Welcome To The IEI-Sponsored Insurance Workshop

1. Welcome To The IEI-SponsoredInsurance Workshop MTSU June 4-6, 2007

2. Overview of Insurance Operations • Insurance Regulation • Evaluation of Insurance Regulation • Reasons for Insurance Regulation • Insurance Regulators • Regulatory Activities • Unofficial Regulators • McCarran-Ferguson Act (Public Law 15)

3. Overview of Insurance Operations (con’t) Risk Management Process • Identify Loss Exposures • Analyze Loss Exposures • Examine the Feasibility of Risk Management Techniques • Select the Most Appropriate Techniques • Implement the Risk Management Techniques • Monitor Results and Make Changes as Needed

4. Overview of Insurance Operations (con’t) Classifications and Types of Insurers ClassificationType Legal Form Of Ownership — Place Of Incorporation Stock Mutual Other — Domestic Foreign Alien

5. Overview of Insurance Operations (con’t) Goals of Insurance Companies • Earn a Profit • Meet Consumer Needs • Comply with Legal Requirements • Fulfill Duty to Society

6. Overview of Insurance Operations (con’t) Constraints on Achieving Goals • Internal Constraints • Efficiency • Expertise • Size • Financial Resources • Other Internal Constraints • External Constraints • Regulation • Public Opinion • Competition • Economic Conditions • Marketing Systems • Other External Constraints

7. Overview of Insurance Operations (con’t) Measuring Insurance Performance • Measuring Profits • Premiums • Expense Ratio • Loss Ratio • Combined Ratio • Operating Profit or Loss

8. Overview of Insurance Operations (con’t) Measurement of Profits Property-Casualty Insurance Combined Ratio, 1996 to 2001 Year Combined Ratio 1996 106.1 1997 101.9 1998 106.0 1999 107.8 2000 110.3 2001 115.9

9. Overview of Insurance Operations (con’t) Measurement of Profits Property-Casualty Insurance Operating Ratio in the United States From 1992 to 2001 YearCombined Ratio Net Investment Operating Ratio Ratio 1992 115.7 14.9 100.8 1993 106.9 13.9 93.0 1994 108.4 13.8 94.6 1995 106.4 14.5 91.9 1996 105.8 14.4 91.4 1997 101.6 15.5 86.4 1998 105.6 14.6 91.3 1999 107.8 14.0 93.8 2000 110.1 14.1 96.2 2001 115.9 12.2 103.7

10. Overview of Insurance Operations (con’t) Insurance Functions • Core Functions • Marketing • Underwriting • Claims • Actuarial • Other Functions • Loss Control (and Premium Audit) • Reinsurance • Investments • Information Technology • Human Resources • Legal Services • Accounting • Interdependence Among Functions

11. Insurance Marketing

12. Insurance Marketing Unique Characteristics • Legal Status of Agents • Duties Owed to Customers • The Marketing Plan • Product Proposal and Sales Goal • Situational Analysis • Marketing Goals • Marketing Strategies Overview of Insurance Product Marketing

13. Insurance Marketing (cont’d) Insurance Distribution Channels • Independent Agency and Brokerage Marketing System • Direct Writers • Exclusive Agents • Convergence of Traditional Marketing Systems • Alternative Distribution Channels • Internet • Call Centers • Direct Response • Group Marketing • Financial Institutions

14. Insurance Marketing (cont’d) Independent Agency System • Independent Contractor • Represents Many Companies • Owns Policy Expirations • Compensation Methods • Commission • Contingent Commissions • Bonuses • Fees • Combination

15. Insurance Marketing (cont’d) Exclusive Agency System • Independent Contractor • Represents One Company • Does Not Own Expirations • Compensation Methods • Commissions (higher for new business) • Salary (while in training)

16. Underwriting

17. Underwriting Purpose • Profitable Book of Business • Avoid Adverse Selection Underwriting Process • Evaluating Loss Exposures • Determining Underwriting Alternatives • Selecting an Underwriting Alternative • Determining the Appropriate Premium • Implementing the Underwriting Decision • Monitoring the Loss Exposures • Owns Policy Expirations

18. Underwriting (cont’d) Types of Underwriters • Line • Staff Underwriting Results • Financial Measures • Non-financial Measures

19. Underwriting (cont’d) Underwriting Alternatives • Accept the Submission As Is • Reject the Submission • Make a Counteroffer to Accept the Submission Subject to Certain Modifications Major Modifications • Require Loss Control Measures • Change Insurance Rates, Rating Plans, or Policy Limits • Amend Policy Terms and Conditions • Use Facultative Reinsurance

20. The Claim Function

21. The Claim Function Goals • Comply With the Contractual Promise • Support the Insurer’s Profit Goal Types of Adjusters • Staff • Independent • Public • Producers

22. The Claim Function (cont’d) Claims Adjusting Process • Determine Whether the Loss is Covered by the Applicable Policy • Determine the Cause of Loss and Legal Liability, if Necessary. • Determine the Amount of Damages or Extent of Loss • Settle the Claim Determining Coverage • Insuring Agreement • Exclusions • Conditions • Response to Coverage Issues

23. The Claim Function (cont’d) Determining Legal Liability • Sources • Torts • Contracts • Statutes Determining Amount of Damages • Property • Bodily Injury (Compensatory, Punitive) Settlement • Claims Reports • Reserving

24. Actuarial Function

25. Actuarial Function Duties • Make Rates • Determine Reserves Ratemaking Goals • Be Stable • Be Responsive • Provide for Contingencies • Promote Loss Control • Be Simple

26. Actuarial Function (cont’d) Rate Components • Prospective Loss Costs (Pure Premium) • Expenses • Profit and Contingencies Ratemaking Methods • Pure Premium Method • Loss Ratio Method • Judgment Method

27. Reinsurance

28. Reinsurance Definitions • Primary Insurer • Reinsurer • Ceding Commission • Retrocession Reinsurance Functions • Stabilize Loss Experience • Improve Large-line Capacity • Provide Catastrophe Protection • Provide Surplus Relief • Provide Underwriting Guidance • Facilitate Withdrawal From a Territory or Type of Business

29. Reinsurance (cont’d) Types of Reinsurance • Facultative • Treaty

30. Conclusions