The Operational Practice of Conventional Insurance.

Normally, the insurance company is operated as well as other companies. However, because the transaction of insurance needs special functions in its operational practice, so in this field there are some functions specified for the insurance company only.
Although there are some different functions between life insurance and lost insurance, but the main operational practice of all kinds of insurance company is divided as below :
a. Underwriting
Underwriting is classifying the risks that will be assured. It is the essential element in the operational practice of insurance company, because the underwriting can maximize the profits through risks distribution.
The main duty of the underwriter in the risks classification is to ensure no risks can cause great difficulties for the company in next days. For this reason the underwriter must develop sharp consideration through understanding the hazards.
To execute the underwriting process effectively, the underwriter must collect the information as much as possible about the insurance subjects and the cost to get additional data. The underwriter may approve new costumer as long as he complies all underwriting requirements determined by the company. But if he does not so and the hazard risks are too big, the underwriter may reject him.
There are five essential information resources related to the risks, they are:
1) New costumer’s statement embodied in the questionnaire,
2) Information from the insurance broker,
3) Direct investigations toward new costumer’s personality related to the moral hazards such as financial status, occupation, characteristics, etc.
4) Information from the service bureau concerning to the objects or goods. For instance, health information bureau which stores the files of costumer’s physical checking up for life insurance.
5) Direct Inspection toward object’s physical condition.
b. Rating / Pricing
Rate is the price of each protection or exposure units. The rate is different from the premium; the premium is determined by multiplying the rate with the total of bought protection units.
To calculate an equitable rate of premium for an individual risk, the underwriter has recourse either to the pooled record of risks of the same class in his own portfolio, or in the wider record of a group of insurers. Having found the norm of the class concerned, he can adjust the rate upwards or downwards for favourable or unfavourable features in the individual risk to arrive at what he considers a fair rate .
By this rate, the income of insurance company from the premium must suffice all losses' covering and operational expenses. To get the income from this premium, insurance company must foretell the claim and distribute the anticipated expenses to every policyholder classes.
c. Investment
It is the liability of financial staff of company to invest the accumulated amount of money as the accumulated premiums paid by insured. The addition of investment interest purchasing is important variable in determining the rate of premium.
Principally, life insurance is long-range investment. Hence, Life Insurance Company entrusts its funds especially in the long-range investment amounted to 2/3 of asset total invested in the company stocks and the obligation letters, the common stocks amounted to less than 10% and the government’s stocks amounted to 5%.
And loss insurance, normally, is short-range investment. Hence, Loss Insurance Company invests half of its assets total in the government and private company’s stocks. The investment percentage composition of life insurance and loss insurance can be seen in the table below :
Investment Capital Life Insurance (%) Loss Insurance (%)
Stock 9,7 32,4
Obligation 36,6 28,8
Government's Obligation 5,2 28,9
Mortgage 30,8 0,2
Real Estate 3,3 1,6
Policy Loan 8,5 -
Premium Balance - 7,2
Other Investments 5,9 7,3
d. Loss Adjustment
Before the insurance company covers the losses, it must finish the process of loss adjustment. Loss adjustment is most difficult step for insurance company; therefore it needs a good adjuster in claim section.
It is important for insurance company to pay for the claim properly, speedy and satisfactory, because it is the effective promotion device. And it is important also for insurance company to refuse the unevaluated claim, and to prevent the payment more than full indemnity.
There are two basic actions for insurance company toward a claim, those are payment and rejection. There are two matters provided the basis for insurance company to refuse the claim:
1) No losses happen,
2) The involved policy does not cover the loss, because it's out of the insurance contract, whether the contract becomes invalid or the insured violates the clauses of the legal policy.
In determining which whether the insurance company must pay or refuse the claim, the adjuster must attend settlement procedures with four main steps as below :
1) Loss information, the insured informs the insurance company that the loss was happening.
2) Loss investigation, the insurer ensures the loss fact by direct investigation which whether that loss assured by policy or not. Then the amount of losses will be countable.
3) Loss evidence, made by the insured after informing the loss.
Payment or rejection. If all steps run as well as the clauses of policy, the insurance company will draw the draft to indemnify the insured. But if they do not so, the insurance company will refuse that claim.