Chapter 2: Insurance Company Structure C16

1)      What are the main TWO (2) general categories of insurance company structure?

·         1) Stock companies -> for profit of their owners: privately held or public.

·         2) Cooperative enterprises -> operate for the mutual benefit of their members include mutual companies, reciprocals and factory mutual companies.

2)      Define subscribed capital.  How does it differ from paid-up capital?

·         Private stock insurance companies are responsible for much of the insurance written in Canada and throughout the world.

·         Security to policyholders for assumed liability is represented by subscribed or paid-up capital and any surplus.

·         Subscribed capital is the amount of stock sold by a corporation.  Policyholders contribute to a communal fund by paying premium for their insurance if premiums do not cover liabilities, then the contributed capital of investors fund any shortfall.

·         Paid-up capital represents that part of subscribed capital that has been paid in full by shareholders.

3)      What type of operational plan exists when a mutual insurer’s policyholder is required to sign a premium note identifying the limit he or she would be responsible to pay should the company suffer a financial loss?

·         A mutual insurer is a form of cooperative enterprise owned by its policyholders.

·         The association is formed for the purpose of insuring one another against the possibility of certain types of loss and operates on a premium note/assessment plan.

·         If the company declares a loss, the policyholders will be assessed and a levy will be determined to make up the deficit, but only up to the agreed amount.

·         Profits are shared amongst the policyholders and are typically redistributed by reducing premiums rather than refunding each policyholder.

4)      What does corporate governance mean?

·         Signifies how a corporation directs itself and how control of this process is managed.

·         Encompasses the process, structure, and information used to manage a company and the means by which the board of directors and senior management are held accountable for their actions.

5)      What is a benefit of a flatter hierarchical management structure?

·         It limits the layers of management that issues must pass through before a decision can be implemented.

·         Flat or networked structures are more common in our changing economic environment that recognizes information and knowledge as well creating assets in addition to labour and capital.

·         In flatter structures, distributed decision-making is used.

6)      What is a drawback of a flatter hierarchical management structure?

·         Provides few opportunities for employees to advance.

·         The degree of hierarchy can vary from strong hierarchical (like a ladder) with lines of reporting going up and lines of command going down to slightly hierarchical (flat structure) in which employees have enough authority to discharge the majority of their responsibilities without seeking approval from those in senior management positions.

7)      What does the span-of-control managerial principle assert?

·         Asserts that limiting the number of employees who report to the same manager improves organizational performance.

·         There is no agreement among most organizations as to what the optimal span of control should be.

·         The manager’s span of control will be affected by the nature and style of the organization, the aptitude, and personality of the manager, and the type of work to be produced.

8)      An organization may choose to form multiple companies in order to provide flexibility in what main areas?

·         Multiple companies within a single corporate structure will be required to provide flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria, and rating plans.

·         Allows an organization to use independent distribution networks as well as a direct sales force.

·         Allows for flexibility in the products that are offered as well as types of risks targeted.

9)      Identify FOUR (4) considerations of a company intending to acquire another company?

·         1) Fit with the purchaser: culture and expertise of its staff.

·         2) Outstanding liabilities of acquired company: purchaser may try to persuade the seller to retain its existing liabilities.

·         3) Integration of companies: purchaser must consider overall situation to develop strategies for a smooth transition.  Goals might include desire to retain the purchased company’s book of business, staff and distribution network.

·         4) Computer system compatibility: must compare its existing system to any acquired system to determine their compatibility.

10)  Name TWO (2) board committees that are mandatory according to the Insurance Companies Act?

·         ICA stipulates that federally regulated insurance companies must have both an audit committee and a conduct review committee.

·         Audit Committee: role is to improve the financial reporting process.  They are generally responsible for reviewing the performance of investment portfolios to ensure that capital is managed effectively to earn an adequate return.  Also responsible for the internal control procedures or documentation of the company, reporting on whether the design of internal controls contains any material weakness.

·         Conduct Review Committee: reviews compliance with legislation on issues such as self-dealing, reviewing procedures and evaluating effectiveness.  Also reviews transactions affective stability or solvency.

11)  The chairperson and the board prepare rules and guidelines for the operation of the company.  Identify FIVE (5) areas likely to be involved.

·         1) Types of insurance and extent of coverage to be sold

·         2) Territory in which the company will operate

·         3) Underwriting policy

·         4) Agency policy

·         5) Investment policy

12)  What THREE (3) functional areas are unique to insurance operations?

·         1) Actuarial

·         2) Underwriting

·         3) Claims

·         Common to all companies: administration, marketing, accounting/finance.

13)  Why would a claims department assign claims to independent adjusters?

·         Hired to handle claims in more rural areas or handle more complex claims.

·         Using an independent adjuster occasionally in a remote geographical area is more cost-effective than hiring a staff adjuster to cover a vast territory where only a few claims would occur.

14)  Identify NINE (9) areas of responsibility for the human resources department.

·         1) Employee recruitment

·         2) Payroll and incentives

·         3) Labour regulation

·         4) Surveys

·         5) Benefits

·         6) Pension plan

·         7) Counselling

·         8) Training

15)  What did most insurance companies rely on to earn a profit between 1978 and 2003?

·         2003 was the first year since 1978 that a collective underwriting profit was earned by the Canadian P&C industry. 

·         Most insurers depended on investment income to produce an overall profit.

·         Achieving a profit permits the payment of dividends to shareholders and provides the capital needed to finance growth.

·         Dependence on investment earnings makes insurers more vulnerable to the unpredictable securities market and fluctuating interest rates.

16)  What duties would one expect to be performed by a seasonal technical underwriting operating out of a head office?

·         May perform audits on the company’s field units to ensure compliance with corporate directives and best practices.

·         They may provide education and training to the field units’ underwriting personnel.

17)  What is the downside of choosing not to appoint an appraiser to view damages?

·         The insurer may decide not to assign appraisers on claims under a certain threshold amount in order to save on appraisal fees.  Consideration must be given to the effects of such a strategy on indemnity levels.

·         A savings realized on appraisal fees may be lost because of higher indemnity payments.

18)  Name three successive multi-layered goal setting levels.

·         Senior management sets goals that filter down to its various departments and to the units within departments, and to each individual employee.

·         1) Departmental goals

·         2) Unit goals

·         3) Individual goals

19)  What TWO (2) areas of measure are used to gauge authority for members of the underwriting department?

·         1) Procedures for referrals: efficient and effective procedures should be developed to govern how questions and decisions travel from one level of authority to the next.  These procedures may depend on the reason for a referral or the complexity of the issue, a higher level of authority may be required.

·         2) Limitations for control: could involved limits to the types of coverage the company writes, limits to the locations of risk, and limits to both individual and aggregate coverage levels.