Question

In: Finance

Take two of the five functions of insurers and describe and discuss the functions. Rate the...

Take two of the five functions of insurers and describe and discuss the functions. Rate the five functions in terms of (1) importance, and separately, (2) difficulty. Explain your reasoning.

Solutions

Expert Solution

Insurance is all about pooling the resources of a large number of people with similar risks to make sure that the few who experience loss are protected

Insurers perform a series of functions, many of them really important roles in our society. Below are functions performed by Insurer:

Functions of Insurers

1. Rate making

2. Production

3. Underwriting

4. Loss Settlement

5. Investment

Rate making: In simple words, Rate making is the determination of what rates, or premiums, to charge for insurance. The process of predicting future losses and future expenses and allocating costs among various classes of insured is called rate making.

An insurance rate is the price per unit of insurance. In other words, we can say “rate” is the price charged for each unit of protection or exposure. It is different from premium, as premium is determined by multiplying the rate by the number of units of protection purchased.

The final premium the insured pays is called the gross premium and is based on a gross rate.

Gross rate is based on two components: Loading and Pure premium

Loading is designed to cover expenses of operation where as Pure premium portion of the Gross Rate designed to pay losses.

Underwriting: Underwriting is the process of

  • Examining, accepting or rejecting insurance risks and
  • Classifying those selected, to charge the appropriate premium for each.

Underwriting is the way an insurer works out how much to charge for each risk they cover for each person who buys an insurance policy and under what terms.

When preparing a policy, insurance underwriters will calculate:

How much they will agree to pay for a loss

Under what circumstances they will make a payment

How much the premium will be.

Every insurer has its own set of underwriting guidelines to help the underwriter determine whether or not the company should accept the risk of a particular situation.

Rate the five functions in terms of (1) importance, and separately, (2) difficulty.

S.No

Functions of Insurers

Rating on basis of

Importance and Separately

1

Rate making

1

2

Production

3

3

Underwriting

2

4

Loss Settlement

4

5

Investment

5

1 Highest & 5 Lowest

Insurance process starts with creating insurance product this function is Product Design.

Rate making is the most important function of insurer as in this like any other business it is like function of cost of production. This is followed by underwriting process which is coordinated with an insurer’s pricing structure. Loss settlement is the next one in the list, this is related to pay claims or benefits obligations arising out of insurance contracts. The investment function is investing cash to recover the time-cost of money and promote efficiency.

S.No

Functions of Insurers

Rating on basis of

Difficulty

1

Rate making

1

2

Production

5

3

Underwriting

2

4

Loss Settlement

4

5

Investment

3

1 Highest & 5 Lowest

Rate making and Underwriting are the most difficult functions of insurer respectively. These functions required expertise from Actuaries. Investing the perfect investment is important as well as difficult. With the market so uncertain it is hard to find perfect investments with high returns and low risk. Loss settlement and production & marketing are easier than other functions


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