Question

Briefly describe the functions of insurers in rate making, underwriting and loss adjustment. Which is the most important? Explain your answer.

Answer 1

The key role of insurers is to help policyholders in managing their risks related to their insurable assets like life,property,automobile etc. but enrolling them in appropriate insurance policies that are appropr6 for them. Although at a very laymen terms this means providing an appropriate policy to the policyholders, the insurer has functions and roles which go a but more detailed to ensure the policyholders gets the best policy in the best price so that they continue to pay premium and are sufficiently protected or insured. Fee main functions of insurers are as below:

1.Rate making: Rate making or insurance pricing is a process followed by insurers to arrive at the appropriate price /premium to be charged for a particular insurance product or policy depending on the market specific factors (like competition and regulatory specifications ) and policyholders specific parameters (depending on the insured; if life,property,automobile etc and the specific risk factors for each of these insured). An appropriate rate/price is essential to ensure that the insurer has sufficient funds to make all the necessary payout & still make profit and also not too high enough to loose policyholders to competition who are ready to lose margins. Thus from a long term profit perspective, appropriate pricing is essential.

2. Underwriting:Underwriting is the process followed from insurance companies to:

1. A certain what risks to cover each insurance policy and what is the price of each o these risk factors

2. What payout to make at what time intervals

3. What conditions and pre-requisites to be satisfied for making these payouts

4. What are the changing risk scenarios that can impact the risk pricing ( for example increased prevalence of flood or such natural disasters can increase the cess charged for that region considering the increased risk possibility for that area).

A robust and efficient underwriting process is essential to ensure that we are considering all the risk factors, they are being priced properly and ensure sufficient buffer is available for business to avoid any unexpected losses from unaccounted payouts.

3. Loss adjustment: Loss adjustment is a process followed or cost incurred by insurance companies to conduct investigations on the genuinity of insurance claims before makig the promised payouts as per the policy terms. A robust loss adjustment system is necessary to avoid making payout to fraudulent policyholders and avoid losses to the company.

There is no function which can be termed as the most important due to the importance of each function that they perform and their I interdependence on each other to ensure the growth of the firm.