As a result of this investigation, regulators look for more transparency in the compensation disclosure of agents and brokers, and major brokerage houses stopped the practice of accepting contingency commission in the belief that clients view the practice negatively. Contingent commissions are paid to brokers for bringing in better business and can be regarded as profit sharing. The compensation issue was brought to the limelight in 2004 when New York State Attorney General Eliot Spitzer opened an investigation of contingent commissions that brokers received from insurers these contingent commissions were regarded as bid rigging. Both agents and brokers are compensated by the insurer. Baranoff, Dalit Baranoff, and Tom Sager, “Nonuniform Regulatory Treatment of Broker Distribution Systems: An Impact Analysis for Life Insurers,” Journal of Insurance Regulations, Regulations 19, no. An agent legally represents the company, whereas a broker represents the buyer and, in half of the states, also represents the insurer because of state regulations. Insurance may be bought through agents, brokers, or (in some cases) directly from the insurer (via personal contact or on the Internet). From a consumer’s point of view, it is the first glimpse into the operations of an insurer. We begin with marketing despite the fact that it is not the first step in starting a business. Regardless of regulation, however, insurers are subject to market conditions. The regulatory structure of insurers is shown in the second part of the link in Figure 7.1 "Links between the Holistic Risk Picture and Insurance Company Operations", which separates the industry’s institutions into those that are government-regulated and those that are non- or semiregulated. Because insurers operate in markets with major influences, especially catastrophes (both natural and human-made), the external conditions affecting the insurers form an important part of this chapter. It is like a circular chain in which each link is as strong as the next one. Each function is closely linked to all the other functions, and none is performed in a vacuum. The figure describes the fluid process of the operations within an insurer. To grasp how we relate to the operations of a typical insurer, look at Figure 7.1 "Links between the Holistic Risk Picture and Insurance Company Operations". The descriptions provided in this chapter are typical of most insurers. Because the risks are not transferred to just one insurer, we must learn about the operations of a series of insurers-the reinsurers that insure the primary insurers. To complete the puzzle of ensuring that our holistic risk management process is appropriate, we also need to understand how our insurance company operates. Therefore, it is imperative that the insurance company be there when we need it. Only when or if we have a loss will we actually see a return on our purchase of insurance. However, this contract is for future payments in case of losses. When we transfer risk to the insurance company and pay the premium, we get an intangible product in return and a contract. As consumers, it is our responsibility to know where our premium money is going and how it is being used. Insurance operations: reinsurance, legal and regulatory issues, claims adjusting, and managementĪs we have done in each chapter, we first link the chapter to the complete picture of our holistic risk management.Insurance operations: actuarial analysis and investments.Insurance operations: marketing, underwriting, and administration. One part is the insurance underwriting business the other is the investment of the funds paid by insureds. An interesting and distinctive characteristic of insurance is that it is really a business with two separate parts, each equally important to the success of the operation. The marketing aspect of insurance is important, as it is for any business, but it is not the only aspect. This chapter will explain the internal operations of an insurance company and will dispel the notion that insurance jobs are all sales positions. Whether you are acting as your own personal risk manager or on behalf of your business, it will help you to know how insurance companies work. The decision to seek coverage is only the first of many important choices you will have to make about insurance.
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