coverage also protects against the financial consequences of
causing injury to another person or damage to the property of others.
Do you know all of the different types of products your company sells? If not,
you might want to do some research before continuing. Knowing what types of
products your company sells will help you better understand how your company
operates.
Providing financial protection is an important

mission. But, what about profits? Aren’t those
important, too?
Stakeholders in an Insurance Company

To accomplish its mission and remain in business, an insurance company, or any
company, must make a profit. A company needs profits so that it can grow in value

and satisfy the various needs and requirements of the company’s stakeholders. A
stakeholder, also known as a constituent, is a party that has an interest in how a
company conducts its business. Lots of individuals and entities have an interest in
how an insurer conducts its business. Some of the most important stakeholders in
an insurance company are shown in Figure 1.1.
Figure 1.1. An Insurance Company’s Key Stakeholders

Owners Customers
Rating Employees
Agencies
Producers
Regulators
Trade
Reinsurers Organizations
Suppliers
Creditors
Owners
The owners of an insurance company expect the company to earn a profit. If the
company earns a profit, its value increases and it can return a portion of those
profits to the owners of the company.

The owners of a stock insurance company are called stockholders, or share-

holders, because they have purchased shares of stock in the company. Stock is
a type of financial security that represents an ownership interest in a company.
A security is a document or certificate that represents either (1) an ownership
interest in a business, or (2) a debt owed by a business, government, or agency.
Periodically, a company’s board of directors—the top level of management—may
distribute the company’s excess profit to the owners. The board of directors of
a stock insurance company pays this excess profit in the form of stockholder
dividends, which are payments to the stockholders.
A mutual insurance company is an insurance company owned by its
policyowners—businesses or individuals who have purchased policies from the
company. Mutual insurance companies do not issue and sell shares of stock. How-
ever, like stockholders, the policyowners of a mutual insurance company may
periodically receive a share of the company’s earnings if the company’s financial
results were positive during the previous year. In this situation, the board of direc-
tors of the mutual insurance company pays their policyowners a policy dividend,
which is an amount of money that is considered to be a return of a portion of the
premium the policyowner paid to the company in a policy year.
A third type of insurance provider—a fraternal benefit society—exists in the
United States and Canada. A fraternal benefit society, or fraternal insurer, is a
nonprofit organization formed to provide social and insurance benefits to its mem-
bers. Members of a fraternal benefit society may periodically receive premium
refunds in much the same manner as do the policyowners of a mutual insurance
company.
I work in customer service, and I spend most

of my day talking with our policyowners.
But sometimes I talk to other people,
like beneficiaries or producers. Are they
customers, too?
Customers
The most obvious customers of an insurance company are its policyowners. How-
ever, insureds, beneficiaries, and applicants are also customers of an insurer. All of
these individuals are external customers. An external customer is any person or
organization in a position to (1) buy or use the company’s products or (2) advise or
influence others to buy or use the company’s products. External customers expect
an insurer to be financially stable and pay financial obligations when required.
A good reputation and strong financials are good indicators that an insurer is
financially stable. However, customers require much more from insurers than just
financial stability. For many customers, insurance products look the same from
one insurer to the next. To attract and satisfy customers, insurers must provide
insurance products that satisfy customers’ needs at reasonable prices. Customers
also expect customer service that is convenient, easily accessible, reliable, accu-
rate, and courteous.

Producers
Because life insurance and annuity products typically are quite complex, they
are often sold by insurance producers. An insurance producer is any individual
who is licensed to sell insurance products, solicit sales, or negotiate insurance
contracts. Producers know that they are more likely to generate sales when they
work for companies with good reputations that offer a broad range of products to
satisfy customer needs.
Producers are external customers of an insurer because they advise customers
and organizational buyers regarding insurance product purchases. Many producers
operate largely independently of an insurer’s control and can take a client’s busi-
ness to the insurance company that best meets that client’s particular needs. As
external customers, producers expect insurers to respond to their needs promptly
and provide them with the best possible customer service, so that they, in turn, can
better serve their own clients.
Sometimes producers are internal customers of an insurer. An internal
customer is an employee or department that receives support from another
employee or department within the organization. Producers who are considered to
be internal customers receive a substantial amount of financial and other types of
organizational support from the insurer.
All types of producers expect insurance companies to pay them a competitive
commission—an amount of money, typically a percentage of the premiums paid
for the sale of an insurance policy. In addition, producers often expect other forms
of compensation such as incentive bonuses and insurance benefits.
Employees
Employees are also stakeholders of an insurer. In fact, they’re very important
stakeholders. The combined efforts of an insurance company’s employees have a
significant impact on the success of an insurance company’s operations and profit-
ability. Insurance company employees expect the insurer to operate in a reputable
and ethical manner so that the company will be able to remain in business. A
company that engages in unfair or illegal practices may be subject to government
actions that, at a minimum, will hurt profitability or possibly result in the loss of
the company’s right to remain in business.
Employees also expect fair and adequate compensation for their work as well as
a safe and comfortable environment in which to work. Governments regulate com-
pensation, employee benefits, and workplace safety in most industrialized coun-
tries. Still, it is in an insurer’s best interests to go beyond the minimum govern-
ment requirements in these areas to attract and retain highly qualified employees.
Regulators
Life insurance companies are subject to extensive government regulation designed
to protect customers and preserve an insurer’s long-term financial stability. Insur-
ers invest huge amounts of money into economies around the world and, as the
2008 global financial crisis illustrated, are vital to the world’s economy. Local,
national, and international laws all impact how insurers operate.

Essentially, the laws regulating insurance companies are designed to make sure
that insurers remain financially sound and uphold customers’ trust. Two broad
categories of insurance regulations throughout the world include solvency laws
and market conduct laws.
In general terms, solvency is the ability of a company to pay its debts, contrac-
tual obligations, and operating expenses on time. In most countries, solvency
regulation, which is referred to as prudential regulation in some countries,
focuses on making sure that insurance companies remain solvent.
Market conduct laws, known as marketplace regulation in some countries,
are designed to ensure that life insurance companies conduct their businesses
fairly and ethically. Market conduct laws focus on nonfinancial operations,
such as marketing and sales practices, policyowner service, underwriting
activities, claim administration practices, and complaint handling.
In addition to insurance regulations, insurance companies must comply with
the laws that govern all businesses—for example, taxation laws, employment laws,
and laws affecting investment transactions.
Rating Agencies
Private organizations known as rating agencies evaluate the financial condition
of insurers and provide that information to potential customers and investors. A
rating agency is an organization, owned independently of any insurer or govern-
ment body, that evaluates the financial condition of insurers and provides informa-
tion to potential customers of and investors in insurance companies. A.M. Best,
Fitch, Moody’s, Standard & Poor’s, and Weiss Ratings are examples of major
insurance rating agencies. Each rating agency has its own rating method for rank-
ing insurance companies. Figure 1.2 presents a portion of the favorable rating
categories A.M. Best, Weiss, and Standard & Poor’s use. To receive a favorable
quality rating from a rating agency, an insurer must satisfy that agency’s internally
Figure 1.2. Favorable Rating Categories
Rank A.M. Best Weiss Standard &

Poor’s
1 A++, A+ A AAA
Superior Excellent Extremely
Strong
2 A, A- B AA
Excellent Good Very Strong
3 B+++, B+ C A
Good Fair Strong

developed minimum standards relating to solvency and profitability. The fact that
the company being rated typically pays a fee to the rating agency has brought into
question the validity of some rating agencies’ decisions.1 Still, customers, produc-
ers, and investors generally prefer to do business with insurers that receive top
evaluations from rating agencies.
Reinsurers
Although insurers can predict with a good deal of accuracy the number of claims
they will receive, the dollar amount of those claims can fluctuate significantly. If
an insurer has to pay a series of large claims unexpectedly, the insurer’s financial
solvency might be negatively affected. To safeguard their financial stability and
maximize the amount of insurance they can safely issue, insurers use reinsurance.
To state it simply, reinsurance is insurance for insurance companies. In a rein-
surance transaction, the insurer that transfers all or part of an insurance risk is
known as the direct writer, or ceding company. The company that assumes the risk
from the direct writer is known as the reinsurer, or assuming company.
The relationship between a direct writer and a reinsurer is complicated. When a
direct writer purchases reinsurance, it becomes a customer of the reinsurer. How-
ever, in many ways, the direct writer and the reinsurer are each stakeholders in
the other company. The direct writer pays a premium to the reinsurer as well as
other agreed-upon expenses. The reinsurer might pay the direct writer an allow-
ance on the reinsured business or a portion of the claims on the reinsured business.
In addition, the reinsurer often provides the direct writer with expertise in many
areas, such as underwriting, reinsurance administration, or claim administration.
Both the direct writer and the reinsurer expect timely, accurate, and professional
customer service from each other and that the other will conduct its business in a
fair and equitable manner.
Other Stakeholders
Many other groups may have an interest in how an insurer operates its business
and could be stakeholders in the company depending on the circumstances. When
an insurer borrows money, banks and creditors become stakeholders in the insur-
ance company. Suppliers, industry trade associations, the media, nongovernmental
organizations, and public, social, or environmental groups may all be stakeholders
in an insurance company at various times.
Balancing Stakeholder Interests

All stakeholders have an interest in an insurance company’s continued solvency
and profitable operations. Beyond this overriding common interest, various stake-
holder interests can diverge from, and even conflict with, one another. For exam-
ple, if an insurer has excess profits, the owners are probably most interested in the
company declaring a large dividend payment. Employees are likely to want a pay
raise. Producers may wish for the company to expand into a new product line so
that they can be more competitive. In such a situation, the insurer cannot satisfy all
of these stakeholders’ interests at once. Every insurance company must be man-
aged in a way that identifies, safeguards, and prioritizes the interests of the various

stakeholder groups. Management is responsible for identifying the positions of

each stakeholder and ultimately deciding the way in which the insurer will act on
each stakeholder’s behalf.
Levels of Management
In a broad sense, there are four distinct levels of management: the board of direc-
tors, senior-level managers, middle-level managers, and first-level or supervisory
managers. Not every company has all of these levels of management. As a com-
pany’s size increases, so does the number of management levels.
Each level of management has varying degrees of authority, responsibility, and
accountability for work activities. Authority is an employee’s right to make deci-
sions, take action, and direct others to fulfill responsibilities. A responsibility is a
duty or a task that has been assigned to an employee. Accountability means that an
employee is answerable for how well he carries out his responsibilities. The board
of directors and senior-level managers have the authority and are responsible for
balancing stakeholder interests. They are also accountable to stakeholders for how
well they carry out these responsibilities.
Board of Directors
The top level of management in a company is the board of directors. The owners
of a company elect the board of directors, which meets regularly to review the
company’s activities and finances and to set broad company policies. The board of
directors appoints a chief executive officer (CEO) to be the head of the company,
as well as other executives, and holds these executives responsible for the com-
pany’s overall operations. Usually, the CEO and other principal executives serve
as members of the board.
Board members—such as the CEO and other principal executives—who hold
positions within the company in addition to their positions on the board are known
as inside directors. Inside directors are knowledgeable about the company’s oper-
ations. Board members who do not hold positions within the company are known
as outside directors or independent directors. Outside directors are usually busi-
nesspeople, professionals in academia, community leaders, or retired executives
of the company. Because of their experiences outside the company, outside direc-
tors often provide a broader, less biased perspective than inside directors. Some of
the duties that board members perform include
Setting major company policies
Evaluating the results of operations
Authorizing major transactions
Declaring dividends to be paid to stockholders or policyowners
Appointing the officers who actually operate the company
Setting compensation for the CEO and some of the other top-level executives

Senior-Level Managers
The most senior member of management is the CEO. In many companies, the
CEO is also the company president. The board of directors entrusts the CEO with
broad authority to oversee the administration of the company. Some companies
also appoint a chief operating officer (COO), who manages the day-to-day opera-
tions of a company, and a chief financial officer (CFO), who oversees an insurer’s
financial management policies and functions. Other typical senior-level managers
are a chief information officer (CIO) and a chief marketing officer (CMO). All of
these positions report to the CEO, as do other executives known as vice presidents.
Each vice president supervises and coordinates the work activities of a major divi-
sion of the company. These positions are known collectively as the company’s
executives or officers.
Lower-Level Managers
Below vice presidents are the company’s middle-level managers. Managers are
generally in charge of smaller units within a company division, known as depart-
ments. Middle-level managers are typically functional experts for the area they
manage. For example, the claim department manager will have a high degree of
expertise in claim administration.
First-level managers, or supervisors, are managers in charge of subunits of
departments. Supervisors have less latitude in interpreting the directives of top
management and spend more time in the direct supervision of nonmanagement
employees than do middle managers.
Aren’t all managers supervisors?
Management Functions
To a certain extent, all managers are supervisors. The board of directors supervises
senior-level management, and senior-level management supervises middle-level
management, and so on. However, supervision is just one aspect of a manager’s
job. The management process involves many interrelated organizational activities.
Traditionally, these activities have been divided into four management functions:
planning, organizing, directing, and controlling, as shown in Figure 1.3. Supervi-
sion corresponds to the formal functions of directing and controlling, which we
describe in Chapter 2. In this chapter, we focus on planning and organizing. Typi-
cally, the higher the level of management, the more the manager engages in plan-
ning and organizing activities.

Figure 1.3. Four Functions of Management
Planning: Organizing:
Sets goals and Coordinates resources
strategies to accomplish goals
Controlling: Directing:
Monitors and Leads, influences, and
corrects motivates
Planning
Planning is the process of preparing for the future by establishing appropriate
goals and formulating strategies and activities for achieving those goals. A goal is
a desired future outcome and is sometimes called an objective. A strategy is a plan
for achieving goals and outlines the tactics—required tasks and activities. Plan-
ning involves determining which strategy is most appropriate for accomplishing a
goal, taking into consideration company resources, strengths, weaknesses, and the
environment in which the company operates.
Under the direction of the board of directors, a company’s officers perform
strategic planning. Strategic planning is the process of determining an organiza-
tion’s major long-term corporate goals and the broad, overall courses of action or
strategies that the company will follow to achieve these goals. Insurers conduct
strategic planning for the company as a whole as well as for each operational area.
Strategic planning answers questions such as
Should we expand our current product line by selling a new type of product?

Should we acquire another company?
How can we use technology to expand product distribution?

A strategic plan covers a fairly long time horizon, such as three to five years,
and evolves as the insurer’s environment changes. A strategic plan must provide
guidance for the company’s future operations but be flexible enough to allow the
company to respond to changes in regulations, customer expectations, competi-
tion, technology, and economic conditions.
Middle-level managers translate the company’s strategic plans into plans for
day-to-day operations. Middle-level managers conduct operational planning,
also called tactical planning, which is a process during which they determine how
to accomplish the specific tasks that need to be performed to carry out the orga-
nization’s strategic plans. Operational planning covers a much shorter period than
does strategic planning—typically a year or less. Operational planning answers
questions such as
Should we hire additional employees to handle the administration of a new
product?
Should we increase the advertising budget because of a new product’s intro-

duction?
Should we purchase a new processing system or upgrade the current system?

Once middle-level managers have created an operational plan, supervisors are
responsible for implementing the plan. For example, if a middle-level manager
decides to purchase a new processing system, the supervisor will be responsible
for overseeing employee training on how to use it.
Organizing
Organizing is the process of assembling and coordinating required resources in
the most efficient and effective manner to attain organizational goals. Organiz-
ing enables a company to (1) assign job responsibilities to employees, (2) provide
employees with the proper authority to meet their responsibilities, and (3) provide
a process for holding employees accountable for their job performance.
Organizing involves dividing large work tasks into smaller activities through
a process known as division of labor. For example, the task of processing a life
insurance application can be broken down into underwriting activities and pol-
icy issue activities. Ideally, a company organizes all jobs so that employees can
develop expertise in the specific tasks associated with their job through training
and clearly communicated expectations.
The process of grouping similar or related work activities—jobs or processes—
into units is called departmentalization. Departmentalization makes it easier for
a company to
Establish and maintain a system of supervision
Create standardized measures for employee performance
Facilitate communication and coordination
Use resources efficiently

Figure 1.4 is an organization (org) chart—a visual display of the lines of

authority and responsibility within a company. The solid lines in the figure repre-
sent the formal lines of authority, or chain of command. The chain of command
identifies who reports to whom in the company, and supports the delegation of
authority. Delegation is the process of assigning authority and responsibility to
another employee for completing a specific task. An org chart may also use dotted
lines to indicate a nontraditional manager-employee reporting relationship. Dot-
ted-line relationships are most common when an employee reports to one manager
but may be accountable to another area for certain job responsibilities.
Figure 1.4. Org Chart
Board of Directors
Chief Executive Officer (CEO)
Vice President Vice President Vice President
Manager Manager Manager Manager Manager Manager Manager Manager Manager Manager
Centralized and Decentralized Organizations

A company can be a centralized organization or a decentralized organization.
A centralized organization is one in which top management retains most of the
decision-making authority for the entire company. A decentralized organization
is one in which top management shares decision-making authority with employees
at lower levels. In decentralized organizations, top management typically makes
decisions regarding general company policy, and delegates other types of deci-
sions to middle- and first-level managers.
Centralized and decentralized organizations each have advantages. For exam-
ple, company policies and actions in a centralized organization tend to be con-
sistent because one central, high-level authority makes the decisions. However,
a decentralized organization can respond more quickly to unexpected situations
because lower-level managers have more authority to make decisions, take action,
or direct others. Having authority dispersed to lower levels of an organization
can increase lower-level managers’ morale and provide them with career develop-
ment experience. Also, a decentralized approach can lead to personalized deci-
sions more closely attuned to specific customers’ needs. However, one drawback
of decentralization is that it can lead to inconsistencies in policies from one area
of the company to another.

In reality, centralization and decentralization are two ends of a continuum, and

no organization is ever completely centralized or decentralized. As companies
periodically adjust their positions on the continuum to adapt to changes in their
environments, they become more or less centralized.
Okay, that’s all very nice, but where do I fit in?
Organizing Insurance Operations

Carrying out the operations of a life insurance company requires the efforts of
many people who perform specific tasks that must be coordinated so that they
work efficiently and effectively together. The word function generally describes a
distinct type of work or an aspect of operations or management that requires spe-
cialized knowledge or technical skill. Figure 1.5 briefly describes functional areas
typically found in insurance companies.
In addition to the functional areas described in Figure 1.5, some life insurance
companies have other areas. For example, some life insurers have departments
specifically devoted to finance, auditing, and risk management. In other compa-
nies, however, finance, auditing, and risk management activities are part of other
functional areas and not organized as separate units.
Some of the functions shown in Figure 1.5 create value for an insurance cus-
tomer through various customer-oriented activities. These functions that create
customer value, often known as line functions, are typically marketing, new busi-
ness administration, underwriting, claim administration, annuity benefits admin-
istration, and customer service. Employees in these primary functional areas per-
form work that directly affects the production or administration of the company’s
insurance products. Other functional areas, called support functions, or staff
functions, provide support services to line functions or to other support func-
tions but do not produce or administer insurance products. Insurance company
support functions typically include actuarial, investments, information technol-
ogy, accounting, human resources, and legal and compliance. Insurance company
operations require that line functions and support functions work closely to coor-
dinate their activities.
Introduction to the Value Chain

You might better understand the differences between line functions and support
functions by looking at a value chain—a model that companies can use for ana-
lyzing which company activities contribute directly to a company’s competitive
position. The value chain model, developed by Michael Porter in the mid-1980s,
reflects the philosophy that a company and all of its resources are dedicated to
generating value for customers and profits for company owners. If customers do
not value the output of the company by purchasing the company’s products, the

Figure 1.5. Typical Functional Areas in Life Insurance Companies
Marketing/Sales: Assists with product development and design, and is responsible

for the promotion and distribution of insurance products
Actuarial: Ensures that the company conducts its operations on a mathematically

sound basis, assists with product development and financial design, determines the
amount of the company’s reserve liabilities, and establishes policy dividend amounts
New business administration: Oversees the policy issue process from application
receipt through issuance of the insurance policy
Underwriting: Ensures that the company classifies proposed life insureds so that
their mortality experience, as a group, falls within the range of the mortality rates
assumed at the time of the product’s financial design
Claim administration: Assesses life insurance claims and processes claim benefit
payments
Annuity benefits administration: Processes annuity benefit payments
Customer service: Assists the company's policyowners, insureds, beneficiaries,

annuity payees, producers, distributors, and company employees
Information technology: Develops and maintains the company’s computer systems

and oversees information management throughout the company
Investments: Manages the company's investments according to the guidelines set by

company management
Accounting: Maintains the financial records of each of the company’s businesses,

prepares reports on the company’s financial condition, and files required financial
statements with appropriate regulatory bodies
Treasury operations: Manages and invests the cash coming into and out of a
company
Human resources: Manages matters related to hiring, training, evaluating,

compensating, and terminating the company's employees
Legal: Represents the company in all legal matters, reviews and approves life insurance
and annuity policy forms, and drafts other contracts that insurers use in the course
of business
Compliance: Ensures that the company's operations comply with general business
laws, financial services laws, insurance laws, and insurance department regulations
that apply in each jurisdiction in which the company operates

Figure 1.6. Value Chain for Life Insurers
Inputs Marketing/ New Business Underwriting Customer Claim Profit

Sales Administration Service Administration
{
Legal/Compliance
Human Resources
Support
Functions Information/Technology
Investments
Accounting
owners will not realize profits.2 Figure 1.6 shows a simplified value chain for life
insurers. Each of the five links in the figure—marketing/sales, new business admin-
istration, underwriting, customer service, and claim administration—represent
activities that offer customer value. These activities are labeled value-added
activities. By optimizing customer value at each link and better coordinating
operations between links, insurers can develop competitive advantages that
increase company profits. For example, providing excellent customer service can
be a competitive advantage for an insurer. Although support activities are vital to
the operation of the value chain, they alone cannot create value for the customer.
Analyzing the value chain identifies existing or potential sources of competitive
advantages and is useful for both strategic and operational planning.
Are you saying that my department doesn’t

add value?
An insurer that successfully manages its support activities like accounting can
create cost-savings or other competitive advantages. For example, a company that
implements new information technology may see process improvements as well
as cost savings in how the insurer markets, underwrites, administers, and services
its products.
Traditional Ways Insurers Organize Work Activities

Life insurance companies can organize work activities by function, by product, by
territory, by distribution channel, by customer, or often by some combination of
these methods.

Organization by Function
An insurance company that is organized by function divides its operations accord-
ing to the work that each division performs. Each area is a separate unit or division
that performs its function for all of a company’s products. You can see in Figure
1.7 how the claim administration function handles claims for the company’s indi-
vidual life and group life insurance products.
The major advantages of organizing operations by function are its simplic-
ity and its focus on the development of managerial and technical skills in each
functional area. Organization by function usually works well in small companies
with centralized operations and in large centralized companies that offer only a
few product lines to fairly well-defined customer groups. As the number of differ-
ent products a company offers and the size and diversity of the company’s mar-
kets increase, organization by function alone becomes less effective. For example,
new specialty products and new markets might be neglected because of competing
demands for resources from larger product lines or markets.
Figure 1.7. Organization of Insurance Operations by Function
CEO
Accounting Human Resources
Investments Legal/Compliance
Information Technology Actuarial
New Business
Marketing/Sales Underwriting Customer Service
Administration
Claim Administration
Individual Life Group Life

Organization by Product
A life insurance company that organizes its operations by product distributes work
according to the company’s lines of insurance products. Such a structure allows the
company to compare different product lines more easily. Looking at Figure 1.8, you
can see that each line of business—individual life insurance, group life insurance,
and individual annuities—is responsible for performing actuarial, marketing, or
other administration activities for that product line. However, a few functions—
such as information technology, legal/compliance, and human resources—may be
handled through centrally administered units. Despite these few centralized areas,
organization by product tends to decentralize an organization because it allows
decisions related to particular products to be made by those most closely involved
with the product line.
Figure 1.8. Organization of Insurance Operations by Product
CEO
Information Technology Legal/Compliance
Individual Life Group Life Individual Annuities
Marketing/Sales Underwriting Actuarial Investments
New Business
Claim Administration Customer Service
Administration
Organization by Territory
A life insurance company may organize its operations by territory. For example,
an insurer that operates in several countries may have a separate division for each
country. Within one country, an insurer may divide its operations into regions
or districts. This type of organizational structure makes sense when regulatory
or language differences exist among the various regions in which the company
operates. When an insurer uses this structure, each division typically handles
the majority of its own actuarial, marketing, and other administrative functions.
Figure 1.9 illustrates organization by territory.

Organization by Distribution System

An insurer that organizes its structure by distribution system organizes its major
divisions by how the company distributes its products to customers. For example,
a company may have two major divisions: a personal sales division and a direct
marketing division. Subsequently, these two major divisions may be organized
according to one of the organization methods previously described.
Organization by Customer
Another type of organizational structure that insurers sometimes use is organiza-
tion by customer type. When an insurer organizes by customer type, the insurer
creates divisions based on particular customer groups such as household markets,
corporate markets, or small business markets. In this type of structure, all of the
marketing, actuarial, and other administrative functions are performed within the
division for each specific type of customer group.
Profit Centers / Strategic Business Units (SBUs)

An insurance company that organizes operations according to product, territory,
distribution system, or customer type typically operates each division as its own
profit center. A profit center is a line of business that (1) is evaluated on its profit-
ability, (2) is responsible for its own revenues and expenses, and (3) makes many
Figure 1.9. Organization of Insurance Operations by Territory
CEO
Information Technology Legal/Compliance
North American
Division Asian Division
Marketing/Sales Underwriting Actuarial Investments
New Business
Claim Administration Customer Service
Administration

of its own decisions regarding operations. In some companies, particularly large

companies that operate in many territories, profit centers are organized as strate-
gic business units. A strategic business unit (SBU) is an organizational unit that
acts like an independent business. An SBU typically will
Generate its own identifiable profits
Have its own set of customers and competitors
Have its own independent management
Have its own budget
Have its own set of strategic goals and strategies

Examples of SBUs for an insurance company might be individual or group divi-
sions, life insurance or health insurance operations, or property/casualty insurance
operations, to name a few. The primary advantage of creating profit centers or
SBUs is that management can identify lines of business or company divisions that
are performing above or below expectations. Such structures also allow decentral-
ized decision making so that employees closer to the external customer make deci-
sions. One common disadvantage of organizing as profit centers or SBUs is that
it leads to duplication of some support functions that might otherwise be central-
ized. To avoid costly duplications, some insurers create a shared services function
that performs specified business processes and distributes accountability for the
costs, timing, and quality of these processes among the profit centers or SBUs.
I’ve got it now. My company is organized by

product line because we have three divisions:
individual life, group life, and individual
annuities. And my accounting job is a support
function. Anything else I need to know?
Committees
Some aspects of a company’s operations fall outside of a single division or depart-
ment and require the expertise of different members of the company. To address
these needs, most companies establish special committees to bring together a
number of people from various areas, each of whom has other responsibilities
within the company. A committee is a group of people chosen to consider, inves-
tigate, or act on matters of a specific type. Committees exist at all levels of an
organization. A permanent committee that company executives use as a source of
continuing advice is called a standing committee. A company’s officers and mem-
bers of its board of directors make up several of the most important standing com-
mittees of any business. Figure 1.10 describes common standing committees that
are composed of board members. By participating on standing committees, board
members stay informed of the company’s activities during the intervals between
regular board meetings and can report on these activities at board meetings.

Figure 1.10. Committees of the Board of Directors
Executive committee: Deals with questions of

overall company policy, the lines of business that the
company sells, the territories in which it operates,
policies that affect the company’s employees, and
items not specifically assigned to other committees
of the board of directors
Investment committee: Determines the broad
investment policy of the company
Audit committee: Sets policy for the company’s
accounting department; reviews all company
policies and the internal audit plan; oversees internal
and external audits; reviews the company’s periodic
financial statements
Insurance companies also have interdepartmental standing committees com-

prising upper-level managers from different departments. The types and respon-
sibilities of such interdepartmental committees vary from insurer to insurer.
Examples of interdepartmental standing committees are shown in Figure 1.11.
Figure 1.11. Interdepartmental Standing Committees
Product development committee: Reviews market research and recommendations

from producers and various departments within the company to decide whether
enough consumer demand exists for the company to develop a new product or revise
a current product; may oversee and provide input on product development activities
Product implementation committee: Oversees product introduction and employee
and producer training for new products
Asset/liability committee: Analyzes the unique asset and liability characteristics
of a company’s products and asset portfolios; recommends optimal investment and
product design strategies to better manage these separate components
Budget committee: Oversees the annual budget for a company's estimated operating
revenues and expenses
Corporate communications committee: Reviews and coordinates the company's
policies on advertising, sales promotion, publicity, charitable contributions,
relationships with the public, and internal communications
Research committee: Analyzes product development and structure, operational
procedures, and actuarial problems; collects data and participates in intercompany
studies; appraises the company’s competitive position; reports on the actions of other
companies

In addition to their standing committees, companies also have various ad hoc

committees. An ad hoc committee, also called a project team, work group, or
task force, is a temporary committee that the company establishes for a specific
purpose, such as evaluating work processes to gain efficiencies or investigating
why claims are escalating in one geographical area. Once an ad hoc committee’s
purpose is accomplished, the committee is disbanded. Ad hoc committees usu-
ally consist of a project chairperson or project director and several committee
members. During the project, the committee members report to the committee
chairperson, although the members do not sever their ties with the departments
they represent.
The other day my boss was talking about a

subsiderary. . . . I mean subsidi—. Whatever!
What is that?
Holding Company Systems

So far, we’ve discussed the internal organizational structure of a single insurance
company. However, an insurance company may be part of a holding company
structure. A holding company is a company that has a controlling interest in one
or more other companies. A controlling interest exists when one company owns
enough shares of another company’s stock to control that company’s operations. A
company that is owned or controlled by another company is known as a subsidiary
of the holding company.
Stock insurance companies can form a holding company and buy a controlling
interest in other companies. If within legal constraints, stock insurers can operate
as a subsidiary in a holding company arrangement. Since a mutual insurance com-
pany does not issue stock, other companies cannot buy a controlling interest in a
mutual insurance company. However, a mutual insurance company can establish
subsidiaries by purchasing the stock of other companies.
A holding company and its subsidiaries typically operate as distinct corporate
entities under their own names. Sometimes the names of the companies are similar
so that customers will associate one company with another. However, the names
of the companies may have no relationship to one another. This is particularly true
when the companies are in widely differing industries. The holding company’s
management typically engages in long-range strategic planning for the entire hold-
ing company system and allocates financial resources among the companies in the
holding company system. However, each subsidiary typically maintains its own
management team which makes operating decisions for that subsidiary. A holding
company structure offers several advantages:
A holding company structure eliminates some of the potential corporate
culture clashes and other problems that can occur as a result of combining two
or more companies.
A holding company structure allows the holding company to diversify the
products and services it offers and, as a result, protect the company from the
risks involved in concentrating in just one type of business.

A holding company often has greater access to external funds—either through

borrowing or by issuing shares of stock in the holding company—than does an
individual insurance company.
A subsidiary can transfer funds to the holding company, within limits estab-
lished by laws, and thereby eliminate the need for the holding company to find
external sources of funds.
Insurance regulators are wary of potential abuses in holding company arrange-
ments. For example, a holding company might raid the assets of an insurance sub-
sidiary and put the policyowners and beneficiaries of the insurer at risk. To avoid
such a situation, regulators in some jurisdictions, including all states within the
United States, have enacted laws requiring that the assets and liabilities of an
insurance subsidiary be kept separate from those of the holding company.
Downstream and Upstream Holding Companies

Holding companies can be created either downstream or upstream. A downstream
holding company is a holding company that is owned or controlled by the com-
pany that forms it. In turn, the downstream holding company owns or controls
another subsidiary company or companies. Stock insurers and mutual insurers can
both own subsidiaries in a downstream holding company arrangement. Figure 1.12
illustrates a hypothetical downstream holding company arrangement. You can see
in this figure how Best Life effectively controls both Best View Life and Large
Life through the holding company that it has created.
Figure 1.12. Downstream Holding Company
Best Life
Insurance
Company
Creates holding company
Best Holdings, Inc.
Owns subsidiaries
President reports to Best Life CEO
Best View Life Large Life

Insurance Company Insurance Company
President reports President reports

to Best Holdings to Best Holdings
President President

An upstream holding company is a holding company that controls the corpora-

tion that formed it and can also own other subsidiaries. Stock insurers can form or
be purchased by an upstream holding company. Some jurisdictions do not allow
mutual insurers to form an upstream holding company. However, several states
in the United States have enacted legislation that allows mutual insurers to form
mutual insurance holding companies (MIHCs).3 The MIHC structure is compli-
cated and involves splitting the mutual insurer into two or three distinct busi-
ness entities, with one being a stock company. Figure 1.13 illustrates a hypotheti-
cal upstream holding company arrangement. You can see how once the insurer
creates Best Holdings Inc., the senior-level management of all three subsidiary
companies report to the CEO of Best Holdings Inc.
Figure 1.13. Upstream Holding Company
Best Holdings, Inc.
Creates Owns subsidiaries and the

holding insurer that created it
company
Best Life Best View Life Large Life

Insurance Company Insurance Company Insurance Company
Key Terms
mission statement solvency
insured rating agency
stakeholder reinsurance
stockholder direct writer
stock reinsurer
security authority
board of directors responsibility
stockholder dividend accountability
policyowner chief executive officer (CEO)
policy dividend inside director
external customer outside director
insurance producer chief operating officer (COO)
internal customer chief financial officer (CFO)
commission planning

goal line function

strategy support function
tactics value chain
strategic planning profit center
operational planning strategic business unit (SBU)
organizing committee
division of labor standing committee
departmentalization ad hoc committee
organization (org) chart holding company
chain of command controlling interest
delegation subsidiary
centralized organization downstream holding company
decentralized organization upstream holding company
function
Additional Activities
If you want to relate the information in this chapter to your company, try these
activities:
Think about your company’s customers and your job. Who do you primarily
serve in your job? Internal customers, external customers, or both?
On your company’s website, find your company’s ratings and identify which
rating agencies evaluate your company.
On your company’s website, find the list of your company’s board of directors
(usually under Investor Relations or Governance) and read about the com-
pany’s officers and the standing committees of the board.
How is your company organized? Find a copy of your company’s organization
chart. Can you find your own position on the chart?
Endnotes
1. David Serchuk, “Playing the Ratings Game,” Forbes, 10 August 2009, http://www.forbes.
com/2009/08/10/ratings-agencies-conflict-intelligent-investing-interest.html (24 March 2011).
2. “The Value Chain,” NetMBA.com, http://www.netmba.com/strategy/value-chain (24 March 2011).
3. Christian J. DesRochers, “Mutual Insurance Holding Companies: An Update,” Small Talk, May 1998, http://
www.soa.org/library/newsletters/small-talk/1998/may/stn-1998-iss11-desrochers.pdf (24 March 2011).

Insurance Company Operations Chapter 2: Corporate Governance, Ethics, and Control 2.1
Chapter 2
Corporate Governance,
Ethics, and Control
Objectives
 Define corporate governance and identify the elements necessary for
good governance
 Describe the importance of directing as a management function and
identify the managerial activities associated with directing
 Define ethics and identify ways in which insurers foster a culture of
ethical behavior
 Describe insider trading and recognize examples of inside information
 Describe types of customer-related confidential information and how
insurance company employees should handle such information to comply
with privacy and confidentiality requirements
 Identify education programs and professional associations affiliated with
the life insurance industry
 Describe control as a management function and the circular nature of the
control cycle
 Describe the three primary types of control mechanisms in an insurance
company and identify examples of each type

2.2 Chapter 2: Corporate Governance, Ethics, and Control Insurance Company Operations
Outline
Corporate Governance Controlling
Directing  Types of Controls
 Establishing Performance Standards
Ethics and Ethical Conduct  Measuring Performance
 A Code of Conduct
 An Ethics Office
 Education
 Training
 Membership in Associations
The word is that one of our suppliers has been

paying off someone in accounting to make
sure we continue our business relationship
with them. I can’t believe something like that
happened in my department.
U
nfortunately people sometimes act in dishonest ways, whether in their per-
sonal lives or in the workplace. You’ve probably come across instances in
your workplace where someone has acted in a way that made you uncom-
fortable. Highly publicized examples of corporate misconduct also illustrate that
dishonest behavior can occur at all levels of a company, from the board of directors
on down.
As we described in Chapter 1, a corporation has many responsibilities to its
stakeholders, and perhaps the most important is to increase the company’s value.
However, a company’s efforts to satisfy that responsibility should not ignore its
other responsibilities to operate ethically and establish a work environment that
encourages employees to behave ethically. Companies that do so risk significant
adverse legal and monetary consequences. A system of good corporate gover-
nance that promotes transparency within a company’s operations, and control pro-
cedures that establish accountability, can help a company operate ethically and
better satisfy all of its stakeholder responsibilities.
Corporate Governance
Corporate governance refers to a system of policies and processes for directing
and controlling a corporation’s activities that emphasizes accountability and integ-
rity in how the company fulfills its mission on behalf of all of its stakeholders.1 A
good system of corporate governance should keep the organization from engaging
in behaviors that might harm the stakeholders.
The increased emphasis on corporate governance in recent years can be attrib-
uted in part to regulations enacted in many countries. In the United States, the
federal Sarbanes-Oxley Act of 2002, also known as Sarb-Ox or SOX, sets new
or enhanced standards for corporate controls and increases regulatory oversight.
Figure 2.1 explains how some other countries have addressed corporate gover-
nance. In addition, well-publicized cases of corporate mismanagement have made

Figure 2.1. Corporate Governance Around the World
United Kingdom—UK Combined Code on Corporate Gover-

nance sets out standards of good practice in relation to board
leadership and effectiveness, remuneration, accountability, and
relations with shareholders.
India—The Companies Bill (2009 Amendment) establishes
the duties of board directors and sets out to improve corporate
governance by strengthening the audit function.
Japan—The Financial Instruments and Exchange Law pro-
motes better financial reporting and disclosure to shareholders
and strengthens internal controls.
companies that can demonstrate good corporate governance much more valuable
to their stakeholders, and to those interested in becoming stakeholders.
Remember the four functions of management—planning, organizing, direct-
ing, and controlling—introduced in Chapter 1. Although governance is most
closely associated with the functions of directing and controlling, management
planning and organizing are also important components. Good corporate gover-
nance requires
Strategic plans that focus on balancing the needs of all stakeholders
Organizational structures and processes that are efficient and work together
effectively to create value for stakeholders
Appropriate company resources (financial, physical, technological, and human)
An ethical organizational culture and leadership that balances risk and rewards
Control systems at all levels of the company that provide transparency and
accountability to stakeholders
Throughout the text, we describe the processes insurers use to achieve strategic
and operational goals effectively and efficiently. We also look at how companies
allocate resources within functional areas for their optimum use. In this chapter,
we focus on the two traditional functions of management known as directing and
controlling and how an ethical culture, ethical leadership, and good control sys-
tems contribute to good corporate governance.
Directing
Mary Parker Follett, a management theorist, defined management as “the art of
getting things done through others.”2 Organizational plans and organizational
structures mean very little without people to carry out the plans and work in the
structures. To execute the management function known as directing, managers
must ensure that employees perform appropriate activities in the appropriate way
to achieve company objectives. The managerial activities of directing include
(1) leading, (2) motivating, (3) supervising, (4) communicating, and (5) facilitating.

How well managers direct their employees determines, to a large extent, how suc-
cessful the company will be. Activities that impact how well managers are able to
direct employees include
Recruiting and hiring qualified individuals
Providing employees with opportunities for training and education
Having in place a system for monitoring, evaluating, and regulating employees
Rewarding employees equitably through compensation and benefits
Creating and maintaining an ethical work environment

We address recruiting, hiring, training, evaluation, and compensation in Chap-
ter 4. Let’s look now at creating and maintaining an ethical work environment.
Isn’t acting ethically just a matter of following

the law?
Ethics and Ethical Conduct

Following the law is the minimum expected from an insurance company or an
insurance company employee. Acting ethically means doing the right thing even
if it’s not required by law. Ethics is a system of accepted standards of conduct
and moral judgment that combines the elements of honesty, integrity, and fair
treatment. When a company operates ethically, the company gains and keeps the
trust of its customers, as well as other stakeholders. For a life insurance company,
keeping the trust of its customers is vital to its continued existence. Customers pay
money to an insurance company over long periods of time, sometimes for decades,
trusting that the insurer will manage the money appropriately and be able to pay
promised benefits when they are due.
To foster an ethical environment that promotes good corporate governance and
compliance with laws and regulations, a company must respect its stakeholders,
compete fairly and within the law, and be a responsible corporate citizen. Specific
actions that insurers can take to encourage ethical behavior within the organiza-
tion include
Establishing a code of conduct for employees and producers
Establishing an ethics office and an ombudsman
Promoting employee education and training
Encouraging employee membership in industry associations

A Code of Conduct
A code of conduct, also known as a code of business conduct or a code of ethics, is
a formal statement of a company’s values and its expectations for how its employees
should behave in the course of business. A code of conduct helps employees evalu-
ate the appropriateness of various responses to a given situation. To be most effec-
tive, a code of conduct should refer to specific practices that may be encountered in
the course of the company’s work, followed by explanations of what the company
believes would be the proper response.
Example: The Fair Insurance Company’s Code of Conduct states that

“All vendors, suppliers, and consultants shall be chosen based on their
reputation, integrity, quality, delivery, and their ability to competitively
meet the Company’s needs. You should never accept cash or cash
equivalents during a bidding process or contract negotiation.”
Of course, not every ethical dilemma can be addressed in a code of conduct. In

an ethical work environment, employees are encouraged to talk with their man-
agers, or with other company resource staff, whenever a question arises that the
company’s code of conduct does not address. Employees often are required to
sign their company’s code of conduct each year to verify that they have read and
understand how they are to behave in the workplace. Involving employees in the
process of reviewing and revising a code of conduct can also be a valuable ethical
learning experience.
An Ethics Office
Another way insurers can make ethics an integral part of operations is to establish
an ethics office, a department in which employees can receive advice or counsel
from qualified professionals about how to handle ethical issues and also report
ethical misconduct. An employee who seeks advice about an ethical matter some-
times wishes to remain anonymous. For example, you might have witnessed mis-
conduct in the workplace but are afraid to report it to your supervisor because you
are unsure how the supervisor might react. A corporate ethics office can provide
anonymity while still bringing the matter to management’s attention. Some com-
panies maintain an ethics hotline or website that allows employees to anonymously
report suspected violations of the code of conduct or other unethical activity.
Some companies have gone further by establishing an organizational
ombudsman—an independent, impartial, and confidential professional who pro-
vides assistance to a company’s stakeholders. For example, an employee may feel
harassed by a manager or a customer may believe that she was treated unfairly
by a company employee. An organizational ombudsman may be able to address a
minor problem in the workplace or in a company’s processes before the problem
escalates or becomes systemic. To maintain neutrality, the ombudsman typically
reports directly to the board of directors or CEO. In addition to acting as a facilita-
tor among stakeholders, an ombudsman coordinates the development of policies
and procedures in the workplace that promote ethical behavior. The ombudsman
also acts as a companywide resource for improving business conduct by sharing
best practices and addressing any systemic organizational problems.3

Education
Encouraging employees and producers to pursue further education is another way
to promote ethical behavior and professionalism. Courses in ethics, insurance, and
general business are often available through local colleges and continuing edu-
cation organizations. Figure 2.2 lists education programs that are designed spe-
cifically for the insurance industry. Education programs specific to an employee’s
particular field can increase job knowledge while reinforcing proper business
behaviors.
Figure 2.2. Examples of Insurance Education Programs
Sponsoring Organization Primary Target Audience Programs
LOMA Home Office Employees • Fellow, Life Management

Institute (FLMI)
• Associate, Life
Management Institute
(ALMI)
• Associate, Customer
Service (ACS)
• Associate, Annuity
Principles and
Administration (AAPA)
• Several other Associate
programs
The American College Insurance Agents and • Chartered Life Underwriter

Producers (CLU)
• Chartered Financial
Consultant (ChFC)
Association of Home Office Home Office Underwriters • Fellow, Academy of Life
Underwriters (AHOU) Underwriting (FALU)
• Associate, Academy of Life
Underwriting (AALU)
Chartered Insurance Institute Home Office Employees • Fellow of the Chartered
(CII) Insurance Institute
• Associate of the Chartered
Insurance Institute
International Claim Claims Employees • Fellow, Life and Health

Association (ICA) Claims (FLHC)
• Associate, Life and Health
Claims (ALHC)
Society of Actuaries (SOA) Actuaries • Fellow, Society of Actuaries
(FSA)
• Associate, Society of
Actuaries (ASA)

Training
Ethics training should be an ongoing process that begins with new employee ori-
entation and continues regularly throughout an employee’s career. Companies
provide this training either online or in-person. Often ethics training focuses on
ensuring employee compliance with certain key laws. Two important areas of
compliance that insurers often address during ethics training are insider trading
and privacy and confidentiality requirements.
Insider Trading
Insider trading is buying or selling a company’s securities (stocks or bonds) based
upon inside information. Inside information is a company’s nonpublic, material
information that employees and other individuals associated with the company
are restricted from disclosing to third parties or using for their individual benefit.
Nonpublic information is any company information that has not been disclosed to
the public. Material information is any company information that might influence
the market price of a company’s securities. Examples of inside information include
nonpublic information about the company’s
Financial performance
Marketing strategies
Ongoing civil/criminal lawsuits
Arbitration results
Product design assumptions

Laws in the United States and in many jurisdictions around the world, as well
as the policies of many insurance companies, forbid insider trading.
If I know our company’s earnings are going

to be better than projected, can I buy my
company’s stock before the information is
made public?
Nonpublic information about a company’s earnings is an example of inside

information. If there is a substantial likelihood that nonpublic information might
affect the price of a company’s stock, then ethically and legally, an employee is
prohibited from purchasing the company’s stock or from sharing this information
with another person who might purchase the company’s stock.
Privacy and Confidentiality

Insurance companies acquire a lot of private information in the course of their
business operations. Insurers have a responsibility to train employees so that they
handle all information in an ethical and confidential manner that complies with
relevant privacy laws. In general, employees should not disclose private infor-
mation to anyone unless for a legitimate business or legal purpose. In addition,
when information is disclosed to another party, it should be limited to the amount

necessary to fulfill the business or legal purpose. Employees are cautioned, in

particular, to treat information transmitted through e-mails or over the Internet as
public communications. Examples of customer-related information that must be
kept confidential include
Financial information, such as income, assets, debts, or credit history
Health information, such as medical records or prescription records
Personal information, such as driving records, hobbies, lifestyle choices

Employees are instructed to exercise special care when handling personally
identifiable information (PII). PII can be used to uniquely identify a person and
includes, but is not limited to (1) name, (2) Social Security or social insurance
number, (3) address, (4) telephone number, (5) e-mail address, or (6) mother’s
maiden name.
Membership in Associations
Industry associations typically have a strong influence on the ethics and profes-
sionalism a particular industry exhibits. Associations influence industry profes-
sionalism by promoting high standards of ethical conduct in their chosen field.
Professional associations give individuals with similar interests, training, and cre-
dentials the opportunity to meet, exchange information, increase their knowledge,
and express their views about developments in their professions. Some of the pro-
fessional associations that are important to the life insurance industry include
Actuarial associations, such as the Society of Actuaries (SOA) in the United
States, the Singapore Society of Actuaries, the Actuarial Society of India, and
the Canadian Institute of Actuaries
Producer associations, such as the U.S. National Association of Insurance
and Financial Advisors (NAIFA) and the Life Underwriters Association of
Canada
Associations of legal professionals, such as the Association of Life Insurance
Counsel (ALIC) in the United States
The Society of Financial Service Professionals, which is an organization for
members of the financial services industry in the United States who hold or
are pursuing Chartered Life Underwriter (CLU) or Chartered Financial Con-
sultant (ChFC) designations or other specified financial services designations
LOMA Societies, which provide Society members, LOMA students, and other
financial services professionals with opportunities for networking, continuing
education, and professional development
Professional associations often have codes of conduct or codes of ethics for
their members. LOMA’s Code of Ethics, for those people who have earned a fel-
lowship designation, is reprinted in Figure 2.3.

Figure 2.3. Code of Professional Ethics for LOMA Fellowship Designees
Individuals earning LOMA fellowship designations shall adhere to LOMA’s Code of

Professional Ethics, which consists of the following canons:
The Designee shall discharge all duties with honesty, integrity, objectivity, fairness,
and professionalism.
The Designee shall deal with others in a manner in which he or she would want to be
dealt with by others.
The Designee shall place the public interest above his or her own interest.
The Designee shall continually strive to master all aspects of his or her business and
to improve his or her professional knowledge and skills.
The Designee shall diligently strive to ascertain clients’ best interests and seek to
ensure that these interests are met.
The Designee shall respect clients’ privacy and the confidentiality of information they
provide, within the constraints of the law.
The Designee shall comply with the spirit and letter of the law in all his or her
activities.
The Designee shall hold his or her professional designation proudly and seek to
enhance the reputation of the designation, as well as the financial services industry,
in every way.
I’m an ethical person, and I think I do a good

job providing service to our customers.
Why does my manager spend so much time
reviewing my work? I feel like she’s trying to
catch me doing something wrong.
Controlling
Consider the work activities of a customer service representative (CSR). A CSR
provides customers with information. What if that information changes and the
CSR continues to provide the old information? What if a procedure changes and
the CSR continues to use the old procedure? If the information a company pro-
vides to customers is wrong, or if the procedures for handling customers are inap-
propriate, customers will have a negative experience. If these negative customer
service experiences persist, eventually they will impact the insurer’s profits. One
of management’s most basic responsibilities is to monitor employee performance,
recognize problems in performance as soon as they occur, and take steps to correct
those problems.

On an organizational level, the control function consists of all management

activities directed toward ensuring that an organization’s mission and strategic
plans are accomplished effectively, efficiently, and in accordance with good gover-
nance. Recall that good corporate governance requires accountability to company
owners, regulators, employees, and other stakeholders. The control function pro-
vides accountability. As the importance of good governance has grown in recent
years, so has the importance of the control function, resulting in many new or
enhanced internal controls in insurance companies.
On an operational level, the control function refers to all of management’s
actions to ensure that specific department objectives are being achieved. The con-
trol function seeks to reduce process variation, detect fraud, and contribute to the
attainment of corporate objectives. The continual improvement of business pro-
cesses is one of the most important goals for the control function at this level.
Types of Controls
Insurance companies use three primary types of control mechanisms: steering
controls, concurrent controls, and feedback controls. Companies apply these con-
trols at the division, department, and individual levels.
Steering Controls
A company applies steering controls before a business process is begun. A steering
control, also known as a feedforward control, describes how a company intends to
implement a process. Steering controls seek to establish the most efficient method
for using a company’s resources, such as people, materials, or money. Steering
controls anticipate problems in advance so that hopefully the problems can be
avoided. Policies, procedures, a code of conduct, and operating manuals are all
examples of steering controls. For example, every claim department maintains
claim procedures that describe how claims are to be processed. One typical proce-
dure is to route simpler claims with lower face amounts to less experienced claim
analysts, and to route more complicated claims with higher face amounts to more
experienced claim analysts. In this way, the company reduces the potential for
processing problems with the more complex claims.
Concurrent Controls
Unfortunately, an insurance company cannot account for every contingency
before a process begins so companies also maintain concurrent controls, which are
applied during the business process. Concurrent controls are checks built into and
applied during a process. Concurrent controls determine whether a process should
proceed, requires corrective action, or must be stopped. Examples of concurrent
controls used in insurance companies include
Activity logs or transaction logs that monitor company activities
Error logs
Pop-up error messages if out-of-range values are entered into a system
Supervisory approval on claim checks exceeding a specified dollar amount

Real-time monitoring of customer calls
Elapsed time clocks running during customer service calls
A supervisor’s approval signature on a purchase request

Concurrent controls allow companies to detect problems during a process and
take immediate corrective action. For example, if a new business processor enters
an inappropriate value into the computer system, the application processing will
not proceed until the information is corrected. Such a concurrent control enables
the company to detect and correct the problem in the insurance application imme-
diately. Employees can act as concurrent control mechanisms as well. Employees
often identify problems in work processes that may not be apparent to manage-
ment and make suggestions for solutions to the problems.
Feedback Controls
Feedback controls gather information about completed processes and evaluate
that information to improve similar activities in the future. Feedback controls are
checks and corrections applied to a process at the end of the process cycle. Feed-
back controls compare the actual performance or output with established stan-
dards. Examples of feedback controls commonly used in insurance companies
include
Audits
Account reconciliations
Performance appraisals
Customer satisfaction surveys
Supervisory reviews of recorded customer calls
Supervisory approvals of expense reports
Budget analyses
Feedback control provides managers with valuable information about the effec-
tiveness of planning and operational processes. If the obtained results are in line
with management expectations, then the planning and operational processes are
on target. However, if the results obtained are not in line with expectations, man-
agement can use this information about past performance to make changes that
will bring future performance in line with planned objectives. For example, if the
error rate for processing life insurance claims is too high, management may need
to revise procedures or identify employees who require additional training in the
procedures. Or, if one CSR consistently has superior quality service ratings, then
management should review that CSR’s methods to try and replicate the success
throughout the department. Feedback control is used in planning throughout all
levels of the organization, in the training of employees, and in quality control. The
major disadvantage associated with feedback control is that, by the time a manager
receives the information, a problem may have already occurred.

To successfully operate an insurance company, management must use all three

control mechanisms in a control cycle—an ongoing repetition of procedures for
steering, monitoring, assessing, and improving business processes. Steering con-
trols help management avoid problems in business processes before they occur,
concurrent controls enable management to catch mistakes in ongoing business
processes, and feedback controls allow management to improve business pro-
cesses in the future. Figure 2.4 illustrates the circular nature of the control cycle.
Figure 2.4. Circular Nature of the Control Cycle
Steering Controls
Anticipate Problems and

Avoid Them
Feedback Controls Concurrent Controls

Improve Future Monitor Performance and
Performance Make Corrections
We’re all about controls in the accounting

department. We do a monthly review of claim
disbursements, a daily report on premium
receipts, and we review questionable data
whenever we find an exception. Who uses all
of this information?

Establishing Performance Standards

Management uses the information obtained from control systems to determine
whether a particular department or organizational goal or objective is being met.
To determine whether goals are being met, management must have in place per-
formance standards. A performance standard is a previously established level of
performance against which actual performance can be measured. To be of value,
performance standards must clearly specify desired outcomes and promote overall
company goals. Performance standards often are expressed in terms of
Units (e.g., policies sold, number of calls made, number of applications under-
written, number of times customers click on website link)
Time (e.g., average length of calls, amount of time on hold, number of days
until completion, amount of time website is accessible to customers)
Money (e.g., monthly premium income, annual claims disbursements, total

expenses)
However, some company goals, such as providing courteous customer service
or working together as a team are not so easily quantified. As difficult as it may
be, management must establish valid performance standards for all processes and
behaviors that contribute to company goals. For example, one company goal might
be for producers to sell quality business. The goal of “quality business” might seem
at first not to be measurable. However, if management defines quality business as
“the percentage of policies sold that remain in force for 13 months or longer,” then
clearly the quality of a producer’s business can be measured.
Performance standards can be internal or external. Internal standards are based
on a company’s own planned or historical performance. For example, an internal
performance standard for customer service might be that 95 percent of all cus-
tomer calls are to be answered within 15 seconds. This standard is based on the
insurer’s own experience in previous years indicating that 90 percent of customer
calls are answered within 15 seconds. The insurer uses this information from
historical performance to establish a goal that will improve performance in this
area. External standards are based on information obtained outside the company.
Companies often use published industrywide averages or best practice reports to
establish external performance standards. Benchmarking is a process by which an
insurer compares its own performance, products, or services with those of other
organizations that are recognized as the best in a particular category. An insurer
uses these “best practices” as a standard for its own performance measures. While
insurers use benchmarks from other insurance companies, they also obtain mea-
surements from other types of companies as well. Insurers often use benchmark-
ing for operational processes that involve customers, such as new business pro-
cessing or customer service.
Measuring Performance
Once a company sets its performance standards, it needs a system to measure
performance. Companies routinely monitor performance that can be quantified
numerically using computerized systems. For example, a computer system can
easily track whether a CSR is answering each call within 15 seconds. Technology
also can be used to measure less quantifiable processes. For example, technology

can record customer conversations so that managers can later review the calls and
rate the level of courtesy an employee exhibits. However, performance measure-
ment does not always involve technology. Surveys, visual inspections, and tests
are frequently used tools in performance measurement.
Later, we describe tools that insurance companies use to measure performance
in various areas of insurance company operations. For now, let’s look at three con-
trol tools used throughout an insurance company.
Budgets
A budget is a financial plan of action, expressed in monetary terms, that cov-
ers a specified period, such as one year. Through budgeting, a company affirms
the goals that management established during the planning process. Budgets also
contain performance standards: estimates that reflect management’s expectations
of a company’s future performance. For example, the budget will show both an
expected level of sales for each product and an expected level of expenses. Man-
agement can compare actual results to budgeted expectations, and gain insights
that help them develop new or improved courses of action. The budgeting process
enables a company to
Monitor and evaluate ongoing operations
Allocate scarce resources efficiently
Control and reduce expenses
Communicate information throughout the company
Motivate employees
A budget can act as a steering control by setting financial limits on company
activities. For example, a company with a $50,000 training budget is constrained
from spending $100,000 on training. A budget also serves as a concurrent control.
For example, managers often receive monthly or quarterly reports that compare
current expenses to budgeted expenses for the year to date. If expenses are too
high, managers can take steps to cut spending in the next period, and hopefully
remain within the overall budget’s limits. Budgets are also useful as feedback
controls. The difference between an actual result and an expected result is called
a variance. At the end of an evaluation period, which could be monthly, quarterly,
or annually, management looks for budget variances—differences between bud-
geted and actual expenses and revenues. Large variances are of particular concern
to management and may result in operational changes.
The budgeting process requires a great deal of cooperation throughout the com-
pany. A budget committee comprising top-level management usually oversees the
budgeting process. However, each department and division within an insurer pro-
vides input to the budget committee and usually drafts its own budget within the
guidelines that the budget committee sets out.
Audits
An audit is a systematic examination and evaluation of a company’s records,
procedures, and controls. An audit is an example of a feedback control in that
a company ensures that its company records are accurate or its operational

procedures and policies are effective for the previous period being examined.
Companies commonly use audits to ensure that their financial information and
financial statements provide a fair and consistent depiction of their financial condi-
tion and performance. Audits also can cover nonfinancial conditions such as man-
agement efficiency, market conduct, and regulatory compliance. Auditing is vital
to demonstrating good governance and is described in greater detail in Chapter 7.
Exception Reports
A commonly used control tool is the exception report—a report that is generated
automatically when results deviate from an established performance standard.
Exception reports can be concurrent controls and feedback controls. An excep-
tion report provides information about a company’s operations that can be used to
modify ongoing operations or as feedback for already completed operations.
Let’s refer back to our earlier customer service example in which customer
calls are to be answered within 15 seconds. Assume that, after three hours of
business, the customer service manager receives information that calls are being
answered within 15 seconds only 85 percent of the time. At this point, the manager
can take immediate action to bring performance levels back in line with the goal.
The manager might assign supervisors to answer the phones or eliminate nones-
sential activities.
At the end of a designated period, such as a month, that same customer service
manager might receive an exception report indicating that, in the previous month,
the percentage of calls answered within 15 seconds was only 90 percent rather than
95 percent. The customer service manager would then look for what caused the
deviation from the performance standard. For example, were several people unable
to work due to illness? If so, the deviation is explainable. A manager should deter-
mine the cause of an exception report, and take corrective action if necessary.
Recognizing that performance can fluctuate, management typically establishes
a range of acceptable performance rather than a specific performance level for a
performance standard. For example, management might set a goal of generating
$1 million in first-year premiums. However, management would be satisfied with
a plus or minus 10 percent premium variance (from $900,000 to $1.1 million)
in first-year premiums. Amounts outside of the established range usually require
investigation.
I can see now that controls are critical to my

company’s success. What’s my role in this
process?
You can support the control function in your company by understanding the
controls related to your job, by suggesting ways to strengthen those controls, and
by encouraging your colleagues to respect controls.
In the next chapter, we begin looking at the various functional areas within an
insurance company. Before you read each chapter, consider ways in which that
functional area interacts with the area in which you work. Understanding how all
of the different functional areas operate and interact can help you better under-
stand how your job contributes to your company’s success.
Key Terms
corporate governance steering control
Sarbanes-Oxley Act of 2002 concurrent control
directing feedback control
ethics control cycle
code of conduct performance standard
ethics office benchmarking
ombudsman budget
insider trading variance
inside information audit
nonpublic information exception report
material information
activities:
Identify characteristics of an ethical culture in your company. Look for exam-
ples of controls that contribute to good governance.
Read your company’s code of conduct (also known as a code of ethics or code
of business conduct). Other than your manager, to whom would you go if you
wanted to report an ethics code violation? Does your company have an ethics
hotline?
Find an example of a steering control, a concurrent control, and a feedback
control in your department. Which do you consider to be the most important
to you in your day-to-day work activities, and why?
Endnotes
1. Gabrielle O’Donovan, “A Board Culture of Corporate Governance,” Corporate Governance Interna-
tional Journal 6, no. 3 (2003).
2. James A. F. Stoner and R. Edward Freeman, Management of Organizations and Human Resources
(Englewood Cliffs, NJ: Prentice Hall, 1989), 3.
3. Mary Rowe, “Identifying and Communicating the Usefulness of Organizational Ombuds with
Ideas about OO Effectiveness and Cost-Effectiveness,” Journal of the International Ombundsman
Association 3, no. 1 (2010), http://web.mit.edu/ombud/publications/usefulness.pdf (11 February 2011).

Insurance Company Operations Chapter 3: Legal and Compliance 3.1
Chapter 3
Legal and Compliance
Objectives
 Distinguish an insurer’s legal function from its compliance function
 Describe typical ways in which insurers organize the legal and
compliance departments
 List the characteristics of a corporation and describe how these
characteristics may differ in various jurisdictions throughout the world
 Define a multinational corporation and identify three ways an insurer
may enter a foreign market
 Describe the litigation process and the legal department’s responsibilities
during litigation
 Explain two alternative dispute resolution (ADR) methods the legal
department uses to settle legal disputes
 Describe typical compliance activities and the three components of a
regulatory compliance management program
 Describe the purpose for and activities involved in a market conduct
examination in the United States

3.2 Chapter 3: Legal and Compliance Insurance Company Operations
Outline
Organization of Legal and Responsibilities of the Compliance
Compliance Functions Department
Responsibilities of the Legal  Prevention
Department  Education and Training
 Responsibilities to the Board  Monitoring
 Responsibilities to Internal Market Conduct Examinations in the

Functions United States
 Responsibilities to External Parties
I hear the terms legal and compliance a lot.

So what’s the difference between these two
areas?
T
he area of an insurer’s operations that handles legal matters—such as con-
tracts and legal disputes—is known as the legal function. The compliance
function has a different purpose. The compliance function performs a wide
range of tasks to make sure that company operations follow policies and proce-
dures, as well as the laws and regulations of all jurisdictions in which the com-
pany does business. Legal and compliance functions are very important to insur-
ance companies’ operations because of the many laws and regulations that apply
to insurance companies. Sometimes companies combine both functions within
the same department, but some companies separate the two functions. Let’s take
a look at how insurers typically organize these functions and why they are so
important.
Organization of Legal and Compliance

Functions
Insurance companies typically have a legal department, also known as a law
department, to handle issues related to law. In some companies, the legal depart-
ment handles both legal and compliance functions. Smaller companies that oper-
ate in fewer jurisdictions are more likely to use this type of organizational struc-
ture. Larger insurance companies are more likely to maintain separate legal and
compliance departments. Yet even small companies sometimes separate the legal
function from the compliance function organizationally to emphasize the impor-
tance of compliance and to ensure the independence of the compliance function.
Other insurers, typically very large insurers, may establish a compliance depart-
ment responsible for ensuring corporate compliance with laws and regulations,
but still delegate responsibility for each division’s compliance to compliance per-
sonnel in that division. For example, a company that is organized by product line

might delegate compliance responsibility to individuals in each of the company’s

product lines. Regardless of organizational structure, a close relationship exists
between the legal function and the compliance function.
Generally, the person in charge of an insurance company’s legal department
is known as the general counsel or chief counsel. The general counsel usually
reports directly to the company’s CEO and advises the company’s board of direc-
tors on important legal issues affecting the company. Attorneys and other legal
department staff report to the general counsel. In some companies, the general
counsel is also the company’s chief compliance officer. The chief compliance
officer (CCO) is responsible for overseeing and managing the company’s compli-
ance with regulatory requirements and internal policies and procedures. If com-
pliance activities are part of the legal department’s duties, the general counsel
also manages the compliance managers and specialists. If the CCO is a separate
position from the general counsel, the chief compliance officer may report to the
general counsel or to the CEO.
Responsibilities of the Legal Department

An insurer’s legal department serves in an advisory capacity to the board of direc-
tors as well as to virtually every insurance company department. In addition, the
legal department interacts with various parties external to the insurer.
Responsibilities to the Board

Before an insurer begins operations, the insurer must satisfy certain legal require-
ments.1 Because of the need for permanence and stability among insurance com-
panies, insurance laws in the United States and Canada typically require that
insurers be organized as corporations. A corporation is a legal entity, separate
from its owners, that is created by the authority of a government and continues
beyond the death of any or all of its owners. As a legal entity, a corporation can
be a party in a legal action, enter into contracts, and own property. The owners of
the corporation are not personally responsible for the corporation’s debts. Instead,
an owner’s personal liability is limited. In the United States, the owner’s personal
liability is limited to the amount the owner invests in the corporation. The contin-
ued existence of the corporation beyond the death of any or all of the corporation’s
owners allows an insurer to conduct its business on an ongoing basis regardless of
the personal circumstances of its owners.
So, that’s in the United States and Canada.

What about other countries?
Although jurisdictions around the world allow for the creation and operation of
business organizations that have many of the same features of U.S. and Canadian
corporations, some differences are worth noting:

In some jurisdictions, a business is given authority to operate for only a spe-

cific number of years. For example, a corporation in the Philippines has a
50-year lifetime, after which time it is renewable for another 50 years.
Some jurisdictions require all corporations to have a minimum amount of
capital—excess of assets over liabilities—to exist. In the United States, insur-
ance companies must meet such minimum capital requirements, but most
other types of businesses do not have to meet such requirements.
Some jurisdictions, such as the United Kingdom and India, recognize two
forms of companies that provide owners with limited liability. One form of
company, similar to that of a corporation in the United States, is a company
limited by shares in which the owners’ liability is limited to the investment
they made when they purchased shares of the company’s stock. A company
limited by guarantee is a company whose owners agree to pay the obligations
of the company up to a stated amount if the company is liquidated.2
The jurisdiction in which an insurer incorporates, or forms the corporation,
is known as its domicile, and the insurer is known as a domestic corporation of
that jurisdiction. Once incorporated, the company’s legal department must obtain
a certificate of authority, or license, which is a document that grants the insurer
legal authority to conduct an insurance business in the specified jurisdiction. As
a general rule, most jurisdictions require insurance companies and insurance pro-
ducers to be licensed by or registered with a specific regulatory agency before con-
ducting business in that jurisdiction. Figure 3.1 identifies the agencies responsible
for insurance regulation in various countries.
An insurer can sell only the products or services authorized by its certificate of
authority or license. If a company’s board of directors decides to expand into addi-
tional product lines or jurisdictions, the legal department oversees the application
process for additional licenses.
A corporation that operates in more than one country—known as a multina-
tional corporation—faces unique legal issues in that it must comply with the laws
of its country of domicile and also the laws and regulations of each country in
which it conducts business. The legal department advises the board of directors
on the best way to enter into business in a foreign market. Insurers typically begin
operations in foreign countries by one of the following methods:
Incorporating a business in the foreign country, which operates as a subsidiary
of the insurer
Opening a branch office in the foreign country that is properly registered with
the foreign government
Entering into a joint venture with a local insurer in the foreign country. A joint
venture is an arrangement between two otherwise independent businesses that
agree to undertake a specific project together for a specified time period. The
joint venture arrangement has become quite popular in some countries, such
as in India, where many insurance companies operate as a joint venture with
foreign insurance companies.
The legal department handles many aspects involved in changing the corporate
form of business. For example, sometimes a mutual insurer may consider chang-
ing to a stock form of ownership through a process called demutualization, or a

Figure 3.1. Insurance Regulatory Bodies
Canada:
Office of the Superintendent of Financial
Institutions and provincial Insurance
Departments
China:
China Insurance
Regulatory Commission
United States:
State Insurance Departments South Korea:
Financial
Supervisory
Bermuda: Commission
Minister of
Finance Philippines:
Mexico: Insurance
National Commis- Commission
sion of Insurance
and Finances India:
Insurance
Regulatory and
Brazil: Development
Superintendency Authority
of Insurance
Singapore:
Monetary Authority
Argentina: of Singapore
Superintendency
of Insurance
Source: Adapted from Harriett Jones, Business Law for Financial Services Professionals [Atlanta: LOMA (Life Office
Management Association, Inc.), © 2004], 180. Used with permission; all rights reserved.
stock insurer may wish to convert to a mutual company through a process called
mutualization. In such cases, the legal department advises the company’s board
of directors on (1) the differences in the regulation of stock companies and mutual
companies, (2) the legal issues involved in changing the company’s corporate
form, (3) the structure that would be most beneficial to the insurer, and (4) the best
way to accomplish a change in corporate form.
In addition, the legal department is available to advise the board of directors
on any number of issues that arise during the course of the company’s operations.
For example, the board may want the legal department to review a contract with a
foreign company to ensure that it doesn’t violate any trade agreements before the
contract is signed.
Responsibilities to Internal Functions

The legal department interacts with and provides support to every internal func-
tion within an insurance company. Some of the legal department’s specific respon-
sibilities include the following:

Claims: Assists claim managers in interpreting policy language as needed,

handles litigation of contested claims, and works to settle claims involving
conflicting claimants
Customer service: Advises on the rights of customers and policyowners,
including privacy of personal information, and advises on legal issues affect-
ing customer service delivery
Human resources: Advises on employment laws, in particular those relating
to employee rights, benefits, and nondiscrimination in employment practices
Investments: Advises on securities law and investment contracts and the han-
dling of real estate assets
Product development: Advises on contract law and tax law, and helps draft
the wording of insurance policies, insurance applications, and other policy
documentation and disclosures; obtains from insurance regulators legal
approval for new or modified products
Product distribution and marketing: Advises on advertising law and agency
law, and helps draft producer contracts, training materials, and materials for
customer communications
Underwriting: Advises on the rights of applicants during the underwriting
process, including privacy rights and nondiscrimination requirements
Responsibilities to External Parties

The legal department acts as a liaison with many parties that are external to the
insurance company. The most important of these external parties include law
firms, policyowners and beneficiaries, former employees, and regulators.
If someone files a lawsuit against my company,

does legal or compliance handle it?
Law Firms
At times a person or organization may initiate a legal proceeding, known as a
lawsuit, against a life insurance company, or an insurer may institute a lawsuit
against another person or organization. A lawsuit is an action brought before a
court of law by a party claiming that they have been harmed in some way by
another party. The process or act of presenting the dispute to a court of law for a
resolution is known as litigation. In such situations, the legal department repre-
sents the insurer, or arranges for an independent law firm, often known as outside
counsel, to represent the insurer in the litigation process. If the company chooses

outside counsel for representation, the insurer’s legal department communicates

with and oversees the outside counsel. Attorneys who handle litigation for an
insurance company, whether company employees or outside counsel, are respon-
sible for
Initiating or responding to a lawsuit
Researching the facts of a case
Taking statements and depositions from involved parties
Consulting with company employees before they testify in court
Researching relevant court cases
Hiring expert testimony, if needed
Representing the insurer in all aspects of the litigation process, including cor-
respondence and court appearances
Litigation can be time consuming and costly. Additionally, a public trial can
result in negative publicity that may harm the company’s image. For all of these
reasons, the legal department typically tries to settle legal disputes without going
to court if at all possible. Formal or informal negotiations to resolve the dispute
are known as alternative dispute resolution (ADR) methods. ADR methods are
available in most countries, although the terminology varies and the specific oper-
ation of the procedure also varies. In some countries, such as China, ADR is the
preferred method for resolving disputes, and the disputing parties only turn to the
court system when such efforts fail. Two common methods of ADR are (1) medi-
ation, sometimes called conciliation in countries outside the United States, and
(2) arbitration.
Mediation is a process in which an impartial third party, known as a
mediator, facilitates negotiations between the parties in an effort to create
a mutually agreeable resolution of the dispute. If the parties cannot resolve
their dispute through mediation, they typically have the right to go to arbitra-
tion or to continue with litigation.
Arbitration is a process in which impartial third parties, known as arbitrators,
evaluate the facts in the dispute and render a decision that usually is binding on
the parties. Appeals of arbitrators’ decisions are generally possible only if the
arbitration was done improperly.
Policyowners/Beneficiaries
Insurers deny a small percentage of life insurance claims for reasons such as the
policy was not in force at the time of the insured’s death, the deceased was not
covered under the policy, or the cause of death was excluded from the insurance
coverage. If a policyowner or beneficiary disputes an insurer’s decision to deny a
claim for benefits, the insurer’s claim department, in conjunction with the legal
department, works with the claimant to settle the dispute. If the dispute cannot be
settled, and a lawsuit is filed, the legal department oversees the litigation process.

In some cases, insurers acknowledge that life insurance benefits are payable
but are unable to determine to whom payment should be made. Often in these
cases, there are conflicting or adverse claimants for the policy’s proceeds. The
legal department works with adverse claimants to resolve the matter or oversees
legal proceedings designed to ensure that the policy’s proceeds are paid to the
rightful party.
Employees/Former Employees
Employees or former employees may occasionally bring lawsuits against an insurer
for a variety of reasons. Sometimes they believe they have been treated unfairly or
that their employment was terminated in an unfair or illegal manner. In general,
management has an ethical obligation in all of its dealings with employees to act
in a manner that is fair, consistent, and equitable and also to provide a safe work
environment.
Many countries have formal legislation in place that prohibits employment dis-
crimination on the basis of a number of factors, including race, religion, color,
sex, national origin, sexual orientation, disability, or age. Also, legislation in many
jurisdictions forbids termination of employment without just cause or without fol-
lowing a prescribed termination process. Countries may also require companies to
comply with certain workplace safety rules.
When an employee or former employee brings a lawsuit against an insurer
because of an issue relating to the worker’s employment, the legal department is in
charge of attempting to settle the dispute through ADR methods or defending the
company against the complaint in a court of law.
Industry Regulatory Groups

The legal department may work with industry groups to formulate new insurance
regulations. Or, when a regulatory issue might impact the insurance industry as a
whole, insurers’ legal departments may work together to try to form a legal con-
sensus among insurance companies on that issue.
Responsibilities of the
Compliance Department
An insurer that fails to comply with a law or regulation may suffer significant
financial consequences. The insurer may incur large government fines or amounts
that must be paid in connection with lawsuits. The insurer’s image, and as a result,
its sales may suffer from negative publicity. In extreme cases, an insurer may lose
its license and no longer be able to conduct business in a jurisdiction.
The compliance department, in conjunction with the legal department, moni-
tors all applicable laws and regulations, communicates compliance requirements
to employees through policies and procedures, and makes sure that company
employees are following the company’s established policies and procedures.
In Chapter 1 we described how insurance legislation can be divided into market
conduct laws and solvency laws. Compliance department employees generally are
responsible for ensuring that the company complies with market conduct laws.

Employees who handle an insurer’s financial matters generally manage solvency

compliance. Market conduct requirements seek to ensure that insurance compa-
nies treat policyowners fairly with respect to marketing and sales practices, policy
provisions, claim handling, and customer service. The extent and nature of market
conduct regulation varies greatly from one country to another. Figure 3.2 lists
some typical activities involved in compliance.
Figure 3.2. Typical Compliance Activities
Disseminating regulatory information to employees
Overseeing the licensing, training, and conduct of

producers
Approving advertisements and sales literature
Protecting customer privacy and confidentiality
Coordinating internal and external audits
Coordinating market conduct examinations
Overseeing proper handling and resolution of

customer complaints
Working with regulatory agencies to demonstrate
the company’s compliance with applicable laws
Managing a fraud prevention unit
Most insurers establish regulatory compliance management programs that

focus on prevention, education and training, and monitoring. Although we present
these three initiatives individually here, they overlap in many ways and ideally are
integrated throughout business processes.
Prevention
To have a successful regulatory compliance management program, management
must commit to an ethical work environment. Compliance and ethics are related
concepts. A company that operates within a framework of integrity and ethical
values also maintains a culture of compliance. The company has in place hir-
ing practices that reinforce the company’s commitment to compliance. Employee
incentives do not encourage employees to ignore compliance policies. Compliance
policies and procedures are integrated into the design of work processes so that
employees view compliance procedures as an integral part of their jobs and not as
something that interferes with their ability to do their jobs. In addition, corporate
communication processes clearly define what is acceptable and unacceptable in
the workplace. In a culture of organizational compliance, every employee views
compliance as his own responsibility.

For a regulatory compliance management program to be effective, compliance

personnel must be knowledgeable about the regulatory requirements of all juris-
dictions in which the company operates. Personnel must also continually monitor
the regulatory environment for changes that might impact insurer operations. If
the right policies and procedures are in place, and if employees follow these poli-
cies and procedures, then problems with noncompliance are significantly reduced
or eliminated.
Finally, an insurer must establish internal control systems that can assess how
well employees are adhering to the company’s compliance policies and proce-
dures. Internal controls may be as simple as establishing a procedure for a compli-
ance officer to sign off on marketing materials before they are used, or as complex
as installing a computer program that can detect confidential information in an
employee’s e-mail.
If a customer calls to complain, I’ve been

trained to complete a customer complaint
form. All of our calls are recorded. Why isn’t
that enough?
Education and Training

To be effective, a regulatory compliance management program must educate
employees about the laws and regulations relevant to their work activities. For
example, in the United States, state insurance laws describe the minimum infor-
mation that insurers must maintain in their complaint records and place specific
requirements on the way insurers handle customer complaints. Just recording a
customer’s complaint isn’t enough to satisfy these laws. Customer service repre-
sentatives and any other employees who are likely to receive customer complaints
must be trained in a company’s complaint handling procedures. In addition, all
company employees must be aware of and understand the company’s policies and
procedures for complying with these laws, so that they do not inadvertently violate
a law.
Much market conduct legislation applies to the insurance sales process. Because
insurers are generally held responsible for the actions of their producers, insurers
spend a significant amount of time and money training their producers in compli-
ance issues. In Chapter 11, we discuss producer licensing and training—and the
compliance issues associated with these areas.
Many companies provide their employees and producers with compliance
manuals containing information about the company’s compliance programs and
the market conduct rules they must follow. Ideally, such manuals provide employ-
ees with specific examples of compliance and noncompliance so that employees
can better identify compliance risks in their day-to-day work activities. In addi-
tion, a regulatory compliance manual must be updated as regulatory requirements
change, and such changes should be clearly communicated to employees.

Monitoring
An insurer’s regulatory compliance management program must include moni-
toring. Why? To ensure that the company (1) responds quickly to issues before
they become bigger problems, (2) identifies training needs of employees, and
(3) improves the quality of compliance procedures.
A common way to monitor compliance is through auditing. An internal audit
is an examination of a company’s records, policies, and procedures that is con-
ducted by a person who works for the insurer, typically in the compliance area. An
internal audit examines a specified area of a company’s operations rather than the
entire company. The results of an internal audit are reported directly to the audit
committee of the insurer’s board of directors.
Audits conducted by parties not associated with the insurance company are
called external audits or independent audits. Insurance laws in many countries
require external audits of an insurer’s market conduct. However, such laws typi-
cally are not nearly as extensive as are the market conduct laws in the United
States.
Market Conduct Examinations

in the United States
Periodically, in the United States, insurance regulators conduct examinations of
the operations of life insurance companies. A market conduct examination is a
formal investigation of an insurer by one or more state insurance departments. The
purpose of the market conduct examination is to determine whether the insurer’s
market conduct—nonfinancial operations—are in compliance with applicable
laws and regulations.
How often do insurers undergo market
conduct examinations?
Some state insurance departments periodically examine each insurer licensed

by the state. For example, a state may examine all insurers operating within the
state every two to three years. Other states conduct examinations when they iden-
tify specific complaints about an insurer’s market conduct activities or have a spe-
cific concern about an insurer’s operations.
One of the primary roles of the National Association of Insurance
Commissioners (NAIC)—a private, nonprofit association in the United States that
promotes uniformity of state insurance regulation—is to advise state insurance
regulators on the most effective and efficient methods for overseeing the market
performance of insurance companies. The NAIC encourages multistate exami-
nations as a way for state insurance departments to share costs. However, states
reserve the right to independently conduct their own review.
Figure 3.3 describes two types of market conduct examinations: target examina-
tions and comprehensive examinations. Both types of examinations are designed
to ensure that (1) the insurer has standards in place for the activity being exam-
ined, (2) the insurer’s standards comply with applicable regulatory requirements,

Figure 3.3. Two Types of Market Conduct Examinations in the United States
Comprehensive Examination Target Examination

A full-scope examination of all nonfinancial A limited-scope examination of one or
aspects of an insurer’s operations more specific nonfinancial aspects of an
insurer’s operations
and (3) the activity being examined is carried out according to established stan-
dards. State laws require that insurers maintain various business records for a
specified time and allow examiners to review these business records as well as
other documents.
Market conduct examiners also want to know whether an insurer has estab-
lished an internal audit plan by which it can detect and correct compliance prob-
lems. Market conduct examiners review the insurer’s audit plan and audit reports,
as well as all accompanying procedures manuals. Market conduct examiners
review how management uses the information in an audit report. For example,
does management respond to recommendations in an audit report by adopting new
procedures or modifying existing procedures?
Most market conduct examinations today are target examinations that exam-
ine one or more lines of business or specific areas of an insurer’s nonfinancial
operations, such as its advertising materials. Target examinations are conducted
whenever an insurance department thinks them necessary, and often result from
customer complaints or recent changes in applicable regulations. Figure 3.4 pres-
ents an overview of the market conduct examination process in the United States.
The more you understand what legal and compliance do, the better you’ll be at
avoiding potential legal liability for your company. Remember, compliance isn’t
just a function within your company; it’s every employee’s responsibility.

Figure 3.4. Overview of the Market Conduct Examination Process

in the United States
Insurer receives written notification of pending market conduct examination, often

one year in advance of the scheduled exam date
Insurer assembles team of knowledgeable employees from relevant functional
areas, such as agency operations, actuarial, claim administration, legal/compliance,
marketing, and information technology
One team member is designated to be the liaison between the insurer and the
market conduct examiners
Market conduct examiners send a list of required records, statements, forms, or
other materials needed upon their arrival at the company’s offices
Team compiles requested materials
Workspace and equipment are arranged for state examiners to use upon their arrival
at the insurer’s offices
Once state examiners arrive, team leader orients them to the company, presents
requested materials, discusses a timeline for completion, and discusses a process
for requesting additional information or interviews with employees
At the completion of the on-site examination, the examiners provide a preliminary
report and discuss outstanding issues with the team leader and company officers
The examiners return to the state insurance department to prepare a draft report to
send to the company
Team meets to analyze draft report and respond in writing to the contents; team
suggests actions the insurer should take based on the examiners’ findings
Examiners file the final report with the insurance department of the applicable state
and schedule any necessary follow-up activities
Key Terms
general counsel litigation
chief compliance officer (CCO) outside counsel
corporation alternative dispute resolution (ADR)
capital method
company limited by shares mediation
company limited by guarantee mediator
domestic corporation arbitration
certificate of authority arbitrator
multinational corporation (MNC) internal audit
joint venture external audit
demutualization market conduct examination
mutualization National Association of Insurance
lawsuit Commissioners (NAIC)

activities:
Do you know in which jurisdiction your company is incorporated? Insurers
often locate their home office in that jurisdiction. Is this true for your com-
pany?
If your company is a multinational corporation, determine in which countries
it operates. Does your company offer all product lines in each jurisdiction?
Why or why not?
Endnotes
1. Portions of this section are adapted from Harriett E. Jones, Business Law for Financial Services
Professionals [Atlanta: LOMA (Life Office Management Association, Inc.), © 2004]. Used with per-
mission; all rights reserved.
2. Companies Act, 2006, c. 46, http://www.legislation.gov.uk/ukpga/2006/46/section/3 (27 June 2011).

Insurance Company Operations Chapter 4: Human Resources Management 4.1
Chapter 4
Human Resources Management
Objectives
 Describe how human resources (HR) departments are typically
organized and their primary responsibilities
 Describe HR planning and how multinational staffing and outsourcing
impact the planning process
 Describe the steps involved in employee selection
 Identify several different types of pre-employment tests
 Describe the advantages and disadvantages of different types of
employee training programs
 Describe the performance evaluation process and identify different types
of performance evaluation tools used in performance evaluation
 Explain HR’s role in compensation and benefits programs
 Identify specific compliance concerns for HR activities

4.2 Chapter 4: Human Resources Management Insurance Company Operations
Outline
Organization of the Human Training and Development
Resources Department
Performance Evaluation
Human Resources Planning  Establishing Performance Goals
 Projecting Staffing Needs  Monitoring and Reviewing
 Estimating the Labor Supply Employee Performance
Recruitment  Performance Evaluation Programs
 Internal Recruitment Compensation and Employee Benefits

 External Recruitment
Compliance
Employee Selection
 Employment Applications and
Screening Interviews
 Pre-Employment Testing
 Employment Interviews
 Background Checks and Drug
Testing
Do employees have to be called human

resources? Makes me feel like I’m a computer
or copying machine.
A
resource is an asset or something of value. The use of the term human
resources to refer to the people who work in a company actually indicates
a heightened awareness among companies about the importance of people
to a company’s success. An organization typically divides its resources into four
categories: human, technological, financial, and physical (buildings and machin-
ery). Although a company’s success depends on having all of the right resources in
place, a company typically views its human resources as the most valuable of these
assets. The difference between a highly successful company and a mediocre com-
pany is likely the difference in the talent level, education level, and training of the
people working in each company. Human resources management is the function
within an insurance company that oversees corporate hiring, training, developing,
and retaining of valued employees.
Organization of the Human Resources

Department
Insurance companies have a human resources (HR) department, sometimes called
a personnel department, which manages the organization’s human resources. Over
the years, HR has evolved from acting primarily in an administrative capacity
into an integral partner in the management of an insurance company. Since HR
supports an insurer’s operations, its goals and strategies must closely align with
corporate goals and strategies. For example, an insurer that plans to expand into
a new territory must know if its current human resources are adequate to operate

in that new market. If not, what additional human resources will it need, are those
resources readily available, and at what costs? In addition, in today’s business
environment, an insurer’s staffing needs may change rapidly because of increased
regulations or changes in the competitive environment. To successfully address
such needs quickly and effectively, HR’s management must be in close communi-
cation with the company’s management.
The individual who leads the HR department is typically a vice president. If
a company has a chief operating officer (COO), the HR vice president typically
reports to the COO. If there is no COO, the HR vice president reports directly
to the CEO. Large HR departments have managers who are in charge of one HR
operation, such as training and development, and who oversee other HR staff
members. Smaller departments may have no managers. In such departments, HR
staff members report directly to the vice president. The organizational structure
of HR departments varies significantly from company to company, but HR is typi-
cally responsible for
Planning
Recruitment and selection
Training and development
Performance evaluation
Compensation and employee benefits
Compliance activities
In small or medium-sized companies, one HR employee may perform two or
more of these activities. In larger companies, the members of the HR staff may
specialize in only one of these activities. Note that an insurance company’s HR
department doesn’t usually provide direct HR support to the company’s producers
and agency personnel. Instead, members of the marketing department usually are
responsible for providing HR support to producers. Finally, in many organiza-
tions, HR organizes employee participation in community activities and charity
events on behalf of the company.
As you read this chapter, remember that a company’s HR practices vary
depending upon the legal requirements, culture, and traditional HR practices
of the country in which the company operates. For example, in some cultures,
employee rewards are based more on department or group accomplishments than
on individual accomplishments.
Human Resources Planning

Human resources management begins with human resources planning, which
is the identification and evaluation of the human resource requirements needed
to meet organizational goals. HR planning consists of (1) projecting a company’s
need for qualified employees and (2) determining the number of qualified people
who are now or may soon be available for employment. A company that effectively
plans for human resources needs is more likely to have appropriate staffing during
either business expansions or slowdowns. In today’s competitive business envi-
ronment, effective human resources planning provides value to an organization’s
stakeholders.

Projecting Staffing Needs

An insurer’s staffing needs depend on and fluctuate with many factors that are
internal and external to the organization. Figure 4.1 identifies many of the internal
and external factors that impact human resources planning.
Although some very large insurance companies conduct studies to predict
staffing needs, most insurers rely on estimates of staffing needs provided by each
department. The company integrates these estimated staffing projections with
long-range corporate plans to make staffing decisions. For example, is the com-
pany considering eliminating or adding product lines or perhaps a merger with
another company?
Example: The Golden Insurance Company has an HR committee that meets

monthly to consider the organization’s staffing needs. The committee
consists of the CEO, the HR vice president, and other company officers.
The committee evaluates staffing requests from various departments. The
HR committee determines whether a particular staffing request is justified
and also whether the request fits into the company’s long-range corporate
plans. Then the HR committee approves or denies the request.
Figure 4.1. Factors That Impact Human Resources Planning
Internal Factors
Employee turnover rate (number of resignations, retirements, or other voluntary
or involuntary employee terminations)
Skills, abilities, and performance levels of current employees
Current and projected financial condition of the insurer
New products or company initiatives that require changes in or additions to cur-
rent staffing
New technology that affects how jobs are performed
Changes in organizational structure that increase or decrease staffing needs
External Factors
State of the economy (changes in a country’s unemployment rate can cause the
labor pool to increase or decrease)
Political environment (stable or unstable)
Laws and regulations
Demographics (aging populations, ethnic diversity within populations)
Demand for products and services (increasing or decreasing)

As part of the HR planning process, insurers also consider staffing needs for
international operations and whether outsourcing can satisfy some of the insurer’s
staffing needs.
Planning for International Operations

HR planning for international operations includes additional staffing consider-
ations. For example, should the insurer staff an international office with employees
from the home country—the country where the home office is headquartered—or
the host country—a foreign country in which a multinational company does busi-
ness? A multinational corporation must decide whether to use
Home country staffing, in which the company places employees from the
insurer’s home country into an international office
Host country staffing, in which the company hires people from the host coun-
try to staff an insurer’s international office
Third-country nationals, in which the company hires people from a country
other than the home country or the host country to staff an insurer’s interna-
tional office
Insurers consider the benefits and limitations of each of these approaches before
choosing one. For example, using home country staffing helps ensure that a com-
pany’s policies are consistent among offices. However, moving staff is expensive,
and such shifts create staff openings in the home office. In addition, the home
country’s employees may lack appropriate foreign language skills and may not
be familiar with the local culture. Hiring employees from a host country is less
expensive, and the employees are already familiar with the local culture, customs,
and ways of doing business. However, the employees may require extensive train-
ing in the insurer’s policies and procedures. In addition, communication between
the home office and international office may be difficult when language differ-
ences exist. Third-country nationals also require extensive training and may have
difficulty communicating with the home office.
Outsourcing
Another important consideration in HR planning is whether certain organizational
activities should be outsourced. Outsourcing is the process of paying external
specialists to handle specified business activities instead of using an organization’s
own employees or processes to perform those activities. The external specialist
in an outsourcing arrangement is known as a service provider or vendor. An out-
sourcing arrangement may cover all or only part of the functions for an opera-
tional area. For example, an insurer might outsource its entire life insurance claim
administration operation, or the company might outsource only claim investiga-
tion and perform all other claim-related processing activities within the company.

We are thinking about outsourcing payroll

administration. What issues should we take
into consideration?
Before deciding whether to outsource a particular operation, an insurer evalu-

ates the expected benefits and drawbacks and generally considers the following
factors:
Can we perform the operation effectively, efficiently, and cost-effectively
ourselves? For example, a service provider that specializes in data processing
is likely to have state-of-the-art technology. Such a service provider might
provide a faster turnaround time on data processing than an insurer could
achieve using its own technology and resources—and at a lower cost.
How urgent is a new operation? A service provider may already have the
human resources, technology, and procedures necessary for a new operation.
In such a case, an insurer can outsource the operation and begin the opera-
tion immediately rather than waiting until it can hire or train needed staff
and establish new systems and procedures. When an insurer needs to react
swiftly to changing market conditions or regulatory requirements, outsourc-
ing is often the best option.
Is start-up capital readily available? Start-up costs for a new operation, such
as establishing a new call center, can be extremely expensive. An insurer may
prefer to avoid the substantial start-up costs associated with new operations.
How necessary is it to control all aspects of the operation? When an insurer
outsources an operation, the insurer relinquishes some control over the day-to-
day performance of that business operation. For example, an insurer that out-
sources its life claim operation loses some degree of control over the quality
of its claim processing. In addition, an insurer may have to share proprietary
technology, procedures, or customer information with the service provider.
What, if any, complications do we expect from using a service provider? A
service provider may be located in a different area of a country or in an entirely
different country. An insurer must consider whether language differences,
time-zone differences, cultural differences, regulatory differences, or political
unrest might negatively impact the quality of the outsourced operation.
If the advantages of outsourcing a particular operation or even several opera-
tions outweigh the costs, outsourcing can be a way for an insurer to increase
operational efficiencies and attain organizational objectives.

Example: The Tolkien Life Insurance Company acquired the Greene Life
Insurance Company. Tolkien contracted with a service provider to handle
the policyowner service functions associated with Greene’s life insurance
policies. Subject to Tolkien’s overall management, the day-to-day
responsibility for the administration of Greene’s life insurance policies and
IT support was transferred to the service provider. The service provider,
who had in place state-of-the-art policy support systems, hired almost all
of Greene’s former employees, who provided policy support tasks, such
as customer service, billing, and claims processing. Through the use of a
high-quality service provider, Tolkien provided Greene’s customers with
the customer service they expected, at a cost lower than Tolkien could
have provided using Greene’s older, dated systems.
Estimating the Labor Supply

Once an insurer determines its short-term and long-term staffing needs, HR staff
estimate the number of people who might be available, from either inside or out-
side the company, to fill the required positions.
Internal Labor Supply

HR staff often use tools such as skills inventories or succession planning to track
the labor supply within the insurance company. A skills inventory is a database
that contains information about the education, training, and work experience of
each employee. The inventory helps identify employees’ qualifications for various
job positions. Figure 4.2 describes the types of employee information typically
included in a skills inventory.
Figure 4.2. Information in a Skills Inventory
Education. High schools, colleges, and universities

attended; degrees and professional designations
earned; scholarships awarded; special awards
received; any work-related courses completed
Work experience. Present position, salary, and
responsibilities; positions formerly held with the
current employer and previous employers; general
salary history
Special qualifications. Professional organizations
to which the employee belongs, authorship of
work-related publications, participation on major
task forces or special work teams, fluency in foreign
languages, computer skills, knowledge in specialized
areas
Potential. Job performance evaluations; aptitude
test results

Skills inventories are also useful for talent development and management. Some
HR departments use the information in skills inventories to identify employees
who, with additional cross-training or education, might qualify for higher-level
jobs within the company.
Example: Amulya Brown’s skills inventory indicated that she had

completed a significant number of university-level courses. With a college
degree, Ms. Brown would be eligible to apply for a management position.
HR notified Ms. Brown of this fact and also sent her information about the
company’s college tuition reimbursement program.
HR can use the information it obtains from a skills inventory to perform suc-
cession planning. Succession planning is the process of identifying possible
replacements within a company for important jobs. Succession planning involves
assessing employees’ current performance levels and promotion potential. Typi-
cally, most companies use succession planning only for management positions.
Companies perform succession planning because it allows the company to plan in
advance for replacing a key employee.
External Labor Supply

When an insurer lacks a sufficient supply of qualified internal candidates or when
staffing entry-level positions, the insurer must consider hiring from outside the
company. Many factors affect the external labor supply, including expected unem-
ployment rates, the opening or closing of large businesses in a company’s area
of operations, and the number of potential employees with needed job skills or
education levels. Most industrialized countries conduct studies of the labor supply
that can aid HR in labor market analysis. The Office for National Statistics in the
United Kingdom, the Labour Bureau in India, and the Department of Labor in the
United States are examples of government agencies that publish current data on
employment, economic activity, and unemployment rates.
Recruitment
Recruitment is the process of identifying and attracting job applicants who are
capable of performing the duties of a particular position. Insurers recruit job can-
didates by looking inside and outside the company for the best-qualified people.
Internal Recruitment
To the extent possible, most insurers try to fill job positions above entry-level posi-
tions with employees from within the organization. Internal recruitment offers
several benefits to an insurer.
Current employees have an employment history with the insurer. Unlike
a person hired from outside the company, an insurer knows the performance
level of current employees.
Internal recruitment is less expensive than external recruitment. Hiring
from within the company does not require purchasing help-wanted advertise-
ments or the services of employment agencies.

Internal recruitment boosts morale. Promotion to a higher-level position

rewards employees for their efforts and encourages employees to work hard
for further career advancement opportunities.
Internal recruitment requires less training than external recruitment. A
current employee knows the company and its mission, general procedures,
and traditions, and so requires less training than a new hire.
Internal recruitment does have some disadvantages, however. For example,
each time an insurer fills a vacant position with a current employee, a new job
vacancy is created. In addition, consistently hiring from within can create an envi-
ronment in which everyone tends to think in similar ways, creating a condition
known as groupthink. Groupthink is a phenomenon in which the members of a
group stress conformity and unanimity to the point where alternative courses of
action are ignored. Applicants hired from outside the company can be a source of
new ideas and knowledge and can help an organization avoid groupthink. Also,
just because an employee has performed well in one job does not guarantee good
performance in a new job. A new job may require a different set of job skills that
the employee doesn’t possess.
Although HR staff can use skills inventories for internal recruitment, the pri-
mary tool they use is job postings. A job posting involves publicizing the avail-
ability of a job and the job’s requirements to all current employees of the organi-
zation either through a company’s intranet or other methods of communication.
Once a job is posted, the insurer allows current employees to apply for the job
within a certain period, such as five days, before it is offered to people outside the
company. When publicizing a job, whether for internal job candidates or external
job candidates, an insurer must be careful to present realistic and legally defen-
sible information about the job. Figure 4.3 presents some general guidelines for
internal job posting information.
Even if an employee is not interested in a posted job, the employee may know of
someone qualified for the position. Employee referrals can be an important source
of potential job candidates. Some insurers offer referral bonuses to employees if
the company hires a referred candidate.
Figure 4.3. General Guidelines for a Job Posting
Include a job description that identifies the duties,

responsibilities, and accountabilities for the position,
including to whom the position reports, the pay range
for the position, and the required level of education,
amount of experience, or training required
Inform potential candidates of what action to take to
apply for the position
Ensure the confidentiality of all candidates
Never refer to age or gender in the job posting unless

such a characteristic is a necessary job requirement

External Recruitment
When no current employees with the required qualifications are available, insur-
ers use external recruitment. Hiring a job candidate from outside the company can
bring fresh energy, perspective, and ideas to the company and stimulate creativity.
The most common methods for external recruiting are (1) placing help-wanted
advertisements in newspapers, (2) listing open positions on the company’s exter-
nal website or on job placement websites, (3) contracting with private employment
agencies, (4) conducting job fairs and searches at educational institutions, and (5)
following up on referrals of potential job candidates made by current employees.
Because of the growing popularity of social media, such as Facebook and Linked-In,
companies are also exploring ways to use social media in their recruitment efforts.
Employee Selection
An insurer’s primary goal when selecting an employee is to determine if a job
candidate’s education, skills, experience, and—for some jobs—personality are
suited to the requirements of a particular position. Traditionally, hiring systems
have focused on current or specific knowledge and skills. In today’s changing work
environment, a candidate’s trainability, problem-solving ability, adaptability, initia-
tive, and ability to work autonomously are increasingly important characteristics.
The number of candidates for a job may be initially quite large. The employee
selection process narrows down the number of candidates until, hopefully, the
company hires the best candidate for the job. The primary steps in the selection
process are shown in Figure 4.4.
Employment Applications and Screening Interviews

An employment application requests specific information that companies need to
identify appropriate job applicants. Generally, every question on an application
form must be justifiable according to business necessity or its relevance to the
job. Otherwise, the company may face legal questions about its hiring policies. In
many countries, laws restrict companies from including questions on application
forms requesting information about an applicant’s sex, race, ethnicity, marital sta-
tus, children, religion, or age (except to verify a certain minimum age). Typically,
an employment application form requests information from the applicant such as
Contact information—name, address, and telephone number
Date available to begin work
Education and training
Foreign language fluency
Work history
Personal references
The applicant must sign the employment application to certify that the informa-
tion on the form is correct. In addition, the applicant’s signature usually authorizes
the potential employer to conduct background checks or drug tests or both.

Figure 4.4. The Selection Process
Employment Applications
Applications that satisfy minimum job qualifications are selected
for screening interviews
Screening Interviews
Applicants who are obviously not candidates for the job
are eliminated; others proceed to pre-employment
tests or interviews
Pre-Employment Tests
Applicants who fail to meet minimum required
standards on performance tests are eliminated;
others proceed to interviews
Employment Interviews
In-depth interviews of remaining
applicants result in selection
of a candidate for job
Background Checks / Drug Tests

Accuracy of information
verified; applicant checked
for illicit drug use
Applicant
Hired
Those job applicants who, on the basis of information in the employment

application, appear to possess the qualifications needed for the job undergo a
screening interview. A screening interview, often conducted over the telephone,
is a series of questions intended to determine if the job applicant’s qualifications,
work experience, and needs are appropriate for the job. Screening eliminates those
job applicants who are obviously not qualified for the job, and reduces the number
of candidates whom department managers or supervisors must consider later in
the selection process. Although an insurer’s HR personnel typically conduct these
activities, some companies outsource the application review and screening inter-
view to human resource service providers who specialize in these activities.

Pre-Employment Testing
Sometimes companies require job applicants to take tests that measure their job-
related abilities, aptitude, knowledge, or skill. For a pre-employment test to be of
value to an employer, the test should be valid and reliable. Validity refers to the
degree to which a test is correlated with job-related skills or behaviors. When a
test is valid, a person who scores well on the test is likely to do well in the job.
The reliability of a pre-employment test refers to the likelihood that an appli-
cant would achieve similar results on repeated administrations of the same or an
equivalent test. For example, if a test is reliable, an applicant who scores a 90 on a
test on Monday should score at about the same level on the same or a similar test
on Tuesday.
Pre-employment tests can generally be categorized as aptitude tests, perfor-
mance tests, or behavioral tendencies tests. An aptitude test, also known as a
cognitive abilities test, attempts to determine a job candidate’s intelligence level
and reasoning ability by evaluating how well the candidate can do such things
as remembering details, solving problems, and understanding and using words
correctly. According to research on many different financial services jobs, apti-
tude tests can reasonably predict how successful new hires will be in completing
training, passing professional licensing exams, and general work performance.1
To evaluate how well an applicant has mastered the specific skills needed to
perform well in a particular position, a company may administer a performance
test, also known as a job skills test or a work sample test. For example, a test mea-
suring a clerical applicant’s ability to use spreadsheet software or word processing
software is a performance test. A behavioral tendencies test, also known as a
personality test, attempts to discover a job applicant’s typical job behaviors, such
as: Is the person a team player? Can the person remain calm under pressure? Is the
person honest?
When I applied for my job, I took a test to see

how well I perform under stress. Did I take a
behavioral tendencies test?
Employment Interviews
Ultimately, the question an insurer wants answered is: Can an applicant do the
job? On the other side, applicants want to know if a job is right for them. An
employment interview, which is often a series of interviews, provides a manager
with the opportunity to decide whether the candidate is qualified for and suited
to do the job. An employment interview also allows a job candidate to assess
the company and the job position. Ideally, an employment interview realistically
presents the positive and negative aspects of a job. Job applicants who have a real-
istic preview of the work adjust better to the position after hire. For example, if
an insurance company expects a claim department employee to work overtime if
claim volume exceeds a certain level, then this expectation should be communi-
cated during the employment interview.

Sometimes the manager or supervisor for the position being filled conducts an
employment interview. Sometimes the employment interview is conducted by a
group of individuals. The group typically consists of the manager and two or three
other employees who will work with the applicant if hired. Having three or four
individuals evaluate the applicant rather than just one lessens the likelihood of
individual bias. Using the same set of job-related questions for all applicants also
lessens the likelihood of bias and promotes consistency in the evaluation process.
Background Checks and Drug Testing

Unfortunately, some employment applications contain false information. Insurers
check an applicant’s background so that the company doesn’t hire someone who
is not qualified for a job or might be a potential legal liability. Although HR staff
cannot verify every aspect of a job application, HR staff members almost always
check with former employers to verify the applicant’s work history. Often the for-
mer employer will only verify the dates of employment and the job title.
Insurers also check to ensure that potential employees do not have a criminal
history that could potentially result in safety or ethics issues in the workplace.
Because many of an insurer’s employees have access to customers’ sensitive per-
sonal and financial data, hiring employees with high ethical standards is extremely
important.
In addition, some insurers have a policy of testing applicants for evidence of
illegal drug use. As a final step before an applicant is hired, such companies require
the applicant to undergo urine or blood tests.
Training and Development

Training and development are becoming even more crucial in today’s competi-
tive business environment. In general terms, employee training is any activity
directed toward learning, maintaining, and improving the skills necessary for
meeting organizational goals. The primary purpose of employee training is to pre-
pare employees to perform specific tasks, such as handling claims, programming
a new computer system, or responding to customer service requests. Employee
training may also present knowledge that is not position-specific, such as informa-
tion on new insurance laws and regulations that an employee may encounter in
his job.
Employee development goes one step beyond training and helps employees
increase their general knowledge and skills. Employee development provides
employees with opportunities to (1) gain new knowledge, (2) learn new skills, and
(3) supplement existing knowledge and skills. Insurers find that employee devel-
opment often improves employee morale and better equips employees to contrib-
ute in an ever-changing workplace.
Typically, the first training that a newly hired employee receives is called an
orientation. An orientation is the process of introducing a new employee to an
organization’s procedures, policies, culture, and other employees. HR staff typi-
cally present to new employees an overview of company policies and the company
as a whole. Managers and staff in a new employee’s department are usually the
people who orient the new employee to her workspace, coworkers, departmental
procedures, and job responsibilities.

Additional employee training programs can generally be classified as on-the-

job training, classroom training, or self-study training. In on-the-job training, an
employee learns by performing real work in the actual work environment. Two
methods of on-the-job training are mentoring and job rotation. In mentoring, a
manager assigns a less experienced employee to work with a more experienced
employee, or mentor. The mentor answers questions, offers advice, and provides
general guidance to the less experienced employee and feedback to management
on how the new employee is progressing. For example, a new claim analyst may
initially work with a more experienced claim analyst who provides a model for the
less experienced employee to follow. In job rotation, an employee moves periodi-
cally from one job to another, staying in each job just long enough to learn how to
perform the job and how it relates to other jobs in the company.
Sometimes, it makes more sense for certain job tasks or responsibilities to be
taught where all the participants can gather in one place to learn about subjects
they need to know for their job. In classroom training, an instructor lectures to a
group of employees, leads the group in discussion, or directs the group members
as they do various exercises, such as role-playing. If classroom training is too
expensive, not feasible, or not desired by the company, a company can use self-
study training. Self-study training requires the trainee to work independently—
using training materials in the form of textbooks, computer software programs, or
web-based programs—to complete a training course or program.
Each of the three primary employee training approaches just described has
benefits and limitations, as shown in Figure 4.5. To compensate for the limita-
tions of the different approaches, insurers often combine two or all three types of
programs.
Performance Evaluation
Performance evaluation, also known as performance appraisal, is a formal
process of reviewing and documenting an employee’s job performance with the
primary goals of (1) ensuring adequate performance, (2) continually improving
performance, and (3) determining whether the employee qualifies for an increase
in compensation or a promotion. The HR department typically helps develop per-
formance evaluation systems and oversees the performance evaluation process.
Performance evaluations measure employees’ actions against performance
standards and are part of an insurer’s control process. To be of the most value, per-
formance standards must relate to specified goals for each employee. The speci-
fied goals are actions, achievements, or competencies that the employee needs to
attain or complete to successfully perform the job. In general, the performance
evaluation process consists of (1) establishing performance goals, (2) monitoring
employee performance, and (3) reviewing employee performance.
Establishing Performance Goals

The manager or supervisor of each functional area determines the tasks that
each department employee needs to perform for the department to achieve its
objectives. As described in Chapter 2, a manager can only evaluate the perfor-
mance of a task when that task is associated with a measurable performance
standard. For example, a performance standard for a claim analyst might be to
evaluate and process 35 claims per day with a 98 percent accuracy rate, and with
no customer complaints.
Figure 4.5. Benefits and Limitations of Various Employee Training Programs
Training Approach Benefits Limitations
On-the-job training Trainee learns by doing Takes co-worker or

actual job tasks supervisor trainer away
from their own work
Trainee can be
tasks while mentoring the
immediately productive
trainee
in the job
Trainee errors create
Helps trainee build
problems that trainer
relationships with
must correct
co-workers
Informal structure can
Trainee receives
lead to inconsistencies
personalized attention
in training for different
trainees
Classroom training Use of professional Information provided

trainers can increase by trainers from outside
quality and consistency of the trainee’s department
training may not be applicable to
actual work
Trainee may learn
better without outside Often more expensive
distractions than other training
methods
Trainee receives
personalized attention
Self-study training Trainee can determine Trainee does not receive

own schedule for study experience in real
work setting
Trainee may learn better
when able to study at Trainee receives no
own pace personalized attention
Requires self-discipline
that trainee may not
possess
Managers must make sure that employees know and understand what is
expected of them in a job. Managers typically meet with employees at the begin-
ning of an evaluation period and discuss performance goals—standards against
which the employee’s work are evaluated. This initial goal setting is a type of
steering control. Employee goals may also include non-work-specific objectives
such as completing additional training or education courses.
Employees are more likely to be committed to achieving performance goals
when they believe that the goals are fair and attainable. If no claim analyst has
ever processed 35 claims in one day with a 98 percent accuracy rating, then this

performance goal is unrealistic and has little value. Also of little value is a per-
formance goal that only one or two exceptional employees are able to reach. If the
majority of the employees in a department are not reaching performance goals, the
manager needs to carefully assess why. Perhaps the one or two employees reach-
ing the goals have qualifications that the other employees don’t have. Perhaps the
underachieving employees need additional training. Or perhaps the performance
goal needs to be adjusted. In any event, investigation is required. When managers
include employees in establishing performance goals, employees are also more
likely to understand and be motivated to attain those goals.
Monitoring and Reviewing Employee Performance

Although performance evaluation is often seen as primarily a feedback control, the
monitoring portion of performance evaluation should be a concurrent or ongoing
control process. Managers should be continually evaluating employees to improve
current behaviors and work performance. An employee who needs additional train-
ing to accomplish a performance goal needs the training sooner rather than later. If
a manager provides continuous performance feedback, an employee should never
be surprised by a manager’s comments in a formal performance review.
Performance Tools
HR can choose from a wide array of performance tools to use in the company’s
performance evaluation system. Performance tools measure an employee’s behav-
ior and accomplishment of objectives. Insurers typically use one or more of the
performance evaluation methods shown in Figure 4.6.
Performance Evaluation Programs

A well-run performance evaluation program benefits employees and the insurer.
For an employee, a performance evaluation affirms the employee’s job accom-
plishments and directs him to areas of job performance that need improvement. In
addition, most companies tie performance evaluation results to employee rewards
and compensation. Compensation is an employer’s payment of money to an
employee for work performed. To best motivate employees, HR must structure
the performance evaluation system so that accomplishing performance goals is
clearly tied to increases in compensation or other rewards. For example, an insur-
er’s guidelines for compensation increases might provide a 6 percent pay increase
for an “Outstanding” performance rating but only a 2 percent pay increase for an
“Adequate” performance rating.
For an insurer, the information obtained from a well-run performance evalua-
tion system supports many organizational decisions. Insurers use such informa-
tion to identify training needs and to evaluate the quality of its recruitment and
selection process. Also, if necessary, an insurer can use performance evaluation
information to defend itself against legal charges of discrimination in any of its
employment practices.

Figure 4.6. Performance Evaluation Methods

Method Description Advantages/Disadvantages
Graphic A supervisor rates an employee’s work Advantages: Easy to use and to develop.
Rating Scale during the evaluation period based on job- Provides an objective, structured format.
related factors identified at the beginning
of the period. Such factors might include Disadvantages: Ratings are subjective.
“completes work on time” or “is a team What one supervisor considers a “5” or
player.” For each factor, the supervisor “Excellent” another may consider merely
selects a rating from a range of choices. For a “3” or “Average.”
example, the range might be from “Poor” to
“Excellent” or from 1 to 5.
Behaviorally Similar to a graphic rating scale but contains Advantages: Factors are tailored to
Anchored job-related factors that are more specific a specific job. Less subjective than a
Rating Scale to the job and more fully described. For graphic rating scale.
(BARS) example, a factor for a CSR might be:
“Provides effective customer service to Disadvantages: Expensive and time-
internal and external customers.” The ratings consuming to develop.
might range from a “5-Regularly receives
positive comments from customers” to a
“1-Receives many customer complaints.”
Essay A supervisor writes a description of an Advantages: Supervisor has freedom to
Appraisal employee’s job performance during the fully describe employee’s performance.
evaluation period. Often used in conjunction Can include qualitative as well as
with a more structured tool such as the quantitative information.
graphic rating scale or BARS.
Disadvantages: Difficult to compare
employees because format is not
structured. Value of appraisal depends
on supervisor’s ability to write clearly.
Critical A supervisor records examples of positive Advantages: Provides specific examples
Incident and negative employee behavior in of an employee’s work performance.
Evaluation the workplace, including dates, people
involved, and actions taken. For example, a Disadvantages: Time-consuming for
supervisor might record a warning given to supervisor if done correctly. Negative
an employee about being late for work or a events tend to be recorded more than
comment made by a co-worker praising the positive events.
employee’s positive attitude.
Ranking The supervisor compares employees with Advantages: Provides clear picture of
one another and places them in order, best and worst performers.
from best to worst, based on specific
characteristics of their work behavior. For Disadvantages: Tends to be subjective.
example, a supervisor might meet monthly Difficult to accomplish with large groups
with employees and provide them with of employees. Perception is that the
a department ranking with regard to lowest ranking employee is a poor
production, accuracy, or courtesy. performer, when the difference between
the top performer and the lowest
performer may be miniscule.
Management Supervisor and employee work together to Advantages: Because employees
by Objectives set goals during the evaluation period and participate in setting goals, they usually
(MBO) develop a plan for achieving goals. Both understand and are committed to them.
evaluate the employee’s success in meeting
goals at the end of evaluation period. Disadvantages: Difficult and time-
consuming to develop and maintain.
Ineffective if goals aren’t realistic or if
employee isn’t an active participant in
the goal-setting process.
360-Degree Supervisor, employee, co-workers, Advantages: Having more than one
Feedback and customers submit evaluations of person evaluate an employee, helps
an employee’s performance. Typically, avoid bias that can occur when a single
questionnaires are distributed asking for person does the evaluation.
feedback on an employee’s performance.
Disadvantages: Expensive and time-
consuming to gather and compile
information from multiple sources.

I love my job and feel good when I do it well.

But, to be honest, I wouldn’t be here without
the compensation and benefits package. After
all, I have to support myself and my family.
Compensation and Employee Benefits

HR is responsible for establishing and administering an insurer’s compensation
and employee benefits programs. One of HR’s greatest challenges is balancing the
need to attract and retain qualified employees by offering competitive compensa-
tion and benefits packages with the costs of such programs. Insurers use the fol-
lowing primary types of compensation methods:
Hourly wage: fixed amount of money per hour worked
Annual salary: contractual amount of money per year
Commission: fixed percentage of premium income
Bonuses: an amount paid in addition to an hourly wage or annual salary as an

incentive for performance
Profit-sharing: an amount paid in addition to an hourly wage or annual sal-
ary as an incentive for performance that is based upon company profits for the
year
In addition to compensation, insurers offer additional programs and services,
called employee benefits, to employees. Typical employee benefits include (1) paid
time-off for vacations and holidays; (2) life, health, vision, and dental insurance;
(3) retirement pensions or retirement savings plans; (4) employee services, such as
day-care or fitness facilities; and (5) government-required benefits, such as unem-
ployment compensation, workers’ compensation, and government-sponsored
retirement programs.
The level of compensation and types of benefits that a company offers to
employees vary from insurer to insurer and from one jurisdiction to another.
Industry or government surveys provide an insurer with comparative information
on other companies’ compensation and benefits practices. Government require-
ments also directly impact insurers’ compensation and benefits practices. Many
countries have minimum wage legislation. For example, in the United States, the
Fair Labor Standards Act (FLSA) sets a minimum hourly wage an employer
must pay. Countries may have antidiscrimination laws that seek to ensure people
of similar abilities, seniority, qualifications, and performance levels receive equal
pay for equal work. In addition, labor union agreements may be a factor in deter-
mining wages and benefits.

Communicating clear and accurate information to employees about com-

pensation and benefits is another major responsibility of the HR department.
In addition, sometimes failing to communicate such information to employees
results in legal consequences. For example, in the United States, the Employee
Retirement Income Security Act (ERISA) requires that employers inform their
employees about their pension and certain other benefits in a manner that the aver-
age employee can understand.
Compliance
Many of an HR department’s actions, as described throughout this chapter, must
comply with government regulations. Two other heavily regulated areas are work-
place safety and the manner in which HR manages employee separations from the
company.
Many countries regulate the safety of the work environment. In the United
States, the Occupational Safety and Health Administration (OSHA) develops
and enforces mandatory job safety and health standards to reduce safety hazards
and health hazards in the workplace. The HR department seeks to ensure that the
company obeys all specified standards and maintains a work environment that is
free from recognized hazards. If an employee in the United States files a complaint
with OSHA claiming that unsafe conditions exist, an OSHA representative visits
the workplace and investigates the complaint. The HR department typically over-
sees the OSHA representative’s visit.
However, some countries, such as India, rely on employers’ voluntary efforts to
maintain workplace safety. In India, the National Safety Council conducts safety
training for and provides promotional materials to the HR departments of employ-
ers to encourage workplace safety.
The governments in many countries have in place laws that regulate the separa-
tion of employees from an employer. Separation occurs when an employee leaves a
company as a result of resignation, layoff, retirement, or discharge. A layoff results
when a company has no work for an employee to perform because the employee’s
position has been eliminated or the company is not operating at full capacity. In
the second situation, the layoff may be temporary and the worker will be recalled
if work becomes available. A discharge occurs when an employer permanently
terminates the employment relationship for cause, including the employee’s poor
performance or the employee’s failure to follow company policies or procedures.
The HR area handles the paperwork associated with ending the employment rela-
tionship in compliance with all applicable laws. Typically, HR personnel explain to
departing employees their rights and options, if any, to elements of the company’s
benefit plan. When an employee separates because of layoff, HR may provide or
coordinate the delivery of outplacement counseling or career counseling services
to help such employees in their search for a new job.

Key Terms
human resources planning employee development
home country staffing orientation
host country staffing on-the-job training
third-country nationals mentoring
outsourcing job rotation
skills inventory classroom training
succession planning self-study training
recruitment performance evaluation
groupthink compensation
job posting employee benefits
job description Fair Labor Standards Act (FLSA)
screening interview Employee Retirement Income Security
validity Act (ERISA)
reliability Occupational Safety and Health
aptitude test Administration (OSHA)
performance test separation
behavioral tendencies test layoff
employment interview discharge
employee training
activities:
Review the job descriptions in your company’s job postings. Do you need
additional skills or training to apply for one of the jobs that interests you? If so,
contact your HR department to discuss the best way to obtain that training.
Look at one of your previous performance evaluation forms. What type of
performance evaluation tool does your company use?
Prepare yourself for your next formal performance evaluation by assessing

your own performance in your job. Regularly ask your manager for feedback
on your performance. Gather examples of work you’ve done well or praise
that you’ve received. Consider the performance evaluation as a way for you to
grow professionally.
Endnote
1. Malcolm McCulloch, “Work Changes and Hiring Practices for the Recovering Economy,” Resource,
July 2010, 21.

Insurance Company Operations Chapter 5: Information and Technology 5.1
Chapter 5
Information and Technology
Objectives
 Recognize and use information and technology terminology
 Describe the key job positions in an information technology
(IT) department
 Describe the main elements in information management, including a
database, a database management system, a data warehouse, a document
management system, and a workflow management system
 Explain the purpose of a transaction processing system and the benefits
and costs involved with legacy systems
 Describe how business intelligence, business analytics, and expert
systems are used in insurance companies
 Define software as a service (SaaS) and cloud computing and explain
how each is used to expand IT capacity
 Describe intranets, extranets, and the Internet, and ways in which
insurers use each type of network
 Explain how insurers use different types of computer telephony
integration (CTI)
 Define data governance and identify several actions insurers should take
to maximize IT security and improve disaster recovery

5.2 Chapter 5: Information and Technology Insurance Company Operations
Outline
Responsibilities of the Telecommunications
IT Department  Networks
Organization of the IT Department  Computer Telephony Integration
 Other Telecommunications
Information Management Technology
 Databases IT Security and Disaster Recovery
 Database Management Systems
 Document Management Systems
 Workflow Management Systems
Business Process Technology
 Transaction Processing Systems
 Business Intelligence
 Outsourcing IT Operations
The people who work in IT are the ones I call

when I’m having a problem with my computer
or network systems. What do they have to do
with information?
T
he insurance industry is an information-driven business. Insurers use
information about customers, products, producers, investments, regulatory
requirements, employees, and many other factors in their operations. Infor-
mation must be managed like any other valuable asset in order to create competi-
tive advantages and increase stakeholder value. Information management refers
to all of the people, processes, and technology that companies use to create and
manage corporate information. Specifically, information management addresses
how companies capture, manage, use, preserve, and store physical and electronic
information so that they can deliver the right information to the right people at the
right time.
The insurance industry is also a technology-driven business. Technology
provides ways for insurers to manage business processes more efficiently, reach
customers more effectively, and distinguish themselves from competitors. Tech-
nology management refers to using technology to maximize company resources
and conduct business operations more effectively and efficiently. Within an insur-
ance company, the functional area responsible for information and technology
management is commonly known as information technology (IT). However, the
department may also be called information technology management, information
management, information services, information resources, or a variety of other
names.
Responsibilities of the IT Department

The mission of the IT department is to identify ways technology can increase rev-
enue, enhance customer relationships, reduce costs, strengthen compliance, and
provide competitive advantages in operations. A high-performing IT department

that understands how a company’s work processes are done today and can also
envision what the work processes should look like in the future can provide stra-
tegic value that far exceeds just cost efficiencies.
The IT department is usually responsible for all of the technology within an
insurance company, including hardware, software, networks, or any other related
processes. The IT department also supports the management and delivery of voice,
data, or video information. Figure 5.1 provides descriptions of common types
of technology and other terminology important for understanding how the IT
department operates.
Figure 5.1. Technology Terminology
Hardware —The equipment or mechanical devices included in a computer system

that can be touched. Hardware is used to enter information into a system, perform
processing activities, and display the results of that processing. Examples include
display screens or monitors, printers, storage devices, and keyboards.
Software —Instructions, or programs, that govern a computer’s operations.
Systems software coordinates the activities and functions of the hardware
components. Application software helps users perform specific tasks or solve
particular problems. For example, word processing software is used to create text
documents. Insurers use many specialized types of software, such as accounting
software to maintain the company’s accounting reports and produce standard
financial reports.
Network —A group of two or more computer systems linked together so that the
computers can communicate with each other.
Server —A computer or a device on a network that manages network resources.
For example, a printer server is a computer that manages one or more printers, and
a network server is a computer that manages network traffic.1
Internet —A massive network of networks that connects computers and other
network devices together globally. Information that travels over the Internet does
so via a variety of languages known as protocols.
Web browser —A software application that allows users to access and navigate the
Internet. Examples of web browsers include Microsoft Internet Explorer, Mozilla
Firefox, and Google Chrome.
World Wide Web (The web) —A portion of the Internet in which information is
accessed or shared using a specific language called HTTP protocol. The web uses
web browsers to access web documents, videos, or other digital materials at pages
on the web, which are known as websites.
Organization of the IT Department

The individual who directs an insurer’s IT department is typically known as the
chief information officer (CIO). The CIO oversees all of the information technol-
ogy systems in an insurance company and provides corporate leadership, vision,
and direction to ensure that IT and an insurer’s business objectives are aligned. In

today’s uncertain and fiercely competitive marketplace, the CIO’s role in aligning
information technology goals and strategies with corporate goals and strategies is
more important than ever. The CIO normally reports to the chief executive officer
(CEO). If the insurance company has a chief operations officer (COO), the CIO
may report to the COO.
Some large companies may also have a chief technology officer (CTO), also
known as a chief architect or enterprise architect, who reports to the CIO and is
responsible for developing and implementing a technology strategy for the entire
organization, including its processes, information, and information technology
assets. For example, the CTO might be involved in researching and determining
whether to purchase or develop in-house a new type of technology. Figure 5.2
describes key job positions in an IT department.
Figure 5.2. Key Job Positions in an IT Department
Project manager—Plans and coordinates project implementation. Responsible for

managing risks, budgets, communication, conflicts, and timelines for a project
Programmer/Developer—Writes/develops software programs
Security analyst—Administers/manages technology security; may help set security
policies and typically interacts with internal/external auditors
Business analyst—Seeks to identify the IT needs of functional areas and determine
the most effective and efficient IT solution for those needs; performs testing for new
applications in the functional environment for the end user
Quality assurance analyst—Tests changes to software and hardware to ensure no errors
occur during operation and that the intent of the change is accomplished
Computer operator—Oversees the operation of the computer systems, ensuring that
the machines are running and physically secure
Database administrator—Creates, optimizes, and maintains a company’s databases or
information stores; at an insurance company, typically works closely with actuaries
Server administrator—Manages server hardware that is used for file/print services,
applications, and databases; also installs and maintains software
Network administrator—Manages the data communication devices that allow the flow
of information from one resource to another
Help desk technician (service desk)—Provides support, through either phone or
e-mail, to company employees who are experiencing a technical problem related to
an application, personal computer, or printer; unresolved issues go to the next level of
support which is usually a desktop technician who provides service to the employee at her
workstation.
Telephone technician—Manages the voice/telephone system; also includes call center
management in larger companies
Print operator—Operates high-speed printers that produce reports and mailings
associated with policyowner support and agent support
Source: Adapted from Ferny Espinoza (Transamerica Life Insurance Company), note to author, 2011. Used with permission.

Management wants to improve our call

center’s service handling. Lately, a business
analyst has been working in the call center
studying our work processes. What’s that all
about?
By placing a business analyst in a functional unit, the IT department staff can

fully appreciate the complexity and subtleties of a particular insurance operation.
Additionally, the functional unit learns how to better articulate its system needs
to IT. Some insurance companies may take more of a team approach by assigning
IT project managers or business analysts to work with representatives from func-
tional areas when IT projects are needed. A team approach can also aid in remov-
ing boundaries between IT and the particular business function involved.
How an insurer organizes its IT department varies considerably among insur-
ance companies depending on company size and culture. Some insurers centralize
all IT staff in one department. In such situations, the department is frequently
called a shared services department. Other insurers have a centralized department
for some work processes, but place business analysts or other IT staff in functional
departments or divisions. For example, the investments department may retain an
IT specialist to support software it uses to buy and sell investments. Also, depend-
ing on the size of the company, one or more of the job positions in Figure 5.2 may
be combined into one position.
In general, the IT department’s activities center on managing and continually
improving three areas: (1) information management, (2) business processes, and
(3) telecommunications.
Information Management
Insurers gather incredible amounts of data from policy applications, policyown-
ers, insureds, claimants, employees, producers, products, and competitors. Data
are unprocessed facts, such as a policyowner’s name, address, date of birth, or the
policy’s face amount or policy number. Insurers can combine, manipulate, and
analyze data to create information. Information is a collection of data that has
been converted into a form that is meaningful or can be used to accomplish some
objective. For example, an insurer combines the face amount of one sold policy
with the face amount of all of the other policies sold during a specified period to
obtain information about total sales during that period.
To operate effectively, all areas of a life insurance company need informa-
tion that is accurate, complete, concise, relevant, clear, timely, accessible, usable,
economical, and secure. One important goal for information management is to
ensure that the company’s information possesses these characteristics, which are
described in Figure 5.3.
If an insurer’s information does not have these characteristics, the insurer is
going to be operating below its capabilities. For example, if customer satisfaction
surveys do not collect accurate information or if they are administered too infre-
quently, an insurer’s understanding of its customers’ needs might be inaccurate or
outdated. An important component in how well a company manages its informa-
tion is effective database management.

Figure 5.3. Characteristics of Valuable Information
Accurate: Free of errors
Complete: Contains everything needed
Concise: Contains only the level of detail needed
Relevant: Meets the needs of the information user
Clear: Easy to understand
Timely: Current and available when needed
Accessible: Available where needed
Usable: Available in forms that meet the needs of

the user
Economical: Cost is appropriate for value
Secure: Accessible only to authorized users

in a way that supports good governance and
compliance with regulations
Databases
A database is an organized collection of data and information. An insurer devel-
ops some databases internally and maintains them for the insurer’s own needs and
uses. For example, an insurer’s life insurance customer database would store con-
tact information and demographic information about the company’s life insurance
customers. Alternatively, an insurer’s personnel database would store information
about the company’s employees, such as salaries, benefits, or skills. Such inter-
nal databases are designed to record business transactions quickly and preserve a
record of these transactions for internal use.
Insurers also use external databases developed by governments and govern-
ment agencies, industry associations, and other information providers. External
databases provide information such as regulatory updates, market demographics,
economic information, actuarial studies, and consumer information. Figure 5.4
lists a few of the many external databases that life insurance companies use.
Database Management Systems

The data stored in a database would be of little help to insurance companies with-
out a database management system that allows users to access and use the data.
A database management system (DBMS) is a group of computer programs that
organizes the data in a database and allows users to obtain the information they
need. A DBMS controls how databases are structured, accessed, protected, and
maintained. As shown in Figure 5.5, a DBMS serves as the link between a data-
base and its users.
A data warehouse is a central repository for data that a company collects
from its existing databases, its internal administrative systems, and possibly from
sources outside the company. The data from the various sources is cleaned—

Figure 5.4. External Databases That Insurance Companies Use
American Council of Life Insurance (ACLI).

Maintains online database of U.S. insurance
laws, regulations, and insurance department
organization
Best’s Database Services. Provides a variety
of online and CD-ROM–based information
about insurance companies and insurance
markets; available from A.M. Best Co.
LexisNexis™. Provides full-text legal research
service and news, business, and financial
research service via online database, CD-ROM,
or books; available from the LexisNexis Group
LIMRA Online. Contains information about life
insurance marketing; available to members of
LIMRA International, Inc.
MIB Group, Inc. On request, offers member insurance companies medical and non-medical
underwriting information on proposed insureds
National Association of Insurance Commissioners (NAIC). Provides online information
about insurance regulators and regulations in the United States
NILS INSource. Provides online or CD-ROM database of insurance laws, regulations, and other
insurance regulatory information; available through CCH Insurance Services
U.S. Securities and Exchange Commission (SEC). Maintains an online database of product
prospectuses for variable life insurance and annuity products and mutual funds
Westlaw®. Provides online databases concerned mainly with insurance law; available through
West, a part of the Thomson Legal and Regulatory market group
screened for duplications and edited into a standard format—and then stored. The
data warehousing system provides management with a means of retrieving and
analyzing data for decision making. For example, if a manager wants to know what
percentage of an insurer’s life insurance business comes from a specified region
or country, an analyst can easily pull such information from the data warehouse.
Traditionally, insurers’ data warehouses were specific to one line of business or
one operation. For example, an insurer might have an individual data warehouse
that captures and maintains individual life, individual disability, and individual
annuity data.
But, what if an insurer needs to access information about its customers’ demo-
graphics and stated preferred method of contact across all of its lines of business?
To meet such a need, insurers are increasingly creating enterprise data ware-
houses, also known as integrated data warehouses, which consolidate data from
data warehouses and operational systems across lines of business, geographies, or
operations. The advantage of an enterprise data warehouse is that it can provide

Figure 5.5. A Database Management System
Database Users
Customer File
New Business
Name
Address
Phone
Age
Policy File Marketing
Policy Number
Anniversary Date
Database
Servicing Producer Management
Beneficiaries System Claim Administration
Policyowner
Producer File
Name
Address
Agency Management
Sales
Commissions
Claims File
Claimant
Underwriting
Policy Number
Claim Number
Policyowner
management with a comprehensive and integrated view of all of a company’s cus-

tomers, policies, financial statements and reports, or other aspects of business. In
addition, insurance companies that develop their own enterprise data warehouses
may find those warehouses helpful in complying with recent legal mandates, such
as those in the United States regarding data and records management.
However, before insurers can create a central, shared place to deposit data,
they must resolve conflicts in what data should be stored and how that data should
be cleaned and standardized. A report by the Data Warehousing Institute found
that 83 percent of organizations suffer from inaccurate reporting of data, internal
disagreements over which data to use, and incorrect definitions that render the
data unusable.2 Defining and organizing data consistently and accurately across
multiple data sources can be an expensive and time-consuming process. Still, an
enterprise data warehouse can be worth the time and expense if the results are
increased efficiency in business activities and better compliance with regulations.

An insurer can analyze the data in a data warehouse through data mining,
which is the analysis of large amounts of data to discover previously unknown
trends, patterns, and relationships. For example, data mining is often used to
detect a pattern of claim fraud or to help identify who among a company’s current
customers are most likely to purchase additional products. Data mining allows
insurers to make proactive, knowledge-driven decisions.
We’re trying to get rid of as many paper

documents as possible. Good for the
environment and saves money, too!
Document Management Systems

A document management system (DMS) is a technology that captures, stores,
organizes, and retrieves documents that have been (1) created electronically or (2)
created on paper and converted to digital images through imaging. Imaging, or
scanning, is the process of using technology to convert printed characters or graph-
ics into digital images that can be stored electronically and, depending upon the
technology, possibly edited. Electronic documents are stored in a document man-
agement system according to a series of rules that specify, among other things
Who may access the document
Who, if anyone, may modify the document
How long the document will be held
When, if ever, the document will be destroyed
Example: A producer uses imaging technology to scan a customer’s

life insurance application and supporting documents at his sales office.
The insurer’s document management system receives the electronic
documents from the producer and stores the documents according to the
rules necessary for new business processing. Such technology speeds up
the application process because information isn’t mailed or shipped, and
also decreases mailing or shipping expenses.
An insurer’s ability to scan new business applications and required forms either
from a centralized location or from a producer’s office has eliminated much of the
need for paper documents and also the associated time and costs of transporting,
processing, and storing paper documents. A DMS offers three primary benefits to
insurers. First, insurers realize a reduction in costs. Second, operational efficiency
increases because employees can access documents quickly through the comput-
erized system and several employees can view the same document simultaneously.
A DMS also aids insurers in satisfying compliance requirements because only
certain people or certain groups of people are permitted access to the electronic
documents.

A content management system is similar to a DMS except that it provides a

much broader system for sharing and editing corporate information. A content
management system (CMS) allows authorized users to create, edit, store, and
publish corporate electronic data and information. The primary difference is that a
DMS is used mainly for storing and accessing documents, while a CMS is used to
create, manage, distribute, and publish all types of electronic information, whether
documents, videos, or graphics.
Workflow Management Systems

In insurance operations, often more than one employee needs to see or handle
some piece of information or complete a work activity involving that informa-
tion. Workflow management systems are often used in conjunction with document
management systems or content management systems to manage the flow of work
from one person or team to the next. A workflow management system, also called
an automated workflow system, or automated workflow distribution, is technology
that allows an insurer to control the documents and work activities associated with
a business process. In its most basic form, a workflow management system routes
folders that consist of different types of electronic documents to various staff
members for processing, placing the items in a work queue until staff members
are available. If a staff member has a question, then the system can route the work
item to a supervisor or subject matter expert for assistance. After a staff member
has finished working on a folder, the staff member directs the system to route the
job to the next staff member or manager who needs to work on the case. Managers
can monitor the work queues and adjust staffing if work queues get too large or if
a work folder has been waiting in a queue for too long.
A workflow management system can recognize the type of work that is needed,
and route the folder to specific teams of staff based on the work type. For instance,
address changes may go to one team, while loan requests could be directed to
a different team. Using a workflow management system increases accountabil-
ity because the system shows the type of transaction, the person to whom it was
assigned, when it was received, questions that arose, actions taken, documents
created, completion dates and times, and so on.
Companies use workflow management systems to continually improve busi-
ness processes. For example, such systems provide average processing times that
can be used as performance standards for measuring and improving employee per-
formance. They also help to ensure that no tasks are left uncompleted, so quality is
improved. Also, insurers can use workflow systems to eliminate redundant tasks
and automate simple tasks to make a process faster and more efficient.
Business Process Technology

Insurance company employees use many different types of technology in their
jobs. For example, a customer service representative may use a combination of a
document management system and a workflow system, as well as technology that
integrates computer applications with telephones. From the employee’s perspec-
tive, all technology is business process technology. However, for our purposes,
business process technology is technology designed to assist with day-to-day
transactions or to support decision making.

Transaction Processing Systems

A transaction is any business-related exchange—such as a life insurance policy
issued in exchange for an application submitted, a death benefit paid in exchange
for proof of death received, or wages paid in exchange for hours worked. All
insurance companies have transaction processing systems, which are organized
collections of procedures, software, databases, and devices used to perform high-
volume, routine, and repetitive business transactions. Transaction processing
systems frequently produce paper or electronic documents intended for a specific
recipient. These documents include
Documents that provide a service for the recipient, such as commission checks,
benefit checks, and employee paychecks
Documents that request payment or other action from the recipient, such as a
premium due notice or a purchase order
Documents that provide information to the recipient, such as a newly

issued policy, a statement of policy values, a financial report, or a statement of
benefits
Would you believe that replacing our policy

administration transaction processing system
is going to cost millions of dollars?
Many of the transaction processing systems insurers use are known as legacy
systems—older systems developed by and customized for an insurer to perform
a specific task. Legacy systems are no longer the best or most modern systems.
However, legacy systems still may efficiently handle processing for very large
blocks of business, and their replacement may present unacceptably high costs and
risks to an insurer. The costs and risks of retaining legacy systems, however, are
growing. Because insurance contracts often stay in force for long periods of time,
a policy administration system may have data going back close to a hundred years.
Transforming this data to work with more contemporary systems can be diffi-
cult, but not doing so means that the data in the legacy system isn’t easily acces-
sible, which may hinder marketing or other essential company efforts. In addition,
because of the system’s age, finding IT staff with the skills necessary to maintain
the legacy system is often difficult. For all of these reasons, many insurers are
being forced to replace legacy systems. Some insurers have found that outsourcing
legacy system operations, such as policy administration, is more economical than
rebuilding these systems internally.
Business Intelligence
Business intelligence (BI), formerly known as a decision support system (DSS), is
an organized collection of hardware, software, databases, and procedures that uses
information taken from a company’s transaction processing systems and databases
to support decision making. Basic BI systems retrieve information, analyze it,

and prepare reports from multiple sources to allow managers to make day-to-day
decisions and control routine activities. Such BI systems typically provide insurers
with automatically scheduled reports on sales, budgets, benefit payments, lapses,
commissions, and many other financial aspects of insurance operations. They also
provide exception reports when an established performance standard is not met.
Our call center has an electronic board

that shows real-time statistics for how fast
customer telephone calls are being answered.
Is that BI?
Some insurers are beginning to use information dashboards rather than printed
or electronic reports to access and monitor information about critical elements
pertaining to company performance. A dashboard, sometimes known as a
performance dashboard or readerboard, is an information system application
that combines information from multiple BI sources into a single, easy-to-read
electronic format that identifies positive and negative trends. A dashboard puts
all of the information needed to evaluate the performance of the company or an
individual business process in one place. A dashboard provides management with
key performance indicators, such as customer service accessibility or sales by line
of business, and allows management to constantly monitor these indicators on a
daily or sometimes real-time basis and proactively manage the processes associ-
ated with the indicators.
More sophisticated BI systems contain business analytics and expert systems.
Business analytics are business intelligence tools that combine technologies,
applications, and processes as well as statistical and quantitative analysis to help
management make decisions or solve problems.3 One of the most important con-
siderations for an insurer when developing business analytics is focusing on key
work processes or aspects of the business that will help the insurer attain some
strategic goal. For example, the new business department might track new appli-
cations coming in according to product type, face amount, premium size, or dis-
tribution channel. Using this information, business analytics can gauge whether a
new product is performing as expected or whether a new marketing campaign is
effective. Insurers increasingly want business analytics that not only identify cur-
rent realities, but also predict future customer patterns and business opportunities.
For example, knowing what products are purchased most often by a particular seg-
ment of the population is good information; knowing whether this pattern is likely
to continue in the future is invaluable information.
An expert system is a knowledge-based computer system designed to provide
expert consultation to information users for solving specialized and complex prob-
lems, which means that the computer system actually suggests a course of action
or helps solve problems. An insurance company can use expert systems for opera-
tional purposes such as assisting in underwriting and claim processing. Expert
systems can also use information gathered through business analytics to suggest
methods for cutting costs, expanding capacity with existing resources, and creating
operational efficiencies.

Outsourcing IT Operations
Until fairly recently, the hardware and software an insurer used for its business
processes and business intelligence was either developed in-house and operated
by an insurer’s IT staff or purchased from vendors and operated in-house either
entirely by the IT staff or by the IT staff in consultation with the vendor. Because
of competitive and economic pressures, insurers are looking for ways to decrease
IT costs and also for ways that IT can modify business processes to react faster to
changing market conditions. Outsourcing, which we described in Chapter 4, is one
way insurers have sought to accomplish these objectives. The outsourcing of IT
operations often involves software as a service (SaaS) and cloud computing.
Software as a service (SaaS), also known as hosted applications, is a software
delivery method for accessing software from a vendor remotely over a web-based
network. Instead of developing an application or purchasing a licensed application
that the insurer will own, the insurer pays a fee to the vendor for the use of the
software. By using SaaS, insurers avoid development or purchase costs, installa-
tion costs, and maintenance costs. However, the use of SaaS requires careful con-
sideration. Poor integration between SaaS and other company systems and a lack
of policies governing the evaluation and use of SaaS can create costly operational
and legal issues for an insurer.
Cloud computing is a subscription-based or pay-per-use service that, in real
time over the Internet, provides an insurer with access to networks, platforms,
applications, or other IT elements that can extend the IT department’s existing
capabilities. To differentiate, SaaS provides software, whereas in cloud comput-
ing, the insurer “plugs in” to the provider to obtain the infrastructure or software
needed.4 For example, actuarial computations that can occupy an insurer’s IT sys-
tems for many hours can be run for a fee on a provider’s system over the Internet.
In this way, insurers can add IT capacity without investing in new infrastructure,
hiring or training new personnel, or purchasing new software. Because of data
security risks, legal compliance requirements, and other issues involving cloud
computing, insurers do not commonly use it for critical business applications. For
example, what would happen to an insurer’s data if a vendor supplying cloud com-
puting were to exit the business suddenly? However, as insurers develop contin-
gency plans and better control mechanisms, cloud computing is likely to become a
more viable alternative for many of an insurer’s business processes.
Telecommunications
Telecommunications is the electronic transmission of communication signals. In
a general sense, telecommunications is a term for a vast array of technologies that
send information over distances. Telephones—land lines and mobile phones—
radios, televisions, and computers that communicate through networks are all
examples of telecommunication devices.
Telecommunications have revolutionized insurers’ business operations. Compa-
nies use telecommunications to communicate more effectively and faster than ever
before with customers, vendors, business partners, and other external stakeholders.
Today, companies compete in a global economy through telecommunications. Tele-
communications provide a variety of tools that allow managers, employees, teams,

and workgroups to exchange information, monitor work processes, and collaborate

in ways that have never before been possible. Networks and computer telephony
integration (CTI) are two telecommunication elements vital to insurance company
operations.
Networks
Computer networks have created a world of possibilities for ways in which com-
panies can improve their operations. Networks are used for such simple tasks as
sending a document from a computer to a printer for printing. Networks are also
used for complex tasks such as connecting hundreds of an insurer’s employees
located around the world to the company’s intranet. An intranet is a company’s
internal computer network that uses Internet technology (such as web browsers)
but is accessible only to people within the organization. Intranets are used for a
wide range of work activities including e-mail, collaborative information sharing,
training, and employee access to company databases and computer applications.
E-mail, or electronic mail, is the transmission of electronic messages over com-
munications networks. Employees can send e-mails to other employees through
the company’s intranet or to anyone in the world when the company’s intranet is
connected to the Internet. E-mail has become an important way for insurers to
communicate with customers. Some insurers also provide employees with inter-
nal instant messaging. Instant messaging is the direct transmission of text-based
communication in real time over communication networks. When used by a com-
pany’s employees, instant messaging is faster than e-mail and doesn’t clog the
company’s e-mail system. Instant messaging can also be used to enable text-based
conversations with customers. In such cases, it is often referred to as web chat, text
chat, or Internet chat.
An extranet is a portion of a company’s intranet that is accessible to people
within the organization and to select external stakeholders. For example, insur-
ers often use an extranet to connect with their producers. As an additional secu-
rity measure, insurers can create a virtual private network (VPN), which is a
secured computer network that uses hardware, software, or a combination of both
to act as a “tunnel” through the Internet so that only people in possession of the
required technology have access to data traveling through the network. Extranets
and VPNs allow insurers to securely distribute information—such as forms, sales
illustrations, policy transaction information, or other data—to customers, suppli-
ers, or other business partners.
The Internet is a network of computer networks that can be accessed by any-
one with a device that supports such access, such as a computer or mobile phone.
Figure 5.6 illustrates how insurers use these three networks.
In Figure 5.6, you can see how Internet users are restricted from accessing a
company’s extranet or intranet by a firewall. A firewall—a combination of hard-
ware and software—creates an electronic barrier between the public and private
areas of an insurer’s systems and protects internal company networks. Only autho-
rized users can access the areas beyond the firewall. Life insurance companies
maintain a large amount of sensitive financial, medical, and personal information
about their customers. An insurer’s information systems also contain proprietary
information about the company itself. To protect the insurer’s information and

Figure 5.6. Intranets, Extranets, and the Internet
Insurance Company Information
Firewall Firewall Firewall

Internet
Provides access to
public information
on an insurer’s
website, such as
information about
the insurer and its
products.
User
Extranet Provides producers,
suppliers, business
partners, and
customers with
access to semi-
public information
pertaining to their
business with an
insurer.
User
Intranet
Provides employees
access to the tools,
applications, and
private information
they need to do
their jobs.
User
information systems, insurers use firewalls as well as other security measures

to prevent the loss, wrongful disclosure, or theft of information. Encryption is
a technology that encodes data so that only an authorized person possessing the
required hardware or software or both can decode the data. Encryption is the main
security measure that insurers use to protect data traveling over a network. Intru-
sion detection software is a type of software that monitors system traffic on the
network and identifies sequences of commands that indicate an unauthorized user
is attempting to access the organization’s systems or databases.
In addition to SaaS and cloud computing, insurers use the Internet for many
business purposes, including (1) electronic data interchange (EDI), (2) e-commerce,
(3) work collaboration, and (4) telecommuting. Figure 5.7 presents brief descrip-
tions of these applications and examples of their uses.

Figure 5.7. Internet Business Applications
Business Application Uses

Electronic data interchange Insurers use EDI for many purposes such as exchanging
(EDI) is the computer-to- information with reinsurers, medical providers, and
computer exchange of data over banks.
the Internet by two business
partners using an agreed-upon
data format.
E-commerce is the use of the Websites—Insurers market products directly to
Internet to deliver information, customers via the insurer’s website. Websites provide
facilitate business transactions, product information and, in some cases, the ability
and deliver products and to apply for and purchase products online. Websites
services. often include a link that allows visitors to send e-mail
messages to the insurer or request a callback from the
insurer. Some websites offer customers the opportunity
to chat live with a customer service representative.
Self-service options—Insurers allow customers to
access policy information, such as payment history, and
conduct certain transactions such as address changes
or premium payments, through the insurer’s website.
Insurance aggregators—Insurance marketers list
products from different insurers on a single website
where customers can comparison shop for various
types of life insurance and annuities.
Social networking—Insurers provide product and
company information as well as topics of general
interest on social networking websites, such as
Facebook and Twitter.
Business-to-business (B2B) e-commerce—Insurers
use the Internet to facilitate business transactions with
other businesses such as suppliers.
Collaborative software Insurers use collaborative software for many purposes,
provides a work team, which including project management and interdepartmental
may be geographically employee teams.
dispersed, with the tools to
communicate, collaborate, and
problem solve over the Internet.
Telecommuting is the act of Some insurers allow certain employees to telecommute
working outside the traditional in order to gain access to employees who otherwise
office or workplace, usually at would not be available or as an employee benefit for
home, by using the Internet to certain types of jobs. Insurers find that telecommuting
communicate with the office, can have a positive influence on employee recruitment
colleagues, and customers. and retention and may reduce real estate and office
expenses.

Computer Telephony Integration

Computer telephony integration (CTI) refers to the hardware, software, and pro-
gramming that integrate computers and telecommunications technology, most
often telephones. CTI is not a specific technology but rather a general term used
to describe a variety of technologies that support communications with customers
and other insurer operations.
Customer Service Applications

Although customers can communicate with insurance companies through e-mail
and the company website, the telephone remains one of the primary tools that
insurance companies and customers use to communicate with each other. Various
types of CTI help improve the accessibility, timeliness, and quality of an insurer’s
telephone customer service. An automatic call distributor (ACD) is a device that,
at the most basic level, answers telephone calls and directs them to the specified
employee or work group, or to a recorded message. In addition to routing calls,
ACDs can perform a variety of other functions. For example, ACDs can link
multiple customer contact centers and integrate telephones with other commu-
nication channels and other computer systems, such as e-mail, fax, a website, or
a database.
Screen pop is a technology that delivers voice and data simultaneously to the
workstation of a customer service representative. When a call reaches the insur-
er’s automated telephone system, the system uses the caller’s telephone number
or a personal identifier supplied by the caller to search a database for that caller’s
information. The system then forwards the customer’s information to the CSR’s
computer screen at the same time that the customer’s call is connected to the CSR.
Another type of CTI is the interactive voice response system. An interactive voice
response (IVR) system, also called a voice response unit (VRU), is a computer-
based technology that answers telephone calls, greets callers with a recorded or
digitized message, prompts callers to enter information or make requests by voice
or telephone keypad, and provides information back to callers for selected entry
options. For example, one option in the system might be to request a payment
history. When the caller selects that option, the system finds the information and
provides the caller with information on when the last premium payment was made
and when the next premium payment is due.
Insurers with customer relationship management programs typically require
extensive technology. Customer relationship management (CRM) is a business
strategy that allows an organization to manage all aspects of its interactions with
current and potential customers. The technology involved in CRM is known by
many names, including customer relationship management systems, enterprise
management tools, customer asset management (CAM) systems, or customer value
management (CVM) programs. CRM systems enable an insurer to collect, store,
consolidate, analyze, and use information about customers and their transactions,
service requests, behaviors, and demographics. Typical components of a CRM
system include
CTI and Internet technologies that (1) facilitate effective interaction between
the company and its customers and producers, and (2) capture information
about customers
Databases and database management systems (DBMSs) for gathering, inte-
grating, storing, analyzing, and sharing information about customers
Workflow systems that control CRM business processes
Business intelligence tools that enable management staff to make decisions

about customers
Other Telecommunications Technologies

Insurers continually search for new ways to decrease operating expenses and
increase operating efficiencies. In addition to the telecommunication technolo-
gies we’ve already described, insurers use many other telecommunication tech-
nologies to accomplish these objectives. To reduce travel expenses, insurers use
teleconferencing, which is the exchange of information among people linked
remotely by a telecommunication system. At teleconferencing’s most basic level,
telephones are used to link groups of geographically dispersed people through
conference calls. Videoconferencing, also known as web conferencing or webi-
nars, uses the Internet to transmit audio, video, and sometimes interactive data
exchange to meeting participants.
Mobile phones that have computer capabilities, often known as smart phones,
are increasing in popularity. Insurers are beginning to use applications that allow
producers and other customers to access account information or even conduct
some sales or claim activities over smart phones.
While insurers no longer use a fax machine—a device that sends and receives
printed pages over telephone lines—as extensively as they did 10 or so years ago,
the fax machine remains an inexpensive and fast way for transmitting contracts
and other documents.
IT Security and Disaster Recovery

IT security refers to the physical, technical, and procedural steps a company takes
to prevent the loss, corruption, wrongful disclosure (accidental or intentional), or
theft of a company’s information and technology. In the insurance industry, IT
security is essential because technology plays a greater role than ever before in
business processes. Also, laws and regulations in many countries require insur-
ers to monitor IT security. Many governments require up-to-date reports on how
company data is acquired, managed, stored, and disposed of to prove compliance
with laws such as those that protect individual and corporate privacy.
Earlier in our discussion of networks, we mentioned some security measures,
such as firewalls, that are designed to limit unauthorized users from accessing
the company’s network. Passwords and other user identification requirements also
restrict access to a company’s networks and computer systems. A 2010 survey by
the Kroll Annual Global Fraud Report indicates that 88 percent of the 801 compa-
nies participating in the survey had been the victim of at least one type of informa-
tion theft or fraud during the previous year.5 The report goes on to say that the theft
of confidential information is on the rise because data is increasingly portable and
can be removed fairly easily unless a company has sufficient controls. Antivirus
software that detects computer viruses and works to prevent them from destroying
data and other computer programs is also an essential element in IT security.
All of these security products and company security procedures need to be
organized and continually updated as part of a company’s comprehensive data
governance policy. Data governance establishes organizational ownership and

accountability for data so that business processes are optimized and data is secure
and protected, and in compliance with government regulations. Proper data gov-
ernance should ensure that an organization’s data can be trusted; this should, in
turn, instill greater confidence in management’s decision making. Although data
governance policies differ depending upon a company’s needs, data governance
has the following primary objectives:
To establish organizational data priorities to accomplish desired business
results, such as maximizing income or minimizing risk
To review and stay current with emerging technologies
To protect the privacy of company and customer data
To protect company systems and networks from damage or operational

failures that could disrupt business operations
To ensure compliance with government regulations

An insurer’s business continuity plan for maintaining IT operations in case of
a fire, flood, or other catastrophic event is an important component in data gov-
ernance. Insight 5.1 describes the issues that must be considered for IT disaster
recovery.
Insight 5.1. IT Disaster Recovery

To maximize IT security, an insurer should have an effective business continuity plan in place in
the event of disasters. This plan should include the duplication of critical records and software—
placing such duplicates in a safe location—and the arrangement of alternative information
processing facilities in the event of a system security breach or system shutdown.
Online technologies are available to back up data from personal computers, servers—computers
that contain shared resources—and mobile computers. Data encryption can be used to protect
the transmission of back-up data from mobile computers and remote locations. In this regard,
the Internet and company intranets are increasingly being used to back up corporate data
while it is created. Systems are now available to cost effectively run these data back-ups while
keeping servers online.
The failure of a supplier of energy, heating, or air conditioning-systems, computer components,
or computer systems can also cause IT to fail to meet its objectives.
Providing back-up for a communications system that shuts down or fails to perform properly
is another disaster recovery challenge. For example, if a virtual private network shuts down,
it may not be possible to find a back-up facility with the same security and access features
quickly enough to avoid disrupting critical customer relationships. Contingency plans should
be developed with the third-party supplier of such a network to minimize this possibility.
An insurer’s outsourcing vendors and strategic alliance partners should also demonstrate that
they have adequate disaster recovery plans for their operations.
Many disaster recovery software programs assist insurers in developing specific recovery
programs. Some of these programs provide simulations of different disasters and IT outcomes
from applying different combinations of back-up resources such as alternative processing
facilities and data storage devices.
Source: Adapted from Stephen W. Forbes, “Risk Management and Technology Security,” Resource, March 2002, 26. Used with
permission; all rights reserved.

Key Terms
information management expert system
technology management software as a service (SaaS)
hardware cloud computing
software telecommunications
systems software intranet
application software e-mail
network instant messaging
server extranet
Internet virtual private network (VPN)
web browser firewall
World Wide Web (the web) encryption
Chief Technology Officer (CTO) intrusion detection software
data electronic data interchange (EDI)
information e-commerce
database collaborative software
database management system telecommuting
(DBMS) computer telephony integration (CTI)
data warehouse automatic call distributor (ACD)
enterprise data warehouse screen pop
data mining interactive voice recognition (IVR)
document management system system
(DMS) customer relationship management
imaging (CRM)
content management system (CMS) teleconferencing
workflow management system videoconferencing
transaction smart phone
transaction processing system fax machine
legacy system IT security
business intelligence (BI) antivirus software
dashboard data governance
business analytics
activities:
Locate the contact information for your company’s help desk technician. Then,
when you need it, you will be ready.
Think about your work duties. What types of technology are you using in your
work? How would you do your work without those automated systems?
Consider why data governance policies are important. What types of data gov-
ernance policies does your company have in place? Find out about a few of
them and what caused the policies to be implemented.

Endnotes
1. Webopedia, s.v. “server,” http://www.webopedia.com/TERM/S/server.html (4 October 2010).
2. “Business Intelligence: Key to Surviving Meltdown, Consolidation and Cost Cutting,” Resource,
March 2009, 26–27.
3. Webopedia, s.v. “business analytics,” http://www.webopedia.com/TERM/B/business_analytics.html
(4 October 2010).
4. Kevin Fogarty, “Cloud Computing Definitions and Solutions,” CIO.com, 10 September 2009,
http://www.cio.com/article/501814/Cloud_Computing_Definitions_and_Solutions (31 May 2011).
5. Carrie Burns, “Data Becomes Most Common Fraud Target: Kroll Report States Information Theft
Tops Physical Losses in Increasingly Expensive Concern,” Information Management Online,
20 October 2010, http://www.information-management.com/news/data_security_governance_ROI_
Kroll-10018961-1.html (27 May 2011).

Insurance Company Operations Chapter 6: Financial Management 6.1
Chapter 6
Financial Management
Objectives
 Describe how insurers organize their financial operations
 Describe the core functions involved in financial management in a life
insurance company
 Distinguish among basic types of financial strategies
 Identify and describe common risks that life insurance companies face
 Describe risk management techniques: diversification, hedging, and
expense management
 Explain the role of enterprise risk management (ERM) in life insurance
companies
 Differentiate between profit and profitability
 Explain the importance of capital management and list ways an insurer
raises and uses capital
 Identify the basic cash inflows and cash outflows for an insurance
company, and describe how cash flow affects solvency and profitability
 Identify the primary sources of financial information for stakeholders
 Describe an income statement and balance sheet and show how the
balance sheet relates to the basic accounting equation
 Describe financial reporting requirements and tools used to monitor
insurer solvency

6.2 Chapter 6: Financial Management Insurance Company Operations
Outline
Organization of Financial Financial Compliance
Management 
Tools to Monitor Solvency
 Accounting and Financial
Reporting
 Treasury Operations
 Investment Operations
 Audit and Internal Control
 Interdepartmental Responsibilities
Responsibilities of Financial
Management
 Setting Financial Strategy
 Managing Risk
 Managing Solvency and Profitability
 Managing Capital
 Managing Cash Flows
 Providing Information to
Stakeholders
Is financial management a new term for

accounting?
A
ccounting focuses primarily on the recording and reporting of a com-
pany’s financial transactions. Financial management, sometimes called
financial operations or finance, is how an insurance company manages
its resources to meet the company’s financial goals, especially the overall goals
of solvency and profitability. Financial management uses a company’s accounting
records and reports to
Generate information that stakeholders, such as customers, investors, regula-
tors, rating agencies, securities analysts, investment bankers, and the general
business community need
Ensure that the company meets all of its financial obligations and complies
with complex financial regulations
Mitigate risk by managing and testing oversight processes
Assist in generating adequate returns for the company’s owners and customers
Organization of Financial Management

Financial management starts with the board of directors. Recall from Chapter
1 that an insurance company’s board has two standing committees that directly
affect financial management:

The investment committee sets the company’s investment policy and oversees
investment operations.
The audit committee, sometimes called the audit/risk committee, directs the
company’s internal audit and control function.
Typically, a company’s chief executive officer (CEO) delegates most financial
and budget responsibilities to senior financial officers. In many life insurance
companies, the chief financial officer (CFO) oversees all the company’s finances
and financial policies. The CFO reports directly to the company’s CEO and works
closely with company directors to develop corporate goals and strategies. Figure
6.1 lists some of the duties of the CFO.
Although many insurance companies have a unit or department called finance
or financial management, many others do not. In either case, people from several
areas, such as investments, accounting, treasury operations, and auditing, typically
contribute to an insurance company’s financial management. Figure 6.2 shows a
simplified illustration of core financial management functions.
Figure 6.1. Duties of a Chief Financial Officer (CFO)
Works with the company’s senior leadership

team on strategic planning activities
Coordinates, monitors, and reports the
company’s financial activities
Works with the company’s information
technology (IT) department to ensure the
quality and accuracy of financial information
Presents financial results to the board of
directors quarterly, yearly, and as needed, and responds to questions from the CEO
and board members about these results
Communicates critical financial information to company managers, external
auditors, regulators, investors, and rating agencies
Works with investment bankers to obtain necessary financing to raise funds
Acts as a final arbiter to resolve internal financial management issues
Maintains strong financial controls and measurement tools to ensure quality
Source: Adapted from Miriam A. Orsina and Gene Stone, Insurance Company Operations, 2nd ed., [Atlanta: LOMA (Life
Office Management Association, Inc.), © 2005], 335. Used with permission; all rights reserved.

Figure 6.2. Core Financial Management Functions
Investment Committee Audit Committee

Board of Directors Board of Directors
Chief Financial Officer (CFO)

Financial Operations
Chief Investment Controller

Treasurer Chief Auditor
Officer Accounting
Treasury Audit and
Investment and Financial
Operations Internal Control
Operations Reporting
Accounting and Financial Reporting

Accounting is a system or set of rules and methods for collecting, recording, ana-
lyzing, summarizing, and reporting financial information. Financial reporting
is the process of presenting financial data about a company’s financial position,
operating performance, and flow of funds into and out of the company. Finan-
cial reporting includes the preparation and filing of financial statements, many of
which are required by law. Often companies organize accounting and financial
reporting responsibilities into one department. Chapter 7 covers accounting and
financial reporting in more detail.
In most insurance companies, the controller—sometimes called the
comptroller—heads the accounting and financial reporting function. In some
companies, the CFO is also the controller. The controller is responsible for over-
seeing the timely and accurate collection and reporting of the company’s financial
data. Reporting to the controller are a number of assistant controllers or assistant
managers, who each oversee a different accounting unit. Employees within each
unit include managers, senior accountants, accounting analysts, and accounting
clerks. Figure 6.3 shows an example of how these units can be organized. Note that
companies vary in how they structure and organize their accounting function and
that some companies combine two or more functions into a single department.
The primary responsibilities of the accounting and financial reporting function
are to
Record, track, and report on financial transactions
Coordinate the budget process and oversee expense analysis
Prepare financial statements and reports for external stakeholders
Gather, record, analyze, and distribute financial information to company

managers
Figure 6.3. Organization of the Accounting and Financial Reporting Function
Audit Committee
Board of Directors
Controller
Financial Reporting Premium Accounting Investment Accounting
Auditing General Accounting Tax Accounting
Budgeting Cost Accounting
Treasury Operations
Treasury operations, sometimes called cash management or cash accounting,
manages the cash coming into and out of a company. In most insurance com-
panies, the person who directs treasury operations is called the treasurer, who
usually reports to the CFO. The treasurer oversees the maintenance and manage-
ment of records and reports for all of an insurer’s cash transactions, specifically
money deposited or withdrawn from the insurer’s accounts at a bank or other
financial institution. Within treasury operations, managers and supervisors over-
see departmental activities. Treasury associates, analysts, assistants, coordinators,
and clerks are some of the job positions in treasury operations. Figure 6.4 shows
the organization of the treasury operations function.
Treasury operations include the following activities:
Cash management—Oversees cash receipts and approves cash disburse-
ments. In many multinational companies, cash management is centralized in
the country of domicile, although it may be decentralized in each separate
country in which the company conducts business. Some multinational insur-
ance companies outsource the management of foreign currency exchange in
specific countries to increase transaction accuracy and speed.
Bank relations and account administration—Sets up bank accounts, recon-
ciles bank statements, manages lockboxes for collecting premium payments,
and earns returns on cash.
Bank reconciliation—Records cash transactions and charges them to the
proper accounts.

Figure 6.4. Organization of the Treasury Operations Function
Treasurer
Cash Management Bank Relations and

Receipts/Disbursements Account Administration
Bank Reconciliation Short-Term Credit
Cash Forecasting Liquidity Management
Short-term credit activities—Invests excess cash in very short-term arrange-

ments (overnight loans) and arranges for very short-term borrowing as needed
(overnight borrowing). Insurance companies cannot afford to have idle cash
in a bank account. Instead, excess cash is invested overnight or over the week-
end. The income earned on this cash may be small, but it adds up over time.
Cash forecasting—Forecasts and tracks the movement of money into and out
of the company.
Liquidity management—Manages cash on hand to meet contractual obliga-
tions by using liquidity. Liquidity is the ease and speed with which an asset
can be converted to cash for an approximation of its true value. Liquid assets
are a company’s cash and other assets that are readily marketable for their
true value.
Investment Operations
Investments are a core insurance company operation. Without careful manage-
ment of its investments, an insurance company would not be able to meet its
obligations over time. An insurer can organize investment operations, as a sepa-
rate department, a subsidiary corporation, or as a major division within a large
corporation, serving the life insurance area and other business units.
Sometimes insurers outsource their investment operations to an investment
company. Although outsourcing investment operations provides insurers with
expert investment experience and can sometimes result in significant cost savings,

insurers must carefully consider regulatory compliance and internal organiza-

tional issues before taking such a step. We discuss the management of investment
operations in more detail in Chapter 8.
The authority for making investment decisions begins with the investment
committee of the board of directors. This committee sets the insurer’s investment
policies, which are guidelines that specify the insurer’s long-term investment
objectives and strategies. The insurer’s investment policies consist of
Investment objectives —Long-term financial goals pursued by the insurer
over time
Investment strategies —A long-term, formal plan of action for achieving the
investment objectives, including identifying acceptable types of investments
and establishing standards for monitoring risk management and investment
performance
Typically, a chief investment officer (CIO) manages investment operations.
Note that “CIO” may also refer to the company’s chief information officer. The
chief investment officer reports directly to either the insurer’s CEO or its CFO as
well as to the investment committee of the board of directors. The CIO is respon-
sible for
Making recommendations to the board and implementing board directives
Ensuring investment decisions are in line with investment policy and regula-
tory requirements
Communicating to the accounting and actuarial areas the current and expected
rates of return on the company’s investments
The CIO directs a team of portfolio managers and asset/liability managers
who coordinate investment strategies for specific types of invested assets such
as stocks, bonds, mortgages, and real estate. A portfolio is a collection of assets
assembled to meet a defined set of financial goals. Each portfolio manager makes
investment decisions for their portfolio according to the company’s general invest-
ment guidelines.
Asset/liability management (ALM) is the practice of coordinating the admin-
istration of an insurer’s asset portfolio (its investments) with the administration
of its liability portfolio (its obligations to customers) so as to manage risk and
still earn an adequate level of return. An asset/liability manager, called an asset
manager in some companies, monitors the investments for a specific line of the
insurer’s business and makes sure funds are available when needed to support
that line. Note that actuaries are responsible for determining the financial resources
needed to support an insurer’s obligations to customers for each insurance product.
A simple example of an investment department organizational structure is
shown in Figure 6.5. Recall that some companies outsource all or part of invest-
ment operations activities. In addition to the CIO, portfolio managers, and asset/
liability managers, other employees in the investment department may include
Investment analysts, who research specific investment opportunities and make
recommendations regarding those opportunities
Economists, who forecast and track economic trends
Traders, who buy and sell assets for the insurer’s portfolios

Figure 6.5. Organization of the Investment Operations Function
Investment Committee
Board of Directors
Chief Investment Officer

(CIO)
Asset/Liability Manager Asset/Liability Manager Asset/Liability Manager

Individual Insurance Group Insurance Annuities
Portfolio Portfolio Portfolio Portfolio

Manager Manager Manager Manager
Bonds Stocks Mortgages Real Estate
Audit is part of financial management? Didn’t

we just learn it was part of compliance?
Audit and Internal Control

By conducting audits of its financial and operational business activities, an insurer
can objectively evaluate its operating procedures, management efficiency, and
compliance with specified rules and regulations. Typically, the chief auditor
oversees audits and internal controls for the company’s operations. Auditing must
operate independently from other financial operations to ensure that auditors give
unbiased opinions. For this reason, the chief auditor reports directly to the audit
committee of the company’s board of directors and typically to the company’s
CEO for administrative purposes. However, from an organizational standpoint,
auditing can be a part of or affiliated with an insurer’s accounting or compliance
areas. The ongoing duties of an insurer’s audit committee, usually made up of
outside directors and not insurance company employees, include
Monitoring internal controls for financial operations
Supervising and meeting with internal auditors to discuss their activities and
findings

Monitoring organizational activities to improve operating efficiencies
Reporting the committee’s activities to the board of directors
Reporting the committee’s activities in the annual report to stockholders and

policyowners
The chief auditor directs auditing activities and oversees internal auditors, many
of whom specialize in various policies and procedures associated with insurance
administration or financial operations. Within each area, managers and supervi-
sors oversee assistant auditors and support staff who perform and compile findings
of audits, as shown in Figure 6.6.
Figure 6.6. Organization of the Auditing Function
Audit Committee
CEO
Board of Directors
Chief Auditor
Senior Auditor Senior Auditor Senior Auditor

Financial Operations Insurance Operations Policies & Procedures
Interdepartmental Responsibilities
Because financial management involves tracking, approving, and reporting the
insurer’s receipts and disbursements of money, it has an impact on nearly all other
insurance company operations. Various departments within financial management
work with other insurance company departments, including
Actuarial. Financial managers work with actuaries in designing new products.
Actuaries project cash flows from premium payments, investment income, and
benefit payments, and coordinate these projections with treasury operations.
Investment operations works closely with actuaries in coordinating income
from investments with contractual obligations. Actuaries also work with
accounting and financial reporting staff on financial reporting activities.
Information technology (IT). Most of the processes for managing, record-
ing, and reporting financial transactions are automated. Financial management
works closely with IT to ensure data quality and to ensure that decision makers
receive the information they need when they need it to make decisions.

Risk management. In most companies, financial managers work closely with

the insurer’s chief risk officer to reduce the insurer’s risk exposure. Joint activ-
ities include defining strategic, operational, financial, or compliance-related
tasks; determining appropriate financial risk tolerances; measuring and moni-
toring financial risk; and identifying risks and ways to manage them.
An insurance company has a lot of financial

areas. How do they work together and get
anything accomplished?
Responsibilities of Financial Management

The financial managers of a life insurance company carefully coordinate the
insurer’s monetary activities and assist the company’s officers in developing,
executing, and fulfilling corporate strategies intended to maximize the value of
the company while minimizing the insurer’s financial risks. Financial manag-
ers are primarily responsible for (1) setting financial strategy, (2) managing risk,
(3) managing the company’s solvency and profitability, (4) managing capital,
(5) managing cash flows, and (6) providing financial information to stakeholders.
Setting Financial Strategy

Establishing financial strategies that are in accordance with the company’s invest-
ment policy is a key financial management activity. Financial strategies may be
characterized as aggressive strategies, conservative strategies, or a combination of
aggressive and conservative strategies. A company that places a strong emphasis
on taking risks that could enhance its profitability generally pursues an aggressive
financial strategy. For example, an aggressive financial strategy might include
investing in relatively high-risk assets, developing many new and unusual prod-
ucts, expanding into new lines of business, and implementing new distribution
systems.
An insurer that places a strong emphasis on avoiding risks that could threaten
its solvency generally pursues a conservative financial strategy. For example,
a conservative financial strategy might include investing in relatively low-risk
assets, developing traditional products for existing markets, and using existing
distribution systems.
Generally, life insurance companies do not use overly aggressive or overly
conservative financial strategies. An insurer using overly aggressive financial
strategies may jeopardize its solvency position by taking on excessive risk. An
insurer using overly conservative financial strategies may miss opportunities for
growth and limit both the potential returns for its owners and its ability to remain
competitive. Most insurers use a combination of aggressive and conservative strat-
egies and adjust their strategies as market conditions change.

Managing Risk
Life insurance companies face many types of risk. What is risk? Risk is the pos-
sibility that an investment or other venture might have an unexpected result. An
investment is any use of resources with the aim of earning a profit or a positive
return. However, investments sometimes result in a loss to the investor or an inad-
equate gain. Therefore, returns on investments can be positive or negative.
When you hear the term investment, you may think of purchasing assets such
as stocks, bonds, mutual funds, or real estate, yet there are many other types of
investments. Examples of insurance company investments include
Buying stocks or bonds
Launching a new product
Hiring an employee
Issuing a policy
Opening a branch office
Installing a new information system
Acquiring a line of business from a competitor
I’ve never thought of hiring an employee

or installing an information system as an
investment.
Some of the items on this list may not fit your idea of an investment. However,
remember that an investment is any use of resources with the aim of earning a
profit. An insurance company cannot earn a profit without a quality workforce or
an adequate information system.
Which investments on this list involve risk? Every one of them. Insurers
encounter risks in every aspect of conducting business. Figure 6.7 lists common
types of risks that insurance companies face.
Risk Management
Risk management is the process of systematically identifying, assessing, and
minimizing the negative impact of risk. An important risk management tool is
diversification, spreading a portfolio of risks across many risk characteristics to
reduce the effect of any one risk. Insurers may diversify risks by
Purchasing assets in a variety of asset classes, such as stocks, bonds, mort-
gages, and real estate
Issuing a variety of products to people in a variety of risk classes, geographic

areas, occupations, and industries

Figure 6.7. Common Types of Risk
Investment risk is the possibility that an investor will fail to earn some or all of an expected
return or will lose all or part of the original investment, or principal. Some important risks
associated with investing are
Market risk: The risk arising from unexpected movements in the value of an entire
market for assets, such as the stock market, bond market, currency markets, or real
estate market. For example, real estate investments may lose value if the real estate
market as a whole declines.
Interest-rate risk: The uncertainty arising from fluctuations in market interest rates.
For example, if interest rates increase, bonds tend to lose market value.
Default risk: The risk that a borrower will fail to repay a debt. For example, a mortgage
owner may fail to make scheduled mortgage payments to a bank.
Liquidity risk: The risk of being unable to quickly convert an asset to cash at its true
value. For example, if the owner of property, such as a shopping mall, should suddenly
need cash quickly, the property may have to be sold for a price less than its true
value.
Currency risk: The risk arising from changes in currency exchange rates. For example,
the value of an insurer’s investments in a foreign country fluctuates with the value of
that country’s currency.
Operational risk is a broad category of risks originating from inadequacies in an insurer’s
operational areas or from external events affecting an insurer’s operational areas. Two
major types of operational risk are business process risk and event risk.
Business process risk: The risk of inadequate or failed internal processes and controls,
people, or systems. For example, inefficient customer service processes might create
long turnaround times, which results in a loss of business.
Event risk: The risk that external events, such as earthquakes, hurricanes, or political
unrest, will negatively impact operations. For example, an earthquake might result in
technology failures and an inability to run the business.
Product risk is the risk that a company’s products might not sell as well or be as profitable
as expected. Insurers face the following unique risks associated with their products:
Pricing risk: The risk that an insurer’s actual experience with an insurance product will
be significantly worse than expected when the product was priced, causing the insurer
to lose money on the product. For example, more insureds might die than an insurer
anticipated when pricing a life insurance product, so claims for life insurance benefits
will be higher than expected.
Policyholder behavior risk , also known as customer behavior risk: The risk that
insurers face as a result of the choices that policyholders make. For example, customers’
surrender patterns may be higher than an insurer anticipated.
Insurers face many other types of risks, in fact, too many to list them all. A few of these
risks include
Regulatory risk—The risk of changes in insurance regulations
Competition risk—The risk associated with competitors’ actions
Reputation risk—The risk that a company’s reputation will be damaged

Maintaining several offices and storing backups of data in several places so

the insurer can continue operating in the event of an emergency
Placing reinsurance with a variety of carriers to reduce the insurer’s depen-

dence on any one reinsurance company
In other words, diversification means

spreading risks so that no one loss will result in
losing everything.
Through hedging, an insurer balances one risk with a complementary risk. To

hedge investment risk, an insurer would purchase complementary investments.
Ideally, when one investment suffers negative outcomes from a risk, the other
investment experiences positive outcomes from the same risk. The insurer can
hedge product risk by selling another product that tends to offset the potential loss
from the first product.
Managing expenses is another critical component of risk management. Gener-
ally, the higher an insurer’s expenses in relation to its revenues, the greater the risk
that the insurer will fail to achieve its financial goals. Regulators and other exter-
nal stakeholders use various tools, such as financial ratios, to measure how insur-
ers manage their expenses. Insurers also use other methods to control expenses,
such as
Establishing cost-effective policies and procedures
Selling a line of business
Decreasing maintenance and other costs
Eliminating staff positions
Preparing budgets and analyzing costs
Enterprise Risk Management

To minimize the negative impact of these various risks across their organizations,
most insurers practice enterprise risk management. Enterprise risk management
(ERM) is a system that identifies and quantifies risks both from potential threats
and potential opportunities and manages them. ERM uses a coordinated approach
that supports the organization’s strategic objectives. Typically, the risk committee
of the insurer’s board of directors oversees the company’s ERM. Insurers often
have a chief risk officer or risk management director in charge of directing ERM
activities. Some companies have a formal ERM department, while others use a
team approach. In either case, those in charge of ERM are usually actuaries or risk
analysts trained in ERM.
For ERM to work effectively, all departments must work together to identify
risk exposures throughout the organization and to prioritize each one. ERM estab-
lishes managerial accountability for each identified risk and a formal reporting
system for communicating the status of each top-priority risk to internal and

external stakeholders. Specifically, regulators and rating agencies need informa-

tion in order to evaluate the
Quality and effectiveness of an insurer’s ERM program
Risks an insurer faces
Insurer’s strategies for managing risks
People always talk about profits, but what

smart investors really want is profitability—
earnings over the long term, not just positive
results on a quarterly report.
Managing Solvency and Profitability

The dual goals of financial management are to (1) protect solvency and (2) increase
profitability. Achieving both goals is difficult. Pursuing profitability requires a
certain amount of risk taking, whereas protecting solvency involves risk avoid-
ance and stability. Ultimately, an insurer must find a way to balance solvency
requirements and profitability goals in order to maximize the company’s value for
the benefit of its stakeholders.
First, an insurer must remain solvent. That is, the insurer must be able to meet
all of its financial obligations as they come due. Solvency goals are typically stated
in relation to regulatory requirements. These requirements mandate that an insurer
maintain capital at or above a minimum standard amount.
Second, an insurer must attempt to earn a profit and maintain profitability.
Although profit and profitability are often used interchangeably to describe a com-
pany’s financial success, the two measures have a different focus and scope. Profit
is a measure of a company’s financial success during a relatively short period of
time. The term profit is also used as a synonym for net income, which we describe
later in this chapter. Profitability is a broader measure of a company’s overall
success in generating positive returns for its owners. Profitability refers to both a
company’s ability to generate profit and its ability to increase the wealth or value
of the company over time.
Although profitability can be attained and measured over a short period of
time, insurers strive for long-term profitability. Long-term profitability enables an
insurer to
Provide funds for investments
Pay policy dividends
Pay cash dividends to stockholders and increase the attractiveness of the com-
pany’s stock to investors
Generate high-quality ratings from insurance rating agencies
Provide funds to develop products, expand product lines, or add distribution

channels
Provide funds for company expansion, joint ventures, or acquisitions

An increase in the value or wealth of a company can be measured in terms

of increases in the company’s capital, assets, or stock value. Many insurers set
profitability goals that specify the target rates of return on capital they want to
earn. Such targets are set for the company as a whole and for each of the insurer’s
lines of business. An insurer may also set a profitability goal of increasing the
value of its assets or capital by a stated percentage each year. In addition, a stock
insurer may set a goal for increasing the share price of its stock by a specified
amount or percentage.
Managing Capital
Financial managers attempt to increase the probability that the company will remain
financially healthy by using the company’s capital appropriately. Capital can be cal-
culated as the amount by which a company’s assets—all the things of value owned
by a company, such as cash, financial investments, buildings, and land—exceed its
liabilities—the company’s debts and future obligations. In other words,
Capital = Assets – Liabilities
If a company’s assets increase or its liabilities decrease, then the company’s cap-
ital increases. Conversely, if a company’s assets decrease or its liabilities increase,
then the company’s capital decreases. Managing capital is a critical component of
a company’s financial success. Capital management consists of all the activities
a company undertakes to use its capital to generate profits while managing risk.
In general, an insurer can reduce its risk of insolvency by holding a large amount
of capital relative to its financial obligations. However, holding too large of an
amount of capital reduces an insurer’s potential profitability because the company
is not using its capital to generate profits and contribute to the company’s growth.
Benefits to an insurer of maintaining a strong capital position—in other words,
holding a large amount of capital—include
Greater ability to withstand difficult conditions such as a bad economy
Better ratings from rating agencies
Greater ability to attract more business

An increase in the company’s value such as its stock price
Greater flexibility in its operations
Greater ability to raise capital on favorable terms
Potential brand enhancement
Symbolic measure of confidence for current and potential business partners,

customers, and employees
A company’s continued profitability requires monitoring current capital man-
agement strategies and updating these strategies as circumstances change. Insurers
can raise capital or use capital to increase long-term profitability. Figure 6.8 shows
some ways that an insurer can raise and use capital.

Figure 6.8. Ways to Raise and Use Capital
$ $ $ $
$ $
$ $
Ways to Raise Capital Ways to Use Capital

Issue new shares of company Create new Pay policy
stock products, product dividends to
Borrow funds lines, or distribution policyowners
Reinsure part of its business channels Pay cash dividends
Sell part of its business Invest in stocks, to stockholders
bonds, real estate, or Pay off debt
other investments Acquire another
Buy back shares of company
the company’s own Acquire in-force
stock policies from
Expand into new another company
markets (states,
provinces, or
countries)
Managing Cash Flows

The life insurance business involves many cash flows. A cash flow is any move-
ment of cash into or out of an organization. A cash inflow, also called a source
of funds, is a movement of cash into an organization. An insurer’s cash inflows
include (1) revenues from product sales (premium income), (2) investment income,
(3) sales of existing assets, and (4) external financing. A cash outflow, also called
a use of funds, is a movement of cash out of an organization. An insurer’s cash
outflows include (1) payments to policyowners and beneficiaries for policy ben-
efits, cash surrenders, and withdrawals; (2) payments for operating expenses; and
(3) purchases of new assets.
The basic goal for managing cash flows is to have enough assets available so
that the insurer can pay its obligations as they come due and to invest the remain-
ing assets wisely to earn favorable returns. Cash-flow management seeks to avoid

cash shortfalls by having sufficient, but not excessive, liquid assets available. In
this way, the company can invest those funds not needed to meet obligations and
earn investment returns that will achieve the insurer’s financial goals. Cash-flow
management is a critical financial management responsibility because the timing
and the amount of cash flows into and out of the company directly affect company
solvency and profitability.
Providing Information to Stakeholders

An insurer’s stakeholders need financial information to evaluate the insurer’s
financial condition. Insurers generally provide information to stakeholders in the
form of financial statements, the annual report, and the Annual Statement, which
we discuss in the next section. Stakeholders also obtain financial information from
independent sources such as investment analysts, stockbrokers, financial advisors,
financial media, consumer advocates, and rating agencies.
Financial Statements
A financial statement is a summary of a company’s financial condition on a speci-
fied date or its performance during a specified period. Financial statements help
interested parties assess the company’s profitability as well as its financial strength.
Every financial transaction feeds into the company’s accounting system, which
records the flow of funds into and out of the company. The accounting system
categorizes the information, summarizes it, and creates financial statements and
other documents. Two key financial statements are the income statement and the
balance sheet, which we introduce here and discuss in more detail in Chapter 7.
The income statement shows a company’s revenues and expenses during a
defined period, such as one quarter or one year, and shows whether the company
experienced a profit or loss during that period. Revenues are amounts that a com-
pany earns from its business operations—typically premium income and invest-
ment income for life insurance companies. Premium income from product sales is
the most important source of funds for most insurers. Typically, about two-thirds
of cash comes from product sales and one-third from investment earnings. How-
ever, in some insurance companies, investment earnings are higher than product
revenues. The percentage of income can vary from year to year and from one
company to another. Expenses are amounts that a company spends to support its
business operations.
The income statement also shows net income, which is calculated by subtract-
ing expenses from revenues. If a company’s revenues are greater than its expenses,
the company earns a profit. Recall that profit is a short-term measure of the com-
pany’s financial success. If the company’s revenues are less than its expenses, the
company incurs a loss. Figure 6.9 shows how you can tell if a company earned a
profit or a loss, given a simplified income statement that contains only revenues
and expenses.

Figure 6.9. Simplified Income Statements
Income Statement for Company A Income Statement for Company B

Revenues $500 million Revenues $500 million
Expenses –480 million Expenses –510 million
$ 20 million ($ 10 million)
Net Income or Profit Loss
The other major financial statement is the balance sheet, which lists the value
of an insurer’s assets, liabilities, and capital and surplus as of a specified date.
Surplus represents the cumulative amount of money—calculated as an insurance
company’s assets minus its liabilities and capital—that remains in the company
to accumulate. The relationship of assets, liabilities, and capital and surplus is
expressed in the basic accounting equation, which states that assets equal the
sum of liabilities, capital, and surplus. The basic accounting equation is typically
presented as follows:
Assets = Liabilities + Capital and surplus
Figure 6.10 shows how the basic accounting equation relates to a simplified
balance sheet.
Figure 6.10. Simplified Balance Sheet
On December 31, the AllTrue Life Insurance Company had $25 billion in assets
and $20 billion in liabilities. According to the basic accounting equation,
AllTrue’s capital and surplus as of December 31 was $5 billion ($25 billion –
$20 billion).
AllTrue’s Balance Sheet
Assets $ 25 billion
Liabilities –20 billion
Capital and surplus $ 5 billion
The Annual Report

One of the most important sources of financial information for investors and other
stakeholders—such as the company’s owners, producers, or policyowners—is
a company’s annual report. The annual report is a financial document that an
incorporated business issues to its stockholders and other interested parties to
report the business’s activities and financial performance for the preceding year.
All stock insurers and most mutual insurers and fraternal insurers develop annual
reports. The annual report assumes that the company will be in business going
forward and helps readers assess a company’s profitability as well as its finan-
cial strength. Although regulations in some countries require insurers to pre-
pare annual reports, many insurers outside such countries voluntarily prepare an
annual report each year.

Why is my company so concerned with

agency ratings?
Rating Agencies
The rating an insurer receives from a rating agency affects the company’s ability
to attract new business. For example, customers may choose to do business only
with companies that have the highest rating. Ratings may also impact what stra-
tegic objectives and strategies the company follows. For example, an insurer may
have to sell off its riskier investments in favor of more conservative investments
in order to improve its ratings. The formulas most rating agencies use emphasize
solvency and reflect the adequacy of an insurer’s capital as well as the insurer’s
ability to pay its obligations to customers and creditors. The rating assigned to a
company allows external stakeholders to compare different insurers on a standard
basis. Figure 6.11 lists questions that external stakeholders often ask which insur-
ance company ratings may help answer.
Figure 6.11. Questions that Insurance Company Ratings Answer

Prospective Producers
Customers
Which insurers should
I recommend to my
Which insurer clients?
should I trust with
my money?
Creditors
Should we lend to this insurer?

If so, on what terms?
Investors/ Reinsurers and

Stockholders other Business
Partners
Is this company’s
stock a good value? Should we
do business
with this
insurer?

Financial Compliance
Insurance companies protect millions of customers against economic loss and
play a vital role in the continued health of global economies. Because of this criti-
cal role and its position of public trust, the insurance industry is subject to intense
government regulation. Regulators want to ensure that insurance companies
avoid insolvency, a situation in which a company is unable to meet its financial
obligations. Regulators use the information in an insurer’s financial statements
to evaluate the insurer’s financial strength and flexibility and compliance with
insurance laws and regulations. When insurance regulators look at an insurer’s
financial situation, they want to know that the insurer has enough assets to cover
financial obligations, over both the short term and the long term.
Does the insurer have enough current assets to satisfy current liabilities with-
out borrowing money or selling long-term investments?
Current assets include cash and readily marketable assets—such as

securities—that can be converted to cash within one year. Current
liabilities are debts that are expected to be paid within the following 12
months. The current ratio can be used to measure an insurer’s ability to
meet its maturing short-term obligations, and is calculated as
current assets
current liabilities
Generally, a current ratio of 100 percent (1.0) or better indicates that

a company has enough cash and other current assets on hand to pay
its contractual benefits and general operating expenses. A ratio of 100
percent means that an insurer has $1 of assets for each $1 of liabilities.
Does the insurer have enough capital and surplus relative to its long-term
liabilities to remain solvent?
The capital and surplus ratio, also known as a capital ratio, can be used
to measure an insurer’s long-term solvency, and is calculated as
capital and surplus

total liabilities
In general, the greater the capital and surplus ratio, the stronger a
company’s financial position. For example, an insurer with a 15 percent
capital and surplus ratio would have a stronger financial position than an
insurer with a 10 percent capital and surplus ratio. To account for risks to
which a particular insurer is exposed, regulators and rating agencies often
require insurers to use weight-adjusted, or risk-based, capital and surplus
ratios in their financial reports.
Insurance regulators typically require that insurers maintain certain minimum

levels of capital and surplus so that assets exceed liabilities by a comfortable mar-
gin. The legal minimum standard of capital and surplus varies from one jurisdic-
tion to another and from insurer to insurer. This minimum standard is based on
the degree of risk associated with an insurer’s investments and the specific lines

of business the insurer sells. An insurer that holds more risky investments has a
higher legal minimum standard of capital and surplus than does a comparable
insurer that holds less risky investments. By establishing risk-based minimum
standards of capital and surplus, along with other minimum requirements on the
company’s reserves and other aspects of operations, insurance regulators attempt
to ensure that each insurer has sufficient resources to pay policy benefits and other
financial obligations on time. Failure to satisfy these requirements could result in
insurance regulators’ taking control of the insurer. Regulators generally require
insurers to invest the majority of the assets that back their contractual obligations
in relatively safe, reliable investments. Insurers also must use specific rules when
reporting the value of these investments. Figure 6.12 addresses financial regula-
tory oversight in the United States and Canada.
Figure 6.12. Financial Oversight in the United States and Canada
United States
Federal Government
Securities and Exchange Commission (SEC) — A federal government agency
that regulates the investment industry.
Financial Industry Regulatory Authority (FINRA) — A self-regulatory
organization that protects and educates investors.
Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act)
• Designed to protect investors by requiring more transparency and

accountability by financial services companies
• Created the Federal Insurance Office (FIO) within the U.S. Treasury Department
to identify insurance companies that should be subject to stricter standards
• Defined equity-indexed products as insurance products, so they will not be
regulated as securities by the SEC1
State Governments
State insurance departments are authorized to take specified actions against
insurance companies, such as suspending or revoking an insurer’s certificate to do
business in a state, if an insurer is found to be in financial difficulty.
In addition to the SEC, states maintain their own securities administrations to
regulate the sale of securities.
Canada
Each province and territory has its own securities regulator.
The Canadian Securities Association (CSA) is an association composed of

provincial and territorial regulators whose mission is to develop a national system
of harmonized securities regulation across Canada.
Self-regulatory organizations are responsible for certain aspects of securities
regulation.

Tools to Monitor Solvency

Regulatory requirements vary across countries. However, all insurance compa-
nies must comply with the financial reporting and other regulatory requirements
within their jurisdictions. For example, in India, the Insurance Regulatory and
Development Authority (IRDA) has prescribed specified formats for the prepara-
tion of financial statements for regulatory purposes.
Annual Statement
Insurance regulators use many tools to monitor insurer solvency, including reviews
of industry-specific financial reports and financial condition examinations. In
the United States, an insurer must file a financial report known as an Annual
Statement with the insurance department in each state in which it does business
as well as with the NAIC. In Canada, every life insurer must file the Life-1, an
accounting report that presents information about an insurer’s operations and
financial performance, with the Office of the Superintendent of Financial Institu-
tions (OSFI) and with the regulators of every province in which the insurer does
business.
Recall that a company’s annual report provides company investors and other
interested parties with general information about the company’s financial perfor-
mance during the past year. Industry-specific financial reports such as the Annual
Statement and the Life-1 are designed to meet the specific requirements of insur-
ance regulators, whose primary purpose is to safeguard insurer solvency and ensure
that the company can take care of its obligations to customers, even if it stops
doing business tomorrow. The Annual Statement must satisfy stricter accounting
requirements than the accounting requirements for preparing the annual report.
Financial Condition Examination

Another solvency monitoring tool is the financial condition examination, a
formal investigation of an insurer that insurance regulators perform to identify
and monitor any threats to an insurer’s solvency. Regulators typically conduct a
financial examination every three to five years, usually in the insurer’s offices. A
financial condition examination includes
Examining accounting records to ensure that the insurer is operating on a
sound and lawful basis
Investigating the insurer’s financial and business activities to ensure that they
do not present any hazards to the insurer’s solvency
Producing an examination report, which identifies potential problems and rec-

ommends solutions to the problems
If a problem is uncovered during a financial condition examination, an insurer
must respond in writing, typically within 30 days, to specify how the identified
problems will be corrected. Based on its findings in the financial condition exami-
nation, regulators may take certain actions to protect the insurer’s policyowners.
These actions range from ordering the insurer to correct identified problems to
seizing control of the insurer in order to sell the insurer’s business and terminate
its operations.

Insurance regulators’ primary goal is to protect customers, who need to know

that the insurer will be able to pay benefits when the time comes. Other stakehold-
ers—investors, creditors, producers, and potential customers—need a source they
can trust for information on whether the insurer can pay its bills. They also want a
broader evaluation of the insurer’s performance as a business.
External Audits
In the United States, federal securities laws require publicly traded companies,
including stock insurance companies, to undergo annual external audits of their
financial statements. An external audit, also called an independent audit, is an
examination and evaluation of a company’s records and procedures conducted by
public accountants—employees of a public accounting company who are not asso-
ciated with the company being audited.
External audits are performed primarily for the benefit of interested third par-
ties such as stockholders, creditors, policyowners, regulators, and government
authorities, who may rely on the information in a company’s annual report. An
external audit provides
An independent professional opinion as to whether a company’s financial state-
ments fairly present the company’s operations and that the statements were
prepared according to a given set of accounting principles and standards
Suggestions for changes to the company’s system of internal control
A report of audit findings
Although an external audit confirms whether a company’s annual report is a
fair representation of the company’s results, it does not guarantee the accuracy of
the company’s financial statements.
Financial Reporting Requirements

In the United States, financial reporting requirements for stock insurance compa-
nies are also affected by requirements established in the Sarbanes-Oxley Act of
2002, also known as Sarb-Ox or SOX. Under SOX requirements, companies must
Attest to the accuracy of the information contained in the statement by having
the company CEO and CFO sign all financial statements
Comply with requirements for the use of independent external auditors to help
avoid any potential conflict of interest
CEOs and CFOs in Canada must also sign their companies’ financial state-
ments to attest to their accuracy.

Key Terms
financial management liabilities
accounting cash flow
financial reporting cash inflow
controller cash outflow
treasury operations financial statement
treasurer income statement
liquidity revenue
liquid assets expense
investment policies net income
investment objectives balance sheet
investment strategies surplus
portfolio basic accounting equation
asset/liability management (ALM) annual report
asset/liability manager insolvency
chief auditor current assets
aggressive financial strategy current liabilities
conservative financial strategy current ratio
risk capital and surplus ratio
investment Securities and Exchange Commission
investment risk (SEC)
operational risk Financial Industry Regulatory
product risk Authority (FINRA)
risk management Dodd-Frank Wall Street Reform and
diversification Consumer Protection Act
hedging Canadian Securities Association
enterprise risk management (ERM) (CSA)
profit Annual Statement
profitability Life-1
assets financial condition examination
Look at your company’s organization chart. How do the areas of financial man-
agement in your company compare to the examples provided in this chapter?
Can you identify types of operational risk in your job? Have you ever experi-
enced event risk?
What are the differences between the annual report and the Annual State-
ment? For example, what is the audience or the purpose?
Endnotes
1. Stephen G. Harvey, Frank A. Mayer III, and Audrey D. Wisotsky, Dodd-Frank Wall Street Reform and
Consumer Protection Act: The Overhaul of the U.S. Financial System, Webinar Manual (Eau Claire,
WI: Lorman Education Services, 2010), http://www.bankerresource.com/ondemand/386639EAU
(19 Aug 2010).

Insurance Company Operations Chapter 7: Accounting, Treasury Operations, and Auditing 7.1
Chapter 7
Accounting, Treasury
Operations, and Auditing
Objectives
 Explain how the organization of accounting, treasury operations, and
auditing is based on the principle of segregation of duties
 Give examples of how internal and external stakeholders use an insurer’s
financial information
 Distinguish between financial accounting and management accounting
 Describe the different types of financial accounting: premium
accounting, investment accounting, general accounting, and tax
accounting
 Distinguish among accounting standards: generally accepted accounting
principles (GAAP), statutory accounting practices, and International
Financial Reporting Standards (IFRS)
 Describe the primary components of an insurance company’s balance
sheet and income statement
 Describe the categories of assets in the U.S. Annual Statement
 Explain how insurance companies use management accounting tools
such as budgeting and cost accounting as control mechanisms
 Describe the treasury operations activities of cash management and
liquidity management
 Describe internal controls that life insurance companies use

7.2 Chapter 7: Accounting, Treasury Operations, and Auditing Insurance Company Operations
Outline
Organization of Accounting, Treasury Operations
Treasury Operations, and Auditing  Cash Management
Accounting  Liquidity Management
 Users of Accounting Information Auditing

Accounting Systems  Internal Controls
 Financial Accounting
 Management Accounting
I work in customer service. Why do I need to

know my company’s financial information?
W
hat if a customer calls and wants information about your company’s
third-quarter financial results? Would you know where to direct that
customer to get this information? What if your company’s agency rat-
ing was recently downgraded and your customer read about it in the newspaper?
Would you have enough knowledge to describe in basic terms the reasons for the
downgrade? Understanding how your company, its customers, and other stake-
holders may use such information and being able to communicate basic financial
information to customers makes you a more valuable employee to your company.
The more you know about the potential impact a particular decision may have
on the company’s financial position, the better you understand the relationship
between your job and your company’s ultimate success.
Organization of Accounting,
Treasury Operations, and Auditing
As described in Chapter 6, accounting, treasury operations, and auditing are
closely related, but they are typically managed separately as a method of internal
control. The principle of segregation of duties, also called dual control, requires
an employer to design jobs so that job tasks do not place an employee in a posi-
tion to conceal errors or irregularities in the normal course of his employment.
For example, employees in treasury operations receive cash, and employees in
accounting record the receipt of that cash. Similarly, employees in accounting
approve payments for expenses and contractual benefits, and employees in trea-
sury operations disburse those payments. When a company designs jobs using this
principle to separate conflicting job functions, employees are not presented with
ethical challenges in their day-to-day work activities. We discuss other internal
controls throughout this chapter.

Every department in an insurance company needs and uses financial informa-

tion. As a result, accounting interacts extensively with other departments within
the company. For example, the accounting department works with actuaries to
complete the financial statements the insurer must file with insurance regulators.
Other departments—such as underwriting, claims, customer service, legal/com-
pliance, human resources, and information management—also evaluate account-
ing information and use it as a guide for day-to-day operations and for long-term
planning. Accounting staff also help plan and control the departmental budgeting
process and serve in an advisory capacity to other departments.
I thought accounting was just about keeping

the company’s books. You know: bean
counting.
Accounting
Accounting is more than just counting money or keeping records. Generally,
accounting staff in a life insurance company gather, record, analyze, and distrib-
ute information about the company’s financial operations. The accounting depart-
ment performs the following specific activities:
Establishes a system of accounts, which is a systematic way for a company to
record, group, and summarize similar types of financial transactions
Maintains the company’s accounting records and investigates any discrepan-
cies in those records
Records cash receipts and cash disbursements
Prepares and analyzes financial statements
Helps product managers and sales managers interpret financial results
Analyzes the company’s operating costs and allocates costs to the areas that
incur them
Assists financial managers in developing long-term financial plans for the

entire organization
Compiles budgets and prepares reports on performance that deviates from

budgets
Prepares tax returns (some insurers establish a separate tax department for
this responsibility)

Users of Accounting Information

An insurer’s internal and external stakeholders use accounting information to
make decisions. Internal stakeholders, such as a company’s officers and directors,
use accounting information to conduct strategic planning and financial manage-
ment. Company managers use accounting information to
Assess their department’s day-to-day operations
Judge whether they are meeting their financial goals
Forecast future needs

External stakeholders use a company’s financial information primarily to make
investment, regulatory, and other decisions about the company. External stake-
holders use the company’s financial information to
Ensure that the company will be able to pay benefits and expenses as they
come due
Evaluate the company’s return on investment and its profitability
The information that accounting distributes helps internal and external stake-
holders answer a variety of questions, as shown in Figure 7.1.
Figure 7.1. How Internal and External Stakeholders

Use Accounting Information
Internal Stakeholders External Stakeholders
Board of directors and company Regulators: Is the insurer solvent and

officers: Is the company meeting its in compliance?
strategic goals? Rating agencies: Is the insurer solvent
Managers: Is my department and profitable?
meeting its budgeted goals? Can we Policyowners: Will the insurer be
cut expenses? in business years from now to pay
Compliance staff: Are we meeting benefits?
regulatory and capital requirements? Investors: Will I earn an adequate
Sales and distribution managers: return if I invest in this insurer?
Are we meeting our sales and Taxing authorities: Is the insurer
revenue goals? correctly calculating and meeting its
Company-affiliated producers: Is tax obligations?
this the company where I want to Competitors: What is the insurer’s
submit business? share of the market?
Company employees: Is this a stable Creditors: Can the insurer meet its
company where I want to work? debt obligations?
Independent producers: Is this the
company where I want to submit
business?
Reinsurers: Can the insurer honor a
reinsurance agreement?
Business partners: Will the insurer
keep its contractual commitments?

What’s the difference between financial

accounting and management accounting?
Accounting Systems
As you saw in Figure 7.1, external stakeholders have different needs for account-
ing information than do internal stakeholders. As a result, two general types of
accounting have been developed to meet the diverse needs of a company’s users of
accounting information.
Financial accounting is the process of reporting a company’s financial account-
ing information to meet the needs of the company’s external stakeholders.
Management accounting is the process of identifying, measuring, analyzing,
and communicating financial information to a company’s internal stakehold-
ers, particularly company managers, so they can decide how best to use the
company’s resources.
Note that one type of accounting is not a substitute for the other. Although both
types of accounting may use the same sources of financial information, sometimes
different accounting principles or financial reporting standards are used, as we
discuss later. The two types of accounting differ in several important ways, which
we summarize in Figure 7.2.
Figure 7.2. Financial Accounting and Management Accounting
Financial Accounting Management Accounting

Provides data for external stakeholders Provides data for internal stakeholders
Is required by law Is not required by law
Is subject to specific accounting principles Is not subject to specific accounting
principles
Financial statements submitted at Financial statements prepared as needed
specified times and cover specified periods by a company at any time and covering
any period
Emphasizes precision of data Emphasizes flexibility and relevance of data
for managers
Has a historical focus Has mainly a forward-looking focus
Reports on the business as a whole Can focus on the business as a whole or on
individual parts of the business
Culminates in the presentation of financial Helps managers make decisions; is a means
statements; is an end in itself to an end
Financial statements subject to external Financial statements not subject to external
audit audit

Financial Accounting
Financial accounting starts with recording all business transactions to which a
company must assign an objective monetary value. The end goal is to produce
the company’s financial statements, the standardized summary reports of a com-
pany’s major monetary events and transactions. Financial accounting is historical
because it is most concerned with events that have already taken place. Accoun-
tants use financial accounting to organize and summarize a company’s business
transactions so that the company can satisfy financial reporting requirements. The
basic financial accounting operations in life insurance companies are shown in
Figure 7.3.
Accounting Standards
Insurers are required by law to conduct their financial accounting activities in
accordance with specified accounting standards. Each country has its own set of
accounting standards with which insurers must comply for financial reporting
Figure 7.3. Types of Financial Accounting
Premium accounting, also called policy accounting, is the accounting operation that
maintains detailed accounting records of all financial transactions related to the policies
an insurer has issued (sold). Premium accounting includes accounting for premiums,
commissions, claim payments, policy loans, and policy dividends. An insurer’s premium
accounting system bills policyowners, records premium payments, calculates producer
commissions, generates management reports and financial statements, and so on.
Investment accounting records transactions related to the assets in an insurer’s
investment portfolios. Because of the volume and monetary amount of investment
transactions, investment accounting is mostly automated. The investment accounting
system tracks and records cash inflows and cash outflows of the insurer’s investments
and investment valuations that will be included in the insurer’s financial statements.
General accounting includes the basic accounting operations that all businesses
undertake. One example is payroll accounting. Payroll accounting involves calculating
employees’ wages, preparing paychecks, maintaining payroll records, and producing
payroll reports for internal management and government agencies. Another type
of general accounting is disbursement accounting. The objectives of disbursement
accounting are to (1) provide a permanent record of all cash disbursed or paid out,
(2) confirm that all cash disbursements are properly authorized, and (3) ensure that all
disbursements are charged to the proper account. Disbursement accounting is usually
performed by a company’s accounts payable department.
Tax accounting keeps records related to all the company’s taxes and prepares tax
returns and filings such as tax forms for employee wages, producer commissions,
and policyowner benefit payments and withdrawals. Insurance companies also pay
premium taxes, which are taxes calculated on premium income an insurer earns within
a particular jurisdiction. Many large insurance companies have a separate function
devoted to tax accounting, which has its own set of reporting rules. In smaller insurance
companies, tax accountants are typically part of the accounting department.

purposes. For example, most countries require insurers to submit detailed finan-
cial statements—balance sheet, income statement, cash flow statement, and state-
ment of owners’ equity—to insurance regulators at least annually. Accounting
standards also advise how and when accountants recognize revenues and expenses
and how they value assets, liabilities, and capital.
Recognition is the process of (1) classifying items in a transaction as assets,
liabilities, capital, surplus, revenues, or expenses, and (2) recording the trans-
action in the company’s accounting records.
Valuation is the process of calculating the monetary value of a company’s
assets, liabilities, and capital for accounting and financial reporting purposes.
Accounting standards—such as standards for recognition, valuation, and for
the types of information to include in financial statements—vary significantly
across countries. In addition, countries that adopt the same standards may vary
widely in the method they use to determine how assets are valued, or how they
recognize certain revenues. What does this mean for an external stakeholder? It
may be difficult to compare insurers in different countries or to assess a foreign
insurer’s financial performance or condition. Having separate, sometimes conflict-
ing, accounting standards and reporting requirements also greatly complicates the
financial reporting process for insurers that do business in more than one country.
For example, many insurance companies in the United States routinely prepare
two sets of financial statements based on different sets of required standards in the
United States. In the near future, these companies face a unique challenge: two
sets of accounting standards, accompanied by increasing pressure to comply with
international standards, which have not yet been implemented.
Generally accepted accounting principles (GAAP) are a set of financial
accounting standards, conventions, and rules that U.S. stock insurers follow when
summarizing transactions and preparing financial statements. Mutual and frater-
nal insurers in the United States currently also must comply with GAAP if they
sell variable insurance products or variable annuities. The underlying premise
of GAAP is the going-concern concept, which means that accounting records
are based on the assumption that a company will continue to operate indefinitely.
GAAP-based financial statements focus on profitability and use standardized defi-
nitions, valuation methods, and formats. Interested stakeholders can evaluate the
financial performance of one company from year to year and can compare the
financial performance of several companies that use U.S. GAAP.
Statutory accounting practices are the accounting standards that all life
insurers in the United States must follow when preparing the Annual Statement
and other financial reports that they must submit to state regulators. Statutory-
based financial statements focus on solvency. Insurance companies must satisfy
the statutory accounting requirements for each state in which they conduct busi-
ness. The NAIC approved the Codification of Statutory Accounting Principles,
which created a single, basic set of written standards for statutory accounting, to
help minimize the differences in standards among the states. Each state may adopt
the Codification or may elect to maintain its unique set of standards.
Generally, financial reports based on statutory accounting practices follow
accounting conservatism. Accounting conservatism typically understates the
values for a company’s assets, overstates the value of a company’s liabilities and
expenses, and projects a lower level of net income than would be the case if the
company used a less conservative reporting method, such as GAAP. Conservatism

is fundamental to statutory accounting practices because insurers want to demon-

strate to regulators that they are able to meet policy obligations even under adverse
circumstances.
In the international landscape, the International Accounting Standards Board
(IASB) developed the International Financial Reporting Standards (IFRS) in
an attempt to promote consistency, comparability, and more complete disclosure
of information included in corporate financial statements. Each country has desig-
nated an agency or organization that will monitor the impact of IFRS on financial
reporting requirements for all companies that conduct business within that coun-
try. For example, the SEC’s Financial Accounting Standards Board (FASB) in the
United States has worked with the IASB on revenue recognition for companies in
all industries.1
Financial Reporting
The culmination of financial accounting is financial reporting—the preparation
and filing of required financial statements that summarize a company’s finan-
cial transactions and indicate the company’s financial health. The accounting
standards used to prepare these financial statements depend on the purpose of
the statements, the stakeholders for whom the statements are intended, and the
applicable laws.
To understand the financial management of a life insurance company, you need
to be familiar with certain financial statements. The two primary financial state-
ments that all types of businesses prepare are the balance sheet and the income
statement. In Chapter 6 we presented the major components of the balance sheet:
assets, liabilities, and capital. Figure 7.4 shows a simple balance sheet for an insur-
ance company.
Figure 7.4. A Balance Sheet
Life Insurance Company

Balance Sheet
December 31, 20xx
($000s)
Assets Liabilities and Capital and Surplus

Cash $ 200,000 Liabilities
Invested Assets 4,000,000 Policy Reserves $3,600,000
Premiums Receivable 200,000 Unpaid Claims 200,000
Property and Equipment 800,000 Total Liabilities $3,800,000
Other Assets 100,000 Capital and Surplus
Capital Stock $ 300,000
Surplus 1,200,000
Total Capital and Surplus $1,500,000
Total Liabilities and Capital
Total Assets $5,300,000 and Surplus $5,300,000

In Chapter 6 we also discussed an insurer’s income statement, which contains

revenues, expenses, and net income or profit. Figure 7.5 shows a simple income
statement for an insurance company.
Two other important financial statements are typically included in an insurer’s
annual report and Annual Statement. These financial statements are the
Cash flow statement, which provides information about the company’s cash
receipts (inflows), cash disbursements (outflows), and the net change in cash
(the difference between cash inflows and cash outflows) during a specified
accounting period
Statement of owners’ equity, also called a statement of capital and surplus,
which shows the changes that occurred in owners’ equity between two sequen-
tial balance sheets
As noted earlier, insurers domiciled or doing business in the United States must
prepare an Annual Statement according to statutory accounting practices and sub-
mit it to the state insurance regulators in each state in which they do business.
Statutory accounting practices prescribe specific rules for asset valuation—the
process of calculating the monetary values for assets. Only specified assets and
Figure 7.5. An Income Statement
Life Insurance Company

Income Statement
For the Year Ended December 31, 20xx
($000s)
Revenues
Premium Income $1,800,000
Net Investment Income 300,000
Total Revenues $ 2,100,000
Benefits and Expenses

Policy Benefits, Claims, $1,400,000
and Surrenders
Increase in Policy Reserves 100,000
Producer Commissions 300,000
Other Operating Expenses 100,000
Total Benefits $ 1,900,000
and Expenses,
(including Taxes)
Net Income $ 200,000

asset amounts are permitted to be listed on the Assets page of the Annual State-
ment balance sheet. Assets not reported on the Assets page are reported elsewhere
in the Annual Statement. For purposes of reporting assets on the Annual State-
ment, life insurers divide their assets into three categories:
Admitted assets are those whose full value can be reported on the Assets
page of the Annual Statement. Typical admitted assets include cash and other
high-quality assets such as investment-grade securities and amounts due to
the insurer within 90 days.
Partially admitted assets are those for which only a portion of their mon-
etary value is reported on the Assets page of the Annual Statement. Partially
admitted assets include invested assets that are decreased by any amount that
exceeds the statutory investment limitations.
Nonadmitted assets are those that are not listed or valued on the Assets page
of the Annual Statement. These assets, which are presumed not to affect an
insurer’s ability to pay its future obligations, include furniture, office supplies,
advances to producers, speculative or low-quality investments, and amounts
due the insurer in 90 or more days. Requiring these assets to be reported
elsewhere in the Annual Statement is one way regulators ensure accounting
conservatism in an insurer’s accounting operations.
Other countries also require insurers to submit periodic financial reports to
appropriate regulatory authorities. However, the required format and the ele-
ments that must be included vary from those in the U.S. Annual Statement. Figure
7.6 illustrates how financial reporting requirements differ among jurisdictions.
Despite these differences, most jurisdictions are moving toward stricter solvency,
risk management, and capital management requirements.
Management Accounting
We’ve learned that financial accounting focuses on financial reporting require-
ments for external stakeholders. Management accounting, however, focuses on
financial information for internal stakeholders. Because management accounting
is for internal users only, no specific laws govern management accounting. Insurers
are free to design any type of management accounting reports they choose. Man-
agement accounting is future-focused in that it helps managers plan and implement
business strategies. However, management accounting also plays an important role
in controlling and evaluating existing operations.
Management accounting helps to identify areas of an insurer’s business, such
as product lines or operating units, that are not performing as planned. Manage-
ment accounting tools can be used to
Measure the profitability of products and services
Analyze operating costs and manage expenses
Budget resources to support goals
Evaluate the efficiency of procedures and staff

Two important components of management accounting are budgeting and cost
accounting.

Figure 7.6. Financial Reporting Requirements
Canada
Effective January 1, 2011:
All companies must prepare financial statements and interim financial reports in
accordance with international financial reporting standards (IFRS).
All financial statements must be in compliance with international standards on
auditing.2
European Union Members

Companies conducting business in the European Union (EU) comply with
financial reporting requirements of Solvency II, a three-pillar approach to
ensuring company solvency.
• Pillar 1 deals with capital management requirements.
• Pillar 2 concerns risk management requirements.
• Pillar 3 concerns reporting and disclosure requirements.
Multinational insurance companies that conduct business in the United
States and in EU member countries must be aware that Solvency II reporting
requirements are inconsistent with
• IFRS requirements
• U.S. statutory requirements
• U.S. GAAP requirements3
Budgeting
Budgeting is a management accounting process that creates a financial plan of
action designed to help an organization achieve its goals. Budgeting typically
projects revenues and expenses for a company as a whole as well as for indi-
vidual departments, products, lines of business, and profit centers. Typically, the
individual budgets for each department or area are combined into the company’s
master budget, which shows the overall operating and financing plans for the
company during a specified accounting period. A master budget includes budgets
for the company’s core business operations, cash, and capital budgeting for long-
term projects. A company’s master budget can also be thought of as a profit plan,
because achieving the goals in the master budget should result in profit for the
company. Most companies compile the master budget annually and update it semi-
annually to ensure that it provides reliable estimates of revenues and expenses.
Budgeting can also serve as an important control tool. At the end of a specified
accounting period, managers perform a variance analysis, in which they compare
actual results to budgeted amounts. Any discrepancy between the two amounts
requires investigation. A favorable variance occurs when actual revenues are
greater than expected revenues or actual expenses are less than expected expenses.
An unfavorable variance occurs when actual revenues are less than expected rev-
enues or actual expenses are greater than expected expenses.

Shouldn’t managers be glad when they are

over budget on revenues or under budget on
expenses?
Higher-than-budgeted revenues or lower-than-budgeted expenses sound good.

However, managers must probe positive and negative budget variances to find
out what caused them. When they understand the causes, they can make adjust-
ments for the future. If the variance showed higher actual revenues than bud-
geted revenues, management must ask several questions. For example, how did the
unit obtain the higher-than-expected revenue numbers? Did the unit sell products
appropriately? Did the unit sell products at a low price to obtain a higher volume of
sales? Were sales projections set artificially low to make the sales team look good?
What external factors contributed to this success? Similarly, if actual expenses
were lower than budgeted expenses, management must ask several questions. For
example, was quality sacrificed in cutting expenses? Were some expenses not
recorded? Were cost control programs implemented? Which important activities
were not accomplished because there was no staff to do them?
Cost Accounting
One way to improve the solvency and profitability of an insurer’s operations
is to understand and control the company’s costs, another word for expenses.
Cost accounting is a system for accumulating and categorizing expense data.
The objectives of cost accounting are to (1) establish effective cost controls and
(2) generate accurate estimates of future costs for use in pricing a company’s
products. Insurers may use various terms for cost accounting such as expense
analysis, expense accounting, or cost allocation. Cost accounting enables a com-
pany’s managers to plan operations, organize employee workloads, and evaluate
current financial performance so that the company can make appropriate finan-
cial management decisions. Cost accounting helps an insurer answer questions
such as
What are our costs for a specific line of business?
What are the estimated future costs for a particular product?
What department, product, or line of business generated a specific cost?

Managers use the answers to these questions to manage their expenses and allo-
cate resources. To be a valuable management tool, a cost accounting system should
accumulate and allocate costs accurately and fairly and in a meaningful way.
Treasury Operations
Staff in treasury operations perform a variety of activities that may range from
processing check deposits to forecasting cash flows to serving as the insurer’s
liaison in banking relationships. Treasury operations staff in some insurance

companies also manage short-term invested assets because these assets can be
readily converted to cash. Most insurance companies administer treasury opera-
tions separately from investment transactions, so they must carefully coordinate
the activities of the two systems. For example, when the investment operations
staff purchases or sells a bond and the system records the transaction, authorized
employees in the treasury operations department can access the relevant informa-
tion. Ultimately, the timely communication of information, such as the amount of
available cash, is critical to effective management of an insurer’s cash and invest-
ments.
Example: Treasury Operations at the Tandem Life Insurance Company

administers its cash management system separately from its investment
management system. Tandem owns many bonds on which interest income
is paid semiannually—at the end of every six months.
Each month, according to accounting standards, Tandem must record in
its accounting records a portion of the bond interest income that is earned
but not yet paid. Staff in Treasury Operations and Investment Management
must communicate regularly, as must each automated system, for Tandem
to report the correct amount of earned-but-not-yet-paid bond interest
income on its income statement to comply with accounting standards.
Example: Employees in Investment Accounting, part of Investment
Operations at the Milford Life Insurance Company, verify the amount
of interest income on Milford’s investments. Employees in Treasury
Operations monitor and project Milford’s cash inflows and outflows and
then notify staff in Investment Operations of the amount of cash Milford
has available to invest.
The control function for treasury operations focuses on key activities to ensure
that
Job duties for cash receipts, cash disbursements, and bank reconciliation are
segregated
Collections procedures are efficient and independently monitored
Controls for authorization, check security, and accounting records for cash
disbursements are maintained
Advances in technology and economic treaties have streamlined treasury oper-
ations in some cases for multinational insurance companies. For example, some
European Union (EU) member countries have moved toward a Single Euro Pay-
ments Area (SEPA), which has reduced the labor and transactions costs associated
with cash receipts and cash disbursements within and among EU countries.4
Cash Management
In simple terms, when a policyowner remits a premium payment, it may come
through a wire transfer or lockbox—a post office box that policyowners use to
remit payments. The insurer’s automated accounting system records the cash
receipt. Staff in treasury operations who do not handle cash are assigned to rec-
oncile the deposit with the insurer’s bank statement, which is typically available

electronically. Likewise, an annuity benefit that was authorized in annuity admin-

istration flows through treasury operations so the insurer would have a record of
this cash disbursement. The insurer’s accounting system records the benefit pay-
ment, and treasury operations reconciles this disbursement with the insurer’s bank
statement.
Liquidity Management
Most activities within treasury operations focus on managing the company’s liquid-
ity, which is closely related to solvency. If liquidity is not managed carefully, the
company may not have enough cash available to meet obligations as they come due.
Why? A sudden increase in cash surrenders as a result of declining economic con-
ditions could challenge an insurance company that did not plan for this possibility.
Insurance company employees who focus on liquidity also must work closely
with the insurer’s risk management team to ensure that the insurer is minimizing
specific risks, including interest-rate risk. Other treasury operation activities per-
formed in liquidity management include
Managing daily cash balances to determine the amount of cash to invest or to
borrow overnight (if the cash balance is below the minimum cash balance the
company requires)
Anticipating and coordinating short-term and long-term obligations to ensure
that cash is available to pay obligations on time
Managing the risks associated with foreign exchange rates
Managing wire transfers of cash
Establishing international banking relationships to smooth transactions across

jurisdictions
Serving as liaison to investment operations
Generating projections of cash receipts and cash projections by product and

by line of business
Ensuring compliance with rating agency requirements concerning ongoing
liquidity
Uncovering and tracking fraudulent activities in cash transactions
Developing the insurer’s business continuity plan, in coordination with the

insurer’s information technology (IT) function or the chief operating officer
(COO)
You do an audit when something goes wrong,

right?

Auditing
In Chapter 6 we introduced auditing as an integral part of financial management.
Insurance companies routinely conduct audits to ensure that operations proceed as
efficiently as possible and as part of the control function to prevent anything from
going wrong. Recall that auditing is the process of examining and evaluating com-
pany records and procedures to ensure that (1) the company’s accounting records
and financial statements are presented fairly and reasonably, (2) quality assurance
is maintained, and (3) operational procedures and policies are effective.
One of the primary responsibilities of auditing is to conduct internal audits of
company operations—an essential part of a company’s risk management efforts.
An internal audit can focus on any area within the company and serves as an
internal control in various areas, including underwriting, customer service, and
claims.
An internal financial audit is a type of internal audit in which auditors evaluate
the accuracy of accounting and financial reporting, and the adequacy of controls
over cash and other assets. In particular, auditors attempt to determine whether
the company’s
Financial records are fair and accurate
Control procedures are adequate and are being followed
Assets are safeguarded
Compliance obligations are being met

Auditors communicate their results to the audit committee of the board of
directors and to appropriate management groups. If auditors find problems, they
make recommendations for improvements, and then conduct follow-up audits to
ensure that changes are implemented.
Example: Each week, an internal financial audit is conducted in the

Cash Disbursements Department in Treasury Operations at the Fine Life
Insurance Company. Fine’s internal auditors conduct this financial audit
to ensure that the correct amount, policy number, payee, and codes
for authorization, product, and producer have been used for each cash
disbursement.
Members of Fine’s internal financial audit team also conduct a quarterly
audit of Fine’s top 25 cash disbursements. The audit team decides which
disbursements to examine and prepares a report of its findings, including
its recommendations, to the audit supervisor, the audit committee of the
board, and to Fine’s treasurer and cash disbursements manager.
Auditing has traditionally been associated with the accounting function. How-
ever, auditing extends well beyond the accounting area. Any investigation of
records, policies, or procedures to ensure that they conform to established poli-
cies can be considered an audit. For example, insurance companies use audits to
evaluate their operating procedures, management efficiency, and compliance with
specified rules and regulations.

Internal Controls
Recall that an insurer’s internal controls are the steps the insurer takes to protect
its assets, monitor the accuracy of its accounting records, and encourage operat-
ing efficiency and adherence to management policies. Insurance companies have
many internal controls that may vary across companies. However, most insurers
have internal controls similar to those listed in Figure 7.7.
Figure 7.7. Examples of Insurance Company Internal Controls
Senior management develops a culture of zero tolerance for dishonesty and

trains all employees in how to prevent and detect fraud.
Actuaries recalculate premiums on blocks of in-force policies and compare
results with premiums actually charged to policyowners.
Actuaries routinely compare all in-force policies with the policy reserves for each
policy type.
Underwriters cross-check information submitted by prospective insureds on
policy applications with information in the insurer’s policyowner master file.
Underwriters and claim analysts number or date-stamp policy applications and
claims as they are received.
Claim processing and claim disbursement job duties are separated.
Claim examiners verify policy beneficiaries before proceeds are approved for
disbursement.
CSRs compare the monetary amounts of policy loan requests with amounts on
loan checks.
Investment purchases and sales are performed by different employees from
those who record and report the purchases and sales.
Senior management approves all claim payments over a specified monetary
amount.
Two senior managers must sign all disbursement checks over a specified
monetary amount.
Compliance employees review a random number of transactions to ensure that
regulations are being followed.
Employees in two different departments must handle receipt of cash and
recording the receipt of that cash.
Internal auditors review a random number of insurance applications to ensure
underwriters have assigned correct risk classes to prospective insureds, based
on given risk factors.
Internal auditors review all identified procedure variances.

Key Terms
segregation of duties International Financial Reporting
account Standards (IFRS)
financial accounting cash flow statement
management accounting statement of owners’ equity
premium accounting asset valuation
investment accounting admitted assets
general accounting partially admitted assets
tax accounting nonadmitted assets
recognition budgeting
valuation master budget
generally accepted accounting favorable variance
principles (GAAP) unfavorable variance
going-concern concept cost accounting
statutory accounting practices lockbox
accounting conservatism internal financial audit
Find out how accounting, treasury operations, and auditing are organized at
your company.
Review a copy of your company’s Annual Statement. Identify the balance

sheet and income statement within the Annual Statement. Can you find infor-
mation relating to your department?
How do internal audit recommendations affect your department?
Endnotes
1. “Revenue Recognition—Joint Project of the FASB and IASB,” Financial Accounting Standards Board,
last modified 3 May 2011, http://www.fasb.org/cs/ContentServer?c=FASBContent_C&pagename=
FASB%2FFASBContent_C%2FProjectUpdatePage&cid=900000011146 (10 May 2011).
2. Shevaun McGrath, “Canada: CSA Approves Amendments Related to Implementation of International
Finance Reporting Standards,” Mondaq, 1 November 2010, http://www.mondaq.com/canada/article.
asp?articleid=114054&tw=0 (10 May 2011)
3. Steve Foster et al., “Solvency II: What Will the Likely Impacts Be for Insurers?” (presentation
notes, Deloitte Dbrief Webcast, 18 August 2010), http://www.deloitte.com/view/en_US/us/Insights/
Browse-by-Content-Type/dbriefs-webcasts/230b4b30fc249210VgnVCM100000ba42f00aRCRD.htm
(18 August 2010).
4. Todd Rizzieri, “Managing Global Growth & Resources in Treasury” (presentation notes, 2008 LOMA
Financial Inforum, Hyatt Regency Coconut Point, Bonita Springs, Florida, May 2008).

Insurance Company Operations Chapter 8: Investment Management 8.1
Chapter 8
Investment Management
Objectives
 Describe necessary elements in an insurer’s investment policy
 Explain the risk-return trade-off and how an investor determines the
required rate of return on an investment
 Describe how diversification decreases investment risk
 Explain asset-liability management (ALM) and the differences between
a buy-and-hold strategy and an active management strategy
 Distinguish between debt securities and equity securities and explain
how securities are bought and sold
 Distinguish between an insurer’s general account and separate account
portfolios
 List and describe the types of investments in which insurance companies
typically invest
 Describe the characteristics that determine the degree of risk associated
with a bond
 Describe the differences between policy loans and other insurance
company investments

8.2 Chapter 8: Investment Management Insurance Company Operations
Outline
Investment Policy Investment Portfolios
Investment Risk  The General Account
 Risk and Return  Separate Accounts
 Diversification Types of Investments

Investment Operations  Bonds
 Evaluating an Investment  Mortgages
 Buying and Selling Securities  Stocks

 Real Estate
 Policy Loans
Do insurance companies play the stock

market?
Life insurance companies invest in stocks

as well as many other types of assets. Life
insurers are among the most important
institutional investors in the world.
I
nstitutional investing is the professional management of money that belongs
to others—individuals, corporations, and governments. The ways insurance
companies manage their own and others’ investments affect not only their
policyowners and stockholders, but also many others throughout the markets in
which the companies do business. By investing in a wide range of businesses and
industries, insurance companies help promote economic growth throughout the
world.
Staff in investment operations conduct investment management. Investment
management consists of all the activities performed to invest a company’s excess
cash, generally in long-term investments. Recall that short-term investments are
often the responsibility of treasury operations.
Investment Policy
As we described in Chapter 6, an insurer’s board of directors establishes invest-
ment policy and also supervises and directs the management of an insurer’s invest-
ments. When setting investment policy, the investment committee, or sometimes
the finance committee, researches the company’s financial position, its current
investments, and any conditions—such as the economic environment—that can
influence investment operations. The investment policy includes the

Insurer’s investment objectives: (1) to create investment portfolios with cash

flow properties that are consistent with the insurer’s asset/liability management
strategy; (2) to meet obligations to policyowners; (3) to contribute to the growth
of the insurer’s earnings and surplus; and (4) to maintain an adequate interest
spread, the difference between the rate of return the insurer earns on its invest-
ments and the interest rate credited to products on behalf of customers
Types of investments needed to achieve the insurer’s investment objectives
Minimum standards for the safety of the principal invested and for the level of
investment earnings
Types of risks that investment staff can and cannot take in making
investments
Maximum amount of money that each level of investment staff can autho-
rize for an investment without having to seek approval from a higher level of
authority within the company
Regulatory constraints on the insurer’s investment activities
Investment Risk
Within regulatory limitations, life insurers choose whether to pursue an aggres-
sive investment strategy, a conservative investment strategy, or a strategy that falls
somewhere in between. Recall that a conservative investment strategy focuses on
safeguarding the company’s capital rather than on earning high returns. Although
earning adequate returns is important for an insurer following a conservative
strategy, the insurer is willing to give up some potential returns in exchange for
reducing the risk of significant investment losses.
Risk and Return

The relationship between risk and return is called the risk-return trade-off. Accord-
ing to the risk-return trade-off, all other factors remaining equal, the greater the
risk associated with an investment, the greater the expected return. Likewise, all
other factors remaining equal, the lower the risk associated with an investment,
the lower the expected return.
For example, putting money in an insured savings account involves virtually
no risk to the investor. However, the return on this investment will be very small.
Investing in a new company in a high-risk industry may provide an investor with
very high returns on his investment, but there is also a possibility that the com-
pany will go out of business and the investor will lose the principal—the amount
originally invested. To accept a large amount of risk, an investor must expect a
large potential return. Generally, there is a direct relationship between risk and
potential return:
As risk increases, potential return also increases.
As risk decreases, potential return also decreases.

Required Rate of Return

Insurance companies cannot hold onto their funds and avoid risk entirely because
investment income is necessary to create affordable insurance products, yet insur-
ers cannot afford to take on an unlimited amount of risk because they must remain
solvent to provide financial security to their customers. Insurers seek reasonable
investment risks that earn an adequate return. To assume the risk of an investment,
insurers require a certain rate of return. Generally, the required rate of return for
a given investment is the sum of the risk-free rate of return and the risk premium.
Required rate of return = Risk-free rate of return + Risk premium
The risk-free rate of return is the return on a risk-free investment—the least

risky investment opportunity available. In most countries, the risk-free rate of
return would be the return earned on investments such as a highly rated savings
bond or a bank’s certificate of deposit, or the yield on a short-term, highly rated
issue of the government. For a country that does not have a risk-free investment,
the risk-free rate of return can be estimated by using the average long-term growth
rate of the country’s economy. The risk premium is the compensation that inves-
tors demand for taking on the risk associated with a specific investment. Without
a risk premium, investors would be better off investing in a risk-free investment.
The risk premium provides the incentive for an investor to make a specific invest-
ment. Figure 8.1 illustrates this concept.
Diversification
To manage the overall risk levels in their investment portfolios, insurance com-
panies diversify their investments by investing in different types of assets. Diver-
sification helps an insurer achieve expected overall investment returns that are
consistent with the level of its tolerance for risk.
Figure 8.1. Required Rate of Return
Forthright Financial is considering 3.5% risk premium:

buying this corporate bond. What For this bond,
investment return would the bond Forthright requires
have to pay for Forthright to buy it? the potential return
to be at least 3.5%
over the risk-free
rate. 3% + 3.5% = 6.5%
required return.
3% risk-free rate: Forthright will only
Forthright won’t purchase this bond
accept any risk if it provides an
unless the expected investment return
return is > 3%. of at least 6.5%

Suppose that an insurer invested all of its money in one type of asset and that
returns were much less than the insurer anticipated. The negative impact on the
insurer’s investment portfolio would be significant. However, if the insurer held
many types of assets in its portfolio, the lower return from one type of investment
would have only a minimal effect on the return of the entire portfolio. Insurers
pursue diversification by holding different types of investments, such as bonds,
stocks, mortgages, and real estate, and also by holding many different investments
within each category. Many insurers further diversify by holding investments in
different countries or different types of industries.
Investment Operations
Recall from Chapter 6 that an insurer’s asset/liability managers generally take
a portfolio approach to managing a company’s investments. For example, an
insurer may assign the earnings from a portfolio of bonds to support one of its
term life insurance products. In this way, investment managers can match spe-
cific assets with specific liabilities and can monitor and manage the cash flows of
each product line.
Another way to categorize an insurer’s investment strategy is by the amount
of trading done in the portfolio. Under a buy-and-hold strategy, investment staff
carefully select securities and expect to hold them for long periods, or until they
mature, are prepaid, or default. The total mix of the asset portfolio remains fairly
constant. Choosing appropriate securities is crucial for this strategy to succeed,
because the asset/liability manager bases investment success largely on the origi-
nal portfolio selections. Under an active management strategy, investment staff
view any investment in a portfolio as potentially tradable, if trading the invest-
ment would improve the portfolio’s performance. Theoretically, the entire mix of
assets in the portfolio can be changed at any time.
In reality, most insurers’ investment strategies fall somewhere between the two
extremes of buy-and-hold and active management. A strict buy-and-hold strat-
egy is generally too inflexible because asset/liability managers may need to make
changes in the portfolio depending upon changes in economic conditions, invest-
ment performance, policyowner needs, or asset/liability management require-
ments. Similarly, a strict active management strategy is generally undesirable
because selling a large portion of the company’s assets at any one time is risky.
In addition, a high rate of asset turnover can produce high brokerage commission
expenses and potentially unfavorable tax consequences. Active management also
requires more management time than a buy-and-hold strategy. Most insurance
companies aim for a balance between the two investment strategies.
Evaluating an Investment
Investment analysts conduct research into specific investment opportunities. For
example, investment analysts evaluate annual reports of companies issuing stocks
and bonds, interview the management of such companies, read financial publica-
tions, and screen potential investments using specialized investment management
software. Analysts also collect information about promising mortgage loan and
real estate investment opportunities. The portfolio managers and other members
of the investment staff examine this research and evaluate the various investments
and investment strategies needed to achieve the company’s investment goals.

When evaluating a specific investment, a portfolio manager generally considers

the following factors:
The investment’s cash flow patterns.
The investment’s expected rate of return, or yield, which is the return earned
on an investment during a given time period expressed as a percentage of the
purchase price. For example, if an insurer invests $1,000 and earns a return of
$70 on the investment during one year, the annual expected rate of return is
7 percent ($70 return ÷ $1,000 investment = 0.07 = 7 percent). Rate of return
incorporates both the gain in the value of the asset and any income earned on
the asset.
The risk characteristics of the investment.
The liquidity of the investment.
General economic conditions, such as expected movements in interest rates

and the expected inflation rate.
Regulatory requirements that constrain the insurer’s investment activities.

After reaching an investment decision, the portfolio manager tells a trader
which investments to buy or sell, the price limitations for buying and selling,
and the deadline for making the transactions. Note that the portfolio manager,
who makes the decision to purchase or sell an investment, is not the person who
handles the actual transaction. A different person records the transaction in the
insurer’s accounting system. For control purposes, separating these duties is
important in financial management. In addition, all investment transactions must
be in compliance with the insurer’s investment policy. Another control mechanism
is the investment committee’s periodic evaluation of the company’s investment
results. The insurer’s investment management system generates various asset/
liability management reports that provide feedback on investment performance.
For example, an investment activity report specifies the details of all portfolio
transactions. A quarterly investment portfolio performance review summarizes
the insurer’s investment performance for the board of directors and the invest-
ment committee. The portfolio manager’s instructions to the trader and the feed-
back provided by the investment committee are other examples of controls used
in investment management. The insurer’s annual audit includes a review of the
insurer’s investment portfolios and investment transactions during the year.
Buying and Selling Securities

Recall that a security represents either (1) an obligation of indebtedness owed by a
business, a government, or an agency, or (2) an ownership interest. When the secu-
rity represents an obligation of indebtedness, it is called a debt security. A bond
is a debt security in which an investor lends money to a corporation or govern-
ment that borrows the funds for a defined period of time at a fixed interest rate. A
security that represents an ownership interest is known as an equity security. For
example, a stock is a security that represents an ownership interest in a company.

New Issues of Securities

In a public offering, the security issuer makes a new security available for sale to
the public. Usually, an investment bank facilitates the offering. The issuer must
register the security with the appropriate government agency, such as the Securi-
ties and Exchange Commission (SEC) in the United States. The security registra-
tion document requires information about the type of security being offered and
the issuing company’s financial condition, management, industry competition,
and experience. After being registered, the securities are distributed to investors
through the investment bank’s network of securities brokers and dealers. Securi-
ties brokers and dealers specialize in the purchase and sale of stocks, bonds, and
other financial instruments.
Private placements have become a preferred way for insurers and other large
institutional investors to purchase new issues of securities. In a private placement,
the issuer sells the security directly to a limited number of investors, typically
institutional investors. Although private placements are subject to regulatory over-
sight, they do not have to be registered with government agencies. The issuer and
the investors negotiate the price and terms of the private placement. As a result,
issuing private placement securities is quicker and less costly than is making a
public offering.
Previously Issued Securities

Insurance companies can sell securities they own and purchase previously issued
securities by placing orders on organized securities exchanges or over-the-counter
markets. A securities exchange is a market in which buyers and sellers of securi-
ties—or their agents or brokers—meet in one location to conduct trades. The New
York Stock Exchange, the London Stock Exchange, the Toronto Stock Exchange,
and the Nikkei Exchange in Tokyo are well-known securities exchanges.
An over-the-counter (OTC) market is an electronic communications network
over which securities that are not bought and sold on an exchange are traded. OTC
dealers are linked together by a vast telecommunications network. The National
Association of Securities Dealers Automated Quotation System (NASDAQ) is a
well-known OTC market for stocks. The majority of bonds are traded as OTC
investments through bond dealers.
Insurance companies play an important role

in society, so regulators are serious about
safeguarding an insurer’s ability to deliver on
the promises made in insurance contracts.
Investment Portfolios
Unlike most investors, insurers must comply with regulatory requirements that
impose limits on the types and amounts of investments they make in their invest-
ment portfolios. These regulatory requirements are designed to
Require insurers to exhibit reasonable behavior with respect to prudent diver-
sification of their investment portfolios

Protect consumers from the threat of insurer insolvency as a result of an

insurer’s taking on too much risk in search of high returns
Insurance company assets are maintained in two primary types of investment
portfolios: a general account portfolio and separate account portfolios.
The General Account

All insurers have a general account—an asset portfolio that supports a life insur-
er’s contractual obligations to owners of guaranteed products, such as traditional
whole life insurance and fixed annuities. Within regulatory constraints, the insurer
determines the types of investments in the general account and bears the invest-
ment risk for funds placed in the general account.
Most of an insurer’s general account investments are in fixed-income invest-
ments. Fixed-income investments—such as bonds and mortgages, which we
describe in greater detail later—provide a predictable stream of income. As a
result, the insurer’s general account contains a greater proportion of lower-risk
investments. Insurers generally limit the amount of corporate stock they hold in
the general account because of insurance laws.
In the United States, each state also requires insurers to follow specified safety
guidelines when selecting their general account investments. These safety guide-
lines require the insurer’s investment portfolios to be diversified and composed
of high-quality assets that present relatively low levels of investment risk. Such
regulatory requirements take two general forms:
Most states impose quantitative limitations on the amount of each type
of asset an insurer may treat as admitted assets. For example, a state may
prohibit insurers from investing more than 20 percent of their admitted assets
in stock.
A few states impose a prudent person approach that, rather than placing quan-
titative limits on insurer investments, requires an insurer to act as a prudent
person would when making decisions about which assets to include in its
investment portfolio.
Separate Accounts
Insurers that offer variable products maintain one or more separate account port-
folios. A separate account, also called a segregated fund or segregated account in
some countries, is one or more asset portfolios that support an insurer’s variable
products, such as variable life insurance policies and variable annuities.
The separate account is divided into various subaccounts, which consist of
pools of investments with distinct investment strategies. Based on their investment
goals and tolerance for risk, variable policyowners choose how their premiums,
and the cash values that accumulate under their policies, will be allocated to sub-
accounts. The insurer manages the purchase and sale of assets in the subaccounts
according to the customer’s allocation decisions. Therefore, investment gains and
losses are based on the customer’s own decisions. An insurer’s separate account
operates in much the same way as a mutual fund, an investment company that
pools the funds of customers and usually invests in a certain type of investment,
such as stocks, bonds, or other securities.

Investments held in an insurer’s separate account are not subject to the same
regulatory restrictions as the investments in the general account. European regu-
lations concerning the types of investments and the amounts of each investment
type that an insurer may hold in its general account and in separate accounts
are typically less restrictive than are those in the United States and Canada. For
example, the general account assets of European insurers typically include a larger
proportion of stocks than do the general account assets of U.S. insurers. However,
investment regulations governing the general account in some emerging insurance
markets are more stringent than are those in the United States.
Types of Investments
As mentioned earlier, the assets in an insurer’s investment portfolios can be clas-
sified generally according to whether the assets represent equity (an ownership
interest) or debt (a liability). Insurance companies primarily invest in (1) bonds,
(2) mortgages, (3) stocks, (4) real estate, and (5) policy loans.
I’ve got a checking account and a savings

account, but bonds, stocks, and mutual funds
are a mystery to me. I know a bond is a loan,
but who’s the borrower and who’s the lender?
Bonds
Bonds are one way that businesses and government entities raise money. A bond
represents a debt that the bond issuer—the borrower—owes to the bondholder,
the investor who owns the bond. The amount owed is specified on the bond and
is called the bond’s par value, face value, or maturity value. Typically, bonds are
issued with par values of $1,000, $10,000, or $100,000. The bond issuer is legally
obligated to pay the bondholder the par value of the bond on the maturity date.
In addition to repaying a bond’s par value, the bond issuer must usually make
periodic—typically semiannual—interest payments to the bondholder. Such inter-
est payments are called coupon payments because the amount of the interest pay-
ments is based on an interest rate, known as the coupon rate, specified on the
bond. Because the coupon rate is generally fixed for the life of the bond, bonds are
a type of fixed-income investment. If the bond issuer does not meet the repayment
terms of the bond, the bondholder has a legal claim on the assets of the issuer.
A bondholder can earn a return from (1) the receipt of coupon payments and
(2) a capital gain upon the sale of the bond before it matures. A capital gain is the
amount by which an investment is sold for more than its purchase price. A capital
loss is the amount by which an investment is sold for less than its purchase price.
A bond’s market price—that is, the price at which the bond can be traded in the
open market—is not necessarily the same as its par value because the price of a
bond changes as market interest rates change. In fact, during much of a bond’s life,
the market price differs from the par value. As interest rates rise, bond prices fall,
and as interest rates fall, bond prices rise. For this reason, bond prices and interest
rates are said to be inversely related.

Example:
The Glacier Insurance Company purchased a bond with a 6 percent coupon
rate that matures in 10 years. The insurer purchased the bond when it
was issued and paid the par value of $1,000. This bond provides annual
income of $60 ($1,000 par value × .06 coupon rate = $60), which is paid in
$30 semiannual interest payments.
One year later, market interest rates rose, and new bonds were being issued
with coupon rates of 7 percent. Because of this change in interest rates,
Glacier’s bond became less valuable in the marketplace. That is, if Glacier
tried to sell its bond for $1,000, it would have trouble finding a buyer;
buyers would instead purchase newly issued 7 percent bonds because
they provide $70 in annual income ($1,000 par value × .07 coupon rate =
$70), rather than the $60 that Glacier’s bond pays. To find a buyer for its 6
percent bond, Glacier would have to reduce the price below $1,000, or sell
the bond at a discount.
The same principle works in reverse. If interest rates had fallen to 4 percent
one year after Glacier purchased its 6 percent bond, the insurer’s bond,
which pays $60 in annual income, would be more valuable than a newly
issued bond that pays only $40 in annual income. Therefore, if Glacier
wished to sell its 6 percent bond, it could demand a price above the $1,000
par value, in which case the bond would sell at a premium.
Note that a bond is always worth its par value on the bond’s maturity date,
and the bond always pays the same coupon payment, regardless of how
much an investor pays to purchase the bond.
In many countries, bonds are the largest investment holding in the general
accounts of insurance companies. They are relatively safe investments that have
extremely predictable cash flows from the periodic coupon payments and the lump-
sum payment of principal at maturity. Bonds also can help with asset/liability man-
agement because an insurer can match the cash flows of various bonds with specific
liability cash flows such as expected policy and annuity benefit payments.
Insurance companies hold many bonds until their maturity date and use the
cash proceeds to pay benefits under insurance and annuity contracts and to pro-
vide guaranteed rates of return on whole life policies. Some insurers actively trade
bonds to take advantage of bond market segments that increase or decrease in
value.
Bond Risk and Return Characteristics

Although bonds as an investment type are considered to be relatively safe invest-
ments, within the category of bonds, you can find specific bond issues that range
from very safe to extremely risky. Several characteristics of a bond determine
the degree of risk it presents to the purchaser. These characteristics include the
bond’s term to maturity, default risk, bond rating, call provision, convertibility,
and collateral. Generally, the riskier the bond, the higher the bond’s coupon rate to
compensate the bondholder for the additional risk he bears.

Term to maturity. A bond’s term to maturity—the length of time until the

bond matures—is one of the most important factors in determining its bal-
ance of risk and return. Bonds with long terms to maturity—10 years or lon-
ger—are more susceptible to interest-rate risk than bonds with short terms to
maturity. Why? Interest-rate changes will likely occur at some time during
the lengthy period before a long-term bond’s maturity date. Long-term bonds
generally offer higher coupon rates than do short-term bonds to compensate
bondholders for the higher risk.
Default risk. For a bond, default risk is the risk that a bond issuer will be
unable to make interest payments when these payments are due or to pay the
par value of a bond when the bond matures. Financially strong bond issuers are
less likely to default on a bond than are financially weak issuers. As a result,
bonds issued by financially strong issuers have less risk and generally offer
lower returns than bonds issued by financially weak issuers. In many countries,
the safest of all bonds are those that the country’s national government issues,
because a national government can always raise taxes to pay its debts.
Bond ratings. Bond ratings help insurance companies and other bond pur-
chasers determine the creditworthiness of a bond issuer. However, a bond rating
is not a guarantee that a bond issuer will be able to make scheduled payments.
A bond rating is a letter grade that a bond rating agency assigns to indicate the
quality of a bond issue. Bond ratings are based on a variety of factors, such as
the earnings record and financial strength of the issuing entity, the total amount
of the issuer’s bond indebtedness, and the property (if any) pledged to back up
the bonds. The meanings and interpretations of the ratings vary only slightly
from agency to agency. According to agency ratings, the higher a bond’s rating,
the lower the default risk. In addition, the higher the bond rating, the safer the
bond investment, and the lower the expected rate of return. Bond ratings may
change over time if the issuer’s financial situation changes. Figure 8.2 describes
the ratings of two of the best-known bond rating agencies.
Call provision. Some bonds contain a call provision that states the conditions
under which the bond issuer has the right to require the bondholder to sell
the bond back to the issuer at a date earlier than the maturity date. The call
provision specifies when a bond can be called and the price that investors will
receive if the bond is called. A call provision increases the risk to the investor
because the investor may be forced to sell the bond at an inopportune time.1
Because of this increased risk to the investor, bonds with call provisions offer
higher coupon rates than comparable noncallable bonds.
Convertibility. A convertible bond can be exchanged for shares of the issu-
ing company’s common stock at the option of the bondholder. This feature
allows the bondholder to share in the company’s good fortunes if the price of
the company’s stock rises. Because a conversion feature offers a bondholder
an additional way to generate a return on the investment, a conversion feature
reduces the risk that the bondholder assumes. Due to their relatively lower
risk, convertible bonds have lower coupon rates than do comparable noncon-
vertible bonds.

Figure 8.2. Bond Ratings
Moody’s Investors Service and Standard and Poor’s Corporation assign a letter grade to a bond
issue. Bonds that are rated in the higher categories—at least Baa (Moody’s) or BBB (Standard &
Poor’s)—and that have the lowest risk of default are known as investment-grade bonds. Bonds
that are rated in the categories below investment grade are known as high-yield bonds or junk
bonds. Almost all of the bonds held in the general accounts of life insurance companies are invest-
ment grade.
Moody’s Standard & Poor’s Description
Aaa AAA Highest quality (lowest default risk)
Aa AA High quality
A A Upper medium grade
Baa BBB Medium grade
Ba BB Lower medium grade
B B Speculative
Caa CCC, CC Poor
Ca C Highly speculative
C D Lowest grade (highest default risk)
Collateral. Bonds may be either secured or unsecured, depending on whether

the bond is backed by collateral—an asset that is pledged as security for a
loan until the debt is paid. Assets that bond issuers commonly use as collateral
include the bond issuer’s accounts receivable, product inventory, equipment,
or real estate holdings. If a bond is secured by collateral, the bondholder can
seize the collateral if the bond issuer fails to make bond payments when due.
The seized property can then be sold to meet the bond obligations. Unsecured
bonds—commonly known as debentures—are not backed by collateral.
Instead, they are backed only by the full faith and credit of the issuer. Unse-
cured bonds are more risky than comparable secured bonds and, consequently,
they tend to have higher coupon rates than secured bonds.
Types of Bonds
Bonds are often categorized by the type of entity or organization that issues them.
Two categories of bonds in which insurers invest are corporate bonds and govern-
ment bonds.
Corporate bonds are issued by corporations, typically very large corpora-
tions. Corporate bonds may be secured or unsecured, and many are callable.
Life insurance companies have been the largest institutional investors in the
U.S. corporate bond markets since the 1930s.
Government bonds are issued by national, state, provincial, or city govern-
ments to generate funds for government expenses, loan programs, or speci-
fied large projects. In the United States, three common types of government
bonds are federal government bonds, agency bonds, and municipal bonds.
Figure 8.3 describes these types of bonds. Most countries issue similar types
of government bonds.
Figure 8.3. Types of Government Bonds in the United States
The U.S. government issues federal government

bonds to help pay government expenditures and
finance the national debt. These bonds are backed
by the credit and taxing authority of the federal
government. Federal government bonds, such as U.S.
Treasury bonds, typically have maturities of 10 to 20
years and are regarded as low-risk, low–coupon-rate
investments.
Agencies of the federal government, such as the
Federal National Mortgage Association (“Fannie Mae”)
and the Federal Home Loan Mortgage Corporation
(“Freddie Mac”), issue agency bonds to raise funds to buy or originate loans, such as
home mortgage loans, farm loans, and education loans. Most investors believe that the
U.S. federal government would not allow a federal agency to default on its obligations
and so tend to think of agency bonds as low-risk investments.
State, county, and local governments issue municipal bonds to finance projects such as
school and road construction and other large programs. An important characteristic of
most municipal bonds is that the interest paid to bondholders is exempt from federal
income taxation. Municipal bonds may be general obligation bonds, which are backed
by the credit and taxing authority of the issuing government, or they may be revenue
bonds, which are backed by the cash flow of a particular revenue-generating project for
which the bonds were issued, such as a toll road or a public university dormitory.
Mortgages
People and businesses use mortgages to finance the purchase of real estate. A
mortgage is a long-term loan, secured by a pledge of specified property, that
the borrower agrees to pay off with regular payments of principal and interest.
Mortgages are debt securities and are used primarily for commercial property—
office buildings, shopping centers, and so on, or for residential properties such as
houses or condominiums. The borrower pays off the loan through the process of
amortization, which is the reduction of a debt by regular payments of principal and
interest that result in full payment of the debt by the maturity date. If the borrower
does not make the mortgage payments as they come due, the lender has the right to
seize the property pledged for the loan and sell the property to satisfy the loan.
Life insurance companies have always been an important source of mortgage
loans in the United States. Most of the mortgages held by insurers are commercial
mortgages that finance retail stores, shopping centers, office buildings, factories,
hospitals, and apartment buildings. Many of the mortgages that insurers originate
are used to pay off short-term, bank-financed construction loans that come due
when the construction is completed. The insurer and the borrower of a commercial
loan negotiate the terms of the loan. These terms include the loan amount, dura-
tion, and interest rate. By negotiating the loan terms, an insurer can match asset
cash flows with expected liability cash flows, such as benefit payments to policy-
owners and beneficiaries.

Like bonds, mortgages are generally considered to be fixed-income invest-

ments, because the insurer receives payments of principal and interest at regu-
lar intervals until a specified maturity date. Such a predictable stream of cash
inflows is appealing to insurers. Mortgages also appeal to insurers because they
are secured debt instruments. As a result, the insurers’ investments should be
protected in the event of a default. However, mortgages tend to be somewhat riskier
investments than are bonds. The following characteristics of mortgages contribute
to their increased level of risk:
Generally, mortgages are resold less often than are bonds. As a result, mort-
gages are much less liquid—or marketable—than are bonds.
Changing market interest rates present significant risks to insurers that hold
mortgages with fixed interest rates. If interest rates rise considerably, the inter-
est an insurer earns from its mortgage investments will lag behind the interest
the insurer could earn on new investments. If interest rates fall considerably,
borrowers are likely to refinance their mortgage loans by paying off their exist-
ing loans and taking out new loans at lower interest rates. When a borrower
refinances, the insurer loses the income stream it had planned to receive from
the investment.
Mortgages, like bonds, are subject to the risk that the debtor may default
and not repay the loan. Unlike bonds that are rated by bond rating agencies,
mortgage loans do not have such a rating. As a result, evaluating the default
risk a mortgage presents is more difficult than evaluating the default risk a
bond presents.
Insurers that invest in residential mortgages do not usually hold individual
mortgage loans. Instead, these insurers typically participate in the residential mort-
gage market by buying mortgage-backed bonds. Such mortgage-backed bonds are
known as collateralized mortgage obligations (CMOs), which are bonds secured
by a pool of residential mortgage loans. Until recently, insurers preferred to invest
in CMOs because they could be bought and sold like bonds and were relatively
liquid. However, after these residential mortgage pools lost significant value as
a result of the worldwide financial crisis that began in 2007–2008, insurance
companies are now less likely to invest in CMOs.
Stocks
During the organization of many companies, the company issues stock to raise
cash in order to begin operations. Other companies operate as privately owned
organizations for a period of time before deciding to offer ownership shares
to the public. Common stock is a type of stock that entitles its owners to share
in the company’s dividend payments. Dividends may be paid in cash—cash
dividends—or in additional shares of stock—stock dividends. A stockholder may
also earn a capital gain upon the sale of the stock.
Generally, stocks are riskier than bonds. First, the cash flows associated with
stocks vary more than the cash flows of bonds. For most stocks, the amount of
a dividend can be changed over time and the dividend may not be paid at all. In
contrast, bond coupon payments are contractually fixed in amount and timing.
Second, stock prices tend to fluctuate much more than bond prices because stocks

have no maturity date and no maturity value. Third, stockholders have a lower
priority claim than do bondholders on the issuing company’s assets if the company
goes out of business. Stockholders are paid only if funds remain after bondholders
and other company creditors have been paid.
Because of the higher risks and irregular cash flows associated with stocks,
insurance regulations place limits on how much of an insurer’s general account
can be invested in stocks. Despite the risks associated with stocks, insurers in
most countries do hold a portion of their general account assets—and a large por-
tion of their separate account portfolios—in stocks.
Real Estate
In addition to financing other people’s purchases of real estate through investing
in mortgage loans, life insurance companies directly purchase real estate. Because
ownership is involved, real estate is classified as an equity investment. Most insur-
ers’ real estate holdings are investment properties, such as office buildings, apart-
ment complexes, and shopping centers in which available space is rented to gen-
erate income for the insurer. The remainder of an insurer’s real estate holdings
typically consist of land and buildings that the company uses for its home office
and regional offices.
Real estate investments provide insurers with a return in the form of rental
income and the opportunity for appreciation in the value of the investments. The
rate of current income received on real estate generally exceeds the rates of div-
idends paid on common stock. However, the income stream from a real estate
investment is unpredictable because of the possibility of vacancies in the proper-
ties. The unpredictable nature of real estate cash flows makes real estate invest-
ments less suited than bonds to meeting an insurer’s asset/liability management
needs. Also, real estate has less liquidity than do stocks and bonds, and the value
of a piece of real estate can fluctuate considerably over time. As a result, real estate
typically represents only a small portion of life insurers’ general account assets.
Insurers can acquire real estate through several methods. The simplest method
of acquiring real estate is outright purchase. The insurer may make the purchase
directly, or it may form a subsidiary company that specializes in real estate invest-
ments. Another option is for the insurer to join with other companies—insurers or
noninsurers—in purchasing a property. The partnering companies then share the
rental income from the property.
Another way for an insurer to invest in real estate is to participate in a sale-
and-leaseback transaction, under which the owner of a building sells the building
to an investor—in this case an insurance company—but immediately leases back
the building from the investor. The individual or organization that leases the build-
ing from the insurer is known as the lessee and is responsible for the maintenance
and operation of the building. The insurer, as lessor, is freed from maintenance
and other property administration responsibilities. However, the insurer receives
regular income in the form of lease payments from the lessee.
Figure 8.4 compares the characteristics of bonds with mortgages, stocks, and
real estate.

Figure 8.4. A Comparison of Bonds with Other Types of Investments
Bonds Mortgages Stocks Real Estate
Less so than
Predictability Predictable,
bonds and Less so than
of Income Predictable but less so
sometimes very bonds
Stream than bonds
unpredictable
Agency No, with the

Ratings of Yes exception of No No
Investment CMOs
Provides
Some issues Yes No Yes
Collateral
Degree of Less than

Good Good Illiquid
Liquidity bonds
Policy Loans
A policy loan is a loan a life insurance company makes to the owner of a life
insurance policy that has a cash value. When a life insurance policyowner borrows
against a policy’s cash value, the insurer classifies the loan to the policyowner as
an investment in the insurer’s accounting records. Although insurers charge cus-
tomers interest on policy loans, the interest rate is relatively low compared to the
rates of interest insurers earn on their other investments. Policy loans make up a
relatively small portion of the assets that life insurance companies hold. A high-
er-than-expected level of policy loans can limit the insurance company’s overall
portfolio investment returns because, by lending money to policyowners, the
insurer can’t invest it elsewhere for higher returns.
Life insurance policy loans differ in several ways from other insurance com-
pany investments.
An insurer can’t control the timing of a policy loan; the policyowner makes
the decision to take out a policy loan.
Policy loans, unlike other loans, do not require the borrower to make system-
atic payments to repay the loan. As a result, an insurer can’t count on a steady
stream of cash inflows from its outstanding policy loans.
In contrast to other debt instruments, policy loans do not have contractual
maturity dates. A customer does not have to pay back the policy loan or the
loan interest as long as the policy has enough cash value to secure the loan
plus any accrued interest. However, the insurer does deduct any outstanding
policy loan and accrued interest from the benefit payable when the insured
person dies.

Key Terms
institutional investing subaccount
investment management mutual fund
interest spread par value
risk-return trade-off maturity date
principal coupon rate
required rate of return capital gain
risk-free rate of return capital loss
risk premium bond rating
buy-and-hold strategy investment-grade bond
active management strategy call provision
investment activity report convertible bond
investment portfolio performance collateral
review debenture
debt security mortgage
bond amortization
equity security collateralized mortgage obligation
public offering (CMO)
private placement common stock
securities exchange sale-and-leaseback transaction
over-the-counter (OTC) market lessee
general account lessor
fixed-income investment policy loan
separate account
activities:
Think about the organization of your company’s investment management
function. Is it decentralized or centralized? What are some advantages gained
from each form of organization?
Look at the breakdown of assets in your company’s annual report. What per-
centage of assets does your company hold in bonds, stocks, mortgages, and
policy loans? Why do you think the company has more of one investment than
another?
If possible, look at your company’s annual reports for the previous three or four
years. How has the percentage of assets held in various asset classes changed
over this period? If it has changed, can you think of reasons why?
Endnotes
1. Bond issuers typically call bonds when market interest rates drop. Then issuers can issue new bonds
with lower coupon rates. If a bond that an insurer is holding is called, and the insurer wishes to reinvest
the proceeds in another bond, it will probably have to purchase a bond with a coupon rate that is lower
than the original bond’s coupon rate.

Insurance Company Operations Chapter 9: Marketing 9.1
Chapter 9
Marketing
Objectives
 Describe how insurers organize their home office and agency marketing
operations
 Identify and describe the essential elements of a marketing plan
 Identify and describe the four variables that make up the marketing mix
 Distinguish among four promotional tools insurers use to help them
convey their messages to customers
 Define positioning and identify the bases on which insurers position
themselves in the marketplace
 Describe how insurers use market segmentation and target marketing to
identify the customers most likely to buy their products
 Distinguish among three primary types of target marketing strategies
 Describe different sources that insurers use for obtaining marketing
information
 Identify elements in the internal and external marketing environments
 Describe marketing control mechanisms

9.2 Chapter 9: Marketing Insurance Company Operations
Outline
Organization of Marketing Identifying Markets
The Marketing Plan  Segmenting Markets
 Communicating the  Target Marketing

Marketing Plan  Target Marketing Strategies
Marketing Information
The Marketing Mix
 Product  Internal Databases
 Price  Website Traffic Analysis
 Promotion  Competitive and Market Intelligence
 Distribution  Marketing Research

 Marketing Environment
Positioning Marketing Controls
Basic Insurance Marketing Activities
I already know about marketing. It’s how we

advertise and sell our products.
A
dvertising and selling are only two parts of a much larger and broader
marketing process. Marketing is the activity, set of institutions, and pro-
cesses for creating, communicating, delivering, and exchanging offerings
that have value for customers, clients, business partners, and society at large.1
Marketing begins long before a product is offered for sale. The process begins
when a company learns about its customers and their needs in order to develop
products to satisfy those needs. The marketing process continues as the developed
products and services are promoted and distributed to prospective customers.
Finally, the marketing process includes tracking how the products perform in the
marketplace and how customers respond to various marketing efforts.
Through the process of marketing, insurers identify customers’ needs for finan-
cial security and develop insurance and annuity products they believe will best
satisfy those needs. Insurers sell or distribute their products to customers through
a variety of methods, including using producers to personally sell their products.
Insurers also use a variety of promotions, often aiming those promotional efforts
at customers as well as producers.
Organization of Marketing
Insurance companies typically structure their marketing operations so that a vice
president or an executive vice president is in charge of marketing. How companies
structure the remainder of their marketing activities varies greatly depending upon
the size of the company and how products are distributed. Insurers that distribute
their products primarily through producers may separate those operations into an
area commonly known as agency operations. In such cases, agency operations and

marketing would both be headed by an executive at the vice president level who
reports to the president or CEO of the company. In such companies, marketing
activities are divided between corporate and agency operations as follows:
Corporate marketing oversees, among other things, companywide marketing
campaigns directed primarily to external customers.
Agency marketing implements regional or local marketing plans directed

toward producers and sometimes external customers. Agency marketing must
ensure that its plans are consistent with corporate marketing strategies.
Figure 9.1 presents a simplified version of this type of organizational structure.
Figure 9.1. Organizational Structure for Corporate

and Agency Marketing Operations
CEO
Executive VP,
Executive VP,
Agency
Marketing
Operations
Customer Agency
Marketing Marketing
Other insurers combine their marketing operations. In this case, if the insurer
has agency operations, one vice president or manager oversees marketing activi-
ties for both corporate and agency operations. For example, the vice president of
advertising may oversee the development of advertising campaigns for customers
and producers. Figure 9.2 shows a simplified marketing structure for this type of
insurance company.
Regardless of organizational structure, marketing staff work with many other
areas of the company. For example, product development teams include representa-
tives from marketing. In some small companies, the vice president of marketing is
also the head of product development. In addition, home office support for product
distribution activities generally flows through an insurer’s marketing department.
We’ll take a look at some of these home office support activities when we describe
distribution in Chapter 11.

Figure 9.2. Organizational Structure for Combined Marketing Operations
CEO
Executive VP, Marketing
Vice President, Vice President, Vice President,

Advertising Market Research Brand Management
Customer Agency
Marketing Marketing
The Marketing Plan

Insurers conduct marketing planning to develop marketing goals and strategies for
producing, distributing, promoting, and pricing financial products and services. A
marketing plan is a written document that states the marketing goals for a product
or product line. The marketing plan also describes the strategies the company will
use, the ways it will put the plan into action, and how it will set controls to make
sure goals are achieved.
Development of the marketing plan begins with a careful review of the com-
pany’s long- and short-range business objectives. By considering both types of
objectives, the marketing staff ensures that the marketing plan agrees with overall
corporate goals and helps turn these goals into specific, action-oriented strategies.
Typically, a marketing plan covers a period of one to five years, with goals and
actions for the first year described in more detail than the goals and actions for
subsequent years. The plan should have built-in flexibility; that is, it must allow
for revisions to the plan as market and competitive forces change. Usually after six
months to a year, something in the marketing plan will need to be changed so that
a product can continue to be marketed and have a chance to profitably capitalize
on sales.
Because the marketing plan affects many of an insurer’s other operations,
senior company executives and representatives from other divisions and depart-
ments participate in the creation or the review of the marketing plan. Key mem-
bers of the distribution channel usually also participate.
Marketing plans differ from company to company, depending on the size of the
company and its marketing objectives. Figure 9.3 lists the essential elements of a
marketing plan.

Figure 9.3. Elements of the Marketing Plan
Executive summary. A brief summary of the plan’s purpose and recommendations,

including proposed actions, the costs associated with these actions, and the intended
results of the actions
Situation analysis. An evaluation of the environmental factors—internal and
external—that affect the company’s marketing operations
Marketing objectives. A list of the goals that the company hopes to achieve as a
result of the marketing efforts
Marketing strategies. The broad plans for achieving the company’s marketing
objectives
Tactical/action programs. Descriptions of the marketing activities that are to be
performed, the people who are responsible for performing the activities, and the
results (revenue, profit, awareness, attitude changes, etc.) that the activities are
expected to produce
Budgets. Schedules of projected expenses and revenues that (1) show how funds
will be allocated to various elements of the marketing mix and (2) divide those funds
among the activities associated with each element
Evaluation and control methodology. The controls that the company will use to
analyze the progress and success of the marketing plan, including descriptions of
these controls and reporting frequency
Communicating the Marketing Plan

A marketing plan provides direction and clarity about future marketing goals and
strategies to everyone within a company. Once a life insurer prepares its market-
ing plan, senior managers need to communicate the goals, strategies, and action
programs of the plan to all areas of the company. Each area must be aware of the
marketing plan to determine its impact on the area’s own operations. A company
must carefully integrate the many different organizational activities required to
reach marketing plan goals so that confusion is minimized and activities in vari-
ous organizational areas do not overlap or result in inefficiencies.
Example: One of the Dawn Life Insurance Company’s marketing goals is

to increase the number of Life Series I policies in force by 10 percent in
the next calendar year. The underwriting department needs to project the
expected number of applications that will be submitted, and the claim
department needs to estimate the number of potential claims so that they
can have adequately trained staff to handle the workload.

The Marketing Mix

Plans are only useful if they are translated into strategies to accomplish goals.
Insurers’ marketing goals typically involve managing four primary marketing
variables—product, price, promotion, and distribution—which are collectively
known as the marketing mix.
Product
Product refers to the goods, services, or ideas that a seller offers to customers to
satisfy a need. For example, life insurers sell life insurance products to satisfy
customers’ needs for protection against financial loss in the event of death. Life
insurers sell many types of life insurance, including individual and group life
insurance, cash value life insurance, term life insurance, variable life insurance,
and variable universal life insurance. In addition, life insurers sell an assortment
of immediate, deferred, fixed, and variable annuities. A product mix, also called a
product portfolio, is the total assortment of products available from a company.
High-level members of a company’s management team set corporate market-
ing strategies that determine the products in an insurer’s product mix. Typically,
an insurer bases its product mix decisions on its particular expertise, its current
resources, its licenses, its overall marketing objectives and strategies, and its com-
petitors’ product mixes.
Example: The Bountiful Life Insurance Company develops and sells fixed
annuities. Bountiful’s marketing department recognizes that there is
a market for variable annuities. However, Bountiful has decided not to
enter into the variable annuity market because a variable annuity product
would not fit well with its conservative product mix strategy. In addition,
the company cannot pursue that opportunity without a significant initial
investment of resources.
I think setting the right price for a product is

the most important marketing variable. We
can’t give our products away, but nobody will
buy them if they’re too expensive.
Price
Price is the monetary value of whatever a customer gives in exchange for a product.
The price of an insurance product is based on a combination of financial features
that are known as the financial design of the insurance product. From a marketing
perspective, the financial design of a product should consider
Competition. Competitors’ pricing strategies and their prices for similar
products can strongly affect the latitude a company has in pricing its own
products.

Customers’ purchasing power. Purchasing power is the measure of a cus-

tomer’s ability to buy goods and services. A customer’s purchasing power is
strongly affected by the general conditions in the economy such as rates of
inflation, taxes, and unemployment. Insurance products designed for custom-
ers with less purchasing power need to be aggressively priced to be competi-
tive with other insurance companies.
Regulatory requirements. Insurers must charge premiums high enough to
generate the revenue needed to maintain the legally mandated level of assets.
Other marketing mix variables. All of the variables in the marketing mix
are interrelated. For example, the costs associated with how an insurer will
distribute a particular product must be figured into the product’s financial
design. The type of product offered also affects the ways in which the com-
pany can distribute the product. An insurer can distribute a relatively simple
life insurance product through direct mail, the Internet, or a television or
magazine advertisement. However, a more complex life insurance product,
such as variable universal life, generally requires distribution through pro-
ducers who can fully explain its features.
Promotion
Promotion is the collection of activities that companies use to make customers
aware of their offerings and to influence customers to purchase, and distributors
to sell, a product. Promotion may include anything from one-on-one conversations
with potential customers to television advertising. An insurer wants to maximize
the impact of the company’s message while controlling overall promotion costs.
Insurers use four promotion tools to help them convey their messages to custom-
ers: personal selling, sales promotion, advertising, and publicity.
Personal selling is a promotion activity that relies on a company’s producers
presenting information to one or more prospective customers. Personal selling
allows a company to (1) communicate information about complex financial
products, (2) provide immediate responses to customer questions, and (3) tai-
lor the sales presentation to potential customers’ needs. The major disadvan-
tage of personal selling is that it costs more to reach each potential customer
than using other promotion tools such as advertising, sales promotion, or pub-
licity. We describe how insurers use personal selling as a distribution method
in Chapter 11.
Sales promotion includes incentive programs, usually monetary, designed to
encourage producers to sell a product or customers to purchase a product.
In insurance, sales promotions are typically aimed at producers rather than
customers because regulations often prohibit offering gifts or prizes as an
inducement to buy a particular insurer’s product unless such inducements are
offered to everyone.

Advertising is any paid form of nonpersonal communication or promotion

about a company or its products or services that an identified sponsor gener-
ates and transmits through any type of media. Insurers typically use advertis-
ing media such as television, radio, direct mail, the Internet, magazines, news-
papers, billboards, signs, banners, and posters. Much of insurer advertising is
institutional advertising, also known as image advertising, that promotes an
idea, a philosophy, a company, a company’s brand message, or an industry.
In contrast, product advertising is any advertising used to promote a specific
product or service. Insurance products are complex and can be difficult to
explain to customers in an advertisement, so product advertising is typically
aimed at producers. Advertising reaches a large number of people, but gener-
ally cannot be customized for each recipient.
Publicit y is any non-paid-for communication of information that is intended
to bring a person, place, thing, or cause to the notice or attention of the public.
Insurers can provide information to the media—often in the form of news
releases—about company activities. In addition, insurers receive positive pub-
licity when they sponsor charity events or participate in community activities.
Distribution
Distribution is the collection of activities and resources involved in making prod-
ucts available for customers to buy. Insurers currently use three primary types of
systems to distribute insurance products.
Personal selling distribution systems. Producers who either receive com-
missions or salaries from insurance companies sell products through oral and
written presentations.
Third-party-institution distribution systems. Banks or other financial
institutions sell insurance products to their own customers but do not issue the
insurance products.
Direct response distribution systems. Insurers initiate or conduct the sales
process by communicating directly with customers through direct mail, tele-
marketing, or the Internet.
Positioning
Insurers develop marketing mix strategies in order to achieve a desired position
in the marketplace. Positioning is the process by which a company establishes
and maintains in customers’ minds a distinct place, or position, for itself and its
products. Through positioning, an insurer attempts to distinguish itself from other
insurers by building a company image or product image that contrasts with the
images that competitors offer. Positioning is particularly important in the insur-
ance industry, where a large number of competitors offer similar products. In other
words, to the average insurance customer, all insurance products are the same. An
insurer may position itself on the basis of
Company or product attributes
Types of products offered

Price and quality of products
Markets served
Distribution characteristics
For example, an insurer might attempt to position itself as “the most financially
stable company” or “the highest-rated company in customer service.” Other insur-
ers may position themselves to appeal to customers who want to purchase insur-
ance products using the Internet or to customers who want to develop a long-term
relationship with a producer. The insurer develops its marketing campaign and
promotional materials to support its intended position.
Marketing goals should always align with the overall strategic (long-term)
goals of the company. For example, suppose a company’s strategic goal is to be
an industry leader in sales of term life insurance. What would this company’s
marketing mix look like? It should contain specific product, price, promotion, and
distribution strategies that will help the company sell term life insurance policies
to customers who have a need for such insurance.
My company positions itself as financially

stable. In these economic times, it’s important
for customers to trust that we will be here for
them when they need us.
Basic Insurance Marketing Activities

Insurance marketing involves all of the activities required to conceive product
ideas, develop those products, and distribute those products to customers. Figure
9.4 describes the basic marketing activities for life insurance products.
Identifying Markets
No life insurance company can profitably serve the needs of every possible cus-
tomer. Instead, insurers direct their marketing efforts toward people whose needs
the company can feasibly meet and whose business will contribute to the compa-
ny’s earnings, growth, and overall financial strength. Before beginning to develop
and market its products, a life insurance company typically (1) identifies and evalu-
ates the total market for the products the company is positioned to offer, (2) selects
the segments of the total market on which the company will focus its marketing
efforts, and (3) develops and implements a marketing mix strategy to satisfy the
needs of the chosen market segments. To accomplish these tasks, marketers target
specific segments of the market.
Segmenting Markets
Market segmentation is the process of dividing large, diverse markets into smaller
submarkets that are more alike and need similar products or marketing mixes.
Each submarket, or group of customers with similar needs, is known as a market

Figure 9.4. Basic Marketing Activities for Life Insurance Products
Identifying markets. Marketers examine and select potential markets for the
company's products. Market identification typically involves segmenting the total
market into smaller submarkets and determining which market segments to target.
Collecting and evaluating marketing information. Marketing research analysts
gather and evaluate information about the company's internal and external
environments to develop sound marketing strategies.
Planning and controlling. Insurance marketers must have a plan for achieving their
marketing goals and ways to assess how well their plan is working. Insurers develop
marketing plans and then compare marketing results to the marketing plan. Insurers
then modify their marketing activities as needed to meet the plan's objectives.
Product development. Marketers participate in many of the activities needed to
manufacture or revise products to meet the needs of a particular market.
Product pricing. Marketers contribute to the financial design of an insurance
product by providing information about the prices of similar insurance products
available in the market.
Promotion. Marketers manage the various activities—personal selling, advertising,
sales promotion, and publicity—that the insurer uses to influence customers to
purchase its products.
Distribution. Marketers help coordinate the activities and resources needed to
make products available to customers. Producer and customer communications are
critical to the success of any distribution plan. Thus, the head of distribution relies
on strong communication support from marketing.
segment. Segmenting a market using only one characteristic is known as single-

variable segmentation. Insurers use single-variable segmentation when they divide
the entire market for life insurance according to whether the product is intended
for personal or business use. The consumer market consists of individuals who
buy products or services for personal or family use. The organizational market,
also called the business market, consists of people, groups, or formal organiza-
tions that purchase products and services for business purposes. Organizations
often purchase insurance products for the benefit of their employees or members.
Although dividing the entire market into a consumer segment and an orga-
nizational segment is a first step in market segmentation, life insurance compa-
nies further divide these markets into smaller, more narrowly defined submarkets.
Multivariable segmentation uses a combination of characteristics to segment a
market. Multivariable segmentation can be based on a wide variety of customer
characteristics, such as
Geographic location
Demographics, such as age, sex, marital status, household composition,
income, educational level, occupation, and nationality of customers
Purchase behaviors, such as benefits sought and the preferred method of

purchase
The more narrowly defined each market segment is, the more precisely the
insurer can identify the needs of that segment and focus its marketing efforts on
those needs.
Example: The Able Life Insurance Company cannot develop an effective

marketing mix for a segment that is defined by sex and age alone. A
segment of 35- to 45-year-old women has many diverse needs. Instead,
Able develops a more effective and meaningful marketing mix by
segmenting the market according to age, sex, marital status, family status,
and income. Able designs a marketing mix for 35- to 45-year-old, divorced
single mothers, who earn between $50,000 and $75,000 per year.
There must be so many different market

segments. How does an insurer determine
which are the right ones to pursue?
Target Marketing
Once a company has subdivided the total market into clearly defined market
segments, the company can conduct target marketing. Target marketing is the
process of evaluating the attractiveness of each market segment to the company
and selecting one or more of the segments—the target markets—on which to
focus the company’s marketing efforts. Because each target market requires its
own marketing mix, a life insurance company’s choice of target markets helps
determine which products the company develops, the financial design of those
products, how the company distributes those products, and the advertising and
promotion techniques the company uses.
Selecting Target Markets

Which market segments should a life insurance company pursue? Young singles
or retired couples with grandchildren? Low-, middle-, or high-income households?
Businesses and groups in urban areas, or individuals and families in rural areas?
Figure 9.5 shows several basic customer market segments for life insurance com-
panies. These are only a few of the many market segments that a life insurance
company may target. Some factors that an insurer typically considers when select-
ing its target markets are each segment’s size, growth potential, and distribution
and service costs; the current and expected competition within each segment; and
a segment’s fit with the company’s overall corporate objectives and position in the
industry.
Target Marketing Strategies

How many target markets an insurer chooses to pursue depends on the strategy it
adopts to define its market. Three primary types of target marketing strategies are
undifferentiated marketing, concentrated marketing, and differentiated marketing.

Figure 9.5. Possible Target Markets for Life Insurers
Segments Targeted by Life Cycle Stage:

Families: Single parent (male), single parent (female), dual income with
dependents, dual income without dependents
Singles with no dependents: College/university students, young
professionals, middle-aged, retired
Segments Targeted by Income:

High-income households: Over $80,000 annually
Middle-income households: Between $25,000 and $80,000 annually
Low-income households: Under $25,000 annually
Segments Targeted by Buying Behavior:

Homeowners
Borrowers of money
Direct-response buyers
Multiple/repeat purchasers of insurance
Segments Targeted by Type of Group:

Individual employer groups: The employees of one company
Multiple-employer groups: The employees of two or more companies within
the same industry or two or more labor unions
Debtor-creditor groups: Lending institutions—such as banks, credit card
companies, and retail merchants—and their debtors
Affinity groups: Individuals with common needs, interests, and characteristics
such as professional associations and social, religious, and ethnic groups
Undifferentiated marketing, also known as mass marketing, is a strategy by

which a company defines the total market as its target market and designs a
single marketing mix for the entire market. For example, an insurer might
market a small-face-amount term life insurance product to the entire potential
life insurance market without distinguishing among segments of that mar-
ket. Because undifferentiated marketing requires only one marketing mix, it
may result in cost savings for the company and lower prices charged for the
product.
Concentrated marketing is a strategy by which a company focuses all of its
marketing resources on satisfying the needs of one segment of the total mar-
ket for a particular type of product. For example, some insurers in the United
States market exclusively to members of the U.S. military and their families.
The advantage of concentrated marketing is that a company can gain extensive
expertise in a particular market segment. The risk is that the company’s profit-
ability is tied to a single market segment. If conditions in that segment change,
sales could suffer and the company may experience financial difficulties.

Differentiated marketing is a strategy by which a company attempts to satisfy

the needs of different segments of the total market by offering a number of
products and marketing mixes designed to appeal to the different segments.
For example, insurers may offer term life insurance, cash value life insurance,
and annuity products to different market segments. One advantage of differen-
tiated marketing is increased diversification of business risks. In other words,
because the company markets multiple products to multiple segments, a com-
pany’s profitability does not depend solely on the sales of a single product.
The primary disadvantage of differentiated marketing is the relatively high
cost of developing a separate marketing mix for each market segment. Also, a
company with a differentiated marketing strategy cannot promote itself as the
expert leader in any one segment.
My company offers a variety of life insurance

products to a variety of different types of
markets, so we must have a differentiated
marketing strategy, right?
Marketing Information
At the heart of insurance company marketing activities is information—information
about market segments, the company itself, its competitors, the regulatory environ-
ment, and many other factors. Marketing information helps an insurer identify and
define marketing opportunities and threats; determine which customers to pursue,
what products these customers need and are most likely to purchase, and the most
effective ways to promote products to these customers; monitor marketing perfor-
mance; and improve the marketing process. Specifically, marketing information
provides answers to the following types of questions:
What are the general economic and business trends in the industry?
What are the demographic trends in our target markets?
What differentiates our products and services from those of our competitors?
What changes should we make in our current distribution channels?
What impact does our advertising have on sales?
What changes might we make to the financial design of our products to give
ourselves a competitive advantage?
What benefits are most important to customers?
Who or what influences the purchasing decisions of customers?

To obtain current marketing information, insurers maintain a marketing
information system—a set of procedures and methods for the regular, planned
collection, analysis, and presentation of information for use in making market-
ing decisions.2 Insurers collect marketing information from internal company

sources such as databases and website traffic analysis, existing external sources of
information about competitors and markets, and industry research studies. Some-
times insurers need information that is not readily available through the marketing
information system. In such cases, insurers conduct research to identify marketing
opportunities or solve a specific marketing challenge.
Internal Databases
Insurers store considerable amounts of product data, sales data, and other types of
data in extensive internal databases. These internal databases can provide detailed
information about a wide variety of topics, including products, promotions, distri-
bution, customers, customer interactions, and markets.
Example: A company’s accounting records provide the marketing depart-

ment with information about sales, expenses, and profit by product.
As long as they act in compliance with privacy regulations, marketers can

access internal database information through data mining, and the information
obtained usually costs less than information obtained from other sources. Data-
bases that include sophisticated business analytics software can take information
that was collected for some purpose other than marketing—such as customer ser-
vice phone logs—and automatically provide marketing managers with informa-
tion that can be used for a variety of purposes, such as to gauge the effectiveness
of various marketing initiatives or the perceived value that customers place on
product features. The information a marketing manager can gain from business
analytics helps identify important trends, such as which products or producers are
underperforming and also directs marketing resources to where the resources can
have the biggest impact.
Website Traffic Analysis

An insurer’s website can provide valuable marketing information about the cus-
tomers who are visiting the company’s website and the products that are being
viewed or purchased. One measurement of website traffic—unique visitors—
reflects the number of individuals who have visited a website at least once during
a fixed time frame.3 Insurers may also track page views—the number of system
requests for loading a single HTML page.4 Marketers also are interested in the
number of seconds or minutes a website visitor spends viewing particular website
pages, as this is an indication of which pages have valued content.
Competitive and Market Intelligence

Insurers need information, often called competitive intelligence, about their com-
petitors. Specifically, insurers want to know about their competitors’ marketing
mixes, target markets, service quality, market shares, marketing strategies, and
product mixes. In addition, insurers need information about ongoing develop-
ments in the marketing environment, often called market intelligence. Specifi-
cally, insurers want to identify issues that might impact a market’s potential.

Insurers obtain most of their competitive and market intelligence from publicly
available sources. Figure 9.6 lists some of the most common sources of these
types of marketing intelligence.
Figure 9.6. Sources of Competitive and Market Intelligence
Public databases, such as the U.S. Bureau of Labor Statistics
Government-reported data, such as census data and economic indicators
Business, financial services, and insurance publications
Industry and professional association meetings
Insurance and financial services trade associations
Competitors’ websites
Competitors’ advertisements
Competitors’ publications that are available to the general public, such as their
annual reports or annual employee benefits’ surveys
Competitors’ financial reports to regulatory agencies
Suppliers of goods and services, such as vendors, consultants, advertising

agencies, public relations firms, and management service companies
Personal and professional contacts with managers and producers from other
insurance companies
Input about a competitor’s actions from a company’s own sales force, employees,
and customers
It seems like there’s a lot of information

available, but what if it’s not exactly the
information marketing needs?
Marketing Research
When required information is unavailable from existing sources, insurers may
engage in marketing research—a process of collecting, analyzing, interpreting,
and reporting information in order to identify marketing opportunities and solve
marketing problems. Marketing research is often done on an as-needed or onetime
basis and can provide information that is specifically tailored to an insurer’s needs.
The major disadvantage of marketing research is the high cost. Marketing research
projects often gather information about customers’ needs, motivations, preferences
for products and distribution channels, and satisfaction with current products
and services. Some insurance companies outsource part or all of their market-
ing research activities to research providers because they find it more economical

than maintaining a staff of technical research experts. In addition, outsourcing a

marketing research project to a local research provider is often necessary when an
insurer requires marketing information about a foreign country and does not know
how to proceed because of language and cultural differences.
Marketing Environment
Marketing information is invaluable but cannot be the sole basis for marketing
decisions. For example, marketing research may uncover an underserved target
market. However, if the economy is in an economic downturn, the marketing deci-
sion may be to wait on pursuing this new target market until a later time.
Insurers analyze marketing information within the context of the company’s
current marketing environment. The marketing environment consists of all of
the elements in the company’s internal and external environments that directly or
indirectly affect the company’s ability to carry out its marketing activities. A com-
pany’s internal environment consists of those elements within the company that
affect the company’s business functions and over which the company has control,
including financial, physical, technological, and human resources; internal organi-
zational structure; and the marketing mix. The external environment consists of
elements that are outside the company and over which the company has little or no
control, including economic, competitive, regulatory, taxation, and social factors.
Marketing Controls
After a marketing plan has been in effect for a specified period of time, market-
ing managers attempt to determine if they are achieving the goals set out in the
marketing plan. For example, did sales of variable annuities increase as a result
of an advertisement targeted to high-wage earners? Companies typically state
performance standards in their marketing plan goals. Companies gauge whether
they achieve their goals by comparing actual performance with the performance
standard. Insurers use control tools such as sales analysis, expense analysis, and
profitability analysis to measure marketing performance. In a sales analysis, a
company examines its sales numbers to evaluate current performance. Current
actual sales are often compared to forecasted sales, sales in previous years, com-
petitors’ sales, or other performance standards. Expense analysis ties marketing
costs to particular marketing activities to help marketing managers decide if a
cost is worth the value of the activity. Profitability analysis compares the sales
an activity generates with the expenses incurred to make those sales to determine
profitability.
If performance does not match the standard, then the insurer investigates to
determine the reasons for the discrepancy. Sometimes the performance standard
was unrealistic because of inaccurate projections, stronger than expected competi-
tion, or unexpected changes in the external environment. If a company can iden-
tify a problem, the company typically attempts to correct the problem by taking
one or more of the following actions:
Changing tactical/action programs or implementation strategies

Developing new products, marketing strategies, or marketing goals while

either continuing current marketing activities or ceasing them altogether
Changing how it collects or analyzes performance data if the current way

doesn’t reflect true performance
Reviewing performance standards to make sure that the standards are valid
and realistic
Insurers may conduct a marketing audit to examine marketing goals, strate-
gies, tactical/action programs, organizational structure, and personnel on a very
broad basis. Alternatively, a marketing audit may look at one aspect of marketing
operations. Regardless of type, the audit should include a review of the interaction
of other functional units with the marketing department. Independent vendors are
often hired to perform marketing audits.
Key Terms
marketing consumer market
marketing plan organizational market
marketing mix multivariable segmentation
product target marketing
product mix target market
price undifferentiated marketing
financial design concentrated marketing
purchasing power differentiated marketing
promotion marketing information system
personal selling unique visitors
sales promotion page views
advertising marketing research
institutional advertising marketing environment
product advertising internal environment
publicity external environment
distribution sales analysis
positioning expense analysis
market segmentation profitability analysis
market segment marketing audit
single-variable segmentation

activities:
Look at your company’s most recent advertisements. Are these examples of
institutional or product advertising?
Insurers typically use personal selling, third-party, or direct response

distribution methods. What method or methods of distribution does your
company use?
Obtain a recent marketing plan for your company. Identify the goals and strat-
egies, as well as methods of control outlined in the marketing plan.
Talk to people in your product development and marketing departments. Ask

what they are doing to prepare for upcoming new product releases.
Endnotes
1. American Marketing Association, “The American Marketing Association Releases New Defini-
tion for Marketing,” press release, 14 January 2008, http://www.marketingpower.com/AboutAMA/
Documents/American%20Marketing%20Association%20Releases%20New%20Definition%20
for%20Marketing.PDF (27 May 2011).
2. “Dictionary,” s.v. “marketing information system,” Marketing Power, http://www.marketingpower.
com/_layouts/Dictionary.aspx?dLetter=M (27 May 2011).
3. “Dictionary,” s.v. “unique visitors,” Marketing Power, http://www.marketingpower.com/_layouts/Dic-
tionary.aspx?dLetter=U (27 May 2011).
4. “Dictionary,” s.v. “page view,” Marketing Power, “http://www.marketingpower.com/_layouts/Diction-
ary.aspx?dLetter=P (27 May 2011).

Insurance Company Operations Chapter 10: Product Development 10.1
Chapter 10
Product Development
Objectives
 Describe three types of new insurance products
 Describe the steps in the product development process
 Explain how insurers generate and screen ideas for new products and use
concept testing to evaluate new products
 Describe the five elements of comprehensive business analysis and
identify the responsibilities of an insurer’s functional areas in this
process
 Explain the technical design stage of product development
 Describe the actions insurers take during the product implementation
stage of product development
 Describe Day 1 and Day 2 functionalities that must be put into place
during product implementation
 Describe how insurers monitor, evaluate, and use feedback to improve
their product offerings as well as their product development process

10.2 Chapter 10: Product Development Insurance Company Operations
Outline
The Product Development Process
 Product Planning
 Comprehensive Business Analysis
 Technical Design
 Product Implementation
 Performance Monitoring and
Review
I hear from some of our best producers

that we need more new products to stay
competitive. How do we come up with new
products?
P
roduct development—the process of creating or modifying a product—is
one of an insurer’s essential marketing and profit-generating activities. Why
is product development so important? The majority of an insurer’s revenues
typically come from product sales. As a product ages and competitors develop new
products, the older product becomes less attractive to producers and customers,
and eventually becomes obsolete. In addition, regulatory changes sometimes make
products obsolete and new ones possible. Thus, insurers are continually creating
new or modified products in order to stay competitive, satisfy customer needs, and
meet regulatory requirements. Yet product development is an expensive process that
requires a lot of human, technological, and financial resources. Too, there is always
the risk that the new product won’t perform as expected, causing the insurer to lose
revenues and market share, and experience lower customer satisfaction. Effective and
efficient product development helps ensure that
New products are consistent with an insurer’s overall strategic marketing
objectives for the company’s product mix
New products serve designated target markets appropriately
A company does not waste its resources on unsuccessful new products
New products generate enough revenue to pay associated benefits and expenses
as well as return a modest profit to the company’s owners
Because product development is so important to insurance companies, most
companies have a dedicated product development team. At some companies, the
team members work exclusively on product development. An actuary often leads a
company’s product development team, and the team includes members from virtu-
ally every operational area, including agency operations.

The Product Development Process

Many factors affect the product development process for a particular insurer, includ-
ing the company’s size, mission, objectives, culture, markets, current products,
customers, competition, distribution systems, location, and employees. Product
development may encompass anything from a small change in an existing product
to the development of a completely new product. Figure 10.1 describes three basic
types of new insurance products.
Figure 10.1. Types of New Products
Rate change—Changing a fee or charge on an existing

product
Revision—Any change that lies between a rate change and

a new product, such as adding a rider to an existing policy
New product—A significant new product feature or

function
Many insurance companies follow the five basic product development steps
shown in Figure 10.2. At the end of the first three steps, senior management deter-
mines whether to (1) continue development of the new product idea, (2) request
additional information or a revision to the product idea, or (3) drop the new
product idea.
Figure 10.2. The Product Development Process
Product Planning
Comprehensive
Business Analysis
Technical Design Feedback
Product
Implementation
Performance
Monitoring and
Review

Product Planning
Product planning consists of three basic activities: idea generation, screening, and
concept development and testing.
Idea generation involves searching for new product ideas that are consis-
tent with the company’s overall product development strategy and the needs
of its target markets. Ideas for new products come from a wide variety of
sources inside and outside the insurance company. Many of these ideas come
from marketing, either from the sales force or from marketing intelligence
and research. Company managers and employees, customers, consultants, and
consumer groups also contribute ideas. Companies that are the most success-
ful at generating new product ideas have an ongoing, formal identification pro-
cess and procedures that encourage employees and others to submit product
ideas. Generally, companies stress creativity more than the technical details of
a new product idea during idea generation.
Screening is a weeding-out process designed to evaluate each new product
idea quickly and inexpensively and to select those ideas that warrant further
investigation. Idea screening involves only a limited evaluation of each prod-
uct idea. For example, the project team looks at such things as whether the new
product (1) is compatible with the company’s corporate goals and existing sys-
tems and distribution channels, (2) satisfies a real need in the target markets in
which the company operates, or (3) replaces sales of existing products instead
of generating new sales. Companies reject more new product ideas during the
screening phase than during any other phase of the development process.
Concept testing is a marketing research technique designed to measure the
acceptability of new product ideas, new promotion campaigns, or other new
marketing elements before entering production. Concept testing for new prod-
uct ideas involves describing the ideas to producers or potential purchasers
and then obtaining their feedback to determine which product ideas have the
greatest appeal. Focus groups—small group interviews, led by a moderator,
in which participants discuss their opinions or feelings about a given topic—
can be used for concept testing. Concept testing might also involve an online
survey where a model of the product is described to survey participants who
then give an opinion as to whether the idea seems interesting to them and
whether they would want to learn more or consider buying it. By gathering the
opinions of the people who will be selling and buying the potential product,
concept testing can provide valuable information about the product idea before
the company incurs the expenses of actually designing and implementing the
ideas. Typically, the more innovative a new product idea is, the greater the
emphasis a company will place on concept testing.
Comprehensive Business Analysis

For each product idea that passes the initial screening, the insurer conducts a
comprehensive business analysis, during which the company conducts research
to determine how feasible and marketable a proposed product is. Unlike the quick
evaluation done during screening, a comprehensive business analysis calls for

extensive research into all the factors likely to affect the design, production, pricing,
marketing, and sales potential of the new product. Companies typically conduct a
more extensive analysis for completely new products than for modified products. A
comprehensive business analysis typically includes the following five elements:
A market analysis, which is an evaluation of all of the environmental factors
that might affect product sales, including target market characteristics, eco-
nomic conditions, legal or regulatory requirements, and tax considerations.
For example, factors such as customer needs and similar products that com-
petitors offer may affect a product’s performance.
Product design objectives, which specify an insurance product’s basic charac-
teristics, features, benefits, issue limits, age limits, commission and premium
structure, and operational and administrative requirements. Product design
objectives serve as guidelines for the technical design step of the product
development process.
A feasibility study, which is research designed to determine, from an opera-
tional and technical viewpoint, (1) how viable it would be for the company
to produce and offer the product and (2) how the new product would impact
the company’s existing products. A feasibility study often involves a review
of other companies’ sales of similar products or discussions with key product
distributors.
A marketing plan, which describes the marketing goals and strategies for a
product or product line and includes specific, detailed activities for how a pro-
posed product will be priced, promoted, and distributed. A marketing plan
may also include an exit strategy to determine what to do if a new product is
unsuccessful.
Marketing projections, which are preliminary sales and financial forecasts
that include estimates of potential unit sales, revenues, costs, and profits for a
proposed product. These projections, which specify an expected or most likely
value—rather than the best-case or worst-case value—help determine how
financially viable a new product will be. Early estimates are modified as the
product development process continues and additional information becomes
available.
If the comprehensive business analysis indicates a product has good potential,
the product development team incorporates these results into a formal product
proposal and presents it to top management for approval. If approved, the com-
prehensive business analysis serves as the overall guide for product design and
development, testing, and introduction. Figure 10.3 describes the responsibilities
of staff in various functional areas during a comprehensive business analysis.
Technical Design
After management approves a new product proposal, the development team for-
mulates the detailed product design that expands upon the research and other pre-
liminary work done during the comprehensive business analysis. Actuaries create
the financial design of the new product using computer models. These models

Figure 10.3. Comprehensive Business Analysis Responsibilities
Marketing
Conducts a market analysis to determine whether customers want the new product
Prepares a marketing plan and marketing projections
Gathers and analyzes information about potential target markets and competitors’ products
Evaluates how the new product might affect in-force business and sales of the insurer’s current
products
Determines the most appropriate distribution channels and advertising and sales strategies
Works with the compliance area to determine the best test markets in terms of legal requirements
and prohibitions
Agency Operations
Determines if changes are necessary for the current sales force to sell the new product
effectively
Helps determine the proper training materials for producers
Must be very responsive to the communications that the marketing department sends out for
both test phase and ultimate launch
Actuarial
Develops product design objectives with advice from other functional areas, including market-
ing, underwriting, and compliance
Performs preliminary calculations to determine if the new product can be priced to be competi-
tive and profitable within a reasonable time frame
Underwriting
With advice from actuarial, establishes initial underwriting guidelines
Investments
With advice from actuarial, determines what types of investments are needed to support the
expected payment of benefits under the new product and also to add to the company’s profits
Claim Administration
Examines claim assumptions made by actuarial staff in product design
Determines whether current claim systems and staff can adequately administer new product
Customer Service
Considers whether current staff and procedures are adequate to support new product
Estimates any additional staffing costs for new product
Information Technology
Assesses whether the current information systems can support the new product
Estimates any costs necessary to upgrade or outsource systems
Accounting
Reviews financial reporting requirements that the insurer must meet in developing and selling
the new product
Evaluates how the new business will be reflected in the company’s financial statements
Legal/Compliance
Assists in developing the product design objectives
Reviews the product to ensure that it complies with all legal and regulatory requirements in the
jurisdictions in which it will be sold
Determines policy filing requirements and whether the product will be prohibited in any
jurisdictions
Advises marketing during the development of product advertisements

approximate the operation of real-world financial processes in a variety of cir-

cumstances, including extremely unfavorable conditions. With the input of sales
projections and company expense factors, among other variables, these financial
computer models show
Cash inflows, such as premiums, deposits, charges, fees, and investment
income
Cash outflows, such as benefits, surrenders, and expenses
Expected profitability in a variety of circumstances

Using the information from the computer models, actuaries determine the new
product’s premium rates, producer commission rates, reinsurance strategies, and
other financial factors. The goals for the financial design are to (1) ensure that the
company can cover future benefits and expenses, even in crisis conditions, (2)
create a package of benefits that will appeal both to producers and customers, and
(3) provide an adequate return to the company’s owners.
In addition to establishing the product’s financial design, the product develop-
ment team (1) creates application forms and sales contracts; (2) sets the product’s
administrative guidelines and underwriting standards, and (3) develops a schedule
and budget for the product’s implementation.
Representatives from functional areas that might be affected by the proposed
product’s design—such as marketing, underwriting, legal, financial, informa-
tion technology, customer service, and claims—review the proposed new prod-
uct’s design and suggest changes based on their area’s needs. The product design
may also be reviewed by a field advisory council, which is a group of producers
designated to represent and provide feedback from the sales force. The design is
reviewed and revised until all functional areas affected by the product reach a
consensus on the product’s design.
Finally, the product development team presents the product design and accom-
panying schedules and budgets to top management for approval. Management may
approve the design, reject it entirely, or call for further refinements and revisions.
Have I got this right? A new product’s financial

design is created during the technical design
stage.
Yes, but don’t forget—the application forms

and sales contracts are also created during
technical design.

Product Implementation
After the company finalizes the new product’s design and other details, the com-
pany must take various steps before it can begin selling the product. Product
implementation involves establishing the administrative structures and processes
needed to introduce a product into the marketplace. Implementation consists of
three concurrent activities:
Obtaining necessary regulatory approvals
Designing promotion and training materials
Developing and putting into place all information systems and procedures
necessary to market and administer the product
Regulatory Approval
Staff members in an insurer’s legal or compliance area obtain legal approval for
a new or modified product according to the requirements of the jurisdiction in
which the product will be sold. Policy filing is the act of submitting a policy con-
tract form and any other legally required forms and documents to the appropriate
regulatory authority for approval. Among other things, regulators check that man-
datory provisions are included in a policy and that policy provisions prohibited by
law are excluded. The requirements may vary from jurisdiction to jurisdiction.
Figure 10.4 describes policy filing requirements in several countries.
Promotion and Training Materials

Companies must educate and train producers so that they understand the new
product and can accurately present it to customers. The marketing department, in
conjunction with legal and compliance, designs a variety of promotion and training
materials specifically for producers as well as materials for the general customer.
Training materials provide producers and support personnel with information
about (1) the features and benefits of the new product, (2) the intended market for
the product, (3) sales ideas and approaches, (4) compensation for selling the prod-
uct, (5) how to fill out and submit applications or transaction requests, and (6) any
regulations regarding the product. Insurers typically develop issue instructions,
which are guidelines showing the policy forms approved for use in each jurisdic-
tion and the requirements that various functional areas need to follow when selling
or administering the new product.
A company’s legal or compliance staff typically approves all promotion and
training materials to make sure that those materials conform to applicable laws.
Some jurisdictions require that such materials be filed with, and in some instances,
approved by, appropriate regulatory bodies. For example, in the United States,
state laws regulate the use of advertisements and sales materials and are intended
to ensure that customers understand the insurance products they purchase. In
some states, life insurers must give a Buyer’s Guide to prospective buyers of
life insurance other than credit life insurance or variable life insurance policies.
The Buyer’s Guide is a publication that explains to customers how to determine
how much life insurance coverage they need, describes the various types of life

Figure 10.4. Policy Filing Requirements
Canada—Provincial policy filing requirements apply

only when an insurer (1) first obtains a license to sell
insurance products in a province, or (2) offers a variable
product in a province.
China—Insurance companies operating in China
must file the premium rates and provisions of some
types of insurance policies with the China Insurance
Regulatory Commission (CIRC). Proposed regulations
would make the clauses in life insurance policies easier
to understand by the public.1
India—In India, insurance companies submit File and
Use documents to the Insurance Regulatory and Development Authority (IRDA). The
File and Use documents consist of the proposed product’s application form along
with all attached tables and sales literature for approval. If the product is approved,
IRDA will check the final policy document to ensure that it reflects the information in
the File and Use documents.2
United States—Insurers must obtain approval for any life insurance or annuity
product from the state insurance department of each state in which the insurer intends
to offer the product. In addition, U.S. insurers who sell variable insurance products
must register new variable products with the Securities and Exchange Commission
(SEC). Although the insurer must register the product with the SEC, the SEC does not
approve the product or judge its merit.
State insurance regulators review new product contract forms to ensure that the
contract includes information necessary to identify the insurer offering the product and
includes all policy provisions required in that state. Regulators also ensure that the policy
satisfies current readability requirements so that people who are not legal experts can
understand the contract. Readability requirements typically limit word length, sentence
length, and the amount of technical and legal language in the contract.
insurance policies, and educates customers about how to compare the costs of
similar types of policies. A policy summary is another document that insurers
in the United States must provide to all potential insurance purchasers. A policy
summary provides the customer with information specific to the policy being pur-
chased, including premium and benefit data for the first five policy years. For
annuity products, the policy summary is called a disclosure document. For vari-
able products, insurers in the United States must provide prospective purchasers
with a prospectus—a written document describing specific aspects of the security
being offered for sale such as the insurer’s investment philosophy and objectives,
fund expenses and fees, and past product performance. Generally, promotion and
sales materials must accurately represent the terms of the policy and not be untrue,
deceptive, or misleading.

Administrative and Systems Activities

Sometimes when a company implements a new product, it needs to add new
administrative procedures or revise current information systems.
Example: The Mockingbird Insurance Company has developed a new

product with five policy riders but all of its other insurance products only
have four policy riders. Mockingbird must modify its information systems
to accept the additional rider.
Because systems activities often require the greatest amount of time in the prod-
uct development process, they should be started as early as possible. To speed up
the implementation process, a growing number of companies are dividing imple-
mentation activities into two categories: Day 1 functionality, which represents
the administrative and systems processes that must be in place and functioning
when the first contract is sold, and Day 2 functionality, which represents the pro-
cesses that are necessary at some future date to service and administer the prod-
uct, but which can be implemented after the product has been launched. Allowing
a product to be introduced to the market before all implementation processes have
been completed can shorten the time it takes insurers to get a product to market.
However, if the company experiences unexpected delays in implementing the later
processes, the company may suffer additional expenses, customer dissatisfaction,
and loss of business.
Implementing some processes after the

product has already been introduced to the
market sounds risky to me.
Sometimes insurers form a product implementation team, also called a launch

team, whose actions are overseen by the product development team to make sure
that all activities necessary for the product launch are handled appropriately. In
other companies, the product development team manages product implementation.
In either case, the team in charge of implementing a new product develops a written
implementation plan that defines tasks, responsibilities, and schedules for complet-
ing each activity.
Performance Monitoring and Review

The product development process doesn’t end with the product’s launch. An impor-
tant step in the control cycle for any organizational process is performance moni-
toring and review. Following a product’s launch, the insurer reviews the product’s
early performance to identify any potential weaknesses and determine any neces-
sary changes. Figure 10.5 shows some of the factors insurance companies consider
in measuring the success of new products.
In the first few months after a product is introduced, the product development
team tracks many of the factors shown in Figure 10.5 to determine how these
results compare with the company’s projections. Usually, sales of a new product

Figure 10.5. Factors Considered in New Insurance Product

Performance Review
Total face amount of insurance sold
Number of policies sold
Actual profits as compared to expected profits
Amount of new annualized premium income generated
Impact on other products
Increase in number of new policyowners
Impact on company’s market share
Increase in value of the company
Demographic characteristics of customers who

purchased the product
Policy lapse rates, loan rates, and claim experience
Sales success of various distribution methods
Success of various advertising campaigns and sales

promotions
grow slowly at first. Producers need time to understand the product and feel com-
fortable selling it. However, if sales are significantly below expectations, inves-
tigation is necessary to determine possible reasons for the poor sales. Perhaps a
competitor has introduced a similar product with more competitive premiums or
benefits. Perhaps promotion and training activities were inadequate, so producers
are unaware of the product or feel insufficiently trained in how to sell the product.
Perhaps the compensation structure for producers is inadequate.
If the product fails to meet projections because of weaknesses in the product
itself or in the way it is marketed, the insurer often takes steps to modify the
design of the product. If the product is not profitable enough, the insurer may
need to tighten its underwriting requirements or reduce the costs of administer-
ing and marketing the product. The company may need to revise the commission
or incentive structure of the product to encourage producers to sell the product or
reduce its price to make it more competitive. If the problem seems to be with the
distribution, the insurer may need to advertise the product more or consider other
distribution methods.
A company that can’t effectively or efficiently modify a poorly performing
product may withdraw the product from the market. In general, withdrawal means
no longer soliciting new product sales. However, existing insurance contracts often
remain in force and must continue to be serviced, in some cases for decades after
the product is withdrawn from the market.

Review of the Product Development Process

A product development project is not complete until the process has been critiqued.
The purpose of the review is to identify strengths and weaknesses of the product
development process. Knowing what works and what doesn’t can help
Improve the success rates of future product development projects
Reduce product development costs
Improve new product performance
Shorten the time needed to bring new products to market
Enhance the product development process by allowing the company to adopt

best practices and innovative tools, and create templates
Members of the product development team provide feedback on what went well
and why. Did the product come out on schedule and on budget? If not, why not?
How well did functional areas communicate and collaborate during the process?
These and other questions are answered during this product development review.
Key Terms
product development field advisory council
idea generation product implementation
screening policy filing
concept testing readability requirements
focus groups issue instructions
comprehensive business analysis Buyer’s Guide
market analysis policy summary
product design objective prospectus
feasibility study Day 1 functionality
marketing projections Day 2 functionality
activities:
Think about how your company’s introduction of a new product impacts your
job. Do you have to attend training and learn new procedures, or will it have
little or no impact upon your current job?
Determine whether members of your company’s product development team
have other job responsibilities in addition to their duties on the product devel-
opment team. Larger companies usually have ongoing product development
teams whose members have no other job responsibilities.
Obtain a copy of a Buyer’s Guide, if one is required in your jurisdiction, and
see if you can compare the costs of the various policies your company offers.

Endnotes
1. “Regulatory Measures of the CIRC,” China Insurance Regulatory Commission, http://www.circ.gov.
cn/web/site45/tab2744/i24832.htm (27 May 2011).
2. “Life Insurance Products—File & Use Procedure | Irda,” Bimadeals, http://www.bimadeals.com/
insurance/insurance-info/life-insurance-products-%E2%80%93-file-use-procedure-irda/ (27 May
2011).

Insurance Company Operations Chapter 11: Product Distribution 11.1
Chapter 11
Product Distribution
Objectives
 Distinguish between product distribution systems and channels
 Distinguish between an employee and an independent contractor
 Describe the characteristics of career agents, multiple-line agents,
independent agents, salaried sales representatives, and financial advisors
and how they operate in personal selling distribution systems
 Explain how insurers provide sales support such as recruiting, licensing,
and training to different types of agents
 List three unfair sales practices and describe the activities that insurers
undertake to monitor the market conduct of their agents and list three
unfair sales practices
 Explain the role of broker-dealers, banks and other depository
institutions, and insurance companies in third-party distribution systems
 Describe a direct response distribution system and identify the primary
types of direct response distribution channels
 Identify and describe the factors an insurer considers when making
decisions about which distribution systems and channels to use

11.2 Chapter 11: Product Distribution Insurance Company Operations
Outline
Personal Selling Direct Response Distribution Systems
Distribution Systems
Distribution Decisions
 Agents
 Costs
 Agent Channel Support
 Control
 Methods of Personal Selling
 Expertise
 Salaried Sales Representatives
 Customers’ Characteristics
 Financial Advisors
 Product Characteristics
Third-Party-Institution  External Marketing Environment
Distribution Systems
 Broker-Dealers
 Banks and Other Depository
Institutions
 Insurance Companies
Product distribution is critical to profits. We

can’t make money if we don’t sell anything.
A
n insurer can have the best products in the world, but without a way to
get those products to potential customers, the company will never make
any money. A distribution system is the method a company uses to make
its products available for sale to the public. An insurance company’s profitability
depends, to a large extent, on how effectively it selects, manages, and integrates
its distribution systems. An insurer’s choice of distribution systems affects and is
affected by the insurer’s target markets, the products the insurer sells, as well as
many other factors. In Chapter 9 we introduced the three major types of distribu-
tion systems insurers use: personal selling distribution systems, third-party-insti-
tution distribution systems, and direct response distribution systems. Within each
of these broad distribution systems, are distribution channels—specific people,
institutions, or communication methods that companies use to connect with their
customers. Figure 11.1 shows a simplified illustration of insurance distribution sys-
tems and channels. Note that the distinctions shown in this figure are not always so
clear. For example, a financial advisor might primarily sell investment securities
and work out of the office of a broker-dealer.
Personal Selling Distribution Systems

Personal selling distribution systems account for the majority of life insurance
and annuity sales. Why? Most life insurance and annuity products are complex
products. Knowledgeable salespeople are needed to supply prospective custom-
ers with product information and to assist them in the purchase decision. Because
insurers use so many different types of sales personnel to sell their products, the
term producer is used to refer to any individual licensed to sell insurance prod-

Figure 11.1. Insurance Distribution Systems and Channels
Distribution Channels
Agents
Personal Selling Salaried Sales

Distribution Systems Representatives
Financial Advisors*
Broker-Dealers**
Third-Party-Institution Banks and Other

Distribution Systems Depository Institutions
Insurance Companies
Direct Mail
Print Media
Direct Response
Distribution Systems Broadcast Media
Telemarketing
Internet Sales
* Financial advisors may work out of broker-dealer offices.

**An insurer may establish its own broker-dealer subsidiary. In such a situation, the broker-dealer would not be a third-
party-institution distribution system for that insurer.

ucts, solicit sales, or negotiate insurance contracts. However, in a personal selling

distribution system, the term agent is commonly used to describe an insurance
company’s sales personnel. An agent is an independent sales representative or
company employee who is authorized to act on behalf of an insurance company in
selling insurance products.
Are all agents producers?
Agents
All agents are producers because they are all licensed to sell insurance contracts.
But not all producers are considered to be insurance company agents. A bank
employee who is licensed to sell insurance is a producer but is not considered to be
an insurance company agent.
We use career agents, but I know some other
insurers use independent agents. What are
the differences between career agents and
independent agents?
Trying to distinguish among types of insurance agents is difficult because

much depends upon the employment relationship between the insurance company
and the agent. The employment relationship between the insurer and the agent
is defined by an agency contract, which is a written agreement that outlines the
agent’s role and responsibilities and the agent’s compensation. The agency con-
tract may be between the agent and the insurance company or between the agent
and the manager of an agency office. Figure 11.2 describes the contents of a typical
agency contract. Let’s consider some of the information presented in Figure 11.2 to
help you understand the differences among types of agents.
Does the Insurer Consider the Agent to Be an Employee?

The agency contract states whether the agent is an employee of the insurance com-
pany. An employee is a person in the service of another, the employer, who has
the power or right to control and direct how the employee performs the work. An
individual who works for an employer but is not considered to be an employee is
known as an independent contractor. An independent contractor is a person who
contracts to do a specific task according to his own methods and who generally
is not subject to the employer’s control except as to the end product or final result
of the work. Independent contractors who work for insurance companies are typi-
cally known as independent agents.

Figure 11.2. Contents of a Typical Agency Contract
A statement of the existence of the contract.
A statement that the agent is or is not an employee of

the insurer, whichever is the case.
A description of the insurance agent’s authority to
represent the company, including the authority to solicit
and submit applications, collect initial premiums, and
issue premium receipts.
A description of limitations placed on the agent, such as
that the agent may not change life insurance premium
rates, alter contracts, incur debts on behalf of the insurer,
enter into a binding contract on behalf of the insurer,
—other than temporarily in connection with a premium
receipt—, or collect renewal premiums.
A listing of the insurance agent’s performance
requirements, particularly minimum production and
persistency requirements that must be satisfied for the
agent to earn compensation and remain associated with
the insurer. Persistency is the retention of business that occurs when an insurance policy
remains in force as a result of the continued payment of the policy’s renewal premium.
Termination provisions that state (1) justifiable causes for terminating an agency contract,
(2) the length of time required for notice of termination by either the insurance agent or
the company, and (3) obligations of each party after contract termination, such as the
agent’s obligation to return company records or materials.
A commission schedule stating the rate of commissions to be paid on sales, as well as any
other payments for servicing a policy, or bonuses that the agent can earn.
Vesting provisions, if any, stating the circumstances under which the insurance agent is
entitled to receive commissions on life insurance policies after the producer’s contract has
terminated.
A statement that the insurer can revise the commission schedule in certain circumstances.
Expense provisions covering the types of expenses, if any, that an insurance agent may
incur and be reimbursed for by the company.
A list of the circumstances under which the insurance agent is permitted to submit life
insurance applications to another insurance company.
An insurer is likely to have an employee relationship with its agents when the
insurer exercises considerable control over how the work is conducted and also
when the insurer contributes significant financial support in addition to com-
mission payments. Agents such as (1) career agents, (2) multiple-line agents, or
(3) home service agents are sometimes, but not always, considered employees of
an insurer.
Career agents are under a full-time contract with one insurance company and
sell primarily that company’s life insurance products.

Multiple-line agents sell life insurance, health insurance, annuities, and prop-
erty-casualty products for one insurance company, with the preponderance of
sales being property-casualty products. Multiple-line agents often can sell a
larger number of products to customers than can career agents because they
learn about a customer’s needs for other insurance products from an initial
insurance transaction. For example, a multiple-line agent may recognize that a
person who purchases automobile insurance and has just had a baby may also
be in need of life insurance. The more products a customer purchases from an
agent, the more likely the agent will retain that customer’s business.
Home service agents, sometimes known as debit agents, sell specified prod-
ucts, typically low-face-amount cash value life insurance with monthly pre-
miums. Home service agents provide policyowner service within a specified
geographical area, and often are authorized to collect renewal premiums from
customers. Home service agents are supervised by a district manager. Presently,
only a few companies use home service agents to distribute their products.
Career agents and multiple-line agents are known as affiliated agents, or
agency-building agents, because they sell primarily the products of a single insur-
ance company. Independent agents may also be affiliated agents if they sell one
insurance company’s products exclusively. Many multiple-line insurers have an
affiliated agency arrangement with their independent agents. Insurers generally
invest considerable time and money in establishing and maintaining an affiliated
agent system.
An insurer’s affiliated agents are collectively known as its field force, and the
offices in which they work are usually known as field offices. Typically, insurers
provide financial assistance for some of a field office’s expenses. If an agent estab-
lishes and finances a field office, this agent is often referred to as a general agent
and the office is referred to as a general agency. The people who work in a general
agency are typically considered to be employees of the general agent.
In certain circumstances, affiliated agents may be allowed to sell another com-
pany’s products. For example, when an agent’s primary company declines to insure
an applicant, then the agent might be allowed to place the business with another
insurer. The contract will specify the circumstances under which an agent may
place business with another insurance company.
How Are Commissions, Bonuses, or

Other Types of Benefits Paid?
Regardless of the type of agent, commissions are the largest single component of
an agent’s compensation, and the agent’s contract includes a commission schedule
that details how commissions are paid. Most life insurance commission schedules
include a first-year and a renewal commission. A first-year commission is a com-
mission paid to a producer who sells a life insurance policy that is equal to a stated
percentage of the amount of premium the insurer receives during the first policy
year. Generally speaking, first-year commission rates for life insurance policies
range from 40 to 90 percent.

Example: Assume that the premium collected on a life insurance policy

is $1,000 during the first policy year and the first-year commission rate
is 50 percent (or 0.50). The first-year commission for that policy is $500
($1,000 x 0.50 = $500).
A renewal commission is a commission paid on policies every year for a certain

number of years after the first policy year. Renewal commissions are paid to the
producer who sold the policy. Renewal commission rates are lower than the first-
year commission rate—usually 2 to 5 percent of premiums received—and they are
paid only on policies that remain in force. First-year commissions are designed to
encourage new sales, and renewal commissions are designed to encourage agents
to sell quality business that will remain in force. Sometimes insurers pay a service
fee, which is a small percentage, often 1 or 2 percent, of premiums payable after
renewal commissions have ceased. Service fees are typically paid to the agent
who is currently servicing the policy, even if that producer did not originally sell
the policy. Annuity commission schedules do not distinguish between first-year
and renewal commission rates, and instead offer a considerably lower commission
rate—typically 4 to 7 percent—of any premium.
Are affiliated agents and nonaffiliated agents
paid the same commission rate?
Commission rates for agents who are not affiliated with one insurance com-
pany are typically higher than the commission rates for affiliated agents. Affiliated
agents receive lower commissions because, typically, they receive some financial
benefits that are not provided to the other types of agents. For example, insurers
may provide their affiliated agents with security benefits such as health insurance,
disability income insurance, or retirement plans. Insurers may also provide their
affiliated agents with an expense allowance for certain business or office expenses,
as well as incentive bonuses, such as cash, trips, or merchandise, as a reward for
sales, persistency, or both. Note that incentive bonuses for sales are often available
to an insurer’s nonaffiliated agents as well.
Must the Agent Satisfy Minimum Production

or Persistency Requirements?
This question is important because it relates to the degree of an insurer’s control
over an agent. Career agents, multiple-line agents, and some independent agents
have to satisfy minimum sales production and sometimes minimum persistency
requirements in order to continue their agency relationship with a particular insur-
ance company.

Example: The Blue Sky Life Insurance Company requires that its career
agents sell at least 50 life insurance policies or a minimum of $500,000
in face amount of life insurance each year in order to maintain a full-time
agency contract with Blue Sky.
Sometimes independent agents—who are not affiliated agents, but who place
a substantial amount of business with one insurance company—may enter into
a special arrangement with that company. The agent, known as a personal-
producing general agent (PPGA), is an independent agent who receives special
consideration for satisfying minimum sales production requirements. For exam-
ple, insurers typically give their PPGAs the option of recruiting and training
full-time subagents. A PPGA receives additional commissions, called overriding
commissions, on the new or renewal business that these subagents sell.
However, most insurers who currently use independent agents market their
products through a wide network of independent agents known as brokers. A
broker, also sometimes known as an agent-broker, is an independent agent who
does not have an exclusive contract with any single insurer or specific obligations
to sell a single insurer’s products. Although brokers may have a primary insurance
company with which they place business, they are under no obligation to place
a certain amount of business with that insurer. They usually enter into separate
agency contracts with each insurer with whom they place business.
Brokers are responsible for all of their own business expenses, including office
expenses, training expenses, marketing expenses, and security benefits. As a
result, insurers incur few, if any costs, in connection with brokers until commis-
sions are due. When an insurer adds brokers to its distribution system, the insurer
instantly adds fully trained, experienced sales agents to its sales force with few, if
any, initial costs to the insurer.
Some independent agents, brokers, and PPGAs have created producer
groups—organizations of producers that negotiate compensation, product, and
service agreements with insurance companies. Producer groups, as well as other
organizations such as independent marketing organizations or brokerage general
agencies, often serve as intermediaries for independent agents, brokers, PPGAs
and insurance companies. By affiliating with an intermediary, an agent has access
to multiple insurers’ products and support services, such as point of sales assis-
tance, underwriting expertise in specialty lines of coverage, business development
services, and management support.
I have a friend who works in the sales and

marketing area of another insurer. He provides
customer service to agents. Why doesn’t the
customer service department at his company
provide service to agents?
Agent Channel Support

The agent distribution channel is of such importance to insurers that it is often
managed separately from other distribution channels. Some insurers have
a single agency unit in the company’s home office, headed by a manager of

agency operations, that handles all supervisory and support activities for the
company’s agents. Other insurance companies divide supervisory and support
duties between an agency operations unit and an agency services unit. However,
regardless of how a company organizes the home office support activities for its
agents, the head of that unit or units usually reports to the company’s chief mar-
keting officer. The head of the insurer’s marketing operations must ensure that
Strategic goals and objectives for the company’s agency operations are consis-
tent with the insurer’s overall goals and objectives
Policies and procedures for agency operations are in compliance with all regu-
latory requirements
Performance standards are in place to measure agency operations
Home office services, including customer service, are in place to adequately

support agency operations
Home office support for an insurer’s agents can be divided into five primary cat-
egories: (1) recruiting, (2) licensing, (3) training, (4) sales support, and (5) market
conduct monitoring.
My company spends a lot of money to recruit

and train new career agents—probably more
than $100,000 during a producer’s first three
years. We’ve got to make sure we spend that
money on the right people. But how?
Recruiting
Insurers that use the personal selling distribution system know that the success of
their company depends largely on the success of their producers. Insurers spend
a lot of money hiring, training, and hopefully retaining their affiliated agents. If
an affiliated agent leaves an insurance company shortly after completing training,
the insurer will not recover its initial investment in that agent and must incur addi-
tional expenses to hire and train replacement agents. As a result, insurers want to
recruit agents who are likely to be successful in selling insurance products and are
likely to stay with the company for a long time.
The home office typically helps agency managers with recruitment by provid-
ing formal screening guidelines or tests for use in recruitment. Larger agencies
may receive assistance from a dedicated recruiting specialist. One screening test
that helps an agency manager determine whether to actively recruit a job candidate
is Career Choice developed by LIMRA. Career Choice uses a questionnaire to
gather information from a job candidate and uses that information to predict the
candidate’s likely success as an insurance producer.
Candidates who successfully complete the screening phase are then eligible
for pre-contract training, a trial program that permits the candidate to become a
producer while continuing to work at a current job. During pre-contract training,
the candidate learns (1) the principles of life insurance and annuities, (2) the prod-
ucts and practices of the hiring company, and (3) sales techniques for insurance

products. Typically, the home office prepares the pre-contract training program for
agency managers to use. Candidates who perform well during pre-contract train-
ing are offered contracts by the insurance company.
Some insurance companies provide financial support to their newly hired affili-
ated agents. For example, a company might provide new agents with an income
for the first six months while they complete licensing and training requirements.
In addition, some companies provide longer financing for affiliated agents who
have difficulty earning enough commissions to maintain an adequate standard of
living during their first years in the insurance business. This financing may be an
advance against future commissions, a higher-than-normal commission rate for
new sales, or a monthly supplement payment. Typically, all financial supports end
by a producer’s third or fourth year of employment.
Insurers that use the broker distribution channel must establish and maintain
good relationships with top producers. Such insurers know that brokers are more
likely to place business with insurers that communicate effectively with them,
provide high-quality customer service to them and to their clients, and pay com-
petitive commissions.
Licensing
Home offices play a significant role in the licensing of all producers. Generally, all
insurance producers must be licensed by each jurisdiction in which they sell insur-
ance products. These requirements apply to all types of insurance agents as well
as to people soliciting insurance product sales on behalf of banks and other orga-
nizations. Insurance producers in the United States must be licensed in each state
in which they sell insurance products. To obtain a license in the United States, the
applicant typically must (1) pay a licensing fee, (2) pass a written examination in
each line of insurance that he plans to sell, and (3) provide assurance that he is of
reputable character. Other countries have requirements that are similar to those in
the United States. Insight 11.1 describes the licensing requirements in India.
Many jurisdictions require that, before an insurance producer begins to solicit
insurance product sales on behalf of an insurer, the insurer must appoint, or
officially notify, regulators that it is authorizing that person to sell insurance on
its behalf. In some jurisdictions, the notice of appointment must be filed with the
application for the producer’s license.
Licensing specialists in an insurer’s home office oversee producer licensing
to ensure that all producers are qualified to sell the company’s products and are
appropriately licensed and appointed for the jurisdictions in which they are to
sell products. Licensing specialists maintain databases to ensure that producer
licenses are renewed on a timely basis, that correct licensing forms are on file, and
that licensing fees are paid in each jurisdiction as required. If an insurer termi-
nates an agent’s contract, the home office must notify insurance regulators of the
date of, and reason for, the termination.
Training
The level of training provided to agents varies depending upon the agent’s rela-
tionship with the insurance company. New affiliated agents typically go through
an initial period of sales, product, and on-the-job training. Brokers and more expe-
rienced agents receive mostly product training because they do not need general

Insight 11.1. Insurance Agent Licensing Requirements in India
In India, all persons who desire to act as an insurance

agent must be registered as such under the provisions
of the Insurance Act and the Insurance Regulatory and
Development Authority (IRDA) (Licensing of Agents)
Regulations. A license issued under the provisions
of the Insurance Act entitles the holder to act as an
insurance agent for any insurer. Before an applicant
can be granted an insurance license, the applicant
must have
Completed the application appropriately
Attained at least a minimum level of education
Completed a required amount of training in life

insurance marketing and sales from an IRDA-ap-
proved institution
Passed a pre-recruitment examination in life insurance by an IRDA-recognized institution
that conducts pre-recruitment tests for insurance agents
Paid the required licensing fees to the IRDA
Source: Adapted from Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000, F.No.
IRDA/Reg./7/2000.The Gazette of India: Extraordinary, 14 July 2000, http://www.irda.gov.in/ADMINCMS/cms/frmGeneral_Layout.a
spx?page=PageNo57&flag=1&mid=Insurance Laws etc. Regulations (23 May 2011).
sales training. However, insurers are required by law to ensure that all of its pro-
ducers are trained in market conduct laws and acceptable sales practices. Agent
training can be provided in formal classes at the home office, regional sales offices,
or the agency office. Virtual training through webinars and online courses is also
becoming much more common.
Sales Support
An insurer’s home office provides many types of sales support to agents. Again,
the amount of sales support an insurer provides to an agent depends upon the
agency relationship. Brokers and independent agents who do not have an exclusive
contract with one insurance company are likely to receive the least amount of sales
support.
Business development support. One of the most difficult tasks for any insur-
ance producer is locating qualified customers for insurance products. Insurers
may assist agents by providing them with lead generation support. For exam-
ple, an insurer may obtain sales leads from direct response advertisements or
from its website and forward these to the agents. In some cases, the address
and telephone number of an agent are provided at the insurer’s website. In
other cases, the website may allow the customer to send an e-mail directly
to the agent or link to the producer’s own website from the insurer’s web-
site. Insurers sometimes provide agents with contact management software or
systems to promote sales lead generation.

Marketing support. Insurers may use advertising to promote the general

quality of their agents. In addition, insurers provide agents with sales promo-
tion materials and sales aids that explain how insurance products can meet a
prospect’s financial needs. Life insurers must take great care that all of their
advertisements and sales aids comply with applicable laws. Laws apply not
only to those advertisements and sales aids provided by the home office but
also to any sales materials producers use when selling an insurer’s products.
Insurers typically prohibit all producers from using any sales materials or
advertisements that have not been approved for use by the home office.
Enhanced service support. Many insurers offer enhanced services to top-
performing agents who consistently exceed sales goals. Examples of these
special support services include
Home office telephone lines that only top producers can use for sales and
operations support.
Extended hours of telephone support.
Personnel in areas such as underwriting, customer service, and claims

who are dedicated to serving only top producers.
Advanced underwriting —a group of specialists who will assist the

producer in preparing proposals, and will accompany the producer, if
requested, to sales presentations on how to use insurance products in a
financial plan or estate planning. In estate planning, the producer helps
a potential customer to develop a program that will cover the customer’s
current and future financial needs and will provide a means of conserving,
as much as possible, the personal assets that the person wants to pass on
to her heirs at her death.
Technology support. Insurers provide agents with different types of technol-
ogy and systems support to promote operational efficiencies. For example,
insurers may provide systems for the online submission of new business appli-
cations, online access to commission reporting, or online access to the status
of new business.
We provide our top producers with

segmented service—the higher a producer’s
sales, the more services we provide.
Monitoring Market Conduct

Insurers must regularly monitor the sales activities of all of their producers to
evaluate their compliance with market conduct requirements. However, an insurer
has less contact with and control over unaffiliated agents, so monitoring the mar-
ket conduct of agents, such as brokers, can be challenging. An insurer typically
performs an extensive background check on unaffiliated agents before entering
into a contract with them.

Regulators may suspend or revoke a producer’s license if the producer engages

in conduct that violates the laws that apply in that jurisdiction. Figure 11.3 lists
actions an insurer can take to ensure that producers comply with market conduct
laws. Also, whenever regulatory requirements change, insurers must communi-
cate these changes accurately and promptly to all of its producers.
Figure 11.3. Insurance Company Actions to Ensure Producers’

Market Conduct Compliance
Develop and communicate clear, specific compliance standards, ethical guidelines, or
codes of ethics for producers
Appoint a compliance officer and establish a compliance team that oversees
compliance training for all producers
Ensure that the background of a producer is subject to rigorous review before an
agency contract is signed
Conduct field audits that can include (1) reviewing a producer’s case files to ensure that
all of the proper documentation is present, and (2) going on joint calls with a producer
to see that the producer’s sales approach
complies with regulations and company
standards
Examine complaint files to identify any
patterns that might suggest market conduct
problems
Monitor policy replacement activity
Require a producer’s prospects to sign any

policy illustration used in the sales process,
and include the signed illustration with the
application in order to have an application
underwritten
Source: Adapted from Albert J. Sheridan and D. Layne Rich, “Are Your Compliance Efforts Working?” LIMRA’s Market Facts, May/
June 1995, 26. Used with permission; all rights reserved.
The monitoring system that an insurer establishes for its producers should
include a method for identifying and reporting producers who are found to be
unsuitable to sell insurance products. Although some producer infractions are
unintentional and merely indicate a need for additional training, some serious
infractions, or a pattern of minor infractions, require that an insurer provide ade-
quate disciplinary action, up to and including a termination of the producer’s con-
tract with the insurer. Figure 11.4 lists certain sales practices that are prohibited in
most jurisdictions.
Methods of Personal Selling

In the personal selling distribution system, agents often meet individually with one
potential customer, who is referred to as the prospect. Agents follow a fairly typi-
cal sales process during this meeting. First, they identify the prospect’s financial
needs. Then the agent develops a proposal that recommends one or more insurance
products to meet the identified needs. The producer presents the proposal to the

Figure 11.4. Unfair Sales Practices
Churning is a practice in which a producer induces a customer to replace a life

insurance policy or annuity contract with another product, multiple times, so that the
producer can earn a series of first-year commissions on the replacements.
Twisting occurs when a producer misrepresents the features of a policy to induce the
customer to replace an existing policy.
Rebating is a practice in which a producer offers a prospect an inducement, such as

a cash payment, to purchase a life insurance policy or an annuity and the inducement
is not offered to all applicants in similar situations and is not stated in the policy itself.
Rebating is legal in a few jurisdictions under certain circumstances.
prospect and, hopefully, completes a sale. Once the prospect agrees to purchase
the insurance product, the agent assists the customer in applying for the product,
submits the application to the insurer, and, in some instances, delivers the policy
to the customer.
The amount of time spent locating new prospects depends on a number of
factors. Until fairly recently, the most important factor was how long the agent
had been in the insurance business. Experienced agents had current clients who
could provide additional sales leads and word-of-mouth referrals. Newer agents,
on the other hand, were forced to rely heavily on cold calling, which is the process
of telephoning or visiting prospects with whom the producer has had no prior
contact. However, the advent of the Internet and social networking websites is rev-
olutionizing the process of prospecting. Studies show that consumers trust Inter-
net peer-review ratings as valued sources of information for product purchases.1
Today, a positive recommendation posted on a social networking site can provide
a producer with many more sales leads than can a word-of-mouth recommendation
by one client.
Agents sometimes engage in methods of personal selling other than one-to-one
selling. Worksite marketing is a method for distributing insurance products to
people at their place of work. Under a typical worksite marketing arrangement,
an employer allows an insurer to offer the employer’s employees the opportunity
to buy insurance or annuity products. The employer deducts employees’ premium
payments from their paychecks through a payroll-deduction plan, and submits
the premium payments to the insurance company. The employee owns the insur-
ance policy and can continue the coverage even if his employment terminates. As
shown in Figure 11.5, worksite marketing offers advantages to insurers, employers,
and employees.
Some agents also sell insurance products through a method known as location-
selling. A location-selling system is designed to generate customer-initiated sales
at an office or information kiosk in a store, shopping mall, or other noninsurance
business establishment. For example, location-selling systems that offer insurance
product information and applications are sometimes located in businesses such as
department stores, grocery stores, and funeral homes.

Figure 11.5. Advantages of Worksite Marketing
Advantages to Insurers
Can be cost effective —Cost of insurance distribution and administration can
be lower than for individually-sold plans of insurance
Serves as a door opener —Can be used as a gateway to sell other products
offered by the insurer
Meets customer needs —Is particularly appropriate for middle- and lower-
income markets
Increases insurer’s name recognition —Puts insurer’s name before large
groups of potential customers
Advantages to Employers
Is cost effective —Few, if any, direct costs or fees to employers; can help manage
rising costs of employee benefits by shifting some costs to employees
Enhances employee goodwill —Allows employers to complement already
existing employer-provided benefits in a way that is valued by employees
Is nonintrusive —Does not interfere with existing employee benefit program
Avoids nondiscrimination requirements —Exempt from legal restrictions that

apply to employer-provided benefits
Advantages to Employees
Is an accessible and convenient buying opportunity —For some employees,
may be the only time they are encouraged to buy needed insurance
Is affordable —Amount of coverage determined by employee
Has convenient payments —Payments are typically made through payroll

deduction
Provides easy qualification —Typically, no medical examination is needed to
apply
Offers portability —Coverage can usually be continued if employee leaves the
company
Is flexible —Coverage can be tailored to employee’s individual needs
Source: Adapted from Conning & Company, Life Insurers’ Distribution Strategies: Testing the Waters (Hartford, CT: Conning &
Company, 1999), 37. Used with permission.
Salaried Sales Representatives

In addition to commissioned agents, some companies use salaried sales represen-
tatives to distribute certain types of products. A salaried sales representative is
a company employee who is paid a salary for making sales and providing sales
support. Most insurers handle their group insurance and group annuity sales
through salaried sales representatives, who are typically referred to as group
representatives. Group representatives are specifically trained in the techniques
of marketing and servicing group products. They promote their companies’ group

products to agents, benefits consultants, and organizational buyers of group prod-

ucts, and often assist agents in group sales by designing, negotiating, and helping
to present group proposals. Group representatives usually assist with the enroll-
ment of group members and also make regular service calls as needed. Group
representatives usually receive a salary plus incentive compensation based on
such factors as overall sales, group operations profitability, persistency, or in-force
premium growth.
Financial Advisors
In the personal selling distribution system, many independent financial advisors
analyze a customer’s personal financial circumstances and goals and prepare a plan
to meet the customer’s financial goals, which often involve retirement or college
savings. Sometimes financial advisors suggest that a customer purchase an insur-
ance or investment product as part of a financial plan. If registered and licensed
appropriately, a financial advisor can assist customers with purchases of insurance
or investment products. In the United States, an independent financial advisor,
also known as a registered investment advisor (RIA), is an individual registered
with the Securities and Exchange Commission to give advice about investment
securities. An independent financial advisor who also sells insurance or annuity
products must comply with all relevant insurance laws. This includes licensing or
registration requirements, as well as regulations regarding advertising and pro-
motional materials. Independent financial advisors typically earn commissions on
their insurance sales, and these commissions are usually higher than commissions
earned by agents.
Third-Party-Institution Distribution Systems

An increasing number of insurance companies are using third parties, typically
other financial institutions, to distribute their insurance products. Insurers use
wholesalers—an intermediary appointed by an insurer—to promote the insurer’s
products to these institutional distributors and to provide these distributors with
marketing support. Third-party distributors include broker-dealers, banks or other
depository institutions, and other insurance companies.
There are brokers in the personal selling
distribution system and broker-dealers in the
third-party distribution system. Seems kind of
confusing to me.
Broker-Dealers
In the personal selling distribution system, a broker is a type of insurance agent.
A broker-dealer is a financial institution that buys and sells securities either
for itself or for its customers and provides information and advice to customers
regarding the purchase and sale of securities. In the United States, variable life
insurance and annuity products—in which the value of the product is linked to
market performance and the owner assumes some or all of the product’s invest-
ment risk—are classified as securities as well as insurance products. In the United

States, securities can only be distributed through broker-dealers that are regis-
tered with the Securities and Exchange Commission (SEC) and are members of
the Financial Industry Regulatory Authority. The Financial Industry Regulatory
Authority (FINRA) is a nongovernmental self-regulatory organization empowered
by the SEC to license, investigate, and regulate securities dealers and their repre-
sentatives. Individuals who sell securities must also register with FINRA, and the
broker-dealer is responsible for overseeing this process.
Some insurers enter into third-party distribution agreements with existing
broker-dealers to market their variable products. However, life insurers sometimes
establish a broker-dealer subsidiary. An insurance broker-dealer, sometimes
referred to as an insurance brokerage or insurance-owned broker-dealer, is a reg-
istered subsidiary of an insurance company that primarily or exclusively sells that
insurer’s variable insurance products and also provides specialized financial plan-
ning and investment services.
Banks and Other Depository Institutions

In many parts of the world, depository institutions, such as banks, that accept
deposits and make loans are primary distribution channels for insurance prod-
ucts, including life insurance products. The distribution of insurance products
to bank customers through a bank-affiliated insurer is commonly referred to as
bancassurance outside the United States. In the United States, it is simply identi-
fied as bank-distributed insurance.
Bancassurance offers many benefits to insurers, banks, and customers. Insurers
gain access to a new market—bank customers; banks earn additional income from
insurance sales; and customers enjoy the convenience of shopping for insurance
and financial products in one location. Bancassurance as a distribution channel
is expected to grow in importance in the future because (1) regulations in many
parts of the world have become more conducive to bancassurance, (2) customers
are generally open to purchasing insurance products from financial institutions
such as banks, and (3) distribution costs are typically lower than for many other
distribution channels.
The four primary bancassurance distribution models are pure distributor, stra-
tegic alliance, joint venture, and financial holding company. Figure 11.6 describes
these various models. Not all models are allowed in all countries, and even if a
model is allowed, it may not be used very often. For example, the pure distributor
model is allowed in all Latin American countries and Asia. However, strategic
alliances are much more common in Latin America and joint ventures in Asia.
The more integration that exists between an insurer and the bank, the more
likely bancassurance operations are to be successful. When a pure distributor
model is used, insurance products are rarely integrated into the bank’s overall
marketing program. As a result, bank employees rarely understand the insurance
products thoroughly nor how best to market them, and sales volume is often low.
Most countries that permit banks to offer insurance, including the United States,
require that a licensed insurance company underwrite and accept the risk associ-
ated with the insurance products the bank sells. In other words, a bank usually can
distribute an insurance company’s products but may not issue its own insurance
products.2 Also, in many countries, like the United States, banks are not permitted
to make the purchase of an insurance product a condition for a customer’s obtain-
ing a loan from the bank.

Figure 11.6. Primary Bancassurance Distribution Models

Pure distributor. A bank acts as an intermediary
offering the products of one or more insurance
companies. This model is the least expensive
to implement but products are not designed
specifically for the banking customer and the
insurer has little control over how the products are
targeted or sold.
Strategic alliance. A bank selects the products
of only one insurance company to sell. Both
companies remain separate entities but can jointly
promote the product brand. This model offers low
risk in terms of required investment. Customers
may be confused about whether bank or insurer is
responsible for insurance product.
Joint venture. The bank and the insurer form a jointly-owned insurance company, thus
creating a new entity for the creation and distribution of insurance. Products can be
specifically designed for bank customers. Insurer loses some control over distribution.
Financial holding company. A holding company owns both the insurer and the bank.
Operations, systems, and products can be fully integrated.
Source: Lori L. Chester, Polly Painter-Eggers, and Ram Gopalan, Bancassurance around the World (Windsor, CT: LIMRA International.
© 2007). Used with permission; all rights reserved.
Banks typically use two types of producers, platform employees and financial
consultants, to distribute insurance and annuity products. A platform employee
is a bank employee whose primary function is to handle customer service issues
and sell traditional bank products such as checking and savings accounts, but who
is also licensed to sell insurance. In Asia and Latin America, platform employees
are the primary distributors of bancassurance. In the United States, financial con-
sultants are used more often. A financial consultant is a full-time bank employee
whose primary function is to sell investment products to bank customers. Financial
consultants are licensed to sell securities as well as life insurance and annuities.
Platform employees usually sell simple life insurance products such as term life
and refer customers with more complex financial needs to financial consultants.
The amount and type of sales support that an insurance company provides
for the bank distribution channel can vary considerably and is often provided to
the banks by wholesalers. Insurance companies typically pay banks commissions,
and the banks decide how to compensate their employees for the sales. Only bank
employees who are licensed producers may receive commissions for the sale of
insurance. However, unlicensed bank employees who refer customers to licensed
bank employees sometimes receive a nominal referral fee.
Insurance Companies
An insurance company can act as a distribution channel by selling nonproprietary
products, which are products developed by another insurance company. By distrib-
uting nonproprietary products, an insurer can provide its sales force and customers

with a full range of financial products. Insurers often distribute nonproprietary

products because they are able to
Offer a new product without spending the money or time necessary to develop
the product
Enter a new market quickly
Decrease the risks involved with introducing a new product by experimenting

with that product or product line before fully committing to it
Better satisfy producers and customers by offering a more complete product

mix
Product-specific training and sales support are provided to the distributing
insurance company as needed.
Direct Response Distribution Systems

Direct response distribution systems do not rely on sales representatives to sell
their products as do personal selling and third-party-institution distribution sys-
tems. Instead, direct response distribution systems connect with their customers
primarily through distribution channels such as the mail, the telephone, or the
Internet. Insurers often use direct response distribution systems in conjunction
with other distribution systems, and they often use multiple direct response dis-
tribution channels. For example, an insurer might sell its products through sev-
eral direct response distribution channels such as the Internet, print media, and
broadcast media. Figure 11.7 describes some of the most common direct response
distribution channels.
With all those distribution choices, how does a
company decide which systems and channels
will be most profitable and best meet its
customers’ needs?
Distribution Decisions
No insurance company can use all of the distribution systems or all of the channel
options available. An insurer is limited by its available resources and also by how
each option fits with its business goals and objectives. The insurer must carefully
weigh the strengths and weaknesses of each distribution option within this con-
text. Insurers consider several factors when making distribution decisions.
Costs
Some insurance distribution systems are more expensive than others. A personal
selling distribution system using a career agent channel is the most expensive
to establish and maintain. In addition to paying commissions for sales, insurers
usually provide for field office expenses, such as rent, technology support, and
utilities. In addition, insurers pay for the recruiting, training, and licensing of
career agents. Newer or smaller insurance companies that wish to use personal

Figure 11.7. Direct Response Distribution Channels
Direct mail. An insurer using direct mail distributes insurance sales

materials through a mail service directly to a list of prospective customers.
The target market for direct mail might be readers of a particular publication
or holders of a particular credit card. The sales materials usually consist of
an introduction letter, a brochure that describes a particular product, an
insurance or annuity application, or an inquiry form the customer can use
to request further information about the product.
Print media. When an insurer uses print media, the insurer uses printed
publications, such as magazines or newspapers, to describe a particular
product and generate interest in that product. The advertisement
typically contains a telephone number for a customer to call to obtain
further information. When using print media, insurers can try to reach
a particular target market by printing advertisements in newspapers
in certain geographical areas or in magazines that appeal to certain
demographics. For example, an advertisement for an annuity product
designed for people age 62 or older might appear in a magazine for
retired people.
Broadcast media. An insurer can use radio or television to disseminate

an advertising message over a wide area to a large, generally
undifferentiated audience. However, selecting certain programs or
times of the day in which to advertise does allow an insurer some
selectivity. For example, a life insurance product might be advertised
on television between the hours of 8 and 10 p.m. when newly married
couples or young parents are likely watching television.
Telemarketing. Insurers can use telephones to produce sales

and also to support other direct response channels. For example,
a customer reads an advertisement for a product in a magazine
and then calls the insurer to purchase the product. Regulatory
restrictions, in some countries, limit the degree to which insurers
can make unsolicited sales calls to prospective customers.
Internet sales. Most insurers have established websites that provide

information and promote products. Customers may contact the
company by telephone, e-mail, or through the Internet site to ask
questions or purchase a product. A growing number of insurers
are using websites to complete sales, including submitting online
applications and initial premium payments. Some insurers conduct
targeted e-mail marketing—communications e-mailed to current policyholders or
prospective customers designed to elicit a response. The most successful types of targeted
e-mails are newsletters that provide information of general use to customers as well as
information about products or specific offers. Many insurers use web advertising to advertise
their products and services on other Internet sites. For example, an insurer might place an
advertisement on the website of a financial publication.

selling distribution may not have adequate financial resources to establish a career
agent sales force and may choose to use a less expensive system of brokers. Other
insurers may choose to distribute their products through a third-party institution to
reduce costs. Direct response channels often require a substantial up-front invest-
ment before any income is received. Direct response insurers must set up facilities
and technology, hire and train staff, and develop sales materials. However, direct
response insurers usually can recover this investment fairly quickly because they
do not rely on commissioned sales personnel with their higher staffing and training
costs. Staffing and training costs are typically lower for direct response distribution
than for other distribution channels.
Control
An insurer that wishes to exercise a great deal of control over distribution activi-
ties typically develops either an affiliated agent system or a direct response dis-
tribution system. An insurer using an affiliated agent system can maintain almost
total control of its distribution system. Agents are required to undergo training and
must sell an insurer’s products. Insurers can also fully control the products and
messages they deliver to customers in the direct response distribution system.
Insurers have less control over other personal selling channels and third-party-
institution distribution channels. Insurers cannot control the types of products on
which brokers and financial advisors focus their sales efforts. However, insurers
may be able to include some controls in these producers’ contracts, such as that the
producers must attend periodic compliance and product training sessions. Insurers
can also run promotions from time to time that reward agents if they reach a cer-
tain sales volume in products that the company wants to promote in a given region,
specific product line, or market situation.
Expertise
Insurers want their producers to have a high degree of sales experience and to be
knowledgeable about the insurer and the insurer’s products. Not only will these
producers be able to sell a primary product, but they can also engage in identifying
an existing customer’s needs for additional products while selling, or after selling,
the primary product.
Career agents, multiple-line agents, and brokers have a high degree of sales
experience and general knowledge about insurance products, and they recognize
the importance of additional sales to increase their earnings. However, career agents
and multiple-line agents are more familiar with their primary insurer’s product
portfolio than are brokers who sell the products of many insurance companies. In
addition, brokers are under no obligation to sell a particular insurer’s products.
Financial advisors often have extensive knowledge about their customers but
may lack expertise about particular insurance products or companies. In some
cases, financial advisors may lack extensive sales experience, as their primary
concern is usually helping their customers achieve overall financial goals. Produc-
ers at third-party institutions also vary widely in terms of sales experience, prod-
uct knowledge, and company knowledge. For example, unless bank employees are
adequately trained, they will not have the knowledge or skills necessary to sell

insurance products. Although third-party institutions encourage multiple sales to

customers, insurers have no control over which products they actively promote or
eventually sell.
Customers’ Characteristics
The distribution system through which a product is sold should meet the needs of
the customers in the insurer’s target market. For example, if an insurer has identi-
fied as a target market older, wealthier individuals who expect personalized ser-
vice, then a distribution system that can provide personalized service is probably
best. Customers who prefer to compare products and prices over the Internet at
their own convenience would prefer a direct response distribution system. Rarely
can an insurer satisfy the needs of all of its customers with a single distribution
system or channel. More often, insurers provide multiple options to satisfy various
customer buying preferences.
Product Characteristics
Some products are more effectively and efficiently sold through one distribu-
tion system than another. A complex product such as universal life insurance
typically requires a personal selling distribution system. Simpler products, such as
term life insurance or fixed annuities, can be distributed through a direct
response system or third-party-institution system. Some products, such as vari-
able life insurance or variable annuities in the United States, must be sold through
licensed broker-dealers. Group insurance products are often best sold through
group representatives.
External Marketing Environment

Conditions in the external marketing environment can make one distribution
option more appealing than others. Changes in the economy, technology, laws, and
competitive pressures can all impact which distribution method an insurer uses or
how an insurer will use a particular method. For example, as people have become
more confident in the security of Internet transactions, insurers have begun using
the direct response Internet channel to complete sales transactions. In addition,
producers using personal selling distribution have begun connecting with pros-
pects through online social media, such as Facebook and Twitter. In bad economic
times, the expenses associated with a career agency sales force might result in
insurers turning to another, less expensive distribution option. Insurers wishing to
sell products internationally must consider which distribution systems are avail-
able and accepted in each particular market. For example, brokers are widely used
in the United States, Canada, and the United Kingdom. However, in many other
countries, brokers don’t even exist.

Key Terms
distribution system pre-contract training
distribution channel appoint
agent advanced underwriting
agency contract estate planning
persistency segmented service
employee churning
independent contractor twisting
independent agent rebating
career agent prospect
multiple-line agent cold calling
home service agent worksite marketing
affiliated agent location-selling system
field force salaried sales representative
field office independent financial advisor
general agent wholesaler
general agency broker-dealer
first-year commission insurance broker-dealer
renewal commission bancassurance
service fee platform employee
personal producing general agent financial consultant
(PPGA) nonproprietary product
overriding commission targeted email marketing
broker web advertising
producer group
activities:
Identify all of the distribution channels your company uses. Based on this
information, does your company primarily use a personal selling distribution
system, a third-party-institution distribution system, or a direct response dis-
tribution system?
If your company uses a personal selling distribution channel, look on your com-
pany’s organization chart and determine how the home office and field office
operations connect. Typically, the head of agency operations reports to market-
ing. Is this true for your company? If not, how are these areas connected?
Insurers often use online newsletters that provide readers with helpful advice
or information as part of their direct response distribution system. If your
company distributes such a newsletter, read through it. Identify ways in
which insurance products are promoted in the newsletter and offered for sale
to customers.

Endnotes
1. LIMRA International and Society of Actuaries, Guaranteed Uncertainty: Socioeconomic Influences
on Product Development and Distribution in the Life Insurance Industry (Windsor, CT: LL Global,
Inc., © 2011). Used with permission; all rights reserved.
2. In general, laws in the United States prohibit banks from issuing insurance products. However, laws in
Connecticut, Massachusetts, and New York allow mutual savings banks to issue life insurance policies
to residents of those states.

Insurance Company Operations Chapter 12: Underwriting 12.1
Chapter 12
Underwriting
Objectives
 Define underwriting and explain the relationship between new business
processing and underwriting
 Describe the role that technology plays in new business processing
 List and describe the basic steps for processing an annuity application
 Identify and describe key underwriting job positions
 Distinguish between an insurer’s underwriting philosophy and
underwriting guidelines
 Describe the underwriting process and the primary sources of medical
information underwriters use in underwriting individual coverages
 Define financial underwriting and personal underwriting
 Explain how underwriters use the numerical rating system to assign
proposed insureds to four general risk classes
 Describe how underwriters use the numerical rating in applying the
premium rate charged for insurance coverage
 Explain the relationships between underwriting and other organizational
functions
 Describe the group insurance underwriting process and recognize risk
factors that pertain to group coverage
 Identify and describe laws and regulations that affect the life insurance
underwriting process

12.2 Chapter 12: Underwriting Insurance Company Operations
Outline
New Business Processing Control Mechanisms for
 Processing Life Insurance Underwriting Operations
Applications  Authority Levels
 Processing Annuity New Business  Other Underwriting Controls
Organization of New Business and Company Interrelationships and
Underwriting Operations Underwriting
Purpose of Underwriting Group Underwriting
 Underwriting Philosophy and  The Group Underwriting Process
Guidelines  Risk Factors for Group Life Insurance
The Underwriting Process Regulatory Requirements
 Field Underwriting and
Teleunderwriting
 Medical, Financial, and Personal
Underwriting
 The Underwriting Decision
 Applying the Premium Rate
Underwriting . . . I think it has to do with risks

to the company, but it’s sort of a mystery to
me.
I know that actuaries set premium rates for

insurance and annuity products. I’m not sure
at what point underwriters get involved in
charging premiums.
Y
ou also may wonder about the role of underwriting with respect to evalu-
ating risks and determining the premiums to charge for each proposed
insured. Remember from Chapter 10 that when a new insurance product
is designed, actuaries make estimates about a product’s inflows, such as premi-
ums paid and investment income earned, and outflows, such as benefits paid and
expenses incurred, to determine the financial design of the product. For life insur-
ance, an important element in determining these inflows and outflows is mortality
risk—the likelihood that a person will die sooner than statistically expected. If
the mortality experience for a particular life insurance product is higher—that is,
if more people die—than the insurer anticipated when the product was designed,
then the inflows will be lower and the outflows will be higher than expected. In
other words, the premium rate the actuaries established would not be sufficient to

cover the benefits and expenses that must be paid and earn a profit for the insurer’s
stakeholders. For annuity products, mortality risk is the likelihood that a proposed
insured will live longer than statistically expected.
When an insurance company receives an application for insurance, the com-
pany must assess the degree of risk associated with the application. Underwriting,
also called selection of risks, is the process of (1) assessing and classifying the
degree of risk a proposed insured or group represents and (2) making a decision
to accept or decline that risk. An underwriter is an insurance company employee
who evaluates risks, accepts or declines insurance applications, and determines
the appropriate premium rate to charge acceptable risks.
Once a proposed insured is determined to be an acceptable risk, the under-
writer must determine an appropriate premium rate to charge for the insurance
coverage. The decision regarding the classification of a risk and the premium rate
to charge is called the underwriting decision. Insurers don’t charge all applicants
for the same insurance product the same premium rate because not all proposed
insureds represent the same amount of risk to the insurer. Some proposed insureds
are older, in poorer health, or have other risk factors that make them more likely to
die than other people who are younger or who are in better health. One purpose of
underwriting is to place each proposed insured in the correct risk class according
to the level of risk that the proposed insured represents. A risk class is a group of
insureds who represent a similar level of risk to an insurance company. Insurers
charge different premium rates depending upon the risk class of the proposed
insured.
An insurance company’s success or failure is greatly affected by its under-
writing decisions. Why? Because every person or group to which an insurance
company issues insurance represents a risk to the company. If an insurer does not
properly assess risks, over time the insurer’s profits will suffer, and in the worst
case, the insurer could become insolvent.
What about new business processing? Is that

the same as underwriting?
New Business Processing

Underwriting is part of new business processing. New business processing
includes all of the activities required to process applications for insurance prod-
ucts, evaluate the risks associated with applications for life insurance, and issue
policies. New business processing for group life insurance resembles that for indi-
vidual life insurance in that group underwriters also gather information, assess
risk, and decide whether and on what terms to approve coverage. In some insur-
ance companies, sales and marketing activities are also considered part of new
business processing.

Processing Life Insurance Applications

A producer often initiates the new business process by accepting an application for
insurance. In direct response marketing of insurance, the applicant often initiates
the new business process. In either case, an insurance application is completed and
submitted to the insurer’s home office. More and more insurers are using technol-
ogy to shorten the time between policy application and policy issuance. Electronic
insurance applications allow an applicant, sometimes in conjunction with a pro-
ducer, to complete an application for insurance online and submit the application
directly to the insurer’s new business processing system.
Problems that occur with paper applications, such as incomplete answers and
unreadable handwriting, can be avoided with electronic applications because all
answers are typed rather than handwritten, and all answers must be complete
before the application can be transmitted. Electronic applications typically contain
an e-signature feature that allows the applicant to sign the application electroni-
cally. Some insurers use a point-of-sale electronic signature pad on which the sig-
nature is written. Others use a process known as click-wrap in which the person
clicks a secure, web-based “I agree” or “I accept” button on the electronic docu-
ment. Still others may record the customer’s voice saying “I agree” or “I accept.”¹
Before an application is underwritten, it must undergo many checks, includ-
ing those to ensure that (1) the application used is the correct form for the issuing
jurisdiction, (2) the application is complete and accurate, and (3) the producer who
submitted the application is properly licensed and appointed. Most of these checks
are completed automatically by the new business processing system. If required, a
check is done to ensure that the insurance product is appropriate or suitable for the
applicant based on financial need.
Technology that integrates expert systems with electronic applications also
greatly simplifies and speeds up the new business process. Computer systems,
using decision rules, can provide a “yes” or “no” decision on whether to accept cer-
tain risks without manual intervention. Alternatively, such systems allow insurers
to engage in exception-based underwriting in which rules are applied to process
all applications except the most difficult ones that require an underwriter to take
part in the decision-making process.
The goal of many insurers is to achieve straight through processing (STP),
which is the electronic processing of every step in the new business process with-
out manual intervention. Pure STP would result in a paperless environment in
which all forms and records are maintained electronically and the computer sys-
tem makes the majority of underwriting decisions. Although STP is not wide-
spread in the insurance industry, its popularity is increasing because insurers are
looking for ways to increase efficiency and reduce expenses.
Processing Annuity New Business

Annuities typically do not go through underwriting, although they go through
similar new business processing, as shown in the following simplified process.
Identify customer needs. A producer submits his recommendation to a
prospective annuity owner after identifying and analyzing her needs. If the
prospective owner accepts the recommendation, information that the producer
collects is entered into the insurer’s automated system.

Generate annuity illustrations. The system generates illustrations for the

producer and the prospective contract owner to review. The illustrations are
compliant with applicable laws and regulations and show, for example, how
long the annuity is projected to support monthly income payments under vari-
ous scenarios.
Submit application. A pending contract number is assigned to the contract
application for tracking purposes. The application is submitted for new busi-
ness processing.
Check for suitability. Suitability refers to whether a particular insurance
or annuity product is an appropriate purchase for an applicant based on the
applicant’s needs and financial condition. By verifying suitability, the insurer
attempts to reinforce trust and loyalty. In addition, regulatory requirements
may apply to specified products, including annuities. Some companies require
producers to verify suitability before submitting the application. Other com-
panies perform a suitability check during new business processing.
Generate pending contract. After processing and approval, the system gen-
erates a pending annuity contract for the producer to present to the prospec-
tive owner. The annuity is in force upon the contract owner’s acceptance. The
contract can be administered through the insurer’s automated system by an
authorized producer or staff member.2
Organization of New Business

and Underwriting Operations
Some insurance companies organize their underwriting operations as part of a
new business department. Other insurance companies organize their new business
activities within the underwriting department. Very large insurance companies
may organize their new business operations and their underwriting operations as
separate departments.
In any case, the individual, who is responsible for directing this department or
departments, is typically at the vice president level of the company and reports
to either the CEO, or the COO if the company has one. Sometimes the head of
underwriting operations is known as the chief underwriter. However, sometimes
the chief underwriter is a separate position that reports to the vice president of
underwriting.3 Figure 12.1 briefly describes the duties of the primary job positions
in the underwriting department.
Regardless of how departments are structured, the new business and under-
writing operations are responsible for
Assessing the degree of risk a proposed insured represents
Assigning the risk to an appropriate risk class
Issuing a policy if the risk is accepted

Insurance companies also organize their underwriting work processes in a
variety of ways. Insurers may organize their underwriting process so that applica-
tions are assigned to individual underwriters who work alone to assess each risk.
Other insurers may establish separate teams to handle applications by type of
coverage, product, producer, or geographic area. A jet unit is a team authorized to
immediately approve individual insurance applications that satisfy certain mini-

mum qualifications. All applications that are not issued for immediate coverage
are sent from the jet unit to other underwriting staff.
Group insurers may organize their underwriting by case—that is, applica-
tion, size, geographic location, or producer. Typically, senior group underwriters
perform underwriting for larger groups with more complex needs. Some prefer
to assign groups to underwriters randomly to give underwriters a wide variety of
experience.
What happens if
underwriting accepts
a risk, but charges a What happens if
premium that is too underwriting accepts
high for that risk? a risk, but charges a
premium that isn’t high
enough to compensate
for that risk?
Purpose of Underwriting
The ultimate goal of underwriting is to accept the greatest number of qualified
proposed insureds or groups while keeping the insurer financially sound—a deli-
cate balancing act. Suppose an insurer’s underwriting standards are too strict or
its premiums are not competitive. In this case, producers are less likely to submit
applications to the insurer. The result is a potential decrease in premium income,
which could reduce the insurer’s profitability. What if an insurer’s underwriting
standards are too relaxed? For example, the insurer accepts too many high-risk
applications or its premiums are too low in relation to the risk the insurer accepted.
In this situation, the insurer might not have enough money to pay benefits when
they come due. Either situation could threaten the insurer’s solvency and result in
disciplinary action from insurance regulators. Sound underwriting ensures that
each person pays a premium for insurance that is proportionate to the risk that the
insured represents. Underwriting is considered to be sound if each risk is evalu-
ated accurately, classified properly, and either approved for an appropriate pre-
mium rate or denied according to the insurer’s procedures.

Figure 12.1. Job Positions in the Underwriting Department
The chief underwriter manages the

underwriting department; establishes
the company’s underwriting philosophy,
guidelines, and procedures; monitors
the cost and quality of underwriting; and
oversees the underwriting of large or
complex applications.
The medical underwriting director
and her staff prepare and update
the company’s medical underwriting
standards and provide assistance to
underwriters concerning proposed
insureds who have unusual or complicated
medical histories. The medical underwriting director does not conduct a physical
examination of each life insurance applicant. Some insurance companies consult
physicians for medical underwriting support on an as-needed basis instead of employing
a full-time medical underwriting director and staff.
Underwriting managers direct all of the insurer’s day-to-day underwriting activities and
report to the department head, typically the chief underwriter.
Underwriting supervisors report to the underwriting managers. Each supervisor
is responsible for one or more insurance products or for a group of producers or
geographic region, depending on how the underwriting department is organized.
Underwriters assess and classify the risks presented in the life insurance applications
submitted to the company.
Producers, also called field underwriters, are not formally part of the underwriting
function. However, they play a significant role because producers initiate the risk
selection process for most policies by gathering initial information about proposed
insureds when they submit insurance applications.
Source: Adapted from Miriam A. Orsina and Gene Stone, Insurance Company Operations, 2nd ed. [Atlanta: LOMA (Life Office
Two concepts are important to sound life insurance underwriting:

Antiselection, also known as adverse selection, is the tendency of people who
believe they have a greater-than-average likelihood of loss to seek insurance
protection to a greater extent than do those who believe they have an average
or a less-than-average likelihood of loss. The possibility of antiselection makes
the underwriter’s role particularly important in the risk assessment process.
Example: A woman who is terminally ill is more likely to be interested in

insuring her life than is a woman in excellent health. To avoid antiselection,
underwriters analyze information provided in the insurance application
and investigate further if needed.

Persistency is the retention of business that occurs when a policy remains in

force. For most life insurance policies, persistency depends upon the continued
payment of a policy’s renewal premiums. When assessing the risk posed by
a proposed insured, underwriters must consider the likelihood of the policy’s
remaining in force if issued. To offset costs related to underwriting and pro-
ducer commissions, life insurance policies need to remain in force for several
years before they are profitable to the insurer.
Example: Policyowners usually will keep policies in force as long as they

have a need for insurance and an ability to pay for the coverage. To
improve persistency, underwriters approve amounts of coverage that are
both suitable and affordable for the insurer’s policyowners.
One of our agents said he submitted an

application to another insurer because he
knew our company wouldn’t approve it. Why
would one insurer accept a risk if another one
wouldn’t?
Underwriting Philosophy and Guidelines

Recall from Chapter 1 that the underwriting committee of the insurer’s board of
directors oversees the insurer’s underwriting philosophy, guidelines, and research.
An insurer’s underwriting philosophy is a set of objectives for guiding all of an
insurer’s underwriting actions. An underwriting philosophy generally reflects
the insurer’s strategic business goals and includes its pricing assumptions for its
products. For example, the underwriting philosophy of a life insurance company
may include a goal to insure some high-risk proposed insureds. The underwrit-
ing philosophy of another insurer may not include such a goal. Regardless of
underwriting philosophy, all companies seek a mix of business that will satisfy a
profit target.
An insurer’s underwriting philosophy, in turn, shapes its underwriting guide-
lines. Underwriting guidelines are standards that specify the limits within which
proposed insureds may be assigned to one of an insurer’s risk classes established
for each insurance product. The specific criteria for each risk class vary from
insurer to insurer. However, most insurance companies base their risk classes on
the four general risk classes, which are described in Figure 12.2.
Many life insurance companies then subdivide these risk classes according
to smoker or nonsmoker status, such as preferred smoker, preferred nonsmoker,
standard smoker, and standard nonsmoker. Smokers represent the highest mortal-
ity risk and nonsmokers represent the lowest mortality risk. Insurance companies
may further divide smokers and nonsmokers into groups according to age. Some
life insurance companies use the terms tobacco users and nontobacco users to
capture the mortality effects of using smokeless tobacco products such as chewing
tobacco as well as cigarette, cigar, and pipe tobacco products. Other life insurance
companies classify nonsmokers as preferred risks and smokers as standard risks
or substandard risks on the basis of other health-related information. We’ll learn
more about how underwriters use these classes later in this chapter.

Figure 12.2. Typical Underwriting Risk Classes
The preferred class designates proposed insureds whose anticipated mortality is

lower than average and who represent the lowest degree of mortality risk.
The standard class designates proposed insureds whose anticipated mortality
is average.
The substandard class, also called the special class, designates proposed insureds
whose anticipated mortality is higher than average, but who are still considered to
be insurable.
The declined class designates proposed insureds whose anticipated extra
mortality is so great that the insurer cannot provide coverage at an affordable cost
or whose mortality risk cannot be predicted because of recent or unusual medical
conditions or other risk factors.
I know producers play a key role in the

underwriting process. They meet with
applicants and proposed insureds all the time,
so they can provide underwriters with lots of
information to use in classifying risks.
The Underwriting Process

The basic underwriting process consists of (1) field underwriting or teleunderwrit-
ing, (2) gathering additional information as needed, and (3) making the under-
writing decision. Figure 12.3 presents a simplified overview of the underwriting
process after the initial field underwriting or teleunderwriting is complete.
Remember that technology has automated much of this process. If the application
is approved as a preferred or standard risk, then new business processing creates
a policy record and arranges for any special services requested by the applicant—
such as an automatic premium payment plan. The policy is then issued and either
mailed directly to the policyowner or sent to the producer to deliver to the policy-
owner. The policy is in force when it is accepted by the policyowner.
If an application is declined, new business processing notifies the producer who
submitted the application so that he can explain to the applicant why the insurer
has declined to issue the policy.
If the proposed insured has certain medical, personal, or financial risk factors
but is still considered insurable, the application is rated. Rating is the process of
approving an application but at a higher-than-average premium rate or with a mod-
ified type or amount of coverage. For example, a proposed insured with a history
of diabetes could be approved for the requested coverage as a substandard risk. The
substandard-rated policy would require a higher-than-standard premium rate.

Figure 12.3. The Underwriting Process
Receive application, create a Search the insurer’s records for information about the
case file, and assign a code or applicant—e.g., other coverage, prior claims or complaints,
number for tracking purposes other pending or denied applications with the insurer
Underwriter reviews application
Obtain and review

additional information—e.g., Need
motor vehicle record (MVR), Yes more No
medical records information?
Insurable
Yes as a preferred or
a standard risk?
No
Approve application
Insurable
Yes
as a substandard
risk?
Send application to Send application to
policy issue policy issue No
Send policy to producer

Send policy to producer
or to policyowner
Decline application
Producer offers
substandard-rated
policy to applicant
Applicant
Yes accepts policy? No
Policy is in force No policy is in force
Managment Association, Inc.),© 2005], 243. Used with permission; all rights reserved.

When a policy is rated, new business processing contacts the producer who
submitted the application and explains why the policy was rated. If the applicant
accepts the rated policy when the producer presents the policy to the applicant,
then the policy is in force. If the applicant does not accept the rated policy, then no
policy is in force.
Field Underwriting and Teleunderwriting

When producers gather initial information about applicants and proposed insureds,
the process is called field underwriting. The proposed insured typically answers
questions about her medical history—whether she now has or ever had certain
medical conditions, diseases, or injuries; the extent of drug or alcohol use; and her
family’s health history. Field underwriting also screens applicants and proposed
insureds to determine if they are likely to be approved for a specific type and
amount of coverage. Field underwriting saves insurers time and money because
most uninsurable risks are identified during field underwriting.
To assist the producer during field underwriting, most insurers provide a field
underwriting manual, which presents specific information that guides a pro-
ducer in (1) assessing the risks a proposed insured represents and (2) assembling
and submitting the application as well as any required evidence of insurability.
Evidence of insurability is documentation that the proposed insured appears to
be an insurable risk. The field underwriting manual typically contains for each
product a table of underwriting requirements, also called an age and amount
requirements chart. The table of underwriting requirements specifies the kinds of
information needed to assess the insurability of a proposed insured. Generally, the
older the proposed insured is or the greater the amount of life insurance requested,
the more information needed to assess the risk. A producer may report, in the
portion of the application called the agent’s statement, additional information that
he thinks could affect the underwriting decision.
An alternative to field underwriting is teleunderwriting, a method by which
a home office employee or a vendor, rather than the producer, gathers most or all
of the information needed for underwriting. When teleunderwriting is used, the
producer and the applicant complete only an abbreviated application. The other
required underwriting information is typically obtained by telephone. However,
some insurers conduct teleinterviews online via their Internet sites. Although each
insurer sets its own guidelines for using teleunderwriting, an international survey
conducted by Hank George Inc. and Select X for SCOR Global Life Re reported
that more than 75 percent of insurers in North America, the United Kingdom,
Ireland, South Africa, Australia, and New Zealand use teleunderwriting in some
form.4
In teleunderwriting, the interviewer follows a prepared script of questions and
enters the answers into a computerized system. Many insurers use expert computer
systems that make inferences based on the information provided. For example, if
a proposed insured tells the interviewer that she has a specific medical condition
or takes certain prescription medications, the system guides the interviewer to ask
relevant follow-up questions.

Insurers find that teleunderwriting often provides more complete and thorough
information than does field underwriting because applicants feel more comfort-
able providing personal information to a stranger over the telephone or the Inter-
net. Producers also benefit from having more time to spend on marketing and sales
activities. In addition, telephone conversations can be recorded and reviewed for
quality assurance and to enhance an insurer’s compliance activities.5
How can underwriters find out if a proposed
insured is telling the truth about his lifestyle or
finances on the application?
Medical, Financial, and Personal Underwriting

In some cases, the information gathered during field underwriting or teleun-
derwriting provides insurers with all the information that is needed to make an
underwriting decision. In other cases, the insurer needs more information from
the applicant or proposed insured. Following is a list of commonly used sources in
medical underwriting:
A nonmedical supplement, also called a statement of health (SOH), contains
the proposed insured’s answers to medical history questions recorded by a pro-
ducer or teleunderwriter at the time of application. The nonmedical supplement
may be in the short form, which asks about the proposed insured’s doctors and
when the proposed insured has been admitted to the hospital, or in the long
form, which asks about diseases, courses of treatment, and medications. The
proposed insured is not required to undergo any type of physical examination.
The nonmedical supplement becomes part of the insurance contract.
A paramedical report contains (1) the proposed insured’s answers to medical
history questions recorded by a paramedical examiner and (2) the results of
an examination that a paramedical examiner conducts. Usually, a paramedical
examination records height, weight, blood pressure, pulse, and sometimes chest
and waist measurements. The completed medical history, but not the results of
the paramedical examination, becomes part of the insurance contract.
A medical report is a report of the insured’s health that both the proposed
insured and a physician complete. The physician completes the medical ques-
tionnaire by recording the proposed insured’s answers to the health ques-
tions. The physician also records the results of a physical examination of the
proposed insured. The proposed insured signs the completed medical ques-
tionnaire. This questionnaire, but not the results of the medical examination,
becomes part of the insurance contract.
The MIB Group Inc. (MIB) is a not-for-profit membership corporation estab-
lished to provide coded information to insurers in Canada and the United
States about medical conditions that applicants have disclosed or other insur-
ance companies have detected in connection with previous applications for
insurance.

An attending physician’s statement (APS), called a medical attendant’s report

(MAR) in some countries, is a report by a physician who has treated or is cur-
rently treating a proposed insured. The APS contains the proposed insured’s
medical records. Sometimes physicians are asked to complete a specialized
medical questionnaire, which is a document that requests detailed informa-
tion about a specific illness or condition from a proposed insured’s attending
physician or a physician who has examined the proposed insured at the request
of the insurance company.
Insurance producers or underwriters sometimes order medical tests or labo-
ratory tests on a proposed insured in accordance with the insurer’s published
underwriting requirements. Four laboratory tests commonly ordered are a
urinalysis, a blood chemistry profile, an electrocardiogram (EKG), and an
oral specimen (saliva) test.
Pharmaceutical databases provide insurers with prescription histories for
proposed insureds that are indicative of what conditions the proposed insureds
have or what treatments have been prescribed.
Financial underwriting is an assessment to determine whether (1) the pro-
posed insured needs the coverage applied for, (2) a reasonable relationship exists
between the need for the coverage and the amount of coverage applied for, and
(3) the applicant can afford the coverage. Generally accepted financial needs for
purchasing personal life insurance include family income protection, estate set-
tlement, and charitable contributions. By engaging in financial underwriting, an
underwriter guards against several risks, including antiselection. For example, an
applicant who applies for an excessive amount of insurance may indicate the pres-
ence of antiselection,
The underwriting decision is based not only on medical and financial fac-
tors, but also on personal factors. Personal underwriting analyzes those life-
style choices that can significantly affect the probable length of a person’s life.
For example, a hazardous occupation, a history of reckless driving, or a criminal
history are personal factors that would increase the degree of risk a proposed
insured represents to an insurance company. Commonly used supporting docu-
ments for personal underwriting include motor vehicle reports (MVR) and criminal
history investigations.
The Underwriting Decision

After gathering all of the needed information, an insurer makes a risk assess-
ment. To make risk classification and premium rate decisions for individual life
insurance products, insurers typically use a numerical rating system, a risk
classification method in which a number—a numerical rating—is assigned to an
individual proposed insured according to the degree of risk he represents to the
insurer. The numerical rating is then used to determine the appropriate risk class
in which to place the proposed insured. Figure 12.4 describes the numerical rating
system in risk classification.

Figure 12.4. The Numerical Rating System

The numerical rating system uses debits and credits. A proposed insured’s medical and
personal risk factors that have an unfavorable effect on mortality are assigned “plus” values
(such as +25) and are called debits. Medical and personal risk factors that have a favorable
effect on mortality are assigned “minus” values (such as –25) and are called credits. To
calculate a proposed insured’s total mortality risk:
Start with a base of 100, which most insurers use for standard mortality.
Assign a debit—a positive number—for each risk factor that has an unfavorable effect
on mortality.
Assign a credit—a negative number—for each risk factor that has a favorable effect on
mortality.
Add the debits to, and subtract the credits from, the base number to obtain the
numerical rating.
Example: Lora Gentry’s medical records indicate that she has a slightly enlarged heart. The
insurer from which Ms. Gentry is requesting coverage typically assigns a debit of +50 to
this impairment. The insurer assigns a credit of –10 because both of Ms. Gentry’s parents
are alive, healthy, and in their 80s. If Ms. Gentry has no other impairments or medical
or personal risk factors that affect mortality, then the total numerical rating Ms. Gentry
represents is 140 (100 + 50 – 10).
150
140
+50 -10
Enlarged Parents’
100 Heart Health
+100
Standard
Mortality
Is it better for me to have a higher or lower

numerical rating? Isn’t higher always better?
Because positive numbers are assigned to factors that have been determined sta-
tistically to increase a proposed insured’s mortality risk, a lower numerical rating
is better than a higher numerical rating. Generally, the higher the numerical rating,
the higher the premium charged for the same type and amount of insurance cover-
age. The lower the numerical rating, the lower the premium charged for the same
type and amount of coverage.
The total numerical rating determines which risk class is most appropriate
for the proposed insured—the preferred, standard, substandard, or declined risk
class, each of which we described earlier in this chapter. The numerical rating

corresponds to a specific acceptable range for a risk class. For example, a numeri-
cal rating from 100 to 125 may be classified as a standard risk and charged the
standard premium rate. Using this range, Ms. Gentry from our example in Figure
12.4 would not be a standard risk. The underwriter evaluating Ms. Gentry’s appli-
cation would have to determine the extra premium necessary to compensate for
her extra mortality. However, if Ms. Gentry had been a preferred risk, she would
pay a lower premium than the premium charged for a standard risk on the same
amount and type of coverage.
So . . . how does the underwriter get from the
numerical rating to the premium rate?
Applying the Premium Rate

Premium rates for individual life insurance are based on an insurer’s actuarial
assumptions concerning the average likelihood of loss for the population as a
whole. Actuaries list premium rates for a particular insurance product in a rate
book, which may be in electronic form. Underwriters refer to the rate book after
evaluating the risk of loss on each insurance application to determine the premium
amount to charge for insurance coverage. Note that rates for group life insurance
are negotiated between the group and the life insurance company.
Example: An underwriter received four applications for $100,000 of the

same type of life insurance coverage. The underwriter determined the
numerical rating and risk class for the proposed insureds, who were all of
the same age.
Juan Coronado 85 (preferred risk)
Shanna Brennan 100 (standard risk)
Leila Appelbaum 200 (substandard risk)
Fred Thiebault 500 (declined risk)
Suppose the premium rate for preferred risks is $4.00 per coverage unit.
(A unit of life insurance coverage is typically $1,000.) The annual premium
for Mr. Coronado’s coverage would be $400 because he is classified as a
preferred risk ($4.00 premium rate × 100 coverage units).*
If the insurer’s rate book listed a premium rate for a standard risk of $4.50
per coverage unit for this type of life insurance, Ms. Brennan’s premium
would be $450 ($4.50 premium rate × 100 coverage units).
Ms. Appelbaum’s premium for the same coverage would be higher than
$4.50 per coverage unit because she is a substandard risk. The underwriter
would not apply a premium rate to Mr. Thiebault’s risk class. Instead, the
underwriter would notify the producer about Mr. Thiebault’s status as a
declined risk.
* In this simple example, we calculate the premium for the mortality risk
each insured represents to the insurer. However, the premium charged
for life insurance coverage also typically includes an amount for policy
expenses and an amount that allows the insurer a modest profit on the
insurance product. The premium is calculated by the insurer’s automated
system based on the underwriter’s classification of the risk the proposed
insured presents.
One person has to pay $50 more per year

than another person for the same insurance
coverage? That doesn’t sound fair to me.
Should someone who represents a higher risk of loss to the insurer pay the same
premium on the same coverage as someone who represents a lower risk of loss?
No. That wouldn’t be equitable to the person who represents a lower risk to the
insurer. For individual life insurance underwriting, insurers charge premiums that
are proportionate to the risk that each proposed insured represents.
Underwriters may use various methods to determine premium rates for pro-
posed insureds classified as substandard risks. Under the table rating method,
premium charges are determined by dividing substandard risks into broad groups
or tables according to their numerical ratings. The extra mortality for each sub-
standard group is expressed as a percentage added to standard mortality as has
been shown by the insurer’s actual mortality experience. Based on the proposed
insured’s numerical rating, a table rating is assigned that generally reflects a mul-
tiple of the insurer’s mortality rates for standard risks. The table rating method is
appropriate when a risk shows a pattern of extra mortality that increases with age,
as is found in diabetic or overweight people.
Example: Life insurance applicant Leila Appelbaum was earlier classified

as a substandard risk. Assume that the life insurance company uses the
table rating method for substandard risks and that Ms. Appelbaum has
a table rating of 4, which represents two times the standard mortality, or
200. The table rating of 4 would be entered into the insurer’s administra-
tive system and an appropriate premium amount would be calculated.
An alternative method of charging for substandard risks is the flat extra

premium method, in which the insurer adds to the standard premium rate a speci-
fied extra dollar amount for every $1,000 of life insurance. The flat extra premium
method is appropriate when the extra mortality risk is expected to remain constant
or decrease with age.
Example: Assume that the life insurance company uses the flat extra
premium method for substandard risks. Life insurance applicant Leila
Appelbaum will be charged an extra $3.00 per $1,000 of life insurance
coverage over the standard premium rate. In this case, Ms. Appelbaum’s
premium will be $750 ($4.50 standard premium per coverage unit + $3.00
extra premium per coverage unit × 100 coverage units).

Control Mechanisms for

Underwriting Operations
Underwriting operations require constant monitoring to ensure that underwrit-
ing staff are following established guidelines and that the underwriting depart-
ment is meeting its goals. Authority levels, productivity metrics, audit logs, and
market conduct examinations are primary control mechanisms for the underwrit-
ing department.
Authority Levels
Not every underwriter has the same level of authority to approve, rate, or decline
an insurance application. An underwriter’s level of authority is specified by (1) the
maximum coverage amount that the underwriter can approve and (2) the degree
to which the underwriter may rate or decline an insurance application without the
approval or review of a more experienced underwriter.
Most individual life insurers develop charts or schedules of underwriting
authority that serve as steering controls. Each chart indicates the highest amount
of coverage that can be approved at each authority level. Generally, an underwriter
one level higher than the original underwriter reviews all rated and declined appli-
cations and all applications that have exclusions.
Example: Marie Fortine, vice president of underwriting and new business

at the Lifeblood Insurance Company, is authorized to approve and
decline all life insurance applications in any coverage amount. She also is
authorized to approve or decline applications that contain exclusions.
Colin Logue, intermediate underwriter, is a highly skilled underwriter
and has years of underwriting experience. He is authorized to approve
standard cases up to $500,000, and substandard cases and cases with
exclusions up to $250,000. He is not authorized to decline cases without
approval from a senior underwriter or Ms. Fortine.
Ina Parra, junior underwriter, has less than one year of experience as an
underwriter. She is authorized to approve standard cases up to $100,000.
Ms. Parra is not authorized to approve substandard cases or cases with
exclusions, nor is she authorized to decline cases.
Other Underwriting Controls

For concurrent controls, insurers establish productivity metrics for a variety of new
business and underwriting activities. Insurers specify a typical volume of cases
for underwriters to complete during a week or a month. For example, an insurer
might specify that experienced underwriters be able to complete between 50 and
75 new underwriting applications each week.6 Others might look at the number
and type of cases underwritten in a month as well as the amount of time spent
underwriting during that month. Insurers may also look at the average number of
days from underwriting approval to policy issue. Managers continually monitor
these productivity metrics to ensure that underwriters are satisfying requirements
and make adjustments as needed.

Automated workflow systems that route documents automatically to staff mem-

bers for underwriting provide an important control feature in that they create an
audit log, which is a record of work completed. Audit logs are a feedback control
in that insurers review these logs to make sure that employees follow all the proper
procedures on each case.
Another feedback control is an insurer’s market conduct examination, which may
include an evaluation of the insurer’s practices regarding premium rates and under-
writing. Market conduct examiners review applications from each line of business
and the insurer’s rating manuals and policy records to determine if the insurer has
applied its premium rates consistently. Examiners review the insurer’s underwrit-
ing practices to ensure that they comply with applicable regulatory requirements.
Examiners also review the insurer’s declined insurance applications to verify that
the reasons for declining the applications are not unfairly discriminatory.
In addition, an insurer’s claims experience is an important indicator in how
underwriting is performing. For example, if claims are higher than anticipated,
the underwriting area may have deviated from its underwriting philosophy, and
underwriting guidelines may need to be adjusted.
Company Interrelationships
and Underwriting
Underwriters frequently interact with external and internal customers. External
customers of the underwriting function include producers, vendors, and reinsurers.
An insurance company typically contracts with vendors to perform one or more
services. For example, vendors may conduct medical exams, provide financial
analyses, or perform criminal background checks on proposed insureds. Insurers
contract with reinsurers when the insurer needs to transfer some or all of the risk
it assumed in underwriting.
Underwriters also collaborate with many internal customers, as shown in the
following examples:
Actuaries set actuarial assumptions for insurance products based on average
risks presented by proposed insureds and share findings with underwriters.
Marketing staff share information with underwriters about customer needs
and wants, competitive products, and sales results.
Reinsurance staff help underwriters develop underwriting guidelines for rein-

surance arrangements.
Compliance staff ensure that underwriters follow all applicable laws and
regulations.
Legal staff ensure that underwriters fulfill the insurer’s legal obligations with
respect to insurance contracts.
Claim staff obtain assistance from underwriters, particularly when claims are
filed during the contestable period.
Accounting staff assist underwriters with the analysis of financial statements

submitted with insurance applications.

Information technology staff support underwriters in developing, maintaining,

and troubleshooting administrative systems used in underwriting.
Customer service staff obtain pertinent information from underwriters to

respond to customer questions.
I’m covered by the group life insurance plan at

work. How do they know how much to charge
me?
Group Underwriting
Underwriting for group life insurance follows essentially the same principles
and procedures that are used in individual life insurance underwriting, with
one key difference. Except for very small groups, group underwriting evaluates
information about the composition of and the risk presented by the group as a
whole, rather than evaluating information about individual group members. How-
ever, underwriters may require evidence of insurability from individual group
members when the group is very small or when new group members enroll in a
plan after the enrollment deadline. In group insurance, the individual members of
a group are called group members.
The goals of group underwriting are similar to the goals of individual under-
writing: (1) to determine the level of risk a group of people represents and (2) to
charge a premium for group coverage that is appropriate to that level of risk. A
large group normally includes people with medical impairments that would make
them substandard or declined risks if the underwriter evaluated them using indi-
vidual underwriting guidelines. The group underwriter is not concerned with the
high risks presented by a few group members. Rather, the group underwriter is
interested in whether the group as a whole is an acceptable risk.
Group insurance contracts in the United States are subject to state laws that may
be based on the NAIC Group Life Insurance Model Act, which defines the types
of groups eligible for group life insurance and sets forth provisions that group
insurance policies must contain. Underwriters also must ensure that groups apply-
ing for insurance coverage are eligible to do so under the applicable state laws.
The Group Underwriting Process

Much of the initial information about a group comes from the individual who
markets the policy to the group. Group representatives, who are salaried insur-
ance company employees specifically trained in the techniques of marketing and
servicing group products, market most group policies. Group representatives may
work alone or with producers, who are paid on commission and who sell the group
insurance policy. In some cases, the group representative initiates the sale to an
organization and is the only contact between the group prospect and the insurer. In
other cases, producers initiate contact with the group prospect and then call on the
group representative for assistance in selling and implementing the plan. Figure
12.5 presents a simplified illustration of the group underwriting process.

Figure 12.5. The Group Underwriting Process
1 A group
prospect—for
2 If the
underwriter
decides that
3 If
the group
prospect
4 If the
underwriter
approves the
5 Each
group insured
is provided
example, an
employer, the group approves the coverage after with a
submits a prospect proposal, assessing certificate of
request for represents an the group the master insurance.
proposal. acceptable prospect application,
risk, he submits the insurer
develops a a master uses the
proposal for application to master
insurance. the insurer. application to
develop the
master group
insurance
contract.
1. request for proposal (RFP): A document that provides detailed information about the
group and the requested coverage, and which solicits a bid from an insurer to provide that
coverage
2. proposal for insurance: A document that details the specifications of a group insurance
plan proposed by an insurer for a group prospect
3. master application: An application for group insurance that contains the specific
provisions of the requested plan of insurance and is signed by an authorized officer of the
proposed policyholder
4. master group insurance contract: A legal document that certifies the relationship
between the insurer and the group policyholder and specifies the contract’s benefits,
typically referred to as the group insurance policy or group plan. Only the insurer and the
group policyholder, and not the group insureds, are parties to the master group insurance
contract.
5. certificate of insurance: A document that describes (1) the coverage that the master
group insurance contract provides to the group insureds and (2) the group insureds’ rights
under the contract

Group members who are covered by the insurance contract are called group
insureds. In many cases, group members and group insureds are one and the
same. However, under some master group insurance contracts, group members
must elect coverage under the contract. In such situations, only those group mem-
bers who choose the coverage become group insureds.
Risk Factors for Group Life Insurance

Group underwriters evaluate the characteristics of (1) the group and (2) the pro-
posed group coverage. Characteristics of the group include the group’s reason for
existence, the group’s size, the age and sex distribution of group members, and the
group’s prior coverage and claim experience. The age and sex distribution of the
group and the group’s prior coverage and claim experience are two critical charac-
teristics for group underwriting purposes. Characteristics of the proposed group
coverage include eligibility requirements, benefit levels, method of plan adminis-
tration, and mode of commission payment.
Regulatory Requirements
The underwriting decision relies on personal and confidential information
obtained from the insurance application and supporting documents such as
reports on the proposed insured’s health and finances. Many countries have laws
and regulations that govern the privacy of the personal and confidential informa-
tion an insurer obtains to make underwriting decisions. Because of such legal
requirements, insurers have incorporated certain forms and procedures into the
application process. For example, a producer must obtain the applicant’s signa-
ture authorizing the insurer to conduct a credit check, to contact the proposed
insured’s physicians on matters that relate to the proposed coverage, and so
on. In addition, the insurer’s automated systems include features that require
passwords and other authentication methods to ensure that only authorized
employees can access the proposed insured’s nonpublic personal information.
Figure 12.6 describes several laws that affect life insurance underwriting.

Figure 12.6. Some Laws and Regulations Affecting Underwriting
Unfair Discrimination
An underwriter’s responsibility is to distinguish risks that are acceptable from risks that are unacceptable by
carefully examining facts about the proposed insured. Laws generally permit insurers to discriminate among
risks as long as they base their decisions on (1) recognized actuarial principles or (2) the insurer’s own actual or
reasonably anticipated experience. However, many jurisdictions have enacted laws to protect customers against
unfair discrimination in underwriting. Generally, insurers are prohibited from basing underwriting decisions on
factors such as the proposed insured’s sex, race, marital status, national origin, or religion. Some jurisdictions
also prohibit insurers from unfairly discriminating against proposed insureds on the basis of certain mental or
physical impairments, such as blindness or deafness.
Example: Underwriters in Canada generally may not discriminate among proposed insureds for life
insurance coverage on the basis of whether a person is male or female. In addition, some provinces
specifically prohibit discrimination on the basis of physical and mental impairments, marital status, and
sexual orientation.
Example: New Zealand’s Human Rights Act of 1993 prohibits discrimination on the basis of age, sex, and
disability. However, the act permits an insurer to base the terms and conditions of insurance coverage
on supporting actuarial or statistical data. An insurer can impose an additional premium or reduce the
amount of insurance coverage if the insurer has actuarial data to support its decision.
Fair Credit Reporting Act (FCRA)

When assessing the risk presented by a proposed insured, an insurer often obtains information relating to an
individual’s credit-worthiness, credit standing, or general background. The U.S. federal Fair Credit Report-
ing Act (FCRA) regulates the reporting and use of consumer information and seeks to ensure that consumer
reports contain only accurate, relevant, and recent information. A consumer reporting agency is a private busi-
ness that assembles or evaluates information on consumers and furnishes consumer reports to other people
and organizations in exchange for a fee. If an underwriter decides to use a report generated by a consumer
reporting agency, the underwriter must follow the procedures specified by the FCRA. For example, the under-
writer is required to notify the applicant before requesting such a report.
Privacy Legislation
The Gramm-Leach-Bliley (GLB) Act is a U.S. federal law that requires insurance companies to respect
customers’ privacy and to protect the security and confidentiality of those customers’ nonpublic per-
sonal information. Nonpublic personal information is personally identifiable information about a con-
sumer that is not publicly available.
Many states in the United States have passed insurance privacy laws based on the NAIC Model Pri-
vacy Act, a model law that establishes standards for the collection, use, and disclosure of information
gathered in connection with insurance transactions. The model act applies only to personal insurance,
and primarily governs underwriting and claim administration.
In Canada, the federal Personal Information Protection and Electronics Document Act (PIPEDA)
governs the collection, use, and disclosure of personal information by organizations in the private sec-
tor. Insurance companies are governed by PIPEDA, except in Quebec, British Columbia, and Alberta,
where substantially similar provincial privacy laws apply. In addition, on the provincial level, the Cana-
dian Life and Health Insurance Association (CLHIA) has issued Right to Privacy Guidelines. Insurers may
either adopt these guidelines or develop their own stricter guidelines.
Laws Restricting the Sale of Insurance

Laws in some countries govern the sale of insurance to their citizens. For example, the sale of life insurance by a
U.S. insurer to Mexican citizens is regulated by the government of Mexico, even if the proposed insured is run-
ning a business, or perhaps owns property in the United States. Similar regulations exist in France. If a foreign
citizen is an insurance applicant in the United States, it does not necessarily mean that a life insurance company
domiciled in the United States can issue the coverage.

Key Terms
mortality risk paramedical report
underwriting medical report
underwriter MIB Group Inc. (MIB)
underwriting decision attending physician’s statement
risk class (APS)
new business processing specialized medical questionnaire
electronic insurance application pharmaceutical database
e-signature financial underwriting
click-wrap personal underwriting
exception-based underwriting numerical rating system
straight through processing (STP) debits
suitability credits
jet unit table rating method
antiselection flat extra premium method
underwriting philosophy audit log
underwriting guidelines group member
preferred class NAIC Group Life Insurance
standard class Model Act
substandard class group representative
declined class request for proposal (RFP)
rating proposal for insurance
field underwriting master application
field underwriting manual master group insurance contract
evidence of insurability certificate of insurance
table of underwriting requirements group insured
agent’s statement Fair Credit Reporting Act (FCRA)
teleunderwriting consumer reporting agency
nonmedical supplement
activities:
Compare how your company organizes the underwriting function with the
descriptions in this chapter. Do you have a new business department or just an
underwriting department?
The MIB Group Inc. (MIB) is a source of medical information for insurers.
Read about MIB at http://www.mib.com/html/consumer_protection.html. If
you wish, obtain information from MIB about the contents of any consumer
file that it has on you. Consumers have the right to request one free copy of an
MIB Consumer File per year.
If you are insured by your employer’s group life insurance policy, locate the
certificate of insurance for your coverage. Note that it is likely located online
at your employer’s website.
Endnotes
1. Tammy J. McInturff, “E-signatures Revisited,” Resource, February 2009.
2. Dan Woodman, “New Business Origination for Annuities,” MSDN Architecture Center, May 2007,
http://msdn2.microsoft.com/en-us/architecture/bb419309.aspx#nbann_topic (16 May 2011).
3. LOMA, New Business and Underwriting Structure, Information Center Brief (Atlanta: LL Global,
Inc., © 2010). Used with permission; all rights reserved.
4. LOMA, Teleunderwriting and Tele-interviewing, Information Center Brief (Atlanta: LL Global, Inc.,
© 2010). Used with permission; all rights reserved.
5. Ibid.
6. LOMA, Measuring Processing Productivity, Information Center Brief [Atlanta: LOMA (Life Office
Management Association, Inc.), © 2009]. Used with permission; all rights reserved.

Insurance Company Operations Chapter 13: Claim and Annuity Benefit Administration 13.1
Chapter 13
Claim and Annuity

Benefit Administration
Objectives
 Explain why effective claim administration is essential to the success of
an insurance company
 Describe the organization of the claim department and the various levels
of authority for claim department staff
 List and describe the basic steps in the life insurance claim decision
process
 Define material misrepresentation and explain the process for handling
material misrepresentations in a life insurance policy
 Identify documents commonly accepted as proof of an insured’s death
and describe types of deaths that might require additional investigation
 Describe the suicide exclusion and how exclusions in a life insurance
policy can affect a claim decision
 Describe the process for calculating and paying the policy benefit
 Describe the claim process for reinsured life insurance policies
 Explain the importance of claim investigation in uncovering claim fraud
 Describe the laws and regulations that affect claim administration
 Describe how an insurer administers annuity death benefits and
scheduled periodic payments

13.2 Chapter 13: Claim and Annuity Benefit Administration Insurance Company Operations
Outline
Organization of the Claim Quality Control in
Department Claim Processing
Claim Philosophy and Regulatory Requirements
Claim Practices  Model Unfair Claims Settlement
Practices Act
Life Insurance Claim Process
 Determining If Benefits  International Laws
Are Payable Annuity Administration
 Calculating the Amount Payable  Annuity Death Benefit
 Paying the Proceeds Administration
 Identifying the Proper Payee  Annuity Payout Administration
Claim Investigation
 Claim Fraud
I’ve been assigned to a special customer

service team. I’m being trained to answer
general claim questions. Anything
complicated, I transfer to the claim
department. I’d like to know more about what
they do.
C
laim administration is the insurance function that is responsible for
evaluating, processing, and paying valid claims for contractual benefits
that policyowners or beneficiaries present. Claim administration, which is
sometimes called claim adjudication, claim handling, claim processing, or claim
servicing, is one of the most significant and often complex processes that life
insurance companies perform. Effective claim administration is important to the
success of an insurance company for several reasons:
Claim administration fulfills the insurer’s primary responsibility to its
policyowners—prompt payment of policy benefits when an insured event
occurs.
As a primary contact point with customers, claim administration greatly
impacts customer loyalty and retention, as well as the company’s reputation.
The data obtained from claim administration is used in determining the accu-
racy of underwriting decisions and in designing new insurance products.
By reducing or eliminating mistaken or fraudulent claims, claim administra-

tion helps a company control expenses.1
Effective claim administration requires satisfying two somewhat contradictory
objectives. First, valid claims should be processed as rapidly as possible. Benefi-
ciaries generally have immediate needs for a policy’s benefits. In addition, laws in
most jurisdictions specify a certain number of days after receiving sufficient proof
of loss in which an insurer must pay a claim or face penalties. For example, in the
United States, laws require insurers to add interest to the benefit amount if they do

not pay a claim within a certain number of days after receiving sufficient proof of
loss. However, processing claims too quickly can result in the payment of claims
that are not valid. A small number of life insurance claims are submitted under
erroneous interpretations of policy provisions. An even smaller number of claims
are submitted fraudulently. By denying these invalid claims, the insurer controls
costs and protects the insurance-buying public from unnecessary increases in
insurance costs. Thus, effective claim administration balances the need for prompt
claim decisions with the need for accuracy—the right beneficiary and the right
amount—and completeness in claim processing.
Organization of the Claim Department

The claim department is the area within an insurance company that is responsible
for handling claim administration. The person in charge is likely to be a vice
president who reports to the CEO or the COO. Within each product line, most
large insurers have claim managers, claim supervisors, and claim analysts. The
claim manager, in such large companies, reports to the vice president for that line
of business. Small life insurers may have a single chief claim officer who oversees
claims for all lines of business. At some companies, customer service represen-
tatives, either within the claim administration department or sometimes within
the company’s call center, handle general customer questions relating to claims.
Claim analysts perform most claim administration activities. A claim analyst,
also called a claim examiner, claim adjustor, claim approver, or claim specialist,
is an insurance company employee who is trained to review individual claims and
determine the company’s liability under each claim.
A claim analyst’s authority to approve larger claim amounts or more compli-
cated claims gradually increases based on experience and training, as illustrated
in Figure 13.1.
I’d hate to be the one making a decision on a
million-dollar claim.
Claim administration interacts with other functional areas, as the following

examples indicate:
Underwriting. Depending on the insurer, underwriters may review death
claims on policies that have a specified minimum face amount, death claims
about which a claim analyst has expressed concern, and all death claims sub-
mitted during the policy’s contestable period.
Legal. Claim analysts consult with corporate legal staff and with outside
investigators when investigating questionable or possibly fraudulent claims.
Product development. Claim history and patterns are used to develop new
insurance products and analyze the profitability of existing products.
Actuarial. Actuaries use statistical information generated by the claim depart-
ment in setting life insurance premium rates.

Figure 13.1. Claim Approval Limits
Type of Claim Amount of Claim Approval Authority

Routine claims that are not within the Analyst Trainee—$25,000 claim amount
contestable period Analyst—$200,000 claim amount
Senior Claim Analyst—$600,000 claim amount
Claim Supervisor—$700,000 claim amount
Claim Manager—$800,000 claim amount
Claims that are within the contestability Analyst Trainee—No authority

period or involve complications such as Analyst—$200,000 claim amount
an accidental death benefit provision
Senior Claim Analyst—$600,000 claim amount
Claim Supervisor—$700,000 claim amount
Claim Manager—$800,000 claim amount
Claims that involve suspicion of fraud or Analyst Trainee—No authority
unusual legal complications Analyst—No authority
Note: Benefit payments are made Senior Claim Analyst—$600,000 claim amount
only after consultation with various
departments, including legal or the Claim Supervisor—$700,000 claim amount
special investigative unit (SIU) Claim Manager—$800,000 claim amount
Auditing. Internal auditors check the accuracy of claim decisions to deter-

mine if claim decisions were made according to policy wording, in the right
amount of time, and so on. Auditors also check to see if any improvements can
be made in the claim process.
However, claim department employees spend the majority of their time interact-
ing with claimants. A claimant is a person—usually a beneficiary or policyowner—
who submits a life insurance policy claim to the insurance company. Because
claimants typically have experienced a significant personal loss, claim department
staff are trained to be sensitive to the emotional state of claimants and also to their
particular circumstances. Claimants want someone at the life insurance company
who can help them navigate the company’s system. When claimants believe that
an insurer sincerely cares about them, they feel more comfortable and confident in
their interactions with the company.
Claim Philosophy and Claim Practices

The claim department operates according to a claim philosophy and established
claim practices. Each insurer establishes a claim philosophy, a statement of the
principles the insurer follows when conducting claim administration. For example,
an insurer’s claim philosophy may be “to act promptly, fairly, and courteously in
paying all eligible claims and to deny all ineligible claims.”

Using the insurer’s claim philosophy as a guide, claim department manage-

ment develop claim practices, which are statements that guide claim department
employees in the day-to-day handling of claims. An insurer must structure its
claim practices to ensure it complies with privacy laws that apply to collecting per-
sonal information as well as any other laws, such as those relating to timeliness. In
addition, most claim practices include commitments to
Process claims on a timely and cost-efficient basis
Apply policy provisions consistently
Investigate questionable claims
Obtain medical and legal advice when necessary to make a claim decision
Train claim staff to perform their duties professionally, accurately, and

appropriately
It all seems pretty simple to me. You get a

claim; you pay it. Right?
Life Insurance Claim Process

A claimant initiates the life insurance claim process when he contacts the insur-
ance company or the producer to notify the company of an insured’s death. Some
insurers allow the claimant to notify the company through the company’s website
and to complete an online claim form. A claim form, also called a claimant’s
statement, provides information about the loss and authorizes others to provide the
insurer with relevant information so that the insurer can begin the claim evaluation
process. Some insurers provide a printable claim form at their websites. However,
most companies, upon notification of an insured’s death, mail a claim form to the
claimant to complete and return. The claim analyst reviews the submitted claim
and sends a letter requesting additional documents, as needed, to complete the
claim file. For example, a life insurance company may request a copy of the death
notice or obituary from the local newspaper following the death of the insured.
The basic claim form requires that the claimant provide the date, place, cause,
and circumstance of the insured’s death. If the death occurred within a speci-
fied period after policy issue, typically two years, or if the death was accidental
or unusual in any way, the insurer may require that the claimant complete more
details on the claim form or complete a specialized questionnaire. In addition to
this basic information, the claim form may require the names and addresses of
physicians and hospitals where the insured was confined or treated over the previ-
ous five years. Some countries, including India, have several types of claim forms,
depending on whether the claim involves accidental death benefits or the claim
occurred during the contestable period.

Claim processing procedures vary, depending on the type of life insurance

policy or annuity. However, the decision process—whether to approve or deny a
claim—is generally the same for all life insurance products. If a claim is valid and
payable, the claim is approved and the insurer follows its established procedures
for paying the claim. If the claim is not a valid claim, the claim analyst denies
the claim.
Most life insurance claims require only routine processing, which consists of
four basic steps: (1) determining if benefits are payable, (2) calculating the amount
payable, (3) identifying the proper payee, and (4) paying the proceeds.
Determining If Benefits Are Payable

Determining whether benefits are payable involves several basic steps that we
show in a simplified process chart in Figure 13.2.
Was the Policy In Force?

The first step in the claim administration process involves checking the insurer’s
policy administration system, which provides an up-to-date record of premium
payments, to see if the insurance policy is in force. Sometimes this process is out-
sourced to a service provider known as a third-party administrator (TPA). TPAs
are often used to maintain the records for group insurance. Generally, a policy is
in force if all premiums have been paid. Occasionally, there may be an issue when
the loss occurred before the policy issue date or after a policy has lapsed. If cover-
age was not in force at the time of the loss, the claim analyst notifies the claimant
of the reason for denying the claim.
Was the Deceased the Insured?

The claim analyst compares the insured’s identification in the claim form and in the
proof-of-loss document with the identifying information contained in the insurer’s
policy records to confirm that the person who died was the person insured by
the policy. Again, this step usually requires only a routine check of the insurer’s
system. However, sometimes people change their names—for example, as a result
of marriage or divorce—and they do not notify the insurer about such changes.
When there is a discrepancy, the claim analyst investigates to determine if the
name under which the claim was submitted represents the same person as the one
to whom the insurance policy was originally issued.
This step protects the insurer against claim fraud and mistaken claims. Claim
fraud occurs when the claimant intentionally uses false information in an unfair
or unlawful attempt to collect benefits under an insurance policy. For example, the
person insured by the policy is still living, but the beneficiary submits a fraudulent
death claim to collect the policy proceeds. We discuss claim fraud in more detail
later in this chapter. A claim is considered to be a mistaken claim when a claim-
ant makes an honest mistake in presenting a claim to the insurer. The beneficiary
might, for example, mistakenly believe that the deceased person was the insured.
The long-term nature of a life insurance policy sometimes accounts for misidenti-
fication of the insured. What if the claim analyst discovers that the deceased was
not the insured? In this situation, the claim analyst notifies the claimant that the
claim is denied because the person named on the claim form was not a covered
insured under any policy with the insurer.
Figure 13.2. Steps in Determining Whether Benefits Are Payable
Was the Policy

in Force? No Claim Denied
Y
E
S
Was the
Deceased the No Claim Denied
Insured?*
Y
E
S
Is the Policy
Contestable?
Y
E N
S O
Rescind Is there Material

Yes Misrepresentation?
Policy**
No
Did the Loss Claim Denied
No
Occur?
Y
E
S
Was the Loss

No Claim Denied
Covered?
Y
E
S
Pay Claim
* For a dependent covered under group life insurance, the insured is the employee, who purchases dependent
spouse or child coverage. The claim for a deceased dependent of the insured is typically processed under the
insured’s name, rather than the name of the deceased dependent. In this case, the deceased is not the insured,
but is the insured’s dependent spouse or child.
** Insurer returns premiums paid by the policyowner.
Is the Policy Contestable?

Applications for life insurance policies contain questions designed to provide
the insurer with relevant information regarding the insurability of the proposed
insured. A material misrepresentation is a statement made in an application for

insurance that is not true and that caused the insurer to enter into a contract it
would not have agreed to if it had known the truth. When an insurer learns that
important information in a policy application is untrue, the insurer may have a
right to cancel the policy on the legal grounds that no valid contract ever existed.
Inaccurate information in an application that would not have affected the under-
writing decision is not a material misrepresentation. For example, the fact that a
proposed insured stated in an insurance application that he broke his left arm in
a car accident when it was in fact his right arm isn’t material to the underwriter.
Figure 13.3 shows examples of misrepresentations that are material to an insurer’s
acceptance of a risk.
Figure 13.3. Misrepresentations That Can Be Material to an Insurer’s

Acceptance of a Risk
Category of Misrepresentation Example

Health Failure to disclose a known medical
impairment that adversely affects life
expectancy
Occupation or avocation Failure to disclose a dangerous job or
hobby
Habits Failure to disclose past abuse of alcohol
or controlled substances
Number of traffic violations Misstatements of the number or severity
of moving violations or collisions
Other insurance applications denied or Concealing information about insurance
rated applications that have been denied,
assigned to a high-risk class, or charged
an additional premium
The legal process of voiding an insurance contract because of material misrep-

resentation is known as rescission. An insurer’s right to rescind a policy is limited.
Most life insurance policies specify a contestable period, which is a period follow-
ing policy issuance during which the insurer has the right to rescind the policy if
the application for insurance contained a material misrepresentation. In the United
States, life insurance policies typically provide a contestable period of two years.
The contestable period may vary by state.
If a claim analyst suspects material misrepresentation or fraud, the claim analyst
launches a claim investigation, which is the process of obtaining the additional
information necessary to make an appropriate claim decision. The information can
come from a variety of sources, such as medical records, motor vehicle records,
criminal court records, or autopsy reports. Although most claim investigations
involve short, simple searches such as checking a medical record, a few can be
quite extensive. Later, we take a closer look at fraud and claim investigation.

Once the contestable period has expired, an insurer generally cannot contest
the validity of an insurance policy because of a material misrepresentation. In
some jurisdictions, however, if an insurer can prove that the policy was taken out
with the intention of defrauding the insurer, then the insurer can rescind the policy.
When a policy is rescinded, the insurer refunds the premiums paid on the policy,
minus any outstanding policy loan amounts.
Did the Loss Occur?

The claimant must supply proof of loss to support a claim for life insurance ben-
efits. Life insurers in the United States generally accept a death certificate, a
document that attests to the death of a person and that bears the signature—and
sometimes the seal—of an official authorized to issue such a certificate as proof of
loss. Life insurers in other countries may accept as proof of loss a death certificate,
an attending physician’s statement (APS), a coroner’s or hospital’s certificate of
death, or—for lower-face-amount policies—a funeral director’s certificate.
Although verifying that a loss occurs is routine in most cases, a small percent-
age of claims require the claim analyst to investigate further. Figure 13.4 presents
two specific situations requiring claim investigation.
I had a friend who died while rock climbing.

The guy had insurance, but it turns out the
insurer excluded rock climbing from coverage.
Seems kind of harsh to me.
Was the Loss Covered?

Life insurance policies sometimes contain exclusions—provisions that describe
circumstances under which the insurer will not pay the policy’s proceeds follow-
ing the death of the insured. For example, if a proposed insured often engages in
dangerous mountain climbing, then he is more likely to have a deadly accident
than someone of the same age and health without such a dangerous hobby. In this
situation, the insurer might issue a policy that excludes hazardous activities such
as mountain climbing. Alternatively, the insurer might issue the policy without an
exclusion but at a higher-than-standard premium rate.
In some companies, checking to see if the insured’s death occurred as a result
of an excluded activity, occupation, avocation, or condition may take place before
the claim analyst verifies that the loss occurred. If the insured’s death did result
from an excluded activity or condition, the insurance company denies the claim.
The suicide exclusion is the most common exclusion in an individual life insur-
ance policy. Typically, the suicide exclusion states that, if the insured dies as a
result of suicide within a certain period—usually one or two years from the date
the policy was issued—the insurance company does not have to pay the policy
proceeds. The suicide exclusion protects the insurance company from antiselection
by people who, at the time they purchase insurance, intend to commit suicide.
If an insured dies during the suicide exclusion period, the claim analyst inves-
tigates to determine whether suicide was the cause of death. Courts in many juris-
dictions have maintained that the burden is on the insurance company to prove

Figure 13.4. Verification of Loss
Two specific situations require the claim analyst to conduct further investigation.
If the insurer is unable to obtain acceptable proof of death, then the insurer would
seek legal advice on how to proceed.
1. The insured dies outside the country of policy issue. The formalities and
procedures for registration of death in some countries are not as rigorous as
life insurers might desire. As a result, documents offered as proof of death may
be difficult to obtain, authenticate, or translate. Such situations may increase
the likelihood of fraud. Benefits would be payable upon receipt of acceptable
proof of death. Most insurance companies have established procedures for
processing these types of death claims.
2. The insured disappears. When an insured disappears, the claimant is unable
to present proof of the insured’s death to the insurer. Whether the insured’s
disappearance can be reasonably explained generally determines how the claim
analyst proceeds.
a. Explainable disappearance. If the insured disappeared as a result of a
specific peril that can reasonably account for the disappearance, the
insured may be presumed dead. Suppose a commercial airplane on which
the insured was a passenger crashed into the ocean and no bodies were
recovered. In this case, the claim analyst would probably accept the claim
form and attached reports of the peril as proof of loss. The claim analyst
would then process the remaining aspects of the claim.
b. Unexplainable disappearance. If a specific peril cannot explain the
insured’s disappearance, the claim analyst would probably close the claim
file after the disappearance pending acceptable proof of loss. In many
jurisdictions, if the insured hasn’t reappeared within a certain period—five
or seven years in the United States—the claimant can petition a court for
an order presuming the insured’s death. If the policy has been kept in force
during the insured’s disappearance, the claim analyst typically accepts the
court order as proof of loss and proceeds with processing the claim.
that an insured committed suicide. If the insurer proves that the insured died by
suicide, the insurer’s payment is limited to the amount of the premiums that were
paid for the insurance coverage, minus the amount of any outstanding policy
loans. If the insured’s death occurs by suicide after the exclusion period expires,
the insurer pays the full policy proceeds. In some group term life insurance poli-
cies, the suicide exclusion period does not expire.
Approve or Deny Claim?

Once the claim analyst has reviewed all of the relevant information, a claim deci-
sion is made to approve or deny the claim.
Claim approval. Life insurers approve the vast majority of claims. Once the
claim has been approved, the insurer determines the amount of the policy
benefit payable, the person or entity entitled to receive the benefit, and how to
distribute the policy proceeds.

Claim denial. If the decision is made to deny a claim, typically a claim man-
ager or a member of the legal department reviews and approves the denial.
Next, the claimant is notified in writing of the reasons for the claim denial.
The claimant is also informed that the insurer will reexamine the claim if
the claimant can provide additional facts that might refute the information on
which the denial was based.
Calculating the Amount Payable

For many claims, the amount payable to the beneficiary is equal to the basic death
benefit, which is often the face amount of the policy. However, the basic death
benefit is not always equal to the face amount of the policy. For example, the basic
death benefit of some universal life insurance policies is equal to the policy’s face
amount plus the accumulated cash value plus applicable interest. The death benefit
available under a variable life insurance policy fluctuates according to the per-
formance of a separate account fund. Other factors may increase or decrease the
amount of the proceeds payable.
Additions and Subtractions

Figure 13.5 lists items that are commonly added to and subtracted from the basic
death benefit of a traditional life insurance policy to obtain the benefit amount
payable.
Figure 13.5. Calculating the Benefit Amount
Additions Subtractions
Premiums that the policyowner paid in Outstanding policy loans
advance
Accumulated policy dividends Accrued policy loan interest
Policy dividends that the insurer declared Premiums due and unpaid
but that remain unpaid
Paid-up additional coverage that the
policyowner purchased
Accidental death benefits that may be
payable
The determination of whether accidental death benefits are payable can be

challenging. An accidental death benefit is a supplementary benefit under which
the insurer pays an amount of money in addition to the basic death benefit if the
insured dies as a result of an accident.

Example: The life insurance policy insuring Vinny Acworth’s life included
an accidental death benefit. Mr. Acworth was hiking in the mountains
along a high ledge and fell to his death. If Mr. Acworth slipped and fell,
his death would be accidental and policy proceeds would include the
accidental death benefit. However, if Mr. Acworth’s death was the result of
a suicide (he jumped), no accidental death benefit is payable.
When evaluating a claim involving an accidental death benefit, all facts of the
case are taken into consideration. The claim analyst may order autopsy reports,
medical records, and police reports to gather enough information to determine
whether the insurer is liable to pay accidental death benefits. If the benefits are
payable, the insurer adds that amount to the policy’s face amount.
Example: Assume that Mr. Acworth’s death was ruled accidental and that
the following information applies in his situation:
$100,000 face amount of policy
$50,000 accidental death benefit
$1,000 policy loan outstanding
$50 accrued policy loan interest
$500 accumulated policy dividends
The correct benefit amount payable for this policy would be $149,450.
$100,000 + $50,000 + $500 – $1,000 – $50 = $149,450
So . . . even if it’s a $100,000 policy, the

claimant may not necessarily get exactly
$100,000.
Adjusting for Misstatement of Age or Sex

The insurance company also adjusts the amount of the benefit payable if the
insured’s age or sex was misstated in the insurance application. These errors are
not treated as material misrepresentations but as mistakes that must be corrected.
Most life insurance policies contain a misstatement of age or sex provision that
specifies how the insurer handles such misstatements.
Often a misstatement of age or sex is discovered after the insured’s death. In
this case, the benefit amount typically is adjusted to the amount the premiums
actually paid would have purchased at the correct age or sex. The benefit amount
is based on the company’s published premium rates on the policy issue date.

Example: Franny Roswell’s $50,000 life insurance policy showed her to

be age 40 at the time of policy issue. The claim analyst discovered, after
Ms. Roswell’s death, that Ms. Roswell was actually age 45 at policy issue. In
this case, the $50,000 death benefit would be reduced to the amount that
the premiums Ms. Roswell paid would have purchased for a 45-year-old
insured on the policy’s issue date.
What if the claim analyst discovered, upon Ms. Roswell’s death, that she
was actually age 38 at policy issue? In this case, the death benefit would
be increased to the amount that the premiums Ms. Roswell paid would
have purchased for a 38-year-old insured on the policy’s issue date.
Paying the Proceeds

Life insurance companies usually pay proceeds in a lump sum directly to the payee
or his bank account. Alternatively, the payee can leave the proceeds on deposit with
the insurer and receive the proceeds under one of four common settlement options.
Policy Settlement Options

Insurers commonly offer payees four options, in addition to the lump sum option,
to settle individual life insurance policy proceeds: (1) the interest option, (2) the
fixed-period option, (3) the fixed-amount option, and (4) the life income option.
Many insurers also offer the retained asset account (RAA) option, in which the
insurer pays the proceeds into an interest-bearing account in the payee’s name.
Under the RAA option, the payee can withdraw a portion or the entire amount at
any time. Figure 13.6 gives examples of common settlement options.
Figure 13.6. Common Policy Settlement Options
Interest option. When the insured died, the beneficiary, Sammy Duffly, chose
to leave the policy proceeds on deposit with the insurer. The insurer periodically
sends interest payments on the deposited amount to Mr. Duffly. When Mr. Duffly
dies, the insurer will pay the remaining proceeds to Mr. Duffly’s beneficiary.
Fixed-period option. At the insured’s death, Tonya Snellville, the policy beneficiary,
elected to leave the policy proceeds on deposit with the insurer and receive equal
monthly payments of principal and interest for the next 10 years.
Fixed-amount option. As the beneficiary of a life insurance policy, Polly Winder
elected to leave the policy proceeds on deposit with the insurer and receive a
specified payment of principal and interest for as long as the proceeds last.
Life income option. After the insured died, Damian Barrow, the policy beneficiary,
elected to have the policy proceeds used to purchase an annuity that will provide
him with a series of periodic payments of a specified amount for the remainder of
his lifetime.

Identifying the Proper Payee

Usually, the payee is the beneficiary named in the policy, and payment is straight-
forward. However, sometimes it is not so easy to identify who should receive the
policy proceeds. If no named beneficiaries survive the insured, the insurer gener-
ally pays the proceeds to the insured’s estate. Complications also arise if the ben-
eficiary is a minor or is otherwise disqualified by law from receiving the proceeds.
For example, if the policy beneficiary were convicted of killing the insured, then
the beneficiary would be disqualified from receiving the policy proceeds.
Occasionally, the identity of the proper payee cannot be determined. The ben-
eficiary designation may be ambiguous, or more than one payee may have filed a
claim for policy proceeds. Sometimes one or more beneficiaries may claim that
the policyowner was incompetent when she made the beneficiary designation. In
such cases, the claim analyst consults with the insurer’s legal department and fol-
lows the insurer’s procedures for handling conflicting claims. If the conflicting
claimants can reach a written agreement among themselves, the insurer pays the
proceeds according to the terms of that agreement.
In the United States, if the insurer can’t identify the proper payee, the insurer
can initiate a legal process called interpleader. Under interpleader, the insurer
pays the policy proceeds to a court, advises the court that the insurer cannot deter-
mine who should receive the proceeds, and asks the court to determine the proper
recipient or recipients. Interpleader eliminates the risk that the insurer may have
to pay proceeds more than once for the same claim. However, the legal expenses
associated with interpleader can be high.
What about when there’s reinsurance? Does

the beneficiary have to wait for the direct
writer to work everything out with the
reinsurer?
Claims on Reinsured Policies

When an insurer receives a life insurance claim, a claim analyst typically checks
for the existence of reinsurance so that, if such coverage applies to the claim, the
insurer can be reimbursed appropriately from the reinsurer. Upon approving a life
insurance claim on a reinsured policy, the direct writer pays the full amount of the
policy proceeds to the beneficiary. Then the direct writer requests reimbursement
from the reinsurer for the amount of the risk that was reinsured.
A reinsurer has claim analysts with extensive claim administration experience
who are responsible for determining the reinsurer’s liability for the claims submitted
by the direct writer. Many reinsurers require that the direct writer notify the rein-
surer promptly when the direct writer receives a claim on a reinsured policy. Such
timely notification can benefit the direct writer as well as the reinsurer because the
Reinsurer has time to verify its liability and resolve administrative questions.
Reinsurer’s claim staff can assist the direct writer’s staff in deciding the
validity of claims.

Reinsurer may be alerted to situations involving multiple claims submitted for

the same insured to different direct writers. The reinsurer can advise its direct
writing clients of this fact, particularly when some or all of the claims are con-
testable, the claims involve large amounts, or fraud is suspected.
The final decision about a claim generally rests with the direct writer. Because
the reinsurer is not a party to the underlying insurance policy, the reinsurer has no
authority to approve or deny a claim. Although a reinsurer can make a recommen-
dation to the direct writer, the direct writer typically is not obligated to follow the
reinsurer’s recommendation in making a claim decision. Reinsurance contracts
typically include provisions for the direct writer and reinsurer to settle disputes
over final claim decisions.
In the movies, people are always lying to get

insurance money. How often does that happen
in real life?
Claim Investigation
Most life insurance claims require only routine handling and can be paid after
an analysis of the claimant’s statement and proof-of-loss documents. However,
unusual claim situations do occur, as we mentioned in our discussion of claim
processing. For example, if the insured’s death occurred under mysterious circum-
stances or during the suicide exclusion period or the contestable period, an insurer
might need to obtain more information in order to process a claim.
Additional information can be obtained from law enforcement agencies, motor
vehicle records, medical records, criminal court records, credit bureaus, employ-
ers, autopsy reports, investigative consumer reports, and from the producer who
submitted the insurance application. An investigative consumer report contains
information obtained through personal interviews with an individual’s neighbors,
friends, associates, or others who may have information about the individual. To
handle claim investigations, particularly those that might involve fraud, some
companies establish a special investigative unit (SIU), a group of individuals who
are responsible for detecting, investigating, and resolving claims. The SIU is often
composed of representatives of the claim, legal, and internal audit functions, as
well as independent investigators.
Claim Fraud
Anyone who can influence a claim decision or benefit from an approved claim can
commit claim fraud. Such a person can be an insured, a beneficiary, a medical
provider, an insurance producer, or an employee of the insurance company. For
example, claim fraud occurs when
An attorney signs a deceased client’s name to the back of the monthly annuity
benefit checks after the client’s death and keeps the money.

A life insurance applicant pays a healthier person to take his medical examina-
tion so the applicant will be accepted by the insurer.
A policyowner purchases life insurance policies on several homeless men,

falsely states in each application that he is a close relative of the insureds,
names himself as the beneficiary of each policy, and receives the policy pro-
ceeds as each insured dies.
A claim analyst approves a claim for life insurance benefits on a friend’s
mother, even though he knows the mother is still alive.
A beneficiary claims that the insured died as a result of an accident in an

attempt to receive the policy’s accidental death benefit, even though the insured
died of natural causes.
An insurer may also suspect fraud as a result of unusual circumstances sur-
rounding an insured’s death or disappearance. For example, the hasty cremation or
burial of the insured in a country that was neither the birthplace nor the residence
of the insured’s family should warrant further investigation to avert a fraudulent
claim. Likewise, a claim on a newly issued policy or a policy for which the contest-
able period has just expired should result in a claim investigation.
However, insurers carefully weigh the potential benefits from a claim investi-
gation against the costs. The costs of a claim investigation—staff salaries and the
costs related to independent investigators—can be quite expensive. Generally, the
more complex the investigation, the higher the cost involved.
Fraud Prevention
Many jurisdictions require insurers to take certain measures to prevent, detect,
investigate, and prosecute claim fraud. For example, in most states in the United
States, insurers must report cases of alleged fraud to the state insurance depart-
ment for further investigation and prosecution.
Some states require insurers to form SIUs to investigate suspected cases of
fraud. Claim analysts and SIU staff members receive training in detecting and
investigating insurance claim fraud and in applying the provisions of unfair claim
practices statutes. In addition, many state insurance departments have established
their own fraud investigation units. Insurers also establish continuous education
programs so employees can maintain awareness of existing and new fraudulent
activities to minimize their impact on insurance operations.
Quality Control in Claim Processing

An insurer expects its claim staff to process claims quickly and thoroughly. Usu-
ally, insurers set goals for a certain number of claims to be processed within a cer-
tain time frame. However, meeting that time frame cannot be done at the expense
of accuracy or quality. An insurance company that emphasizes quality control in
claim processing helps to ensure that its employees (1) comply with laws and regu-
lations related to claim settlement practices and (2) adhere to the insurer’s claim
philosophy and claim practices. The control function is an essential part of quality
control in claim administration.
Figure 13.7 lists several control mechanisms that insurers use in claim
administration.

Figure 13.7. Control Mechanisms in Claim Administration
Steering Controls
The insurer’s claim

philosophy and claim
guidelines
Tiered approval levels
for claim analysts
Training

Internal audits of approved Supervisory approval on
and denied claims claim checks that exceed a
Market conduct examinations specified amount
External audits of claim Claim investigation checklists
processes for identifying claims
with certain suspicious
characteristics
Underwriting reviews of
death claims submitted
during the contestable period
What impact do laws and regulations have on

claim administration?
Regulatory Requirements
Claim administration staff must comply with many laws and regulations during
claim processing. The laws that govern a person’s right to privacy, which we’ve
described throughout the text, are of particular importance in claim processing.
For example, privacy laws in many jurisdictions require that claim forms request
only information that an insurer reasonably needs to make a claim decision.
Claim analysts must also protect the confidentiality of information gathered dur-
ing a claim investigation. Insurers may use only lawful, reasonable, and ethical
means of obtaining information when investigating claims. Many jurisdictions
prohibit insurers from conducting a claim investigation under a false pretext in
most circumstances.
Model Unfair Claims Settlement Practices Act

As we mentioned earlier, laws in many jurisdictions require insurance companies
to process and settle claims promptly and accurately. In the United States, most
state laws are based on the NAIC’s Unfair Claims Settlement Practices Act. This
NAIC Act describes specific actions that are considered unfair claim practices if
done (1) in conscious disregard of the law or (2) so frequently as to indicate a gen-
eral business practice. Prohibited practices include
Failing to promptly acknowledge receipt of claim-related communications
Attempting to settle claims based on an application that was materially altered
without the policyowner’s knowledge
Failing to affirm or deny coverage of claims within a reasonable time after the
claim investigation is completed
Compelling claimants to initiate lawsuits to recover death benefits by offering

substantially less than the amounts due
International Laws
Many other countries have laws, regulations, and recent court decisions that affect
claim administration. For example, in Australia, a 2005 High Court decision
resulted in clearer definitions of policy terms used to describe insurance coverage.
In Canada, provincial laws and guidelines for members of the Canadian Life and
Health Insurance Association (CLHIA) provide protection against unfair claim
practices. In Chile, General Regulation 250 oversees exclusions or other restric-
tions on coverage for preexisting conditions for life, disability, and health insur-
ance policies.
Annuity Administration
Annuity administration consists of all of the work an insurer must do between the
time the insurer receives an annuity application until the time the annuity contract
ceases to be in force. For our purposes, we examine two areas of annuity adminis-
tration: (1) processing annuity death benefit claims and (2) handling the scheduled
periodic payments during the payout period.
Annuity Death Benefit Administration

The terms of deferred annuity contracts require the insurer to pay a specified death
benefit if the annuitant dies before scheduled annuity income payments begin.
Some life insurance companies assign the responsibility for administering annuity
death claims to staff in annuity administration. In other companies, the unit that
processes life insurance claims also processes annuity death claims.

The claim form for an annuity death benefit identifies the deceased, lists all
contracts for which the death benefit is claimed, and indicates how the beneficiary
wants to receive the proceeds. Once the insurer receives the claim form, claim
processing can begin. Claim processing for annuity death benefit claims is similar
to that for life insurance claims and includes the following activities:
Authenticating and documenting the claim. To administer an annuity death
benefit, insurers require certain documentation, including a claim form and an
official death certificate.
Determining the amount of the death benefit. Most deferred annuities pay a
death benefit equal to the greater of (1) the amount paid into the annuity con-
tract or (2) the annuity contract’s accumulation value on the day the insurer
receives the required proof-of-loss documents.
Paying the death benefit. The insurer pays the annuity death benefit as a
lump sum or according to a settlement option chosen by the contract owner or
beneficiary. Annuity settlement options generally are the same as the settle-
ment options for life insurance policies.
Addressing applicable tax issues. Unlike life insurance death benefits, annu-
ity death benefits typically result in taxable income to the beneficiary. For
this reason, the insurer typically obtains the beneficiary’s tax identification
number. The insurer reports to the beneficiary and to tax authorities the total
death benefit payment, the taxable portion of the payment, and any taxes the
beneficiary elected to have the insurer withhold from the payment.
Annuity Payout Administration

The period during which annuity benefit payments are made is known as the pay-
out period. Insurers often have a separate unit or team within annuity administra-
tion that prepares annuities for payout and oversees scheduled periodic payments.
This unit also provides information about payout options to the annuity contract
owner and documents the choice of payout option. For immediate annuities, pay-
out preparation activities occur when the annuity application is processed.
Payout preparation activities for deferred annuities usually occur several
months before the policy’s annuity date—the date on which the insurer begins to
make the periodic income payments under an annuity contract.
When an annuitant selects a payout option, the annuitant also submits tax
identification information and any other required tax information forms. Payout
administration staff enters this information into the annuity administration sys-
tem, which automatically calculates and generates the correct payments for each
annuity. Staff members also confirm payout transactions, handle address changes,
and address tax issues for annuitants during the payout period. Common annuity
payout options are listed in Figure 13.8.

Figure 13.8. Common Annuity Payout Options
Nonannuitized options, which are not linked to the life expectancy of any person,
such as (1) lump-sum distributions, (2) fixed-period distributions, and (3) fixed-
amount distributions. These options are similar to corresponding life insurance policy
settlement options.
Annuitized options tie annuity payments to the life expectancy of the annuitant. To
simplify, assume that the annuitant—the person whose lifetime is used to measure the
length of time that lifetime payments are payable under an annuity policy—and the
payee—the person who receives the annuity payments—are the same person.
A life annuity, also called a life only annuity, provides periodic payments only for
as long as the annuitant lives.
A joint and survivor life annuity is a life annuity that provides a series of periodic
payments based on the life expectancies of two or more annuitants. Payments
continue until the last annuitant dies.
A life income with period certain annuity guarantees that annuity payments
will be made throughout the annuitant’s lifetime and that payments will continue
for at least a specified period, even if the annuitant dies before the end of that
period. If the annuitant dies before the specified period expires, a contingent
payee designated by the policyowner will receive annuity payments throughout
the remainder of the specified period.
A life income with refund annuity, also called a refund annuity, provides
annuity payments throughout the lifetime of the annuitant. This annuity provides
a guarantee that at least the purchase price of the annuity will be paid out.
Suppose the annuitant dies before the total purchase price of the annuity has
been paid in benefits. In this case, the insurer issues a refund to the contingent
payee equal to the difference between the purchase price and the amount that
has been paid out.
Key Terms
claim administration claim investigation
claim analyst death certificate
claimant exclusion
claim philosophy suicide exclusion
claim practices accidental death benefit
claim form retained asset account (RAA) option
third-party administrator (TPA) interpleader
claim fraud investigative consumer report
mistaken claim special investigative unit (SIU)
material misrepresentation Unfair Claims Settlement
rescission Practices Act
contestable period annuity date

activities:
Look at your company’s website. Click on the tab for the Claims page and
review the ways in which a claimant can submit an individual life insurance
claim to your company.
Obtain a copy of your company’s claim form. This form is also likely to be
found on your company’s website, on the Claims page. What proof of death
does your company require?
If your company offers annuities, compare how the claim form for annuity
death benefits differs from the claim form for life insurance benefits.
Endnotes
1. LOMA, Death Claim Processing (Individual Products), Information Center Brief [Atlanta: LOMA
(Life Office Management Association, Inc.), © 2009)]. Used with permission; all rights reserved.

Insurance Company Operations Chapter 14: Customer Service 14.1
Chapter 14
Customer Service
Objectives
 Explain why providing exceptional customer service is important to
insurance companies
 Define work team and explain the purpose of a customer contact center
 Identify customer service job positions and explain the relationships
between customer service and other organizational functions
 List the characteristics of effective customer service and explain how
providing effective customer service contributes to customer loyalty and
customer relationship management
 Define a seamless process and describe the role that technology plays in
providing seamless and personalized customer service
 Describe the customer service processes for fulfilling customer requests,
handling complaints, and conserving, up-selling, and cross-selling
insurance and annuity products
 Describe the differences between customer service processes for group
products and those for individual products
 Identify and describe common controls used in customer service to
enhance the customer experience

14.2 Chapter 14: Customer Service Insurance Company Operations
Outline
Organization of the Customer Customer Service Processes
Service Department  Fulfilling Customer Requests
 Typical Customer Service Job  Handling Customer Complaints
Positions  Conserving, Up-Selling,
 Customer Service Department and Cross-Selling
Relationships  Customer Service Processes for
Group Products
Effective Customer Service
 Education and Training Control Mechanisms for
 Technology Customer Service
 Customer Relationship  Qualitative Performance
Management Measurements
 Quantitative Performance
Measurements
I don’t communicate with our company’s

policyowners, so customer service isn’t
relevant to my job . . . or is it?
E
mployees who interact directly with customers clearly play a role in customer
satisfaction. However, do employees in support functions, like accounting,
who seem far removed from external customers, have an impact, too? What
if accounting doesn’t promptly process a customer’s benefit payment? What if an
IT technician is slow in repairing or replacing a CSR’s computer so that fewer CSRs
are available to answer customers’ questions than are needed? Employees in sup-
port functions provide services to employees who interact directly with external
customers. Without those support services, employees who interact with external
customers couldn’t satisfy customer needs. In one way or another, customer ser-
vice is the responsibility of every insurance company employee. Customer service
consists of a broad range of activities that an insurer and its employees perform to
keep customers satisfied so that they continue doing business with the company
and speak positively about it to other potential customers.
Insurance companies that commit to delivering exceptional customer service
encourage each employee to think of himself as a customer service provider by
focusing on how the work he performs affects customers. Why is exceptional cus-
tomer service important? Exceptional customer service (1) enhances a company’s
image, (2) attracts new customers, (3) helps companies retain existing customers,
(4) makes it easier to recruit new employees and producers, (5) reduces the amount
of time employees spend correcting problems, and (6) potentially increases a com-
pany’s profitability.
According to a 2009 Accenture study of 4,100 consumers in eight countries
across five continents, two-thirds (67 percent) of respondents reported moving
their business to other companies because of poor service. The study also found

that “the number who left because of a poor customer experience was significantly
higher than the number of those who left a business because they found a lower
price elsewhere.”1 What this means for insurers is that customer service is a great
way for an insurer to differentiate itself from its competitors in the marketplace
and increase profitability.
Organization of the
Customer Service Department
Although customer service is every employee’s job, for purposes of this chapter,
we now focus on the customer service activities that the “customer service” unit
within an insurance company provides. The department within an insurance com-
pany whose primary responsibility is performing customer service activities can go
by many names, such as customer service, policyowner service, or client services.
Customer service for group insurance products is often called member services.
The management structure of the customer service department is similar to that
of other departments. An executive such as a vice president or senior vice presi-
dent oversees the department. Some insurers establish one department or area to
deal with every kind of customer service activity. Other insurers divide customer
service activities by product, territory, distribution system, customer, method of
communication, or service request, for example.
Some insurers further assign customer service employees to separate work
teams, two or more people who work together on a regular basis and coordinate
their activities to accomplish common goals. The work teams report to a super-
visor. The supervisor reports to the department manager, who generally reports
to a member of the insurer’s senior management. In some companies, customer
service work teams are employees in processing centers, which handle all cus-
tomer contacts related to a particular process. For example, customers might
contact the claim processing center for claim inquiries or the billing service cen-
ter for billing inquiries. Typical employees in a processing center have greater
knowledge and experience about a particular process than do employees in a
general customer service department.
Most insurance companies have specialized customer service units that serve
as a customer’s first contact with the insurer. Because these organizational units
initially relied primarily upon telephone technology, they were known as call cen-
ters. However, advances in communications technology now provide customers
with a variety of channels for receiving customer service. A customer contact
center, also called a customer care center, provides customers with a variety of
channels, such as telephone, fax, e-mail, Internet chat, and traditional mail, for
communicating with a company. Some customer contact centers handle only rou-
tine customer requests for information and forward other customer requests to
processing centers. Other customer contact centers directly handle a relatively
high percentage of the customer processing requests, while transferring relatively
few requests to processing centers for handling. Customer contact centers rely
heavily on technology, such as customer databases and document management
systems, to provide needed customer service.

Typical Customer Service Job Positions

A customer service representative (CSR) is any employee whose primary job
responsibility is to support external customers by conducting two basic types of
activities: (1) interacting with customers through face-to-face communications or
through communications media, such as the telephone, fax, e-mail, or Internet
chat sessions, and (2) processing transactions for customers.
Most insurance companies classify new employees in customer service as
customer service associates. To be promoted to the position of CSR, a customer
service associate must demonstrate a variety of skills, including accuracy in pro-
cessing transactions, verbal and written communication, productivity, completion
of continuing insurance education requirements, and proficiency in the company’s
operations and products. CSRs receive increasing amounts of decision-making
authority as they gain experience and demonstrate enhanced ability and quality of
judgment. In addition, CSRs are trained to be pleasant, polite, and accommodating
in every interaction with customers.
As with other functions, organization, staffing, and authority levels in customer
service vary according to management preferences and the insurer’s products and
services. CSRs provide both basic and specialized customer service, depending
on their level of training and experience. Less experienced CSRs handle routine
customer transactions and basic information requests. More experienced CSRs
resolve complex customer transactions and answer more technical or complicated
requests for information.
Example: Josie Rodriguez has been a CSR at the Rightful Life Insurance
Company for less than two years. She processes routine customer
requests, which include making changes to a policyowner’s name,
address, and contact preferences. Hank Aspinall, a senior CSR at Rightful,
has nine years of experience in customer service. He typically handles
more complex customer service requests and transactions such as policy
surrenders and reinstatements.
Customer Service Department Relationships

An insurer’s CSRs serve as a link to the information, products, and services that
insurance customers need. CSRs are the face and the voice of the insurer, but as
stated earlier, they rely on information and services that other organizational units
provide. Figure 14.1 shows the customer service department’s relationships with
parties internal and external to the insurance company.
Effective Customer Service

The primary goal of a customer service department is to provide effective and
cost-efficient customer service that builds customer loyalty. Customer loyalty is
a customer’s feeling of attachment to or preference for a company’s people, prod-
ucts, or services. Loyal customers provide steady, dependable income through
repeat business; become a valuable source of new customers through referrals; and
provide feedback about the company and its operations. Appropriate education,

Figure 14.1. Customer Service Department Relationships
Underwriting Information Technology Product

Development
Underwriting for Information systems Administrative

coverage changes and needs needs: forms, etc. New product
reinstatements
information: training
and updates
Lapse and
replacement Lapse and replacement
statistics Customer Service statistics
Department
Training
updates
Actuarial
Marketing
Service
Sales leads Calculations

Legal information and
guidelines
Requests for Customer Requests for

information and billing information
Legal/Compliance changes
Requests for
information
Producers
Claims Policyowners, insureds, Accounting

beneficiaries, and
annuity payees
training, and technology are critical to a customer service department’s ability to

provide effective customer service. Generally, customer service is considered to
be effective if it is
Prompt. Service is delivered to the customer in a timely manner.
Example: The Superlative Life Insurance Company handles routine

requests and transactions within 48 hours.

Complete. Every aspect of the customer’s problem or inquiry is resolved to

the customer’s satisfaction.
Example: Superlative’s CSRs either satisfy a customer’s request or ensure

that the request is forwarded to the appropriate area for handling.
Accurate. The CSR is knowledgeable about the company’s products and

procedures and can provide the customer with accurate information.
Example: Superlative’s CSRs receive continuing training and education

about Superlative’s products and procedures.
Courteous. The CSR is polite, tactful, and attentive to the customer’s feelings
and situation.
Example: CSRs at Superlative are trained to listen attentively and to be

polite and tactful as they help customers with their needs.
Confidential. Only authorized customers and staff can access and view infor-
mation and perform transactions.
Example: Superlative’s CSRs verify that the person requesting a policy

change is authorized to do so.
Convenient. Customers can get the services they need when, where, and how
they want the services delivered.
Example: Superlative provides customers access to a toll-free telephone

number that is staffed after regular business hours. Superlative also
provides customers with online access to policy information.
Education and Training

Education and training are essential to an insurer’s ability to provide effective cus-
tomer service. Insurers train their CSRs when the CSRs are hired, and the training
continues throughout a CSR’s career to reinforce and update existing skills and
knowledge. CSRs generally need ongoing training in the following areas:
Technology. CSRs must be proficient in using a variety of types of technol-
ogy, including sophisticated telephone systems, automated transaction sys-
tems, imaging systems, and automated workflow systems.
Products and processes. CSRs must be knowledgeable about an insurer’s
products, including their prices and enhancements, and understand the pro-
cesses used to support those products so that they can answer customers’
questions and process customer requests and transactions.

Communication and interpersonal skills. CSRs must be able to interact

effectively with customers in a variety of situations, many times when cus-
tomers are upset or angry. Training in effective interpersonal skills can help a
CSR better satisfy customer needs and deliver pleasant service.
Our company has a great website. Customers

can use it to solve a lot of problems for
themselves.
Technology
Insurers provide effective customer service and encourage customer loyalty
by providing a seamless customer service process through a variety of service
options. A seamless process is a smooth process designed so that a customer is
not inconvenienced by—or even aware of—the steps involved in fulfilling the
customer’s request. Many automated systems, such as workflow systems, docu-
ment management systems, and other systems which we described in Chapter 5,
are essential pieces that together allow an insurer to provide a seamless customer
service process. Technology also helps in providing personalized customer service
through a variety of service options.
Most insurers offer customers a choice of self-service, human-assisted ser-
vice, or a combination of self-service and human-assisted service. Some people
want customer service to be conveniently available anytime and anywhere. With
a self-service option, the entire customer experience for some transactions can be
fully automated and available whenever the customer requires service. To ensure
security, an insurance company typically assigns a login and password or per-
sonal identification number (PIN) to authorized policyowners so they can confirm
their identities before making routine changes and requests through an automated
system. Routine requests include changing contact information and handling pre-
mium payments. In some cases, a transaction confirmation that includes contact
information for an insurance company employee is sent to the customer so the
customer has a personal contact with the company should she have any additional
questions or problems.
In addition, many insurers offer self-service website options to producers that
allow them to obtain product information, print copies of marketing materials,
prepare sales presentations, and submit applications or changes on behalf of their
customers. Another self-service option is the interactive voice response (IVR) sys-
tem described in Chapter 5. Using this system, customers may pay premiums,
check the status of applications and claims, and order forms.
Example: Lakshmi Kutar called the Emerald Life Insurance Company to

check on the status of a claim. Ms. Kutar’s call was answered by Emerald’s
automated telephone system. The system greeted her with a digitized
message and prompted her to enter information using her telephone
keypad. By following the prompts from the automated telephone system,
Ms. Kutar was able to access the claim information she was seeking
without having to speak to a CSR.

Many customers prefer more direct contact with a CSR. Traditional toll-free
telephone numbers still allow customers to connect directly with a CSR at an
insurer’s customer contact center. However, insurers are also providing ways for
customers to connect to CSRs through the Internet. E-mail allows a customer to
contact a CSR and receive a response within a designated time, such as within 24
hours. When a customer chooses to communicate via instant messaging or web
chat, the customer types a question, which then appears on the CSR’s computer
screen. When the CSR types a response, the response appears on the customer’s
computer screen below the original question. Web callback allows a customer to
click on an icon at a website and request that a CSR call the customer on the tele-
phone. Web collaboration, also called collaborative browsing or shadowing, is
a technology that enables participants to “meet” at a website, synchronize their
browsers, and explore the website together, communicating with each other in real
time. With web collaboration, a CSR can help a customer complete a form online.
Insurers typically offer a combination of self-service and human-assisted
customer service because many insurance transactions are complex and require
human assistance. Many times self-service customers access the insurer’s web-
site, but find that they need help in completing their transactions. Still, providing
self-service options for less complex transactions frees CSRs to focus more on the
complicated ones.
Insurers can provide faster and more personalized service through an auto-
matic call distributor (ACD). The ACD can be programmed to route calls based
on the skills necessary to process the request. This process is called skill-based
routing (SBR), and the call is transferred to the most appropriate CSR based on
the caller’s answers to questions. One advantage of using the SBR system is fewer
call transfers, as customers reach the CSR who can perform their request without
being transferred multiple times. Computer systems that match a caller’s telephone
number or some other type of personal identifier with information in the insurer’s
database can send the customer’s records directly to the CSR’s computer screen
so that the CSR can provide personalized service to the customer. Other systems
described in Chapter 5 allow CSRs to access and manage customer information
more efficiently.
Have you heard of customer relationship

management? It’s the ultimate in customer
service!
Customer Relationship Management

Insurers who wish to take effective customer service one step further establish
customer relationship management (CRM) programs that deliver products, ser-
vices, distribution channels, and communication methods that the company’s most
valued customers want. Some insurance companies now refer to CRM as customer
experience management, total client management, or customer focus. Regardless
of the terminology used, through enhancing the customer experience, the insurer
Learns from every customer interaction.

Uses what has been learned to anticipate customer needs.
Offers products and services to satisfy those needs. Recall that privacy
laws and regulations set limits on how specific information can be used. The
insurer’s legal and compliance departments provide guidelines for CSRs in
using customer information.
An insurance company can achieve the benefits of CRM only if it takes steps
to promote a culture in which everyone in the company makes customer service a
primary business goal. Theoretically, employees are empowered to take quick
action, within certain limits, to do whatever is necessary to meet and exceed cus-
tomer expectations. In practice, this means delegating more authority and account-
ability to CSRs and other front-line employees. The insurer must give those
employees the necessary technology, training, and education to do their work;
create customer-oriented automated systems; and frequently measure customer
satisfaction to ensure that CRM goals and objectives are being met.
Customer Service Processes

CSRs are responsible for maintaining and correcting life insurance or annuity
policy records. Each policy has its own record that shows the premium payments,
the designated beneficiary, the various options the policyowner has selected, the
policyowner’s current address, and any other information necessary to provide
effective service to the policyowner and other customers. CSRs are also respon-
sible for administering financial transactions that relate to policy values, under-
standing the tax consequences of various types of transactions, informing poli-
cyowners of developments that affect their policies, and processing simple policy
changes. Note that CSRs do not give tax or investment advice to customers.
Although insurance companies have different methods for delivering cus-
tomer service, most customer service processes fall into general categories, such
as answering questions about insurance and annuity products, fulfilling requests,
handling complaints, or engaging in activities such as conserving, up-selling, and
cross-selling.
Fulfilling Customer Requests

One of the keys to delivering exceptional customer service is linking the customer
with the CSR or work team most capable of handling the customer’s request. As
mentioned, insurers typically use automated systems to aid in accomplishing this
objective.
Another important step in fulfilling requests is to verify customer identity. A
CSR verifies the identity of the person making a request and confirms that the
person has the authority to make the request. To ensure that the person calling is the
policyowner, the policyowner enters information—such as date of birth, last four
or five digits of her Social Security or social insurance number, or password—by
telephone keypad into the automated telephone system and often repeats the infor-
mation to the CSR who processes the request.
The CSR also typically checks whether the life insurance policy specifies an
irrevocable beneficiary, a life insurance policy beneficiary whose designation as
beneficiary cannot be cancelled by the policyowner unless the beneficiary gives
written consent. Some customer service transactions cannot be completed without
the consent of an irrevocable beneficiary.
Most insurers maintain documented procedures, talking points, and scripts so

that CSRs provide consistent responses to customers’ requests. Talking points are
a list of important items that employees refer to using their own words. A script
is a written dialogue or set of systematic instructions that employees usually fol-
low word-for-word. Scripts are often used in situations that require complete and
accurate information, such as legal explanations.
CSRs perform a variety of transactions related to individual life insurance poli-
cies and annuities. CSRs process many of these transactions over the telephone,
send the policyowner a form to complete, or direct the policyowner to the insurer’s
website for a self-service change. For many types of transactions, the request must
be made in writing and signed by the policyowner, who must provide proper iden-
tification to the insurer. Most customer service transactions can be described as
being either nonfinancial or financial.
Common Nonfinancial Transactions

Nonfinancial transactions in customer service usually pertain to policyowner con-
tact information or to policy wording, insurance coverage, or benefits. Common
nonfinancial transactions in customer service include
Address and name changes. Requests to change a policyowner’s address are
common. Most insurers accept these requests by telephone or over the Inter-
net, if the caller provides the correct identifying information. To guard against
fraud, insurers often send confirmation of the address change to both the
old and the new addresses. A policyowner who undergoes a name change—
typically as a result of marriage, divorce, adoption, or court order—may
request that a name be changed on a policy. Most insurers typically require
policyowners to request name changes in writing.
Policy ownership changes. Insurers typically require the policyowner to sub-
mit a change in policy ownership in writing on an appropriate form. This
form is often available for printing from the Internet. The form must be signed
by the policyowner and any irrevocable beneficiaries who have rights to the
policy. A CSR searches policy records to confirm the policyowner’s identity
and signature. Then the CSR updates the policy record to reflect the change
in ownership. For annuities, the insurer also reports any tax obligations that
result from the change in ownership to the appropriate taxation authority.
Beneficiary changes. All beneficiary changes must be made in writing by the
policyowner and signed by any irrevocable beneficiaries. A CSR examines the
written beneficiary change request to verify that it includes all of the required
information and that the signature on the request matches the policyowner’s
signature on file with the insurer. Many deferred annuities have a beneficiary,
who is the person or party named to receive any death benefits payable dur-
ing the annuity’s accumulation period. The annuitant or another payee, not
the beneficiary, receives the proceeds of the annuity once the periodic income
payments begin on an in-force contract.

Premium payment changes. CSRs process policyowner requests to increase

or decrease the frequency of premium payments or to change the premium
payment method. For example, a policyowner may request an automatic
payment plan, under which the policyowner designates a bank account from
which the insurer will make regular withdrawals and either use the withdrawn
funds to pay the policyowner’s life insurance premiums or deposit the with-
drawn money as additional contributions into the policyowner’s annuity.
Insurer producer changes. An insurer’s customer contact system generally
documents each policy’s producer of record—the agent, broker, or other type
of producer currently providing service to the policyowner. The producer of
record changes if the producer moves, retires, dies, or stops marketing the
insurer’s products, or if a customer indicates she prefers to work with another
producer for any reason, such as she has moved to a new area. Orphan policy-
owners, who do not currently have a relationship with a producer, are likely to
surrender their policies or let them lapse. In many companies, a CSR assigns
orphan policyowners to new producers. Some companies allow CSRs, who
are licensed to sell insurance products, to act as a producer of record for spe-
cific customers.
Life insurance coverage changes. Major life events such as the birth of a
child, a marriage or divorce, a promotion or retirement, or a dependent child’s
marriage can prompt a policyowner to request a change in life insurance cov-
erage. A policyowner can either (1) increase or decrease the monetary amount
of coverage or (2) add a policy rider, an amendment to an insurance policy
that expands or limits the benefits payable under the policy. CSRs administer
requests to increase and decrease coverage in collaboration with the producer
or the underwriting department. Some changes include a financial component,
such as a premium increase that accompanies an increase in coverage.
Common Financial Transactions

Life insurance and annuity products have financial value for customers. Custom-
ers often have questions about the amounts of these values and ways in which they
can access the value. The following sections describe typical financial transac-
tions that CSRs administer for an insurer’s customers.
Investment fund allocations. Variable insurance and variable annuity prod-
ucts let policyowners choose into which investment funds they want to invest
their premiums and what percentage of their total investment will go into each
chosen investment fund. Most insurers let policyowners make changes by tele-
phone or via the insurer’s website. Some insurers require written notice to real-
locate funds. CSRs process requests to (1) reallocate currently invested money
from one investment fund to another and (2) allocate future premium payments
among investment funds. In some jurisdictions, CSRs who assist policyowners
with variable products may be required to obtain special licenses.

Life insurance policy surrenders. The owner of a cash value life insurance
policy can surrender—terminate—his policy and receive an amount of money
known as the policy’s net cash surrender value. Most insurers require the
policyowner to submit a signed surrender request form to terminate a policy.
Some insurers require that the policyowner return the surrendered policy with
the surrender request. For life insurance policy surrenders, the CSR notifies
the producer of record about the pending surrender and reviews the benefits of
keeping the policy in force and the disadvantages of surrendering the policy
with the policyowner. To process a policy surrender, the CSR calculates the net
cash surrender value and arranges for payment of that amount to the policy-
owner. Figure 14.2 lists items that are commonly added to and subtracted from
a life insurance policy’s cash value to determine the net cash surrender value.
Figure 14.2. Calculating the Net Cash Surrender Value:
Additions Subtractions
Cash value of paid-up Outstanding policy loans
additions
Accumulated policy Accrued policy loan
dividends interest
Advance premium Any surrender charges
payments
Annuity surrenders. The net cash surrender value for an annuity is the amount
of a deferred annuity’s accumulated value, less any surrender charges, that the
annuity contract owner is entitled to receive if the contract is surrendered dur-
ing its accumulation period. Cash surrenders are not available for immediate
annuities or for deferred annuities that have entered the payout period. The
contract owner can choose to surrender the entire annuity or elect a partial
surrender. In a partial surrender, the contract owner withdraws only a por-
tion of the annuity’s accumulated value instead of surrendering the contract
entirely. Annuity withdrawals may be subject to mortality charges, surrender
charges, and income taxes.
Policy loans. Recall that a policy loan is a loan a life insurance company
makes to the owner of a life insurance policy that has a cash value. Although
the policy loan does not have to be repaid, most insurers offer policyowners
a choice of loan repayment plans. Many insurers accept telephone requests
for loans under a certain monetary amount and require written requests for
amounts over that limit. Some insurers require a written request for all policy
loans. The CSR examines the policy record to ensure that the policyowner
has made the request and that the request contains all applicable signatures:
assignee, irrevocable beneficiary, or spouse in a community property jurisdic-
tion. The CSR determines the cash value available under a policy and, assum-
ing that the cash value is at least equal to the loan amount requested, arranges
payment to the policyowner.

Dividend payments. Recall that some policyowners receive policy dividends.

Policy dividends are payable to policyowners at the end of a policy year or
on a policy’s anniversary. Policyowners elect a policy dividend option—how
they want their policy dividends applied—when they apply for the policy.
Figure 14.3 lists the life insurance policy dividend options that insurers typi-
cally offer. Policyowners can change the dividend option while the policy is in
force. CSRs answer questions and resolve problems related to dividend pay-
ments, and they fulfill policyowners’ requests to switch from one dividend
option to another. Typically, the transaction processing system calculates any
applicable taxes due on policy dividends.
Figure 14.3. Life Insurance Policy Dividend Options
Receive the dividends in cash.
Apply the dividends to pay some or all of the policy’s

premiums.
Apply the dividends to repay some or all of a policy loan.
Use the dividends to purchase additional insurance.
Leave the dividends on deposit with the insurer to

accumulate at interest.
Replacements. Most insurers maintain a separate unit for replacements, which

are generally more difficult to handle than other transactions. A replacement
is the purchase of one life insurance policy or annuity contract using money
received from the surrender of another life insurance or annuity contract.
Typically, the producer submits the replacement request at the time an appli-
cation is submitted for a new policy or contract. CSRs in this unit ensure that
each replacement is handled ethically, legally, and with full disclosure. To
protect customers’ interests, most jurisdictions have laws and regulations that
require insurers and producers to provide customers with a notice describing
the effects—including the tax impact—of replacing a policy or an annuity
when a replacement is involved. Replacements can be internal or external. An
internal replacement is one in which a new policy or annuity contract is pur-
chased from the same insurer that issued the original policy or contract. The
CSR provides requested information to the producer and the policyowner or
contract owner, terminates the original policy or contract, and sets up the new
records. An external replacement is one in which the policyowner or annuity
contract owner purchases a new policy or annuity from a different insurer.
The replacing company notifies the original insurer and provides detailed
information about the applied-for policy or annuity. The CSR and producer at
the original insurer typically attempt to conserve the existing product or offer
a competitive replacement product. If this attempt is unsuccessful, the CSR

updates the records to reflect the terminated policy or annuity contract. The
policy administration system calculates the net cash surrender value of the
surrendered policy and transfers the amount to the policyowner or, in some
cases, the replacing insurer. In the United States, the rules and required paper-
work to accomplish replacement vary greatly by state.
Reinstatements. After a life insurance policy has lapsed, the policyowner
may ask to have the original policy reinstated. Recall that reinstatement is the
process by which an insurer puts back in force a policy that lapsed because of
nonpayment of renewal premiums. For a policy to be reinstated it must contain
a provision that allows policy reinstatement. If the policyowner has surren-
dered the policy, a right to reinstate the policy is generally not available. Also,
an insurer is not obligated to reinstate a policy just because an insurer has
included a reinstatement provision in that policy. Typically, the CSR submits
the reinstatement application to underwriting. Under certain circumstances,
however, the CSR may be authorized to approve the reinstatement. In such
cases, the CSR obtains from the policy administration system the amount of
(1) back premiums due and (2) outstanding premium policy loans payable.
I’m not afraid of customer complaints! They’re

a gold mine of information.
Handling Customer Complaints

Customer complaints offer a life insurance company many insights into such
issues as how customers understand the company’s marketing messages and if,
when, and how customers use the company’s various products. Most insurers have
procedures for handling customer complaints. These procedures are designed to
comply with regulatory requirements, minimize the risk of lawsuits, and improve
customer service.
Complaint handling procedures vary by company and product. In some com-
panies, for instance, the CSR who receives the complaint logs it into a complaint
management system. A complaint management system consists of the processes
and procedures for recording, evaluating, and taking action on complaints. Com-
puter-based systems allow for quick recording and retrieval of detailed complaint
information.
Most companies have a complaint team, also known as a problem resolution
team, a work group dedicated to resolving customer complaints. A member of a
complaint team may either attempt to resolve a complaint or forward the com-
plaint to the appropriate area for handling. For example, if the company receives
a complaint about how a claim was handled, the complaint team may forward the
complaint to the claim department. Depending on the type of insurance policy,
customer complaints that are not resolved quickly or to the customer’s satisfaction
may be routed to a specially trained team of employees.

An important part of any complaint-handling process is to carefully document

all relevant information. Figure 14.4 lists some types of information typically
recorded for complaint handling.
Figure 14.4. Information Documented for Complaint Handling
Name of person receiving complaint
Date and time complaint received
Source of complaint, such as applicant, policyowner, or producer
Name of complaining party, including all identifying information
Company units involved, such as marketing or underwriting
Nature of complaint, such as failing to respond to request, misleading information

provided, or violation of privacy
Company unit or employee responsible for
resolving complaint
Written acknowledgment to complaining
party that states the (1) company’s decision or
resolution of the complaint, and (2) any options
available to the complaining party for appeal of
the company’s decision
Any referrals to legal or compliance units for
review or advice
Any actions taken to investigate complaint
All communications with complaining party
Yesterday I heard some customer service

people talking about conservation, but they
weren’t talking about the rain forests!
Conserving, Up-Selling, and Cross-Selling

In addition to fulfilling customer requests and handling customer complaints,
many insurance company CSRs also participate in the process of (1) conserving
in-force policies and (2) up-selling and cross-selling new products. CSRs focus
primarily on the conservation of existing policies unless they are appropriately
licensed to sell insurance products. However, unlicensed CSRs may obtain valu-
able information that can be communicated to other licensed CSRs or producers.

The process of ensuring that policies do not lapse but remain in force as long
as possible is called conservation. As mentioned before, policies that have been in
force for a long time are more profitable for insurers than policies that lapse soon
after policy issue. Before processing a life insurance policy surrender request, a
CSR may attempt to conserve the policy by suggesting one or more of the follow-
ing alternatives:
The policyowner can avoid future premium payments and still continue insur-
ance coverage by using the policy’s net cash surrender value to purchase either
reduced paid-up insurance or extended term insurance.
The policyowner can obtain funds and continue the insurance coverage by
taking out a policy loan.
The owner of a universal life insurance policy can reduce the amount of future
premium payments by reducing the policy’s face amount.
The owner of a universal life insurance policy that provides a policy with-
drawal feature can withdraw part of the policy’s cash value.
The policyowner can change the premium payment method to one that is
more manageable financially, such as from an annual premium payment to a
monthly premium payment.
An orphan policyowner can be assigned to a new producer, and encouraged to
meet with the new producer before surrendering the policy.
Example: A policyowner wants to use his policy’s cash value for making a
down payment on a house. The CSR points out that the policyowner can
obtain the funds he needs for the house and still continue his insurance
coverage by taking out a policy loan. If the policy were a universal life
insurance policy, the CSR would point out that the policyowner may
withdraw part of the policy’s cash value under the policy withdrawal
feature. In either case, the CSR is attempting to conserve the existing
policy.
During a CSR’s conversation with a customer, the CSR might realize that the
customer could benefit from an insurer’s additional products or services. The CSR
could inform the customer of the availability of such products without attempt-
ing to make a sale. The CSR might ask the customer’s permission to transfer the
customer to a licensed producer to talk further, or the CSR might forward the
customer’s information to a producer after the call ends. If the CSR is licensed
appropriately, the CSR can engage in up-selling or cross-selling. Up-selling is
promoting a more powerful, more enhanced, or more profitable product than the
one a customer originally considers.
Example: A policyowner wishes to renew a five-year term life insurance

policy. A CSR, who is licensed to sell insurance products, suggests that
the policyowner might benefit from purchasing a cash value life insurance
policy that includes a savings element. Because cash value policies usually
generate more premium income than do term policies, the insurer would
also benefit from this sale.

Cross-selling is identifying a customer’s needs for additional products during

or after selling a primary product, and then promoting complementary products
that, combined with the primary product, provide a more complete solution for the
customer’s needs.
Example: A policyowner wants to surrender a life insurance policy and

purchase a critical illness policy. The CSR, who is licensed to sell insurance
products, suggests adding an accelerated death benefit rider to the exist-
ing policy that will give the policyowner income in the event of a critical
illness. In addition to cross-selling, the CSR is attempting to conserve the
existing policy.
Our company has a separate unit—member

services—that handles requests and
transactions for group insurance products.
Is customer service different for group
insurance?
Customer Service Processes for Group Products

The principles of customer service for group life insurance and annuities are simi-
lar to those for individual insurance and annuity products; customer service should
be prompt, complete, accurate, courteous, confidential, and convenient. However,
customer service transactions for group insurance products do differ from the
usual customer service transactions for individual insurance products. For this
reason, most insurance companies that sell group products devote a segment of
the customer service unit exclusively to group products. This unit is often called
member services, and it engages in extensive recordkeeping activities. Member
services also provides information and answers questions about the plan’s eligi-
bility requirements, benefits, and provisions. For example, member services may
inform group insureds about what portion of the premium, if any, each group
insured must pay. Member services also works closely with the group representa-
tive or the plan administrator to resolve any problems quickly. For example, if a
group insured is having difficulty in providing information required to process
a claim, member services may advise the group representative or the group plan
administrator about the required information and ways to obtain it.
Establishing Records and Processing Enrollments

Member services has important duties during the installation of a new group insur-
ance or annuity policy, including
Providing information to and answering questions from the group policyholder
and eligible group members about the plan’s eligibility requirements, contract
provisions, benefits, and premium payments
Establishing the group policy’s records, including the number of participating
group members, the benefits stated in the contract, the date that insurance cov-
erage or annuity participation begins for each member, and, for life insurance,
the premium rate for the policy
Processing life insurance enrollment cards completed by group members
Issuing certificates of life insurance coverage to the policyholder for delivery

to covered group insureds
Group Administration
Once installed, a group insurance product may be administered by the insurance
company that sold the coverage, by a third-party administrator, or by the group
itself. If the insurance company administers the insurance or annuity plan, the
member services department usually maintains life insurance enrollment cards,
records of dates and amounts of premiums received, life insurance claims filed
and paid, commissions paid, and other payments that affect the group policy. The
member services unit updates the insurer’s records as group insureds are added to
or terminated from the plan. Member services also handle complaints and answer
inquiries from the group policyholder, the plan administrator, and group insureds.
Terminating Group Coverage

When the policyholder of a group insurance product does not renew its group
contract with the insurer, the group plan terminates. The member services unit
closes the files for that contract and informs the group insureds of their rights, if
any, regarding the terminated plan. For example, group life insureds may have the
right to convert their group coverage to an individual plan of life insurance. In the
United States, participants in certain employer-sponsored group annuity plans can
transfer their annuity values tax free to another financial institution. The member
services unit assists group insureds with the life insurance conversion or the annu-
ity transfer.
Member services also handles group insurance conversion requests and annu-
ity transfer requests from group members who are no longer eligible to participate
in a group plan. A group member loses eligibility for participation if he terminates
his employment or is no longer a member of an eligible class of employees.
Just about everything we CSRs do gets

measured.
Control Mechanisms for Customer Service

Every contact between an insurer and a customer produces a moment of truth, an
instant when the insurer has an opportunity to create a good or bad impression in
the customer’s mind. During a moment of truth, a customer decides whether he is
satisfied with the insurer based on the service he received. Insurers aim to make
every moment of truth a positive and beneficial experience for their customers. To
accomplish this objective, insurers use a variety of control mechanisms in customer
service, including those shown in Figure 14.5.

Figure 14.5. Control Mechanisms in Customer Service
Steering Controls
Policies and
procedures
Authority levels
Performance
standards
Training
Performance Real-time monitoring

measurements
Electronic
Customer complaints
dashboards that
and satisfaction
provide real-
surveys
time statistics on
Customer focus
performance results
groups
Producer feedback
groups
Mystery shoppers
Customer service activities are probably the most frequently measured activi-
ties in an insurance company. Managers regularly monitor and evaluate customer
service performance by using qualitative performance measurements and quan-
titative performance measurements. A qualitative performance measurement
focuses on behaviors, attitudes, or opinions to determine how efficiently and
effectively processes and transactions are completed. A quantitative performance
measurement uses numerical methods to track and report results to determine
how efficiently and effectively processes and transactions are completed.

Qualitative Performance Measurements

Customer satisfaction surveys, monitoring, and mystery shopping are examples of
primarily qualitative customer service performance measurements. A customer
satisfaction survey helps a company determine whether its products, services,
and prices are meeting customer expectations. A well-designed survey can also
measure customer loyalty. Some insurers send a short general survey to randomly
selected customers. Other insurers conduct a short survey after each transaction.
For example, a customer may be asked to complete an automated survey at the end
of a telephone call. Customers may be asked to comment on an individual CSR’s
timeliness, accuracy, and professionalism. In addition, customers may be asked if
the CSR made them feel welcome or valued during the interaction.
Monitoring is a process used to review and evaluate the quality of customer ser-
vice interactions either as they happen or after the fact. A customer service man-
ager often listens to live or recorded telephone conversations between customers
and CSRs. Insurers must inform callers of their call-monitoring practices to comply
with applicable laws and regulations regarding call notification. In addition, many
companies monitor all of their contacts with customers—not just those involving
telephones. Monitoring is a method for improving individual CSR performance as
well as customer service systems and processes.
Monitoring written and verbal communications enables managers to evaluate
a CSR’s performance according to the level of the CSR’s communication skills,
ability to identify and solve problems, and empathy with customers. Empathy is
the process of understanding another person’s emotional state and imagining how
you would feel in a similar situation. A manager can use monitoring as a teach-
ing device by pointing out the strengths and weaknesses of the CSR’s techniques
during a customer interaction. If a manager observes a significant or frequently
recurring problem during monitoring, the manager may decide to modify a cus-
tomer service process or revise its training program.
Some insurers use mystery shoppers, trained evaluators who contact CSRs and
pretend to be customers. The mystery shopper conducts a transaction with the
CSR and evaluates the CSR’s communication skills, etiquette, product knowledge,
clarity of explanations, attitude, and so on. In addition to being able to assess the
CSR’s performance, a mystery shopper can manipulate the encounter to see how
the CSR responds to various scenarios.
Quantitative Performance Measurements

Quantitative performance measurements rely on numerical methods to judge per-
formance. Customer complaints are simultaneously qualitative and quantitative
performance measurements. Studying customer complaints can be a valuable
method for obtaining information about customer problems or trends. By analyz-
ing the source, number, frequency, and nature of complaints, an insurer may be
able to identify and reduce or even eliminate the problems that are causing the
complaints.

Insurers also use persistency rates to gauge the quality of customer service. A
persistency rate is the percentage of an insurer’s business in force at the begin-
ning of a specified period that remains in force at the end of the period. Theoreti-
cally, a high or rising persistency rate indicates that customers are satisfied with
the company’s products and the quality of its customer service. Conversely, a low
or declining persistency rate could mean that customers are dissatisfied with the
company and its products.
Figure 14.6 describes other quantitative measures that insurers use to evalu-
ate customer service transactions regarding service level, timeliness, quality, and
departmental productivity.
Figure 14.6. Quantitative Performance Measurements
Service Level/Accessibility to the Customer

Service level. The percentage of inbound customer contacts the CSR answers
within a specified time frame—for example, 90 percent answered within 20
seconds.
Number of blocked calls. The number of inbound telephone calls that encounter
a busy signal and cannot get through to the customer contact center.
Average speed of answer. The average time in seconds to answer a telephone
call or, depending on the context, the average amount of time in seconds or
minutes that telephone callers are on hold before being connected with someone
who can meet customer needs.
Abandonment rate. The percentage of inbound telephone calls that are
automatically placed on hold and then terminated by the caller before the call is
answered by someone who can meet customer needs.
Misdirected calls. The number or percentage of inbound telephone calls that
are transferred to the wrong department.
Timeliness
Turnaround time. The amount of time needed to complete a particular
customer-initiated request or transaction; also called average handling time.
First-contact resolution. The percentage of inbound customer contacts that
are successfully completed at the initial point of contact—that is, without being
transferred and without the need for follow-up work.
Quality
Quality rate. The accuracy of a particular type of transaction, often expressed as
a percentage of the total number of transactions handled or processed, such as
99.5 percent of account transactions having no reported errors.
Error rate. The percentage of particular types of transactions that result in errors,
such as 0.5 percent of account transactions reported errors.
Productivity
Processes completed. The number of transactions that are handled within
a specified time frame. Some tasks are to be completed during the customer
contact; other tasks are completed after the customer call.
Source: Adapted from Mary C. Bickley et al., Insurance Administration, 4th ed. (Atlanta: LL Global, Inc., © 2011), 78. Used
with permission; all rights reserved.

Insurers use performance measurement results in a variety of ways. Recall that

benchmarking compares a company’s own performance with that of other organi-
zations that are recognized as the best. Customer service benchmarking enables
an insurer to determine how well it is performing a particular customer service
process in relation to the benchmarked standard it aspires to achieve. In addition,
insurers share performance measurement results through dashboards or on each
CSR’s computer monitor so that everyone can help meet or exceed performance
standards. For example, during peak periods, CSRs may delay taking breaks or
postpone paperwork. Some insurers may tie individual or work-team bonuses to
performance measurement results.
I understand so much more about insurance

company operations than I did at the
beginning of this book. However, I’m still a bit
nervous about taking the exam.
I’m going to review the Top Ten Tough Topics

and learning aids on the Course Portal.
Also, taking the practice questions in the
Test Preparation Guide should really help us
get ready for the exam.
Key Terms
customer service partial surrender
work team replacement
customer contact center reinstatement
customer service representative (CSR) complaint management system
customer loyalty complaint team
seamless process conservation
web callback up-selling
web collaboration cross-selling
skill-based routing (SBR) member services
irrevocable beneficiary moment of truth
talking points qualitative performance measurement
script quantitative performance
automatic payment plan measurement
producer of record customer satisfaction survey
orphan policyowner monitoring
policy rider empathy
net cash surrender value mystery shopper

activities:
Can you think of an example of a moment of truth in your job? You might
have had a direct interaction with a customer that helped create a good or bad
impression in the mind of a customer. If you work in a support function, how
have you indirectly contributed to a moment of truth?
Visit your company’s website to determine which customer service transac-
tions are fully automated. Does your company offer web chat or web call-
back?
Consider the average speed to answer the next time you make a telephone call
to a business. If it takes the company a long time to answer, how do you feel
about the company?
Endnotes
1. LOMA, Customer Experience Management, Information Center Brief [Atlanta: LOMA (Life Office
Management Association, Inc.), © 2009]. Used with permission; all rights reserved.

Insurance Company Operations Glossary GLOSS.1
Glossary
accidental death benefit. A supplementary life insurance policy benefit under

which the insurer pays an amount of money in addition to the basic death ben-
efit if the insured dies as a result of an accident. [13]
account. The basic tool that a company uses to record, group, and summarize
similar types of financial transactions. [7]
accountability. In a company, the obligation of employees to answer to the
employer for how well they carry out their responsibilities. [1]
accounting. A system or set of rules and methods for collecting, recording, analyz-
ing, summarizing, and reporting financial information. [6]
accounting conservatism. An approach to financial reporting that typically
understates the values for a company’s assets, overstates the value of a compa-
ny’s liabilities and expenses, and projects a lower level of net income than would
be the case if the company used a less conservative reporting method. [7]
ACD. See automatic call distributor.
active management strategy. An investment strategy under which investment
staff view any investment in a portfolio as potentially tradable, if trading the
investment would improve the investment portfolio’s performance. [8]
ad hoc committee. A temporary committee that company executives establish for
a specific purpose. Also known as a project team or task force. [1]
admitted asset. In the United States, an asset whose full value can be reported on
the Assets page of the Annual Statement. [7]
ADR. See alternative dispute resolution method.
advanced underwriting. A group of specialists who will assist a producer in pre-
paring sales proposals, and will accompany the producer, if requested, to sales
presentations on how to use insurance products in a financial plan or estate
planning. [11]
adverse selection. See antiselection.
advertising. Any paid form of nonpersonal communication or promotion about
a company or its products or services that an identified sponsor generates and
transmits through any type of media. [9]
affiliated agent. An agent who sells primarily the products of a single insurance
company. Also known as an agency-building agent. [11]
age and amount requirements chart. See table of underwriting requirements.
agency contract. A written agreement between an agent and an insurance com-
pany that outlines the agent’s role, compensation, and responsibilities to the
insurance company. [11]

GLOSS.2 Glossary Insurance Company Operations
agency-building agent. See affiliated agent.

agent. An independent sales representative or company employee who is autho-
rized under the terms of an agency contract to act on behalf of an insurance
company in selling insurance products. [11]
agent-broker. See broker.
agent’s statement. A portion of an insurance application in which a producer may
report additional information that he thinks could affect the underwriting deci-
sion. [12]
aggressive financial strategy. A financial management strategy that emphasizes
taking risks to enhance a company’s profitability. [6]
ALM. See asset-liability management.
alternative dispute resolution (ADR) method. Formal or informal negotiations
to resolve a legal dispute. [3]
amortization. The reduction of a debt by regular payments of principal and inter-
est that result in full payment of the debt by the maturity date. [8]
annual report. A financial document that the management of a company sends to
interested parties—such as stockholders and investors—to report on the com-
pany’s financial performance during the preceding year; helps users assess a
company’s profitability and financial strength. [6]
Annual Statement. A financial statement that every insurer in the United States
must file with the National Association of Insurance Commissioners (NAIC)
and the insurance regulatory organization in each state in which the insurer
conducts business; helps regulators assess a company’s solvency. [6]
annuity date. The date on which an insurer begins to make periodic income pay-
ments under an annuity contract. [13]
antiselection. The tendency of people who believe they have a greater-than-aver-
age likelihood of loss to seek insurance protection to a greater extent than do
those who believe they have an average or a less-than-average likelihood of
loss. Also known as adverse selection. [12]
antivirus software. Computer software that detects computer viruses and works to
prevent them from destroying data and other computer programs. [5]
application software. Computer programs that help users perform specific tasks
or solve particular problems. [5]
appoint. The process by which an insurer officially notifies regulators that it is
authorizing a person to sell insurance on its behalf. [11]
APS. See attending physician’s statement.
aptitude test. A type of pre-employment test that attempts to determine a job can-
didate’s intelligence level and reasoning ability by evaluating how well the
candidate can do such things as remembering details, solving problems, and
understanding and using words correctly. Also known as a cognitive abilities
test. [4]

arbitration. An alternative dispute resolution method in which impartial third

parties, known as arbitrators, evaluate the facts in a legal dispute and render a
decision that usually is binding on the parties. [3]
arbitrator. An impartial third party who evaluates the facts in a legal dispute and
renders a decision that is binding on the parties. [3]
asset. Any item of value owned by a company. [6]
asset valuation. The process of calculating the monetary values for assets. [7]
asset-liability management (ALM). The practice of coordinating the administra-
tion of an insurer’s asset portfolio (its investments) with the administration of
its liability portfolio (its obligations to customers) so as to manage risk and still
earn an adequate level of return. [6]
asset-liability manager. The position within an insurance company responsible
for monitoring the investments for a specific line of the insurer’s business and
making sure funds are available when needed to support that line. Also known
as an asset manager. [6]
asset manager. See asset-liability manager.
assuming company. See reinsurer.
attending physician’s statement (APS). A report by a physician who has treated
or is currently treating a proposed insured. Also known as a medical attendant’s
report (MAR). [12]
audit. A systematic examination and evaluation of a company’s records, proce-
dures, and controls. [2]
audit log. In underwriting, a record of the work completed on a case. [12]
authority. In a company, the right of an employee to make decisions, take action,
and direct others to fulfill responsibilities. [1]
automated workflow distribution. See workflow management system.
automated workflow system. See workflow management system.
automatic call distributor (ACD). A computer telephony integration device that,
at the most basic level, answers telephone calls and directs them to a specified
employee or work group, or to a recorded message. [5]
automatic payment plan. A premium payment plan under which the policyowner
designates a bank account from which the insurer will make regular withdraw-
als and either use the withdrawn funds to pay the policyowner’s life insurance
premiums or deposit the withdrawn money as additional contributions into the
policyowner’s annuity. [14]
balance sheet. A financial document that lists the values of a company’s assets,
liabilities, and capital and surplus as of a specific date. [6]
bancassurance. A term used, outside of the United States, to describe the distribu-
tion of insurance products to bank customers through a bank-affiliated insurer.
[11]

basic accounting equation. An equation which states that a company’s assets

equal the sum of its liabilities and its capital and surplus. [6]
behavioral tendencies test. A type of pre-employment test that attempts to dis-
cover a job applicant’s typical job behaviors, such as: Is the person a team
player? Can the person remain calm under pressure? Is the person honest? Also
known as a personality test. [4]
benchmarking. A process by which a company compares its own performance,
products, or services with those of other organizations that are recognized as
the best in a particular category in order to identify areas for organizational
improvement. [2]
BI. See business intelligence.
board of directors. A group of individuals who are responsible for overseeing the
management of a corporation; the top level of management. [1]
bond. A security that represents a debt that a borrower (the issuer of the bond)
owes to the bondholder (the person or company that buys the bond). [8]
bond rating. A letter grade that a bond rating agency assigns to indicate the quality
of a bond issue. [8]
broker. An independent agent who does not have an exclusive contract with any
single insurer or specific obligations to sell a single insurer’s products. Also
known as an agent-broker. [11]
broker-dealer. A financial institution that buys and sells securities either for itself
or for its customers and provides information and advice to customers regard-
ing the purchase and sale of securities. [11]
budget. A financial plan of action, expressed in monetary terms, that covers a
specified period, such as one year. [2]
budgeting. An accounting process that creates a financial plan of action designed
to help an organization achieve its goals. [7]
business analytics. Business intelligence tools that combine technologies, appli-
cations, and processes as well as statistical and quantitative analysis to help
management make decisions or solve problems. [5]
business intelligence (BI). An organized collection of hardware, software, data-
bases, and procedures that uses information taken from a company’s transac-
tion processing systems and databases to support decision making. [5]
business market. See organizational market.
buy-and-hold strategy. An investment strategy under which investment staff
carefully select securities and expect to hold them for long periods, or until
they mature, are prepaid, or default. [8]
Buyer’s Guide. In the United States, a publication that explains to customers how
to determine how much life insurance coverage they need, describes the vari-
ous types of life insurance policies, and educates customers about how to com-
pare the costs of similar types of policies. [10]

call provision. A bond provision that states the conditions under which the bond
issuer has the right to require the bondholder to sell the bond back to the issuer
at a date earlier than the maturity date. [8]
Canadian Securities Association (CSA). A Canadian association whose mission
is to develop a national system of harmonized securities regulation throughout
Canada. [6]
capital. The excess of a company’s assets over its liabilities. [3]
capital and surplus ratio. A solvency ratio that describes the relationship between
an insurer’s capital and surplus and its liabilities. [6]
capital gain. The amount by which the selling price of an investment is more than
its purchase price. [8]
capital loss. The amount by which the selling price of an investment is less than
its purchase price. [8]
career agent. An agent who is under a full-time contract with one insurance com-
pany and sells primarily that company’s life insurance products. [11]
cash accounting. See treasury operations.
cash flow. Any movement of cash into or out of an organization. [6]
cash flow statement. A financial statement that provides information about a
company’s cash receipts (inflows), cash disbursements (outflows), and the net
change in cash (the difference between cash inflows and cash outflows) during
a specified accounting period. [7]
cash inflow. A movement of cash into an organization. Also known as a source of
funds. [6]
cash management. See treasury operations.
cash outflow. A movement of cash out of an organization. Also known as a use of
funds. [6]
CCO. See chief compliance officer.
ceding company. See direct writer.
centralized organization. An organization in which top management retains most
of the decision-making authority for the entire company. [1]
CEO. See chief executive officer.
certificate of authority. A document that grants an insurer the right to conduct an
insurance business and sell insurance products in the jurisdiction that grants the
certificate. Also known as a license. [3]
certificate of insurance. A document that describes (1) the coverage that the mas-
ter group insurance contract provides and (2) the group insured’s rights under
the contract. [12]
CFO. See chief financial officer.
chain of command. The organizational structure that identifies who reports to
whom in the company, and supports the delegation of authority. [1]

chief architect. See chief technology officer (CTO).

chief auditor. The person within a company who oversees audits and internal con-
trols for the company’s financial operations. [6]
chief compliance officer (CCO). The person within an insurance company who
is responsible for overseeing and managing the company’s compliance with
regulatory requirements and internal policies and procedures. [3]
chief executive officer (CEO). The head of a company who is appointed by the
company’s board of directors. [1]
chief financial officer (CFO). An individual who oversees an insurer’s financial
management policies and functions. [1]
chief operating officer (COO). An individual who manages the day-to-day opera-
tions of a company. [1]
chief technology officer (CTO). Within a company, the individual who is respon-
sible for developing and implementing a technology strategy for the entire or-
ganization, including its processes, information, and information technology
assets. Also known as a chief architect or enterprise architect. [5]
churning. An unfair sales practice in which a producer induces a customer to
replace one life insurance policy or annuity contract with another product, mul-
tiple times, so that the producer can earn a series of first-year commissions on
the replacements. [11]
claim adjudication. See claim administration.
claim adjustor. See claim analyst.
claim administration. The insurance function that is responsible for evaluating,
processing, and paying valid claims for contractual benefits that policyowners
or beneficiaries present. Also known as claim adjudication, claim handling,
claim processing, or claim servicing. [13]
claim analyst. An insurance company employee who is trained to review individ-
ual claims and determine the company’s liability under each claim. Also known
as a claim examiner, claim adjustor, claim approver, or claim specialist. [13]
claim approver. See claim analyst.
claim examiner. See claim analyst.
claim form. A document containing information about a loss under an insurance
policy that is submitted to an insurer to begin the claim evaluation process. Also
known as a claimant’s statement. [13]
claim fraud. An action by which a person intentionally uses false information
in an unfair or unlawful attempt to collect benefits under an insurance policy.
[13]
claim handling. See claim administration.
claim investigation. The process of obtaining the additional information neces-
sary to make an appropriate claim decision. [13]

claim philosophy. A statement of the principles the insurer will follow when con-
ducting claim administration. [13]
claim practices. Statements that guide claim department employees in the day-to-
day handling of claims. [13]
claim processing. See claim administration.
claim servicing. See claim administration.
claim specialist. See claim analyst.
claimant. A person—usually a beneficiary or policyowner—who submits a life
insurance policy claim to the insurance company. [13]
claimant’s statement. See claim form. [13]
classroom training. An employee training method in which an instructor lectures
to a group of employees, leads the group in discussion, or directs the group
members as they do various exercises, such as role-playing. [4]
click-wrap. A technology in which an insurance applicant clicks a secure web-
based “I agree” or “I accept” button on an electronic insurance application.
[12]
cloud computing. A subscription-based or pay-per-use service that, in real time
over the Internet, provides access to networks, platforms, applications, or other
IT elements that can extend an IT department’s existing capabilities. [5]
CMO. See collateralized mortgage obligation.
CMS. See content management system.
code of business conduct. See code of conduct.
code of conduct. A formal statement of a company’s values and its expectations
for how its employees should behave in the course of business. Also known as
a code of business conduct or a code of ethics. [2]
code of ethics. See code of conduct.
cognitive abilities test. See aptitude test.
cold calling. The process of telephoning or visiting prospects with whom a pro-
ducer has had no prior contact. [11]
collaborative browsing. See web collaboration.
collaborative software. Software programs that provide a work team, that may
be geographically dispersed, with the tools to communicate, collaborate, and
problem-solve over the Internet. [5]
collateral. An asset that is pledged as security for a loan until the debt is paid. [8]
collateralized mortgage obligation (CMO). A bond secured by a pool of residen-
tial mortgage loans. [8]
commission. An amount of money, typically a percentage of the premiums paid
for the sale of an insurance policy, that an insurer pays for selling and servicing
an insurance or annuity policy. [1]

committee. A group of people chosen to consider, investigate, or act on matters of

a specific type. [1]
common stock. A type of stock that entitles its owners to share in the company’s
dividend payments. [8]
company limited by guarantee. A type of company whose owners agree to pay
the obligations of the company up to a stated amount if the company is liqui-
dated. [3]
company limited by shares. A type of company in which the owners’ liability is
limited to the investment they made when they purchased shares of the com-
pany’s stock. [3]
compensation. The payment of money by an employer to an employee for work
performed. [4]
complaint management system. The processes and procedures for recording,
evaluating, and taking action on complaints. [14]
complaint team. A work group dedicated to resolving customer complaints. Also
known as a problem resolution team. [14]
comprehensive business analysis. An evaluation of all the factors that are likely
to affect the design, production, pricing, marketing, and sales potential of a new
product. [10]
comptroller. See controller.
computer telephony integration (CTI). The hardware, software, and program-
ming that integrate computers and telecommunications technology, particularly
telephones, to enhance the service and information provided to customer con-
tacts. [5]
concentrated marketing. A marketing strategy that involves focusing all of a
company’s marketing resources on satisfying the needs of one segment of the
total market for a particular type of product. [9]
concept testing. A marketing research technique designed to measure the accept-
ability of new product ideas, new promotion campaigns, or other new market-
ing elements before entering production. [10]
concurrent control. An organizational control applied during a business process
to monitor the process as it is being performed. Concurrent controls deter-
mine whether a process should proceed, requires corrective action, or must be
stopped. [2]
conservation. The process of ensuring that policies do not lapse but remain in-
force as long as possible. [14]
conservative financial strategy. A financial management strategy that empha-
sizes avoiding risks that, while potentially enhancing a company’s profitability,
could threaten its solvency. [6]
constituent. See stakeholder.
consumer market. A market that consists of individuals who buy products or ser-
vices for personal or family use. [9]

consumer reporting agency. A private business that assembles or evaluates in-

formation on consumers and furnishes consumer reports to other people and
organizations in exchange for a fee. [12]
content management system (CMS). A technology that allows authorized users
to create, edit, store, and publish corporate electronic data and information.
[5]
contestable period. The time period following policy issuance within which an
insurer has the right to void a life insurance contract if the application for insur-
ance contained a material misrepresentation. [13]
control cycle. An ongoing repetition of procedures for steering, monitoring, as-
sessing, and improving business processes. [2]
controller. The person within a company who heads the accounting and financial
reporting function. Also known as a comptroller. [6]
controlling interest. When one company owns enough shares of another com-
pany’s stock to control that other company’s operations. [1]
convertible bond. A type of bond that can be exchanged for shares of the issuing
company’s common stock at the option of the bondholder. [8]
COO. See chief operating officer.
corporate governance. A system of policies and processes for directing and con-
trolling a corporation’s activities that emphasizes accountability and integrity
in how the company fulfills its mission on behalf of all of its stakeholders. [2]
corporation. A legal entity, separate from its owners, that is created by the author-
ity of a government and that continues beyond the death of any or all of its
owners. [3]
cost accounting. A system for accumulating and categorizing expense data that
is used to facilitate effective cost control and to generate accurate estimates of
future costs for use in the pricing of a company’s products. [7]
coupon rate. For a bond, the interest rate that determines the amount of periodic
interest payments made to the bondholder. [8]
credits. In the numerical rating system, a proposed insured’s medical and personal
risk factors that have a favorable effect on mortality and are assigned “minus”
values (such as –25). [12]
CRM. See customer relationship management.
cross-selling. A sales activity in which a customer’s needs for additional products
are identified during or after the sale of a primary product. The customer is
invited to purchase the complementary products that, when combined with the
primary product, provide a more complete solution for the customer’s needs.
[14]
CSA. See Canadian Securities Association.
CSR. See customer service representative.
CTI. See computer telephony integration.

CTO. See chief technology officer.

current assets. Assets such as cash and readily marketable assets that can be con-
verted to cash within one year. [6]
current liabilities. Debts that are expected to be paid within the following twelve
months. [6]
current ratio. A solvency ratio that compares a company’s current assets to its
current liabilities. [6]
customer care center. See customer contact center.
customer contact center. A unit within an insurer that provides customers with
a variety of channels—such as telephone, fax, e-mail, Internet chat, and tradi-
tional mail—for communicating with the company. Also known as a customer
care center. [14]
customer loyalty. A customer’s feeling of attachment to or preference for a com-
pany’s people, products, or services. [14]
customer relationship management (CRM). A business strategy that allows an
organization to manage all aspects of its interactions with current and potential
customers. [5]
customer satisfaction survey. A survey designed to help a company determine
whether its products, services, and prices, are meeting customer expectations.
[14]
customer service. A broad range of activities that an insurer and its employees
perform to keep customers satisfied so that they will continue doing business
with the company and speak positively about it to other potential customers.
[14]
customer service representative (CSR). Any employee whose primary job re-
sponsibility is to support external customers by conducting two basic types of
activities: (1) interacting with customers through face-to-face communications
or through communications media, such as the telephone, fax, e-mail, or Inter-
net chat sessions, and (2) processing transactions for customers. [14]
dashboard. An information system application that combines information from
multiple business intelligence sources into a single, easy-to-read electronic for-
mat that identifies positive and negative trends for an individual business pro-
cess or for the whole company. Also known as a readerboard. [5]
data. Unprocessed facts, such as a policyowner’s name, address, date of birth, or
the policy’s face amount or policy number. [5]
data governance. The process of establishing organizational ownership and ac-
countability for data so that business processes are optimized and data is secure
and protected, and in compliance with government regulations. [5]
data mining. The analysis of large amounts of data to discover previously un-
known trends, patterns, and relationships. [5]

data warehouse. A central repository for data that a company collects from its ex-
isting databases, its internal administrative systems, and possibly from sources
outside the company for managers to use in decision making. [5]
database. An organized collection of data and information. [5]
database management system (DBMS). A group of computer programs that or-
ganizes the data in a database and allows users to obtain the information they
need. [5]
Day 1 functionality. The administrative and systems processes that must be in
place and functioning before an insurance product can be introduced to market.
[10]
Day 2 functionality. The administrative and systems processes that are necessary
at some future date to service and administer an insurance product, but which
can be implemented after the product has been launched. [10]
death certificate. A document that attests to the death of a person and bears the
signature—and sometimes the seal—of an official authorized to issue such a
certificate. [13]
debenture. A bond that is not backed by collateral but only by the full faith and
credit of the issuer. Also known as an unsecured bond. [8]
debit agent. See home service agent.
debits. In the numerical rating system, a proposed insured’s medical and personal
risk factors that have an unfavorable effect on mortality and are assigned “plus”
values (such as +25). [12]
debt security. A financial security that represents an obligation of indebtedness
owed by a business, government, or an agency. [8]
decentralized organization. An organization in which top management shares
decision making authority with employees at lower levels. [1]
declined class. A risk class composed of proposed insureds whose anticipated ex-
tra mortality is so great that an insurer cannot provide coverage at an affordable
cost or whose mortality risk cannot be predicted because of recent or unusual
medical conditions or other risk factors. [12]
delegation. In a company, the process of assigning authority and responsibility to
an employee for completing a specific task. [1]
demutualization. The process an insurer undertakes to convert from a mutual
form of ownership to a stock form of ownership. [3]
departmentalization. The process of grouping similar or related work activities—
jobs or processes—into units. [1]
differentiated marketing. A marketing strategy that aims to satisfy the needs of
different segments of the total market for a particular type of product by offer-
ing a number of products and marketing mixes designed to appeal to the differ-
ent segments. [9]

direct writer. In a reinsurance transaction, the insurance company that purchases

reinsurance to transfer all or part of the risks on insurance policies the company
issued. Also known as a ceding company. [1]
directing. Directing is one of four primary management functions: planning, or-
ganizing, directing, and controlling. Directing is the management function that
ensures employees perform appropriate activities in the appropriate way to
achieve company objectives. The managerial activities of directing include (1)
leading, (2) motivating, (3) supervising, (4) communicating, and (5) facilitat-
ing. [2]
discharge. A type of employment separation in which an employer permanently
terminates the employment relationship for cause, including the employee’s
poor performance or the employee’s failure to follow company policies or pro-
cedures. [4]
distribution. The collection of activities and resources involved in making prod-
ucts available for customers to buy. [9]
distribution channel. Specific people, institutions, or communication methods
that companies use to connect with their customers. [11]
distribution system. The method a company uses to make its products available
for sale to the public. [11]
diversification. A technique for spreading a portfolio of risks across many risk
characteristics to reduce the effect of any one risk. [6]
division of labor. The process of dividing large work tasks into smaller activities.
[1]
DMS. See document management system.
document management system (DMS). A technology that captures, stores, orga-
nizes, and retrieves documents that have been (1) created electronically, or (2)
created on paper and converted to digital images through imaging. [5]
Dodd-Frank Wall Street Reform and Consumer Protection Act. In the United
States, a federal law designed to protect investors by requiring more transpar-
ency and accountability by financial services companies. Also known as the
Dodd-Frank Act. [6]
domestic corporation. From the point of view of a particular jurisdiction, a cor-
poration that is incorporated in that jurisdiction. [3]
downstream holding company. A holding company that is owned or controlled
by the company that forms it and that in turn owns or controls other companies.
[1]
dual control. See segregation of duties.
e-commerce. The use of the Internet to deliver information, facilitate business
transactions, and deliver products and services. [5]
EDI. See electronic data interchange.

electronic data interchange (EDI). The computer-to-computer exchange of data

over the Internet by two business partners using an agreed upon data format.
[5]
electronic insurance application. A technology that allows an applicant, some-
times in conjunction with a producer, to complete an application for insurance
online and submit the application directly to the insurer’s new business pro-
cessing system. [12]
e-mail. The transmission of electronic messages over communications networks.
[5]
empathy. The process of understanding another person’s emotional state and
imagining how you would feel in a similar situation. [14]
employee benefits. Additional programs and services offered by an employer to
an employee in addition to compensation. [4]
employee development. Employee activities that go beyond training to help em-
ployees increase their general knowledge and skills. [4]
Employee Retirement Income Security Act (ERISA). A United States federal
law that requires employers to inform their employees about their pension and
certain other benefits in a manner that an average employee can understand.
[4]
employee. A person in the service of another, the employer, who has the power or
right to control and direct how the employee performs the work. [11]
employee training. Any employee activity directed toward learning, maintaining,
and improving the skills necessary for meeting organizational goals. [4]
employment interview. An interview, or a series of interviews, that provides a
manager with the opportunity to decide whether a job candidate is qualified for
and suited to do a job. [4]
encryption. A technology that encodes data so that only an authorized person pos-
sessing the required hardware, and/or software can decode the data. [5]
enterprise architect. See chief technology officer (CTO).
enterprise data warehouse. A data warehouse that consolidates data from indi-
vidual data warehouses and operational systems across lines of business, geog-
raphies, or operations Also known as an integrated data warehouse. [5]
enterprise risk management (ERM). A system that identifies and quantifies risks
from both potential threats and potential opportunities and manages these risks
in a coordinated approach that supports the organization’s strategic objectives.
[6]
equity security. A financial security that represents an ownership interest in a
business or piece of property. [8]
ERM. See enterprise risk management.
e-signature. A technology that allows an insurance applicant to sign an electronic
insurance application online. [12]

estate planning. A type of planning in which a producer helps a potential cus-

tomer to develop a program that will cover the customer’s current and future
financial needs and will provide a means of conserving, as much as possible,
the personal assets the person wants to pass on to her heirs at her death. [11]
ethics. A system of accepted standards of conduct and moral judgment that com-
bines the elements of honesty, integrity, and fair treatment. [2]
ethics office. A department within a company where employees can receive advice
or counsel from qualified professionals about how to handle ethical issues and
also report ethical misconduct. [2]
evidence of insurability. Documentation that a proposed insured appears to be an
insurable risk. [12]
exception report. A report that is generated automatically by a company’s infor-
mation systems when results deviate from an established performance stan-
dard. [2]
exception-based underwriting. A technology that integrates expert systems with
electronic applications so that all insurance applications, except the most dif-
ficult ones that require an underwriter to take part in the decision-making pro-
cess, are processed electronically. [12]
exclusion. A policy provision stating that benefits will not be paid for any loss that
results from the condition specified in the provision. [13]
expense. An amount that a company spends in the course of conducting business.
[6]
expense analysis. The process of determining which costs are associated with par-
ticular activities to help managers decide if a cost is worth the value the activity
provides. [9]
expert system. A knowledge-based computer system designed to provide expert
consultation to information users for solving specialized and complex prob-
lems. The expert system actually suggests a course of action or helps solve
problems. [5]
external audit. An examination of a company’s records, policies, or procedures
conducted by parties not associated with the company. Also known as an inde-
pendent audit. [3]
external customer. Any person or organization in a position to (1) buy or use a
company’s products or (2) advise or influence others to buy or use a company’s
products. [1]
external environment. All of those elements that are outside the company and
over which the company has little or no control, including economic factors,
competitive factors, regulatory factors, taxation factors, and social factors. [9]
extranet. A portion of a company’s intranet that is accessible to people within the
organization and to select external stakeholders. [5]
face value. See par value.

Fair Credit Reporting Act (FCRA). A U.S. federal law that regulates the report-
ing and use of consumer information and seeks to ensure that consumer reports
contain only accurate, relevant, and recent information. [12]
Fair Labor Standards Act (FLSA). A United States federal law that sets a mini-
mum hourly wage an employer must pay. [4]
favorable variance. In budgeting, an accounting result in which actual revenues
are greater than expected revenues and/or actual expenses are less than ex-
pected expenses. [7]
fax machine. A telecommunications device that sends and receives printed pages
over telephone lines. [5]
FCRA. See Fair Credit Reporting Act.
feasibility study. In a comprehensive business analysis, research designed to de-
termine the operational and technical viability of producing and selling a prod-
uct. [10]
feedback control. An organizational control applied to a business process at the
end of the process cycle to compare actual performance or output with estab-
lished standards. [2]
feedforward control. See steering control.
field advisory council. A group of producers designated to represent and provide
feedback from the sales force on such topics as product design and customer
service. [10]
field force. The collective term for an insurer’s affiliated agents. [11]
field office. An office in which an insurer’s affiliated agents work. [11]
field underwriting. The process in which producers gather initial information
about applicants and proposed insureds to determine if they are likely to be ap-
proved for a specific type of insurance coverage. [12]
field underwriting manual. A manual that guides a producer in (1) assessing the
risks a proposed insured represents and in (2) assembling and submitting the
application and any required evidence of insurability. [12]
finance. See financial management.
financial accounting. The field of accounting that focuses primarily on reporting
a company’s financial accounting information to meet the needs of the com-
pany’s external stakeholders. [7]
financial condition examination. A formal investigation of an insurer that in-
surance regulators perform to identify and monitor any threats to an insurer’s
solvency. [6]
financial consultant. In a bank-distributed system of insurance sales, a person
whose primary function is to sell investment products to bank customers, but
who is also licensed to sell insurance. [11]
financial design. The combination of a life insurance product’s financial features.
[9]

Financial Industry Regulatory Authority (FINRA). A nongovernmental self-

regulatory organization empowered by the SEC to license, investigate, and
regulate securities dealers and their representatives. [6]
financial management. How an insurance company manages its resources to
meet the company’s financial goals, especially the overall goals of solvency
and profitability. Also known as financial operations or finance. [6]
financial operations. See financial management.
financial reporting. The process of presenting financial data about a company’s
financial position, operating performance, and flow of funds into and out of the
company. [6]
financial statement. A summary report of a company’s financial condition on a
specified date or of its performance during a specified period. [6]
financial underwriting. An assessment of a proposed insured’s financial condi-
tion to determine whether (1) the proposed insured needs the coverage applied
for, (2) a reasonable relationship exists between the need for the coverage and
the amount of coverage applied for, and whether (3) the applicant can afford
the coverage. [12]
FINRA. See Financial Industry Regulatory Authority.
firewall. A combination of hardware and software which creates an electronic bar-
rier between the public and private areas of an insurer’s systems and protects
internal company networks. [5]
first-year commission. A sales commission equal to a stated percentage of the
amount of premium the insurer receives during the first policy year. [11]
fixed-income investment. An investment that provides a predictable stream of
income, such as a bond or a mortgage. [8]
FLSA. See Fair Labors Standards Act.
flat extra premium method. A method for charging for substandard individual
life insurance in which the insurer adds to the standard premium rate a specified
extra dollar amount for every $1,000 of life insurance. [12]
focus groups. A marketing research data collection method that involves small
group interviews, led by a moderator, in which participants discuss their opin-
ions or feelings about a given topic. [10]
function. A distinct type of work or an aspect of operations or management that
requires specialized knowledge or technical skill. [1]
GAAP. See generally accepted accounting principles.
general account. An asset portfolio that supports a life insurer’s contractual obli-
gations to owners of guaranteed products, such as traditional whole life insur-
ance and fixed annuities. [8]
general accounting. The basic accounting operations that all businesses undertake
such as making payroll and recording cash disbursements. [7]

general agency. An insurance company field office that is established and financed
by a general agent. [11]
general agent. An agent who establishes and finances an insurance field office
known as a general agency. [11]
general counsel. The person in charge of an insurance company’s legal depart-
ment. [3]
generally accepted accounting principles (GAAP). A set of financial accounting
standards, conventions, and rules that U.S. stock insurers follow when summa-
rizing transactions and preparing financial statements. [7]
goal. A desired future outcome. Also called an objective. [1]
going-concern concept. An accounting principle that requires a company’s ac-
counting records to reflect the assumption that the company will continue to
operate indefinitely. [7]
group insurance policy. See master group insurance contract.
group insured. A group member who is covered by a group insurance contract.
[12]
group member. For insurance purposes, the individuals who are part of a group
but are not covered by insurance. Contrast with group insured. [12]
group plan. See master group insurance contract.
group representative. Salaried insurance company employees specifically trained
in the techniques of marketing and servicing group products. [12]
groupthink. A phenomenon in which the members of a group stress conformity
and unanimity to the point where alternative courses of action are ignored. [4]
hardware. The equipment or mechanical devices included in a computer system.
[5]
hedging. A risk management strategy that involves balancing one risk with a com-
plementary risk that will ideally offset the original risk. [6]
holding company. A company that has a controlling interest in one or more other
companies. [1]
home country staffing. A staffing option for international operations that involves
placing employees from a multinational company’s home country into an inter-
national office. [4]
home service agent. An agent who sells specified products, typically low face
amount cash value life insurance with monthly premiums, and provides policy-
owner service in an assigned geographic territory. Also known as a debit agent.
[11]
host country staffing. A staffing option for international operations that involves
staffing an international office with employees from the host country. [4]
hosted applications. See software as a service.

human resources planning. The identification and evaluation of the human re-
source requirements needed to meet organizational goals. [4]
idea generation. The step in the product development process that involves search-
ing for new product ideas that are consistent with both the company’s overall
product development strategy and the needs of its target markets. [10]
IFRS. See International Financial Reporting Standards.
image advertising. See institutional advertising.
imaging. The process of using technology to convert printed characters or graph-
ics into digital images that can be stored electronically or, depending upon the
technology, edited. Also known as scanning. [5]
income statement. A financial document that shows a company’s revenues and
expenses over a specified period, such as a year, and shows whether the com-
pany experienced a profit or a loss during that period. [6]
independent agent. An independent contractor who works for an insurance com-
pany and who may be an affiliated or nonaffiliated agent of the insurer. [11]
independent audit. See external audit.
independent contractor. A person who contracts to do a specific task according
to his own methods and who generally is not subject to the employer’s control
except as to the end product or final result of the work. [11]
independent director. See outside director.
independent financial advisor. In the United States, an individual registered with
the Securities and Exchange Commission to give advice about investment se-
curities. Also known as a registered investment advisor (RIA). [11]
information. A collection of data that has been converted into a form that is mean-
ingful or can be used to accomplish some objective. [5]
information management. All of the people, processes, and technology compa-
nies use to create and manage corporate information. [5]
inside director. A member of the board of directors who holds a position within
the company in addition to her position on the board. [1]
inside information. A company’s nonpublic, material information that employees
and other individuals associated with the company are restricted from disclos-
ing to third parties or using for their individual benefit. [2]
insider trading. Buying or selling a company’s securities (stocks or bonds) based
upon inside information. [2]
insolvency. A situation in which a company is unable to meet its financial obliga-
tions. [6]
instant messaging. The direct transmission of text-based communication in real
time over communication networks. When used by a company’s employees, it
is faster than e-mail and doesn’t clog the company’s e-mail system. When used
by customers to connect to a company, it is often known as web chat, text chat,
or Internet chat. [5]

institutional advertising. Advertising that promotes an idea, a philosophy, a com-

pany, a company’s brand message, or an industry. Also known as image adver-
tising. [9]
institutional investing. The professional management of money that belongs to
others—individuals, corporations, and governments. [8]
insurance brokerage. See insurance broker-dealer.
insurance broker-dealer. A registered subsidiary of an insurance company that
primarily or exclusively sells that insurer’s variable insurance products and
also provides specialized financial planning and investment services to custom-
ers. Also known as an insurance brokerage or insurance-owned broker-dealer.
[11]
insurance producer. Any individual who is licensed to sell insurance products,
solicit sales, or negotiate insurance contracts. [1]
insurance-owned broker-dealer. See insurance broker-dealer.
insured. The person whose life is insured under a life insurance policy. [1]
integrated data warehouse.. See enterprise data warehouse.
interactive voice response (IVR) system. A computer-based technology that
answers telephone calls, greets callers with a recorded or digitized message,
prompts callers to enter information or make requests by voice or telephone
keypad, and provides information back to callers for selected entry options.
Also known as a voice response unit (VRU). [5]
interest spread. The difference between the rate of return an insurer earns on its
investments and the interest rate credited to products on behalf of customers.
[8]
internal audit. An examination of a company’s records, policies, and procedures
that is conducted by a person who works for the company, typically in the com-
pliance area. [3]
internal customer. A company employee or department that receives support from
another employee or department within the organization. [1]
internal environment. All of those elements within the company that affect the
company’s business functions and over which the company has control, includ-
ing financial, physical, technological, and human resources, internal organiza-
tional structure, and the marketing mix. [9]
internal financial audit. An examination that is conducted by company employ-
ees to determine the accuracy of a company’s accounting and financial report-
ing, and the adequacy of its controls over cash and other assets. [7]
International Financial Reporting Standards (IFRS). Accounting standards de-
veloped by the International Accounting Standards Board (IASB) to promote
consistency, comparability, and more complete disclosure of information in-
cluded in corporate financial statements. [7]

Internet. A massive network of networks that connects billions of computers and

other network devices together globally. Information that travels over the Inter-
net does so via a variety of languages known as protocols. [5]
Internet chat. See instant messaging.
interpleader. In the United States, a procedure by which an insurer pays a policy’s
proceeds to a court, advises the court that the insurer cannot determine who
should receive the proceeds, and asks the court to determine the proper recipi-
ent or recipients. [13]
intranet. A company’s internal computer network that uses Internet technology
(such as web browsers) but is accessible only to people within the organization.
[5]
intrusion detection software. A type of software that monitors system traffic on
a network and identifies sequences of commands that indicate an unauthorized
user is attempting to access the organization’s systems or databases. [5]
investigative consumer report. A consumer report that contains information
obtained through personal interviews with an individual’s neighbors, friends,
associates, or others who may have information about the individual. [13]
investment. Any use of resources with the aim of earning a profit, or a positive
return. [6]
investment accounting. The area of accounting that is responsible for recording
all accounting transactions related to the assets in an insurer’s investment port-
folios. [7]
investment activity report. An asset-liability management report generated by an
insurer’s investment management system that specifies the details of all portfo-
lio transactions. [8]
investment management. All of the activities performed to invest a company’s
excess cash, generally in long-term investments. [8]
investment objective. A long-term financial goal. [6]
investment policy. An insurer’s guidelines for long-term investment objectives
and strategies. [6]
investment portfolio performance review. A quarterly management report that
summarizes an insurer’s investment performance for the board of directors and
the investment committee. [8]
investment risk. The possibility that an investor will fail to earn some or all of an
expected return or will lose all or part of the original investment. [6]
investment strategy. A formal plan of action for achieving an investment objec-
tive that includes identifying acceptable types of investments and establishing
consistent standards for risk management and investment performance. [6]
investment-grade bond. A bond that is rated in the highest categories by a bond
rating agency—at least Baa (Moody’s) or BBB (Standard & Poor’s)—and that
is thought to have the lowest risk of default. [8]

irrevocable beneficiary. A life insurance policy beneficiary whose designation as

beneficiary cannot be cancelled by the policyowner unless the beneficiary gives
written consent. [14]
issue instructions. Insurer guidelines showing the policy forms approved for use
in each jurisdiction and the requirements various functional areas need to fol-
low when selling or administering a new product. [10]
IT security. The physical, technical, and procedural steps a company takes to
prevent the loss, corruption, wrongful disclosure (accidental or intentional), or
theft of a company’s information and technology. [5]
IVR system. See interactive voice response (IVR) system.
jet unit. A work team authorized to approve certain types of individual insurance
applications for immediate policy issue. [12]
job description. A document that identifies the duties, responsibilities, and ac-
countabilities of a job position. [4]
job posting. The process of publicizing available jobs to all current employees of
a company either through a company’s intranet or other methods of communi-
cation. [4]
job rotation. An on-the-job training method in which an employee moves periodi-
cally from one job to another, staying in each job just long enough to learn how
to perform the job and how it relates to other jobs in the company. [4]
job skills test. See performance test.
joint venture. An arrangement between two otherwise independent businesses
that agree to undertake a specific project together for a specified time period.
[3]
lawsuit. An action brought before a court of law by a party claiming that they have
been harmed in some way by another party. [3]
layoff. A type of employment separation in which a person’s employment ends
because the employer has no further work for the person to perform; the em-
ployee’s job may have been eliminated or the company may not be operating
at full capacity. [4]
legacy system. A transaction processing system that is older than current systems
and was developed by and customized for a company to perform a specific task.
[5]
lessee. The individual or organization that leases a building from the building’s
owner. [8]
lessor. A building owner that leases a building to another individual or organiza-
tion. [8]
liability. A debt or future obligation of a company. [6]
license. See certificate of authority.

Life-1. A financial report that insurers operating in Canada must submit to the Of-
fice of the Superintendent of Financial Institutions (OSFI) and to the regulators
of every province in which the insurer does business. [6]
line function. An area within a company that creates value for the customer
through various customer-oriented activities. [1]
liquid assets. A company’s cash and other assets that are readily marketable for
their true value. [6]
liquidity. The ease and speed with which an asset can be converted to cash for an
approximation of its true value. [6]
litigation. The process or act of presenting a dispute to a court of law for a resolu-
tion. [3]
location-selling system. A method for distributing insurance products that is de-
signed to generate customer-initiated sales at an office or information kiosk in a
store, shopping mall, or other non-insurance business establishment. [11]
lockbox. A post office box that policyowners use to remit premium payments. [7]
management accounting. The field of accounting that focuses primarily on iden-
tifying, measuring, analyzing, and communicating financial information to a
company’s internal stakeholders, particularly company managers, so they can
decide how best to use the company’s resources. [7]
MAR. See attending physician’s statement (APS).
market analysis. An evaluation of all of the environmental factors that might af-
fect product sales, including target market characteristics, economic conditions,
legal or regulatory requirements, and tax considerations. [10]
market conduct examination. In the United States, a formal investigation of an
insurer by one or more state insurance departments to determine if the insurer’s
market conduct—that is, nonfinancial operations—are in compliance with ap-
plicable laws and regulations. [3]
market segment. A submarket or group of customers with similar needs and pref-
erences. [9]
market segmentation. The process of dividing large, diverse markets into smaller
submarkets that are more alike and need relatively similar products or market-
ing mixes. [9]
marketing. The activity, set of institutions, and processes for creating, commu-
nicating, delivering, and exchanging offerings that have value for customers,
clients, business partners, and society at large. [9]
marketing audit. A systematic examination and appraisal of a company’s mar-
keting goals, strategies, tactical/action programs, organizational structure, and
personnel on a very broad basis. [9]
marketing environment. All of the elements in a company’s internal and external
environments that directly or indirectly affect the company’s ability to carry out
its marketing activities. [9]

marketing information system. A set of procedures and methods for the regular,
planned collection, analysis, and presentation of information for use in making
marketing decisions. [9]
marketing mix. The four primary marketing variables—product, price, promo-
tion, and distribution—that companies manage in order to fulfill marketing
goals. [9]
marketing plan. A written document that states the marketing goals for a product
or product line, and describes the strategies and the implementation and control
efforts the company intends to use to achieve those goals. [9]
marketing projections. In a comprehensive business analysis, preliminary sales
and financial forecasts that include estimates of potential unit sales, revenues,
costs, and profits for a proposed product. [10]
marketing research. A method of collecting, analyzing, interpreting, and report-
ing information in order to identify marketing opportunities and solve market-
ing problems. [9]
mass marketing. See undifferentiated marketing.
master application. An application for group insurance that contains the specific
provisions of the requested plan of insurance and is signed by an authorized
officer of the proposed policyholder. [12]
master budget. A budget which shows the overall operating and financing plans
for a company during a specified accounting period; formed by combining all
of the individual department budgets. [7]
master group insurance contract. A legal document that certifies the relation-
ship between the insurer and the group policyholder and specifies the benefits
provided by the contract. Also known as the group insurance policy or group
plan. [12]
material information. Any company information that might influence the market
price of a company’s securities. [2]
material misrepresentation. A statement made in an application for insurance
that is not true and that caused the insurer to enter into a contract it would not
have agreed to if it had known the truth. [13]
maturity date. For a bond, the date on which the bond issuer is legally obligated
to pay the bondholder the bond’s par value. [8]
maturity value. See par value.
mediation. An alternative dispute resolution method in which an impartial third
party, known as a mediator, facilitates negotiations between the parties to a legal
dispute in an effort to create a mutually agreeable resolution of the dispute. [3]
mediator. An impartial third party who facilitates negotiations between disputing
parties in the process of mediation. [3]
medical attendant’s report (MAR). See attending physician’s statement (APS).

medical report. A report that contains a proposed insured’s answers to medical

history questions recorded by a physician and the results of a medical examina-
tion of the proposed insured that is conducted by a physician. [12]
member services. A customer service unit devoted exclusively to group products.
[14]
mentoring. An on-the-job training method in which a less experienced employee
works with a more experienced employee, or mentor, who answers questions,
offers advice, and provides general guidance to the less experienced employee
and feedback to management on how the new employee is progressing. [4]
MIB Group Inc. (MIB). A not-for-profit membership corporation established to
provide coded information to insurers about medical conditions that applicants
have disclosed or other insurance companies have detected in connection with
previous applications for insurance. [12]
MIB. See MIB Group Inc.
mission statement. A formal written statement of a company’s fundamental pur-
pose or reason for being. [1]
mistaken claim. A claim submitted to an insurer based on an honest mistake by
the claimant. [13]
MNC. See multinational corporation.
moment of truth. An instant when an insurer has an opportunity to create a good
or bad impression in the mind of the customer. [14]
monitoring. A process used to review and evaluate the quality of customer service
interactions either as they happen or after the fact through some sort of record-
ing device. [14]
mortality risk. For life insurance, the likelihood that a person will die sooner than
statistically expected; for annuities, the likelihood that a person will live longer
than statistically expected. [12]
mortgage. A long-term loan, secured by a pledge of specified property, that the
borrower agrees to pay off with regular payments of principal and interest. [8]
multinational corporation (MNC). A corporation that operates in more than one
country. [3]
multiple-line agent. An agent who sells life insurance, health insurance, annuities,
and property-casualty products for one insurance company, with the preponder-
ance of sales being property-casualty products. [11]
multi-variable segmentation. A method of segmenting a market that uses a com-
bination of characteristics to determine a segment. [9]
mutual fund. An investment company that pools the funds of customers and usu-
ally invests in a certain type of investment such as stocks, bonds, or other se-
curities. [8]
mutualization. The process an insurer undertakes to convert from a stock form of
ownership to a mutual form of ownership. [3]

mystery shopper. A trained evaluator that contacts customer service representa-

tives and pretends to be a customer. [14]
NAIC. See National Association of Insurance Commissioners.
NAIC Group Life Insurance Model Act. In the United States, a National Asso-
ciation of Insurance Commissioners Model law that defines the types of groups
eligible for group life insurance and sets forth provisions that group insurance
policies must contain. [12]
National Association of Insurance Commissioners (NAIC). A private, nonprofit
association in the United States—composed of insurance commissioners from
all 50 states and the District of Columbia— that promotes uniformity of state
insurance regulation within the United States. [3]
net cash surrender value. The actual cash amount—after adjustments for factors
such as policy loans, withdrawals, or surrender charges—that an insurer makes
available to a policyowner upon the surrender or lapse of a policy. [14]
net income. The excess of revenues over expenses during a defined period of time,
which is measure of a company’s financial success during a relatively short
period of time. Also known as profit. [6]
network. A group of two or more computer systems linked together so that the
computers can communicate with each other. [5]
new business processing. All of the activities required to process applications
for insurance products, evaluate the risks associated with applications for life
insurance, and issue policies. [12]
nonadmitted asset. In the United States, an asset that is not listed or valued on the
Assets page of the Annual Statement. [7]
nonmedical supplement. A document that contains a proposed insured’s answers
to medical history questions recorded by a producer or teleunderwriter at the
time of application. Also known as a statement of health (SOH). [12]
nonproprietary product. An insurance product developed by one insurance com-
pany that is sold by another insurance company. [11]
nonpublic information. Any company information that has not been disclosed to
the public. [2]
numerical rating system. A risk classification method in which a number—a nu-
merical rating—is assigned to an individual proposed insured according to the
degree of risk he represents to the insurer; the underwriter then places the pro-
posed insured in a risk class according to the numerical value. [12]
objective. See goal.
Occupational Safety and Health Administration (OSHA). A United States fed-
eral agency that develops and enforces mandatory job safety and health stan-
dards to reduce safety hazards and health hazards in the workplace. [4]
ombudsman. Within a company, an independent, impartial, and confidential pro-
fessional who provides assistance to the company’s stakeholders. [2]

on-the-job training. A method of employee training in which an employee learns

by performing real work in the actual work environment. [4]
operational planning. The process of determining how to accomplish the specific
tasks that need to be performed to carry out the organization’s strategic plans.
Also known as tactical planning. [1]
operational risk. A broad category of risks originating from inadequacies in an
insurer’s operational areas or from external events affecting an insurer’s opera-
tional areas. [6]
organization (org) chart. A visual display of the lines of authority and responsi-
bility within a company. [1]
organizational market. A market that consists of people, groups, or formal or-
ganizations that purchase products and services for business purposes. Also
known as the business market. [9]
organizing. The process of assembling and coordinating required resources in the
most efficient and effective manner to attain organizational goals. [1]
orientation. The process of introducing a new employee to an organization’s pro-
cedures, policies, culture, and other employees. [4]
orphan policyowner. A policyowner who does not currently have a relationship
with a producer. [14]
OTC market. See over-the-counter market.
outside counsel. An independent law firm that represents an insurer in the litiga-
tion process. [3]
outside director. A member of the board of directors who does not hold a position
within the company. [1]
outsourcing. The process of paying external specialists to handle specified busi-
ness activities instead of using an organization’s own employees or processes
to perform those activities. [4]
overriding commission. A sales commission that is paid to the head of an agency
office, typically a general agent, on the new and renewal business generated by
the general agency or group of agents. [11]
over-the-counter (OTC) market. An electronic communications network that is
used for buying and selling securities that are not bought and sold on a securi-
ties exchange. [8]
page views. A measurement of website usage that involves identifying the number
of system requests for loading a single HTML page. [9]
par value. For a bond, the amount owed on the bond’s maturity date. Also known
as face value or maturity value. [8]
paramedical report. A document that contains (1) a proposed insured’s answers
to medical history questions recorded by a paramedical examiner and (2) the
results of an examination that a paramedical examiner conducts. [12]

partial surrender. When a contract owner withdraws only a portion of an annu-

ity’s accumulated value instead of surrendering the contract entirely. [14]
partially admitted asset. In the United States, an asset for which only a portion of
its monetary value is reported on the Assets page of the Annual Statement. [7]
performance appraisal. See performance evaluation.
performance dashboard. See dashboard.
performance evaluation. A formal process of reviewing and documenting an em-
ployee’s job performance with the primary goals of (1) ensuring adequate per-
formance, (2) continually improving performance and (3) determining whether
the employee qualifies for an increase in compensation and/or a promotion.
Also known as performance appraisal. [4]
performance standard. A previously established level of performance against
which actual performance can be measured. [2]
performance test. A type of pre-employment test that attempts to evaluate how
well a job applicant has mastered the specific skills needed to perform well in a
particular position. Also known as a job skills test or a work sample test. [4]
persistency. The retention of business that occurs when an insurance policy re-
mains in force as a result of the continued payment of the policy’s renewal
premium. [11]
personal selling. A promotion activity that relies on a company’s producers pre-
senting information during face-to-face or telephone meetings with one or more
prospective customers. [9]
personal underwriting. An assessment of a proposed insured’s lifestyle choices
that can significantly affect the probable length of a person’s life. [12]
personality test. See behavioral tendencies test.
personal-producing general agent (PPGA). An independent insurance agent
who receives special consideration from an insurance company if he or she
satisfies minimum sales production requirements. [11]
pharmaceutical database. A database that contains prescription histories for pro-
posed insureds that are indicative of what conditions the proposed insureds
have or what treatments have been prescribed. [12]
planning. The process of preparing for the future by establishing appropriate goals
and formulating strategies and activities for achieving those goals. [1]
platform employee. In a bank-distributed system of insurance sales, a bank em-
ployee whose primary function is to handle customer service issues and sell
traditional bank products such as checking and savings accounts, but who is
also licensed to sell insurance. [11]
policy dividend. An amount of money that is considered to be a return of a portion
of the premium the policyowner paid to the company in a policy year. [1]
policy filing. The act of submitting a policy contract form and any other legally
required forms and documents to the appropriate regulatory authority for ap-
proval. [10]

policy loan. A loan made by a life insurance company to the owner of a life insur-
ance policy that has a cash value. [8]
policy rider. An amendment to an insurance policy that either expands or limits
the benefits payable under the policy. [14]
policy summary. A document that provides the customer with information spe-
cific to the policy being purchased including premium and benefit data. [10]
policyowner. A person or business that owns an insurance policy. [1]
portfolio. A collection of assets assembled for the purpose of meeting a defined set
of financial goals. [6]
positioning. The process by which a company establishes and maintains in cus-
tomers’ minds a distinct place, or position, for itself and its products. [9]
PPGA. See personal-producing general agent.
pre-contract training. A trial program that permits an insurance producer can-
didate who has satisfied the initial screening process to prepare to become a
producer while continuing to work at a current job. [11]
preferred class. A risk class composed of proposed insureds whose anticipated
mortality is lower than average and who represent the lowest degree of mortal-
ity risk. [12]
premium accounting. The maintenance of accounting records and reports of in-
surance premium transactions. Also known as policy accounting. [7]
price. The monetary value of whatever a customer exchanges for a product. [9]
principal. For an investment, the amount of money originally invested. [8]
private placement. A method of issuing securities in which the issuer sells the
security directly to a limited number of investors, typically institutional inves-
tors. [8]
problem resolution team. See complaint team.
producer group. An organization of independent insurance producers that negoti-
ate compensation, product, and service agreements with insurance companies.
[11]
producer of record. The agent, broker, or other type of producer currently provid-
ing service to the policyowner. [14]
product. The goods, services, or ideas that a seller offers to customers to satisfy
a need. [9]
product advertising. Any advertising used to promote a specific product or ser-
vice. [9]
product design objective. In a comprehensive business analysis, a specification of
an insurance product’s basic characteristics, features, benefits, issue limits, age
limits, commission and premium structure, and operational and administrative
requirements. [10]
product development. The process of creating or modifying a product. [10]

product implementation. The product development step during which an insurer

establishes the administrative structures and processes needed to introduce a
product into the marketplace. [10]
product mix. The total assortment of products available from a company. Also
known as a product portfolio. [9]
product portfolio. See product mix.
product risk. The risk that a company’s products might not sell as well or be as
profitable as expected. [6]
profit. The excess of revenues over expenses during a defined period of time,
which is a measure of a company’s financial success during a relatively short
period of time. Also known as net income. [6]
profit center. A line of business that (1) is evaluated on its profitability, (2) is re-
sponsible for its own revenues and expenses, and (3) makes many of its own
decisions regarding operations. [1]
profitability. The overall degree of success a business has in generating positive
returns for its owners, including the company’s ability to generate profits and
increase the value of the company. [6]
profitability analysis. The process of determining which company operations are
losing or making money by comparing the sales an activity generates with the
expenses incurred to generate those sales. [9]
programs. See software.
project team. See ad hoc committee.
promotion. The collection of activities that companies use to make customers
aware of their offerings and to influence customers to purchase, and distributors
to sell, a product. [9]
proposal for insurance. A document that details the specifications of a group in-
surance plan proposed by an insurer for a group prospect. [12]
prospect. A potential customer for an insurer’s products or services. [11]
prospectus. A written document describing specific aspects of a security being
offered for sale; often includes fund expenses and fees, and past product per-
formance. [10]
public offering. A method of issuing securities in which the security issuer makes
a new security available for sale to the public. [8]
publicity. Any non-paid-for communication of information that is intended to bring
a person, place, thing, or cause to the notice or attention of the public. [9]
purchasing power. The measure of a customer’s ability to buy goods and ser-
vices. [9]
qualitative performance measurement. A type of performance measurement that
focuses on behaviors, attitudes, or opinions to determine how efficiently and
effectively processes and transactions are completed. [14]

quantitative performance measurement. A type of performance measurement

that relies on numerical methods to track and report results to determine how
efficiently and effectively processes and transactions are completed. [14]
RAA option. See retained asset account option.
rating. The process of approving an insurance application but at a higher-than-
average premium rate or with a modified type or amount of coverage. [12]
rating agency. An organization, owned independently of any insurer or govern-
ment body, that evaluates the financial condition of insurers and provides that
information to potential customers and investors of insurance companies. [1]
readability requirement. A regulatory standard that limits sentence length, word
length, and the amount of technical and legal language allowed in an insurance
contract so that people who are not legal experts can understand the contract.
[10]
readerboard. See dashboard.
rebating. A sales practice, prohibited in most jurisdictions, in which an insurance
producer offers a prospect an inducement, such as a cash payment, to purchase
a life insurance policy or an annuity contract, and the inducement is not offered
to all applicants in similar situations and is not stated in the policy itself. [11]
recognition. In accounting, the process of classifying an item in a financial state-
ment as an asset, liability, capital or surplus, revenue, or expense. [7]
recruitment. The process of identifying and attracting job applicants who are ca-
pable of performing the duties of a particular position. [4]
registered investment advisor (RIA). See independent financial advisor.
reinstatement. The process by which an insurer puts back into force a life insur-
ance policy that lapsed because of nonpayment of renewal premiums. [14]
reinsurance. Insurance that one insurance company, known as the direct writer
or ceding company, purchases from another insurance company, known as the
reinsurer or assuming company, to transfer all or part of the risk on insurance
policies that the direct writer issued. [1]
reinsurer. An insurance company that accepts risks transferred from another in-
surer in a reinsurance transaction. Also known as an assuming company. [1]
reliability. For a pre-employment test, the likelihood that an applicant will achieve
similar results on repeated administrations of the same or an equivalent test.
[4]
renewal commission. A sales commission paid to a producer who sold a life in-
surance policy that remains in force; the commission rate is equal to a stated
percentage of each premium paid for a specified number of years after the first
policy year. [11]
replacement. The purchase of one life insurance policy or annuity contract using
money received from the surrender of another life insurance or annuity con-
tract. [14]

request for proposal (RFP). A document that provides detailed information about
the group and the requested coverage and solicits a bid from an insurer to pro-
vide that coverage. [12]
required rate of return. For a given investment, the sum of the risk-free rate of
return and the risk premium. See risk-free rate of return and risk premium.
[8]
rescission. The legal process of voiding an insurance contract because of material
misrepresentation in the insurance application. [13]
responsibility. In a company, a duty or a task assigned to an employee. [1]
retained asset account (RAA) option. A settlement option that allows an insurer
to pay a life insurance policy’s proceeds into an interest-bearing account in the
payee’s name; the payee can then withdraw all or part of the proceeds at any
time. [13]
revenue. An amount that a company earns from its business operations. [6]
RFP. See request for proposal.
RIA. See independent financial advisor.
risk. The possibility that an investment or other venture might have an unexpected
result. [6]
risk class. A group of insureds that represent a similar level of risk to an insurance
company. [12]
risk management. The process of systematically identifying, assessing, and mini-
mizing the negative impact of risk. [6]
risk premium. The compensation that investors demand for taking on the risk as-
sociated with a specific investment. See risk-free rate of return and required
rate of return. [8]
risk-free rate of return. The return on a risk-free investment—the least risky
investment opportunity available. See required rate of return and risk pre-
mium. [8]
risk-return trade-off. The interplay between risk and return; according to this
interplay, in general, the greater the risk associated with an investment, the
greater the expected return on the investment; conversely, the lower the risk as-
sociated with an investment then, generally, the lower the expected return. [8]
SaaS. See software as a service.
salaried sales agent. See salaried sales representative.
salaried sales representative. A company employee who is paid a salary for mak-
ing insurance sales and providing sales support. Also known as a salaried sales
agent. [11]
sale-and-leaseback transaction. A method of investing in real estate under which
the owner of a building sells the building to an investor, but immediately leases
back the building from the investor. [8]

sales analysis. The process of examining sales numbers to evaluate a company’s

current performance. [9]
sales promotion. A form of promotion that uses incentive programs, usually mon-
etary, designed to encourage producers to sell a product or customers to pur-
chase a product. [9]
Sarbanes-Oxley Act of 2002. In the United States, a federal law that sets new or
enhanced standards for corporate controls and increased regulatory oversight.
Also known as Sarb-Ox or SOX. [2]
Sarb-Ox. See Sarbanes-Oxley Act of 2002.
SBR. See skill based routing.
SBU. See strategic business unit.
scanning. See imaging.
screen pop. A technology that delivers voice and data simultaneously to a cus-
tomer service representative’s workstation. [5]
screening. In the product development process, a weeding out process designed to
evaluate new product ideas quickly and inexpensively in order to select those
ideas that warrant further investigation. [10]
screening interview. A series of questions intended to determine if a job appli-
cant’s qualifications, work experience, and needs are appropriate for a job.
A screening interview eliminates those job applicants who are obviously not
qualified for a job. [4]
script. A written dialogue or set of systematic instructions that employees usually
follow word-for-word when handling certain types of customer inquiries or
requests. [14]
seamless process. A customer service process designed so that a customer is not
inconvenienced by—or even aware of—the steps involved in fulfilling the cus-
tomer’s request. [14]
SEC. See Securities and Exchange Commission.
Securities and Exchange Commission (SEC). In the United States, a federal
government agency that regulates the investment industry. [6]
securities exchange. A market in which buyers and sellers of securities—or their
agents or brokers—meet in one location to conduct trades. [8]
security. A document or certificate that represents either (1) an ownership interest
in a business (for example, a share of stock), or (2) a debt owed by a business,
government, or agency (for example, a bond). [1]
segmented service. A method of providing sales support to producers in which the
higher a producer’s sales production, the more services the insurer provides to
the producer. [11]
segregated account. See separate account.
segregated fund. See separate account.

segregation of duties. An internal control that requires an employer to design jobs

so that job tasks will not place an employee in a position to conceal errors or
irregularities in the normal course of his or her employment. Also known as
dual control. [7]
selection of risk. See underwriting.
self-study training. An employee training method in which the trainee works
independently—using training materials in the form of textbooks, computer
software programs, or web-based programs—to complete a training course or
program. [4]
separate account. One or more of an insurer’s asset portfolios that support the
insurer’s variable products, such as variable life insurance policies and variable
annuities. Also known as a segregated fund or segregated account. [8]
separation. The resignation, layoff, retirement, or discharge of an employee from
a company. [4]
server. A computer or a device on a network that manages network resources. [5]
service fee. An amount paid—typically a small percentage of premiums payable
after renewal commissions have ceased—to a producer currently providing ser-
vice to a life insurance policyowner. [11]
shadowing. See web collaboration.
shareholder. See stockholder.
single-variable segmentation. A method of segmenting a market using only one
characteristic, such as income level. [9]
SIU. See special investigative unit.
skill-based routing (SBR). A type of automatic call distributor that is programmed
to direct specific types of calls to the most qualified customer service represen-
tative. [14]
skills inventory. A database that contains information about the education, train-
ing, and work experience of each employee working for an organization. [4]
smart phone. A mobile phone that has computer capabilities. [5]
software. Instructions that govern a computer’s operations. Also known as pro-
grams. [5]
software as a service (SaaS). A software delivery method for accessing software
remotely over a web-based network from a vendor. Also known as hosted ap-
plications. [5]
SOH. See nonmedical supplement.
solvency. The ability of a company to pay its debts, contractual obligations, and
operating expenses on time. [1]
source of funds. See cash inflow.
SOX. See Sarbanes-Oxley Act of 2002.
special class. See substandard class.

special investigative unit (SIU). A group of individuals who are responsible for
detecting, investigating, and resolving claims, particularly those involving in-
surance fraud; often composed of representatives of the claim, legal, and inter-
nal audit functions as well as independent investigators. [13]
specialized medical questionnaire. A document that requests detailed informa-
tion about a specific illness or condition from a proposed insured’s attending
physician or a physician who has examined the proposed insured at the request
of the insurance company. [12]
staff function. See support function.
stakeholder. Any party that has an interest in how a company conducts its busi-
ness. [1]
standard class. A risk class composed of proposed insureds whose anticipated
mortality is average. [12]
standing committee. A permanent committee that company executives use as a
source of continuing advice. [1]
statement of capital and surplus. See statement of owners’ equity.
statement of health (SOH). See nonmedical supplement.
statement of owners’ equity. A financial statement that provides information
about changes that occurred in owners’ equity between two sequential balance
sheets. Also known as a statement of capital and surplus. [7]
statutory accounting practices. Accounting standards that all life insurers in the
United States must follow when preparing the Annual Statement and specified
other reports that are submitted to state regulators. [7]
steering control. An organizational control that is established before a business
process is begun and describes how a company intends to implement the pro-
cess. Also known as a feedforward control. [2]
stock. A type of financial security that represents an ownership interest in a com-
pany. [1]
stockholder. A person or organization that owns shares of stock in a corporation.
Also known as a shareholder. [1]
stockholder dividend. A portion of a corporation’s earnings paid to the owners of
the company’s stock. [1]
STP. See straight through processing.
straight through processing (STP). The electronic processing of every step in the
new business process without manual intervention. [12]
strategic business unit (SBU). An organizational unit that acts like an indepen-
dent business in that it (1) generates its own identifiable profits, (2) has its own
set of customers and competitors, (3) has its own independent management, (4)
has its own budget, and (5) has its own set of strategic goals and strategies. [1]

strategic planning. The process of determining an organization’s major long-term

corporate goals and the broad, overall courses of action or strategies that the
company will follow to achieve these goals. [1]
strategy. A plan for achieving goals. [1]
subaccount. One of several alternative pools of investments with distinct invest-
ment strategies to which the owner of a variable life insurance policy or vari-
able annuity allocates the premiums she has paid and the cash values that have
accumulated under her policy. [8]
subsidiary. A company that is owned or controlled by another company. [1]
substandard class. A risk class composed of proposed insureds whose anticipated
mortality is higher than average, but who are still considered to be insurable.
Also known as a special class. [12]
succession planning. The process of identifying possible replacements within a
company for important jobs. [4]
suicide exclusion. A life insurance policy provision that typically states that, if the
insured dies as a result of suicide within a certain period—usually one or two
years from the date the policy was issued, the insurance company does not have
to pay the policy proceeds. [13]
suitability. The process of determining whether a particular insurance or annuity
product is an appropriate purchase for an applicant based on the applicant’s
needs and financial condition. [12]
support function. An area within a company that provides support services to
line functions or to other support functions but does not produce or administer
insurance products.Also called a staff function. [1]
surplus. The cumulative amount of money that remains in an insurance company
over time and is calculated as the insurer’s assets minus its liabilities and its
capital. [6]
systems software. Computer programs that coordinate the activities and functions
of the hardware components. [5]
table of underwriting requirements. A document for an insurance product that
specifies the kinds of information needed to assess the insurability of a proposed
insured for coverage under that product. Also known as an age and amount re-
quirements chart. [12]
table rating method. A method for adjusting individual life insurance premium
rates to compensate for extra mortality that divides substandard risks into broad
groups or tables according to their numerical ratings. [12]
tactical planning. See operational planning.
tactics. The tasks and activities required for the accomplishment of a goal. [1]
talking points. A list of important items that employees refer to using their own
words when handling certain types of customer inquiries or requests. [14]
target market. A specific market segment on which a company focuses its efforts
to market and sell products. [9]

target marketing. The process companies use to evaluate the attractiveness of

each market segment in order to select one or more segments as the focus for
their marketing efforts. [9]
targeted e-mail marketing. Communications e-mailed to current policyholders
or prospective customers designed to elicit a response. [11]
task force. See ad hoc committee.
tax accounting. The area of accounting that is responsible for submitting financial
reports and premium tax payments to taxation authorities. [7]
technology management. The use of technology to maximize company resources
and conduct business operations more effectively and efficiently. [5]
telecommunications. The electronic transmission of communication signals. [5]
telecommuting. The act of working outside the traditional office or workplace,
usually at home, by using the Internet to communicate with the office, col-
leagues, and customers. [5]
teleconferencing. The exchange of information among people linked remotely by
a telecommunication system, most often a telephone. [5]
teleunderwriting. A method by which a home office employee or a vendor, rather
than the producer, gathers most or all of the information needed for underwrit-
ing. [12]
text chat. See instant messaging.
The web. See World Wide Web.
third-country nationals. A staffing option for international operations that in-
volves staffing an international office with employees from a country other than
the host country or the home country. [4]
third-party administrator (TPA). An organization other than an insurance com-
pany that provides administrative services to the sponsors of group insurance
plans. [13]
TPA. See third-party administrator.
transaction. Any business-related exchange—such as a life insurance policy is-
sued in exchange for an application submitted, a death benefit paid in exchange
for proof of death received, or wages paid in exchange for hours worked. [5]
transaction processing system. An organized collection of procedures, software,
databases, and devices used to perform high-volume, routine, and repetitive
business transactions. [5]
treasurer. The position within a company responsible for overseeing the mainte-
nance and management of records and reports for all of an insurer’s cash trans-
actions, specifically money deposited or withdrawn from the insurer’s accounts
at a bank or other financial institution. [6]

treasury operations. The management and maintenance of records and reports for
all of an insurer’s cash transactions, specifically money deposited or withdrawn
from accounts at a bank or other financial institution. Also known as cash
management or cash accounting. [6]
twisting. An unfair sales practice that occurs when an insurance producer misrep-
resents the features of a policy to induce the customer to replace an existing
policy. [11]
underwriter. An insurance company employee who (1) evaluates the degree of
risk represented by a proposed insured or group with respect to a specific insur-
ance product, (2) accepts or declines insurance applications, and (3) determines
the appropriate premium rate to charge acceptable risks. [12]
underwriting. The process of (1) assessing and classifying the degree of risk a
proposed insured or group represents with respect to a specific insurance prod-
uct and (2) making a decision to accept or decline that risk. Also known as
selection of risk. [12]
underwriting decision. The decision an underwriter makes regarding the clas-
sification of a risk and the premium rate to charge for the insurance coverage if
the risk is accepted. [12]
underwriting guidelines. General standards that underwriters follow that specify
the limits within which proposed insureds may be assigned to one of an insurer’s
risk classes. [12]
underwriting philosophy. A set of objectives for guiding all of an insurer’s
underwriting actions, generally reflects the insurer’s strategic business goals,
and includes its pricing assumptions for products. [12]
undifferentiated marketing. A marketing strategy that involves defining the total
market for a product as as its target market and designing a single marketing
mix directed toward the entire market. Also known as mass marketing. [9]
Unfair Claims Settlement Practices Act. In the United States, a National As-
sociation of Insurance Commissioners model act that specifies a number of
actions that are considered unfair claims practices if committed by an insurer
(1) in conscious disregard of the law or (2) so frequently as to indicate a general
business practice. [13]
unfavorable variance. In budgeting, an accounting result in which actual rev-
enues are less than expected revenues and/or actual expenses are greater than
expected expenses. [7]
unique visitors. A measurement of website traffic that reflects the number of indi-
viduals who have visited a website at least once during a fixed time frame. [9]
unsecured bond. See debenture.
up-selling. A sales activity in which customers are invited to purchase a more
powerful, more enhanced, or more profitable product than the one a customer
originally considers purchasing. [14]
upstream holding company. A holding company that controls the corporation
that formed it and can also own other subsidiaries. [1]

use of funds. See cash outflow.

validity. The degree to which a pre-employment test is correlated with job-related
skills or behaviors. [4]
valuation. The process of calculating the monetary value of a company’s assets,
liabilities, and capital for accounting and financial reporting purposes. [7]
value chain. A graphical representation of a company’s operations illustrating
how these operations create value for customers and profits for company own-
ers. [1]
variance. In budgeting, the difference between an actual result and an expected
result. [2]
video conferencing. The use of the Internet to transmit audio, video, and some-
times interactive data exchange to meeting participants who are geographically
dispersed. Also known as web conferencing or webinars. [5]
virtual private network (VPN). A secured computer network that uses hardware,
software, or a combination of both to act as a “tunnel” through the Internet so
that only people in possession of the required technology have access to data
traveling through the network. [5]
voice response unit (VRU). See interactive voice recognition (IVR) system.
VPN. See virtual private network.
web advertising. When a company advertises its products or services on Internet
sites other than its own website. [11]
web browser. A software application that allows users to access and navigate
the Internet. Examples of web browsers include Microsoft Internet Explorer,
Mozilla Firefox, and Google Chrome. [5]
web callback. A communication technology that enables customers to request ad-
ditional information by clicking on an icon at a website and requesting that a
company representative call the customer on the telephone. [14]
web chat. See instant messaging.
web collaboration. A technology that enables participants—such as customers—
to “meet” at a website, synchronize their browsers, and explore the website
together, communicating with each other in real time. Also known as collab-
orative browsing or shadowing. [14]
web conferencing. See video conferencing.
webinars. See video conferencing.
wholesaler. A sales intermediary appointed by an insurer to promote the insurer’s
products to third-party distributors and to provide these distributors with mar-
keting support. [11]
work sample test. See performance test.
work team. Two or more people who work together on a regular basis and coordi-
nate their activities to accomplish common goals. [14]

workflow management system. A technology that allows a company to control

the documents and work activities associated with a business process. Also
known as an automated workflow system, or automated workflow distribution.
[5]
worksite marketing. A method for distributing insurance products to people at
their place of work on a voluntary, payroll-deduction basis. [11]
World Wide Web (The web). A portion of the Internet in which information is
accessed or shared using a specific language called HTTP protocol. The web
uses web browsers to access web documents, videos, or other digital materials
at pages on the web, which are known as websites. [5]

Insurance Company Operations Index INDEX.1
Index
A ALM. See asset liability management

alternative dispute resolution (ADR), 3.7
abandonment rate, 14.21 American College, 2.6
accidental death benefit, 13.11–13.12 American Council of Life Insurance (ACLI),
accountability, 1.9 5.7
account administration, 6.5 amortization, 8.13
accounting, 6.4, 6.5, 7.3–7.4 annual report, 6.18
comprehensive business analysis Annual Statement, 6.22, 7.7, 7.9–7.10
responsibilities for, 10.6 annuities, 1.3
conservatism in, 7.7–7.8 administration for, 13.18–13.19, 13.20
as functional area, 1.15 processing new business for, 12.4–12.5
relation with customer service annuitized options, 13.20
department, 14.5 annuity benefits administration, as functional
standards for, 7.7 area, 1.15
systems for, 7.5–7.12 annuity commission schedules, 11.7
underwriters’ collaboration with, 12.18 annuity date, 13.19
accounts, 7.3 annuity surrenders, 14.12
ACD. See automatic call distributor antidiscrimination laws, 4.18
ACLI. See American Council of Life Insurance antiselection, 12.7
active management strategy, 8.5 antivirus software, 5.18
actuarial application
comprehensive business analysis for employment, 4.10
responsibilities for, 10.6 for insurance, processing of, 12.4
financial management working with, 6.9 application software, 5.3
as functional area, 1.15 appoint, 11.10
interacting with claims, 13.3 APS. See attending physician’s statement
relation with customer service aptitude test, 4.12
department, 14.5 arbitration, 3.7
underwriters’ collaboration with, 12.18 arbitrator, 3.7
actuarial associations, 2.8 asset/liability committee, 1.21
Actuarial Society of India, 2.8 asset/liability management (ALM), 6.7, 8.6
address changes, 14.10 asset/liability managers, 6.7
ad hoc committee, 1.22 asset manager, 6.7
administrative activities, in product assets, 6.15
development, 10.10 asset valuation, 7.9–7.10
admitted assets, 7.10 Association of Home Office Underwriters
ADR. See alternative dispute resolution method (AHOU), 2.6
advanced underwriting, 11.12 Association of Life Insurance Counsel (ALIC),
adverse selection, 12.7 2.8
advertising, 9.8 associations, membership in, 2.8
affiliated agency system, 11.21 assuming company, 1.8
affiliated agent, 11.6, 11.7 attending physician’s statement (APS), 12.13
affinity groups, 9.12 audit committee, 1.21, 6.3
age and amount requirements chart, 12.11 auditing, 6.8–6.9, 7.15–7.16
agency bonds, 8.12, 8.13 interacting with claims, 13.4
agency-building agents, 11.6 audit log, 12.18
agency contract, 11.4, 11.5 audit/risk committee, 6.3
agency operations, 9.2–9.3, 10.6 audits, 2.14–2.15, 6.23
agent-broker, 11.8 authority, 1.9
agents, 11.4–11.14 authority levels,
support for, 11.8–11.13 in underwriting operations, 12.17
agent’s statement, 12.11 in claim administration, 13.17
aggressive financial strategy, 6.10 in customer service operations, 14.19

INDEX.2 Index Insurance Company Operations
automated workflow distribution, 5.10 capital, 3.4

automated workflow system, 5.10 capital gain, 8.9
automatic call distributor (ACD), 5.17, 14.8 capital loss, 8.9
automatic payment plan, 14.11 capital management, 6.15, 6.16
capital ratio, 6.20
B capital and surplus, 6.19–6.21
capital and surplus ratio, 6.20
background check, 4.11, 4.13 career agent, 11.5, 11.7
balance sheet, 6.18, 7.8 Career Choice (LIMRA), 11.9
bancassurance, 11.17–11.18 cash accounting, 6.5
bank reconciliation, 6.5 cash flow, 6.16–6.17
bank relations, 6.5 cash-flow management, 6.16–6.17
banks, as distributors of insurance products, cash flow statement, 7.9
11.17–11.18 cash forecasting, 6.6
BARS. See behaviorally anchored rating scale cash inflow, 6.16
basic accounting equation, 6.18 cash management, 6.5, 7.13–7.14
behaviorally anchored rating scale (BARS), cash outflow, 6.16
4.17 CCO. See chief compliance officer
behavioral tendencies test, 4.12 ceding company, 1.8
benchmarking, 2.13, 14.22 centralized organization, 1.13–1.14
beneficiaries, legal department working with, CEO. See chief executive officer
3.7–3.8 certificate of authority, 3.4
beneficiary changes, 14.10 certificate of insurance, 12.20
benefits, determining payable status of, CFO. See chief financial officer
13.6–13.11 chain of command, 1.13
best practices, 2.13 Chartered Insurance Institute, 2.6
Best’s Database Service, 5.7 chief architect, 5.4
BI. See business intelligence chief auditor, 6.8
blocked calls, 14.21 chief claim officer, 13.3
board of directors, 1.5, 1.9, 1.11, 1.20, 1.21 chief compliance officer (CCO), 3.3
bond rating, 8.11, 8.12 chief counsel, 3.3
bonds, 8.6, 8.9–8.13, 8.16 chief executive officer (CEO), 1.9–1.10
bonuses, 4.18 chief financial officer (CFO), 1.10, 6.3, 6.4
branch office, 3.4 chief information officer (CIO), 1.10, 5.3–5.4
broadcast media, as distribution channel, 11.20 chief investment officer, 6.7
broker, 11.8 chief marketing officer (CMO), 1.10
broker-dealer, 11.16–11.17 chief operating officer (COO), 1.10
budget committee, 1.21 chief technology officer (CTO), 5.4
budgeting, 7.11–7.12 chief underwriter, 12.5, 12.7
budgets, 2.14, 9.5 China Insurance Regulatory Commission
budget variance, 2.14 (CIRC), 10.9
business analyst, 5.4 churning, 11.4
business analytics, 5.12, 9.14 CIO. See chief information officer; chief
business-to-business (B2B) e-commerce, 5.16 investment officer
business development support, 11.11 claim adjudication, 13.2
business intelligence (BI), 5.11–5.12 claim adjustor, 13.3
business market, 9.10 claim administration, 13.2–13.3
business process risk, 6.12 comprehensive business analysis
business process technology, 5.10–5.13 responsibilities for, 10.6
Buyer’s Guide, 10.8–10.9 as functional area, 1.15
buy-and-hold strategy, 8.5 international laws regarding, 13.18
claim analyst, 13.3
C claimant, 13.4
claimant’s statement, 13.5
call provision, 8.11
claim approval, 13.10
CAM systems. See customer asset management
claim approval limits, 13.4
systems
claim approver, 13.3
Canadian Institute of Actuaries, 2.8
claim denial, 13.11
Canadian Securities Association (CSA), 6.21

claim department compliance department, 3.8–3.11

legal department’s responsibilities to, 3.6 relation with customer service department,
organization of, 13.3–13.4 14.5
relation with customer service department, underwriters’ collaboration with, 12.18
14.5 compliance manuals, 3.10
underwriters’ collaboration with, 12.18 comprehensive business analysis, 10.4–10.5,
claim examiner, 13.3 10.6
claim form, 13.5 comprehensive examinations, 3.11–3.12
claim fraud, 13.6, 13.15–13.16 comptroller, 6.4
claim handling, 13.2 computer operator, 5.4
claim investigation, 13.8–13.10, 13.15–13.16 computer telephony integration (CTI), 5.17
claim philosophy, 13.4 concentrated marketing, 9.12
claim practices, 13.5 concept testing, 10.4
claim processing, 13.2 concurrent control, 2.10–2.11, 2.12, 2.14. 2.15
for life insurance, 13.5–13.15 in claims, 13.17
quality control in, 13.16, 13.17 in customer service, 14.19
claims confidentiality, 2.7–2.8
calculating amount payable, 13.11–13.13 conservation, 14.16
identifying proper payee for, 13.14–13.15 conservative financial strategy, 6.10
paying the proceeds, 13.13 conservative investment strategy, 8.3
regulatory requirements for, 13.17–13.18 constituent, 1.4
claim servicing, 13.2 consumer market, 9.10
claim specialist, 13.3 consumer reporting agency, 12.22
classroom training, 4.14, 4.15 content management system (CMS), 5.10
cleaning, of data, 5.6–5.7 contestable period, 13.8–13.9
click-wrap, 12.4 control, 7.16
client services, 14.3 in customer service, 14.19
cloud computing, 5.13 as element of distribution decision, 11.21
CMO. See chief marketing officer; tools for, 2.14–2.15
collateralized mortgage obligation control cycle, 2.12
CMS. See content management system control function, 2.10
code of business conduct, 2.5 controller, 6.4
code of conduct, 2.5 controlling, 2.3, 2.9–2.15
code of ethics, 2.5 controlling interest, 1.22
Code of Professional Ethics (LOMA), 2.9 convertible bond, 8.11
Codification of Statutory Accounting Principles, COO. See chief operating officer
7.7 corporate bonds, 8.12
cognitive abilities test, 4.12 corporate communications committee, 1.21
cold calling, 11.14 corporate governance, 2.2–2.3
collaborative browsing, 14.8 corporation, 3.3–3.5
collaborative software, 5.16 cost, as element of distribution decision,
collateral, 8.12 11.19–11.21
collateralized mortgage obligation (CMO), 8.14 cost accounting, 7.12
commission, 1.6, 4.18, 11.6–11.7 cost allocation, 7.12
committee, 1.20–1.22 coupon payments, 8.9
common stock, 8.14 coupon rate, 8.9
Companies Bill (2009 Amendment; India), 2.3 credit activities, short-term, 6.6
company limited by guarantee, 3.4 credits, 12.14
company limited by shares, 3.4 critical incident evaluation, 4.17
compensation, 4.16–4.18 CRM. See customer relationship management
competition risk, 6.12 cross-selling, 14.17
competitive intelligence, 9.14–9.15 CSA. See Canadian Securities Association
complaint management system, 14.14 CSR. See customer service representative
complaint team, 14.14 CTI. See computer telephony integration
compliance, 3.2 CTO. See chief technology officer
comprehensive business analysis currency risk, 6.12
responsibilities for, 10.6 current assets, 6.19
as functional area, 1.15 current liabilities, 6.19

current ratio, 6.19 death certificate, 13.9

customer asset management (CAM) systems, debenture, 8.12
5.17 debit agent, 11.6
customer behavior risk, 6.12 debits, 12.14
customer care center, 14.3 debtor-creditor groups, 9.12
customer complaints, 14.14–14.15 debt securities, 8.6, 8.13
customer contact center, 14.3 decentralized organization, 1.13–1.14
customer experience management, 14.8 decision support system, 5.11
customer focus, 14.8 declined class, 12.9
customer loyalty, 14.4 default risk, 6.12, 8.11
customer relationship management (CRM), delegation, 1.13
5.17–5.18, 14.8–14.9 demutualization, 3.4–3.5
customer relationship management systems, departmentalization, 1.12
5.17 Department of Labor (U.S.), 4.8
customers, 1.5 desktop technician, 5.4
characteristics of, as element of development, for employees, 4.13–4.14
distribution decision, 11.22 differentiated marketing, 9.13
customer satisfaction survey, 14.20 directing, 2.3–2.4
customer service, 14.2–14.3 direct mail, 11.20
comprehensive business analysis direct response distribution systems, 9.8, 11.3,
responsibilities for, 10.6 11.19, 11.20, 11.21
control mechanisms for, 14.18–14.22 direct writer, 1.8
computer telephony integration disappearance of the insured, 13.10
used for, 5.17–5.18 disaster recovery, 5.18–5.19
department organization for, 14.3–14.4 disbursement accounting, 7.6
department relationships, 14.4, 14.5 discharge, 4.19
education and training for, 14.6–14.7 disclosure document, 10.9
effectiveness of, 14.4–14.9 discount, 8.10
financial transactions in, 14.11–14.14 discrimination, 12.22
as functional area, 1.15 distribution, 9.8
for group products, 14.17–14.18 decisions related to, 11.19–11.22
legal department’s responsibilities to, 3.6 distribution channel, 11.2
nonfinancial transactions in, 14.10–14.11 distribution system, 11.2
processes for, 14.9–14.18 diversification, 6.11–6.13, 8.4–8.5
typical job positions for, 14.4 dividend payments, 14.13
underwriters’ collaboration with, 12.19 division of labor, 1.12
customer service associate, 14.4 DMS. See document management system
customer service representative (CSR), 2.9, document management system (DMS), 5.9,
14.4 14.7
customer value management (CVM) programs, Dodd-Frank Wall Street Reform and Consumer
5.17 Protection Act, 6.21
CVM programs. See customer value domestic corporation, 3.4
management programs dotted-line relationships, 1.13
downstream holding company, 1.23
D drug tests, 4.11, 4.13
DSS. See decision support system
dashboard, 5.12 dual control, 7.2
data, 5.5
database, 5.6, 5.7
external, 5.7 E
internal, 9.14 e-commerce, 5.16
database administrator, 5.4 economists, 6.7
database management system (DBMS), 5.6–5.9 EDI. See electronic data interchange
data governance, 5.18–5.19 education
data mining, 5.9, 9.14 as aspect of regulatory compliance, 3.10
data warehouse, 5.6–5.9 for customer service, 14.6–14.7
Day 1 functionality, 10.10 to promote ethical behavior, 2.6
Day 2 functionality, 10.10 electronic data interchange (EDI), 5.16
DBMS. See database management system electronic insurance application, 12.4

electronic mail. See e-mail

e-mail, 5.14
F
empathy, 14.20 face value, 8.9
employee benefits, 4.18 Fair Credit Reporting Act (FCRA), 12.22
Employee Retirement Income Security Act Fair Labor Standards Act (FLSA), 4.18
(ERISA), 4.19 FASB. See Financial Accounting Standards
employees, 1.6, 11.4 Board
development of, 4.13–4.14 favorable variance, 7.11
legal department working with, 3.8 fax machine, 5.18
selection of, 4.10–4.13 FCRA. See Fair Credit Reporting Act
training of, 4.13–4.14 feasibility study, 10.5
employment application, 4.10–4.11 federal government bonds, 8.12, 8.13
employment interview, 4.11, 4.12–4.13 Federal Home Loan Mortgage Corporation,
encryption, 5.15 8.13
enhanced service support, for agents, 11.12 Federal National Mortgage Association, 8.13
enterprise architect, 5.4 feedback control, 2.11, 2.12, 2.15
enterprise data warehouse, 5.7–5.8 in claims, 13.17
enterprise management tools, 5.17 in customer service, 14.19
enterprise risk management (ERM), 6.13–6.14 feedforward control, 2.10
equity security, 8.6 field advisory council, 10.7
ERISA. See Employee Retirement Income field force, 11.6
Security Act field office, 11.6
ERM. See enterprise risk management field underwriters, 12.7
error rate, 14.21 field underwriting, 12.11
e-signature, 12.4 field underwriting manual, 12.11
essay appraisal, 4.17 finance, 6.2
estate planning, 11.12 financial accounting, 7.5–7.10
ethics, 2.4–2.9 Financial Accounting Standards Board (FASB),
ethics office, 2.5 7.8
evaluation and control methodology, 9.5 financial advisor, 11.16
event risk, 6.12 financial compliance, 6.19–6.23
evidence of insurability, 12.11 financial condition examination, 6.22
exception-based underwriting, 12.4 financial consultant, 11.18
exception reports, 2.15, 5.12 financial design, 9.6
exclusion, 13.9 financial holding company model of
executive committee, 1.21 bancassurance, 11.17, 11.18
executive summary, 9.5 Financial Industry Regulatory Authority
expense, 6.17 (FINRA), 6.21, 11.17
expense accounting, 7.12 financial information, confidentiality of, 2.8
expense analysis, 7.12, 9.16 Financial Instruments and Exchange Law
expense management, 6.13 (Japan), 2.3
expertise, as element of distribution decision, financial management, 6.2, 6.4
11.21–22 responsibilities of, 6.9–6.19
expert systems, 5.12, 12.4, 12.11 financial operations, 6.2
external audit, 3.10, 6.23 financial reporting, 6.4, 6.5, 7.8–7.10, 7.11
external customer, 1.5, 1.6 financial statement, 6.17
external databases, 5.7 financial strategy, 6.10
external environment, 9.16 financial underwriting, 12.13
external labor supply, 4.8 FINRA. See Financial Industry Regulatory
external recruitment, 4.8–4.10 Authority
external replacement, 14.13–14.14 firewall, 5.14–5.15
external standards, 2.13 first-contact resolution, 14.21
extranet, 5.14, 5.15 first-year commission, 11.6
fixed-amount option, 13.13
fixed-income investment, 8.8
fixed-period option, 13.13

flat extra premium method, 12.16

FLSA. See Fair Labor Standards Act
I
focus groups, 10.4 IASB. See International Accounting
Follett, Mary Parker, 2.3 Standards Board
fraternal benefits society idea generation, 10.4
(fraternal insurer), 1.5, 7.7 IFRS. See International Financial
fraud, 13.15–13.16 Reporting Standards
function, 1.14 image advertising, 9.8
functional areas, 1.14, 1.15 imaging, 5.9
income statement, 6.17, 6.18, 7.9
G incorporation, 3.4
independent agent, 11.4, 11.7–11.8
GAAP. See generally accepted accounting independent audit, 3.10, 6.23
principles independent contractor, 11.4
general account, 8.8 independent director, 1.9
general accounting, 7.6 independent financial advisor, 11.16
general agency, 11.6 individual employer groups, 9.12
general agent, 11.6 industry associations, 2.8
general counsel, 3.3 inflows, 12.2
generally accepted accounting information, 5.5, 5.6
principles (GAAP), 7.7 information fraud, 5.18
general obligation bonds, 8.13 information management, 5.2, 5.5–5.10
General Regulation 250 (Chile), 13.18 information resources, 5.2
GLB Act. See Gramm-Leach-Bliley Act information services, 5.2
goal, 1.11 information technology, as functional area, 1.15
going-concern concept, 7.7 information technology (IT) department, 5.2–5.5
government bonds, 8.12 comprehensive business analysis
Gramm-Leach-Bliley (GLB) Act, 12.22 responsibilities for, 10.6
graphic rating scale, 4.17 financial management working with, 6.9
group insured, 12.21 relation with customer service
group life insurance, risk factors for, 12.21 department, 14.5
group member, 12.19 underwriters’ collaboration with, 12.19
group products, customer service information theft, 5.18
processes for, 14.17–14.18 inside director, 1.9
group representative, 11.15–11.16, 12.19 inside information, 2.7
groupthink, 4.9 insider trading, 2.7
group underwriting, 12.19–12.21 insolvency, 6.19
instant messaging, 5.14
H institutional advertising, 9.8
institutional investing, 8.2
hardware, 5.3 insurance, laws restricting sale of, 12.22
health information, confidentiality of, 2.8 Insurance Act (India), 11.11
hedging, 6.13 insurance aggregators, 5.16
help desk technician, 5.4 insurance brokerage, 11.17
holding company, 1.22–1.24 insurance broker-dealer, 11.17
home country, 4.5 insurance company, as distribution
home country staffing, 4.5 channel, 11.18–11.19
home service agent, 11.5, 11.6 insurance-owned broker-dealer, 11.17
host country, 4.5 insurance producer, 1.6
host country staffing, 4.5 Insurance Regulatory and Development
hosted applications, 5.13 Authority (IRDA; India), 6.22, 10.9, 11.11
HR department. See human resources insured, 1.3
department integrated data warehouse, 5.7–5.8
HTTP protocol, 5.3 interactive voice recognition (IVR) system,
human resources, 4.2 5.17, 14.7
as functional area, 1.15 interdepartmental standing committees, 1.21
legal department’s responsibilities to, 3.6 interest option, 13.13
human resources department, 4.2–4.3, 4.14 interest-rate risk, 6.12, 8.14
human resources planning, 4.3–4.8 interest spread, 8.3

internal audit, 3.10 job skills test, 4.12

internal control, 6.8–6.9, 7.16 joint and survivor life annuity, 13.20
internal control systems, 3.10 joint venture, 3.4
internal customer, 1.6 joint venture model of bancassurance,
internal databases, 9.14 11.17, 11.18
internal environment, 9.16
internal financial audit, 7.15
internal labor supply, 4.7–4.8
L
internal recruitment, 4.8–4.9 laboratory tests, 12.13
internal replacement, 14.13 labor supply, 4.7–4.8
internal standards, 2.13 labor union agreements, 4.18
International Accounting Standards Board Labour Bureau (India), 4.8
(IASB), 7.8 launch team, 10.10
International Claim Association, 2.6 law department, 3.2–3.3. See also
International Financial Reporting Standards legal department
(IFRS), 7.8, 7.11 law firms, 3.6–3.7
international operations, HR planning for, 4.5 lawsuit, 3.6
Internet, 5.3, 5.14, 5.15 layoff, 4.19
Internet chat, 5.14 legacy system, 5.11
Internet sales, 11.20 legal, 3.2
interpleader, 13.14 comprehensive business analysis
intranet, 5.14, 5.15 responsibilities for, 10.6
intrusion detection software, 5.15 as functional area, 1.15
investigative consumer report, 13.15 legal department, 3.2–3.8
investment accounting, 7.6 interacting with claims, 13.3
investment activity report, 8.6 relation with customer
investment analysts, 6.7 service department, 14.5
investment committee, 1.21, 6.3 underwriters’ collaboration with, 12.18
investment fund allocations, 14.11 legal professional associations, 2.8
investment-grade bond, 8.12 lessee, 8.15
investment operations, 6.6–6.7, 6.8, 8.5–8.9 lessor, 8.15
investment portfolio performance review, 8.6 LexisNexis, 5.7
investment portfolios, 8.7–8.9 liabilities, 6.15
investment risk, 6.12, 8.3–8.5 license, 3.4
investments, 6.11 licensing, for insurance producers, 11.10
comprehensive business analysis life annuity, 13.20
responsibilities for, 10.6 life income option, 13.13
evaluation of, 8.5–8.6 life income with period certain annuity, 13.20
as functional area, 1.15 life insurance
legal department’s responsibilities to, 3.6 benefits, common uses for, 1.3
management of, 8.2 claim process for, 13.5–13.15
objectives for, 6.7 coverage changes, 14.11
policy for, 6.7, 8.2–8.3 policy surrenders, 14.12
strategies for, 6.7 Life-1, 6.22
types of, 8.9–8.16 life only annuity, 13.20
IRDA. See Insurance Regulatory and life with refund annuity, 13.20
Development Authority Life Underwriters Association of Canada, 2.8
irrevocable beneficiary, 14.9 LIMRA Online, 5.7
issue instructions, 10.8 line function, 1.14
IT. See information technology liquid assets, 6.6
IT security, 5.18–5.19 liquidity, 6.6
IVR. See interactive voice response system liquidity management, 6.6, 7.14
liquidity risk, 6.12
J–K litigation, 3.6–3.7

location-selling system, 11.14
jet unit, 12.5–12.6 lockbox, 7.13
job description, 4.9 LOMA, 2.6, 2.9
job posting, 4.9 LOMA Societies, 2.8
job rotation, 4.14 London Stock Exchange, 8.7

loss, verification of, 13.10 medical attendant’s report, 12.13

lower-level managers, 1.10 medical report, 12.12
medical tests, 12.13
M medical underwriting, 12.12–12.13
medical underwriting director, 12.7
management, 2.3 member services, 14.3, 14.17
functions of, 1.10–1.14 mentor, 4.14
levels of, 1.9–1.10 mentoring, 4.14
management accounting, 7.5 , 7.10–7.14 MIB Group Inc. (MIB), 5.7, 12.12
management by objectives, 4.17 middle-level managers, 1.10, 1.12
manager of agency operations, 11.8–11.9 MIHC. See mutual insurance holding company
market analysis, 10.5 misconduct, ethical, 2.5
market conduct compliance, for producers, misdirected calls, 14.21
11.12–11.13 mission statement, 1.2–1.3
market conduct examination, 3.11–3.12, 3.13, misstatement of age or sex, 13.12–13.13
12.18 mistaken claim, 13.6
market conduct laws, 1.7, 3.8–3.9 MNC. See multinational corporation
marketing, 9.2 moment of truth, 14.18
activities of, 9.9, 9.10 monitoring, 14.20
comprehensive business analysis as aspect of regulatory compliance, 3.10
responsibilities for, 10.6 Moody’s Investors Service, 8.12
as functional area, with sales, 1.15 mortality risk, 12.2
information for, 9.13–9.16 mortgages, 8.13–8.14, 8.16
legal department’s responsibilities to, 3.6 multinational corporation (MNC), 3.4
organization of, 9.2–9.4 multiple-employer groups, 9.12
relation with customer service department, multiple-line agent, 11.5, 11.6, 11.7
14.5 multistate examinations, 3.11
marketing audit, 9.17 multivariable segmentation, 9.10–9.11
marketing controls, 9.16–9.17 municipal bonds, 8.12, 8.13
marketing department, 4.3 mutual fund, 8.8
marketing environment, 9.16 mutual insurance companies, 1.5, 1.22,
external, as element of distribution 1.24, 7.7
decision, 11.22 mutual insurance holding company (MIHC),
marketing information system, 9.13–9.14 1.24
marketing mix, 9.6–9.8 mutualization, 3.5
marketing objectives, 9.5 mystery shopper, 14.20
marketing plan, 9.4–9.5, 10.5
marketing projections, 10.5
marketing research, 9.15–9.16 N
marketing staff, underwriters’ collaboration NAIC. See National Association of Insurance
with, 12.18 Commissioners
marketing strategies, 9.5 NAIC Group Life Insurance Model Act, 12.19
marketing support, for agents, 11.12 NAIC Model Privacy Act, 12.22
market intelligence, 9.14–9.15 name changes, 14.10
marketplace regulation, 1.7 NASDAQ. See National Association of
market risk, 6.12 Securities Dealers Automated Quotation
markets, identification of, 9.9–9.13 System
market segment, 9.9–9.10 National Association of Insurance
market segmentation, 9.9–9.11 Commissioners (NAIC), 3.11, 5.7
mass marketing, 9.12 National Association of Insurance and Financial
master application, 12.20 Advisors (NAIFA), 2.8
master budget, 7.11 National Association of Securities Dealers
master group insurance contract, 12.20 Automated Quotation System
material information, 2.7 (NASDAQ), 8.7
material misrepresentation, 13.7–13.9 National Safety Council (India), 4.19
maturity date, 8.9 net cash surrender value, 14.12
maturity value, 8.9 net income, 6.17
MBO. See management by objectives network administrator, 5.4
mediation, 3.7 networks, 5.3, 5.14–5.15
mediator, 3.7

new business, organization of, 12.5–12.6 performance appraisal. See performance

administration of, as functional area, 1.15 evaluation
processing for, 12.3–12.5 performance dashboard, 5.12
new products, types of, 10.3 performance evaluation, 4.14–4.16, 4.17
New York Stock Exchange, 8.7 performance goals, 4.14–4.16
Nikkei Exchange, 8.7 performance monitoring and review, in product
NILS INSource, 5.7 development, 10.10–10.11
nonadmitted assets, 7.10 performance standard, 2.13
nonannuitized options, 13.20 performance test, 4.12
nonmedical supplement, 12.12 performance tools, 4.16, 4.17
nonproprietary product, 11.18–11.19 persistency, 11.5, 12.8
nonpublic information, 2.7 requirements, for agents, 11.7–11.8
nontobacco users, 12.8 persistency rate, 14.21
numerical rating system, 12.13–12.15 personal information, confidentiality of, 2.8
Personal Information Protection and Electronics
O Document Act (PIPEDA; Canada), 12.22
personality test, 4.12
objective, 1.11 personally identifiable information (PII), 2.8
Occupational Safety and Health Administration personal producing general agent (PPGA), 11.8
(OSHA), 4.19 personal selling, 9.7
Office for National Statistics (U.K.), 4.8 methods of, 11.13–11.15
Office of the Superintendent of Financial personal selling distribution systems, 9.8,
Institutions (Canada), 6.22 11.2–11.16
officers, 1.10 personal underwriting, 12.13
ombudsman, 2.5 personnel department, 4.2–4.3
on-the-job training, 4.14, 4.15 pharmaceutical database, 12.13
operational planning, 1.12 PII. See personally identifiable information
operational risk, 6.12 PIPEDA. See Personal Information Protection
by customer, 1.19 and Electronics Document Act
by distribution system, 1.19 planning, 1.11–1.12, 2.3
by function, 1.17 platform employee, 11.18
by product, 1.18 policy accounting, 7.6
by territory, 1.18, 1.19 policy dividends, 1.5, 14.13
organizational market, 9.10 policy filing, 10.8
organization (org) chart, 1.13 policyholder behavior risk, 6.12
organizing, 1.12–1.22, 2.3 policy loans, 8.16, 14.12
orientation, 4.13 policyowners, 1.5
orphan policyowner, 14.11 policyowner service, 14.3
OSFI. See Office of the Superintendent of policy ownership changes, 14.10
Financial Institutions policy rider, 14.11
OSHA. See Occupational Safety and Health policy settlement options, 13.13
Administration policy summary, 10.9
OTC market. See over-the-counter market Porter, Michael, 1.14
outflows, 12.2 portfolio, 6.7
outside counsel, 3.6–3.7 portfolio managers, 6.7
outside director, 1.9 positioning, 9.8–9.9
outsourcing, 4.5–4.6, 5.13 PPGA. See personal producing general agent
overriding commission, 11.8 pre-contract training, 11.9–11.10
over-the-counter (OTC) market, 8.7 pre-employment tests, 4.11, 4.12
preferred class, 12.9
P premium (bonds), 8.10
premium accounting, 7.6
page views, 9.14
premium payment changes, 14.11
paramedical report, 12.12
premium rates, 12.15–12.16
partially admitted assets, 7.10
premium taxes, 7.6
partial surrender, 14.12
prevention, as aspect of regulatory compliance,
par value, 8.9
3.9–3.10
payee, identifying, 13.14–13.15
price, 9.6–9.7
payroll accounting, 7.6
pricing risk, 6.12
performance, measurement of, 2.13–14

principal, 8.3 pure distributor model of bancassurance,

print media, as distribution channel, 11.20 11.17, 11.18
print operator, 5.4
privacy, 2.7–2.8
privacy legislation, 12.22
Q
private placement, 8.7 qualitative performance measurement, for
problem resolution team, 14.14 customer service, 14.19, 14.20
processes completed, 14.21 quality assurance analyst, 5.4
processing centers, 14.3 quality rate, 14.21
producer associations, 2.8 quantitative performance measurement, for
producer group, 11.8 customer service, 14.19, 14.20–14.22
producer of record, 14.11
producers, 1.6, 11.2–11.4, 12.7
relation with customer service department,
R
RAA. See retained asset account option
14.5
ranking, 4.17
product design objective, 10.5
rate of return, 8.6
product development, 10.2, 10.3
rating, 12.9
interacting with claims, 13.3
rating agencies, 1.7–1.8, 6.19
legal department’s responsibilities to, 3.6
readability requirements, 10.9
relation with customer service department,
readerboard, 5.12
14.5
real estate, 8.15, 8.16
product development committee, 1.21
rebating, 11.4
product distribution, legal department’s
recognition, 7.7
responsibilities to, 3.6
recruitment
product implementation, 10.8–10.10
of agents, 11.9–11.10
product implementation committee, 1.21
of employees, 4.8–4.10
production requirements, for agents, 11.7–11.8
refund annuity, 13.20
product mix, 9.6
registered investment advisor (RIA), 11.16
product planning, 10.4
regulation
product portfolio, 9.6
financial, 6.19–6.21
product risk, 6.12
underwriting and, 12.21, 12.22
products, 9.6
regulators, 1.6–1.7
advertising of, 9.8
regulatory approval, for products, 10.8
characteristics of, as element of
regulatory bodies, 3.5
distribution decision, 11.22
regulatory groups, industry, 3.8
knowledge of, among producers,
regulatory risk, 6.12
11.21–11.22
reinstatement, 14.14
professional associations, 2.8
reinsurance, 1.8
profit, 6.14
reinsurance staff, underwriters’ collaboration
profitability, 6.14–6.15
with, 12.18
profitability analysis, 9.16
reinsured policies, claims on, 13.14–13.15
profit center, 1.19–1.20
reinsurer, 1.8
profit plan, 7.11
reliability, 4.12
profit-sharing, 4.18
renewal commission, 11.7
programmer/developer, 5.4
replacement, 14.13
programs (computer), 5.3
reputation risk, 6.12
project manager, 5.4
request for proposal (RFP), 12.20
project team, 1.22
required rate of return, 8.4
promotion, 9.7–9.8
rescission, 13.8
promotion materials, 10.8–10.9
research committee, 1.21
proposal for insurance, 12.20
responsibility, 1.9
prospect, 11.13–11.14
retained asset account (RAA) option, 13.13
prospectus, 10.9
revenue, 6.17
protocols, 5.3
RFP. See request for proposal
prudential regulation, 1.7
RIA. See registered investment advisor
prudent person approach, 8.8
risk, 6.11
publicity, 9.8
risk classes, 12.3, 12.8, 12.9
public offering, 8.7
risk committee, 6.13
purchasing power, 9.7
risk-free rate of return, 8.4

risk management, 6.11–6.13 smart phone, 5.18

financial management working with, 6.9 social networking, 5.16
risk premium, 8.4 Society of Actuaries, 2.6, 2.8
risk-return trade-off, 8.3–8.4 Society of Financial Services Professionals, 2.8
software, 5.3
S software as a service (SaaS), 5.13
SOH. See statement of health
SaaS. See software as a service solvency, 1.7, 6.14
salaried sales representative, 11.15–11.16 tools for monitoring, 6.22–6.23
salary, annual, 4.18 source of funds, 6.16
sale-and-leaseback transaction, 8.15 SOX. See Sarbanes-Oxley Act of 2002
sales analysis, 9.16 special investigative unit (SIU), 13.15, 13.16
sales experience, 11.21 specialized medical questionnaire, 12.13
sales promotion, 9.7 speed of answer, 14.21
sales support, 11.11–11.12 staff function, 1.14
Sarbanes-Oxley Act of 2002 (Sarb-Ox, SOX), staffing needs, 4.4–4.7
2.2–2.3, 6.23 stakeholders, 1.4–1.9
SBR. See skill-based routing providing financial information to, 6.17–19
SBU. See strategic business unit as users of accounting information, 7.4
scanning, 5.9 standard class, 12.9
screening, 10.4 Standard and Poor’s Corporation, 8.12
screening interview, 4.11 standing committee, 1.20
screen pop, 5.17 statement of capital and surplus, 7.9
script, 14.10 statement of health (SOH), 12.12
seamless process, 14.7 statement of owners’ equity, 7.9
SEC. See Securities and Exchange Commission statutory accounting practices, 7.7
securities steering control, 2.10, 2.12, 2.14
buying and selling of, 8.6–8.7 claims and, 13.17
distribution of, 11.16–11.17 customer service and, 14.19
securities exchange, 8.7 stock, 1.5, 8.14–8.15, 8.16
Securities and Exchange Commission (SEC; stockholder, 1.5
U.S.), 5.7, 6.21, 10.9, 11.17 stockholder dividend, 1.5
security, 1.5 stock insurance companies, 1.5, 1.22, 1.24, 7.7
security analyst, 5.4 STP. See straight through processing
segmented service, 11.12 straight through processing (STP), 12.4
segregated account, 8.8 strategic alliance model of bancassurance,
segregated fund, 8.8 11.17, 11.18
segregation of duties, 7.2 strategic business unit (SBU), 1.20
selection of risks, 12.3 strategic planning, 1.11–1.12
self-service options, in e-commerce, 5.16 strategy, 1.11
self-study training, 4.14, 4.15 subaccount, 8.8
senior-level managers, 1.10 subsidiary, 1.22, 3.4
SEPA. See Single Euro Payment Area substandard class, 12.9
separate account, 8.8–8.9 succession planning, 4.8
separation, 4.19 suicide exclusion, 13.9–13.10
server, 5.3 suitability, 12.5
server administrator, 5.4 support function, 1.14
service desk, 5.4 surplus, 6.18
service fee, 11.7 systems activities, in product development,
service level, 14.21 10.10
service provider, 4.5–4.6 systems software, 5.3
shared services department, 5.5
shareholder, 1.5
Singapore Society of Actuaries, 2.8 T
Single Euro Payment Area (SEPA), 7.13 table rating method, 12.16
single-variable segmentation, 9.10 table of underwriting requirements, 12.11
situation analysis, 9.5 tactical/action programs, 9.5
SIU. See special investigative unit tactical planning, 1.12
skill-based routing (SBR), 14.8 tactics, 1.11
skills inventory, 4.7–4.8 talking points, 14.10

targeted e-mail marketing, 11.20 purpose of, 12.6–12.9

target examinations, 3.11–3.12 relation with customer service department,
target market, 9.11–9.13 14.5
target marketing, 9.11–9.13 underwriting decision, 12.3, 12.13–12.15
task force, 1.22 underwriting managers, 12.7
tax accounting, 7.6 underwriting philosophy, 12.8
technical design, for products, 10.5–10.7 underwriting supervisors, 12.7
technology undifferentiated marketing, 9.12
for agent support, 11.12 Unfair Claims Settlement Practices Act, 13.18
in customer service, 14.7–14.8 unfavorable variance, 7.11
management of, 5.2 unique visitors, 9.14
telecommunications, 5.13–5.18 up-selling, 14.16
telecommuting, 5.16 upstream holding company, 1.24
teleconferencing, 5.18 use of funds, 6.16
telemarketing, 11.20 U.S. Treasury bonds, 8.13
teleunderwriting, 12.11–12.12
term to maturity, 8.11
text chat, 5.14
V
third-country nationals, 4.5 validity, 4.12
third-party administrator (TPA), 13.6 valuation, 7.7
third-party-institution distribution systems, 9.8, value-added activities, 1.16
11.3, 11.16–11.19 value chain, 1.14–1.16
360-degree feedback, 4.17 variable annuities, distribution of, 11.16–11.17
tobacco users, 12.8 variance, 2.14
Toronto Stock Exchange, 8.7 variance analysis, 7.11–7.12
total client management, 14.8 vendor, 4.5–4.6
TPA. See third-party administrator vice presidents, 1.10
traders, 6.7 videoconferencing, 5.18
training, 4.13–4.14 virtual private network (VPN), 5.14
as aspect of regulatory compliance, 3.10 voice response unit (VRU), 5.17
for customer service, 14.6–14.7 VPN. See virtual private network
ethics, 2.7–2.8 VRU. See voice response unit
for insurance producers, 11.10–11.11
training materials, 10.8 W–X
transaction, 5.11
wage, hourly, 4.18
transaction processing system, 5.11
web, the. See World Wide Web
treasurer, 6.5
web advertising, 11.20
treasury operations, 6.5–6.6, 7.12–7.14
web browser, 5.3
as functional area, 1.15
web callback, 14.8
turnaround time, 14.21
web chat, 5.14
twisting, 11.4
web collaboration, 14.8
web conferencing, 5.18
U webinars, 5.18
UK Combined Code on Corporate Governance websites, 5.3, 5.16
(United Kingdom), 2.3 website traffic analysis, 9.14
underwriters, 12.3, 12.7 Westlaw, 5.7
underwriting, 12.3 wholesaler, 11.16
company interrelationships and, 12.18–19 workflow systems, 5.10, 14.7
comprehensive business analysis work group, 1.22
responsibilities for, 10.6 work sample test, 4.12
control mechanisms for, 12.17–12.18 worksite marketing, 11.14, 11.15
as functional area, 1.15 work team, 14.3
group, 12.19–12.21 World Wide Web (the web), 5.3
guidelines for, 12.8
interacting with claims, 13.3 Y–Z
jobs in, 12.7
yield, 8.6
legal department’s responsibilities to, 3.6
operations for, 12.5–12.6
process for, 12.9–12.16

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Insurance Company Operations

ONLINE COURSE PORTAL

Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

Statement of Purpose: LOMA Educational Programs Testing and Designations.

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LOMA Education and Training

Information in this text may have

Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

Authors: Jo Ann S. Appleton, FLMI, PCS, ALHC,

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Copyright © 2012 LL Global, Inc. All rights reserved.

Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

Learning Aids............................................................................LRN AID.1

Module 1: Company Organization and Governance

Chapter 1: Organization and Operations.................................. 1.1

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Chapter 2: Corporate Governance, Ethics, and Control..... 2.1

Module 2: Support Functions

Chapter 3: Legal and Compliance................................................. 3.1

Chapter 4: Human Resources Management............................ 4.1

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Chapter 5: Information and Technology................................... 5.1

Module 3: Financial Functions

Chapter 7: Accounting, Treasury Operations,

Chapter 8: Investment Management........................................... 8.1

Module 4: Marketing, Product Development,

Chapter 9: Marketing.......................................................................... 9.1

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Chapter 10: Product Development.............................................10.1

Chapter 11: Product Distribution................................................11.1

Module 5: Product Administration Functions

Chapter 13: Claim and Annuity Benefit Administration.13.1

Chapter 14: Customer Service.......................................................14.1

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LOMA 290 Textbook Development Panel

Matthew J. Budenz, CPA, FLMI

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Susan Devanny, MBA, FLMI

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Ferny Espinoza, FLMI, FFSI, ACS

Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

Jo Ann S. Appleton, FLMI, PCS, ALHC, HIA, CEBS

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Copyright © 2012 LL Global, Inc. All rights reserved. www.loma.org

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Using the Test Preparation Guide

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Module 1 - Company Organization and

Module 2 - Support Functions

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Module 3 - Financial Functions

Module 4 - Marketing, Product

Module 5 - Product Administration Functions

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Organization and Operations

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I’m new to the insurance industry. Well . . .

I worked in the accounting department of a

How is an insurance company like any other

Just like any company, insurance companies operate to accomplish a purpose

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 Maintaining a standard of living for an insured’s survivors

 Paying off a mortgage or paying rent

Maintaining a standard of living for an insured’s survivors

Paying off a mortgage or paying rent

Paying estate and inheritance taxes

Funding a gift to a charitable organization

Helping a business continue operations after an insured’s death

Establishing an education fund for an insured’s children

Providing supplemental retirement income for a surviving spouse

Authorizing major transactions

Declaring dividends to be paid to stockholders or policyowners

Appointing the officers who actually operate the company

Should we acquire another company?

How can we use technology to expand product distribution?

Should we increase the advertising budget because of a new product’s intro-

Should we purchase a new processing system or upgrade the current system?

Facilitate communication and coordination

Use resources efficiently