A life insurance company is a company that underwrites and sells life insurance, which is insurance that provides protection against the economic loss caused by the death of the person whose life is insured.
An annuity is a legally enforceable written agreement between an insurance company and a policy owner under which the insurer promises to make a series of periodic payments to a named person in exchange for a premium or a series of premiums.
Life insurance products can be classified as
- Term Life Insurance
- Cash value life insurance (Permanent Life Insurance)
- Endowment Life Insurance
Annuities can be classified based on when the insurer begins making periodic annuity payments.
- Immediate Annuity
- Deferred annuity
They can also be classified according to the payout option chosen by the policy owner to indicate how the insurer should distribute the policy’s accumulated value.
- Life Annuity
- Annuity Certain
Role of Life Insurance Companies
Are an important component of the financial services industry, which consists of financial institutions that offer products and services to help people, businesses, and governments meet their financial goals? These goals include protecting against financial loss, accumulating and investing money and other assets, and managing debt and payments.
A financial institution is a business that owns primarily financial assets, such as stocks and bonds, rather than fixed assets, such as equipment and raw materials. Insurance company, commercial banks, and other depository institutions, pension funds, mutual fund companies, securities firms, investment banks, and finance companies are all examples of financial institutions.
Financial Intermediaries
Life insurance companies also serve as financial intermediaries. A financial intermediary is an organization that channels funds from those people, businesses and governments who have a surplus of funds (savers) to those who have a shortage of funds (borrowers).In the process of moving funds from savers to borrowers, financial intermediaries generate income for themselves.
Life Insurance Company Operations
· Forming & Organizing the insurance company
· Assessing customer needs
· Developing products
· Distributing products
· Administering products
· Managing information
· Ensuring corporate success.
All life insurance companies carry out each of the above operations in some way and not the same way.
Integration among Functional Areas
Effective life insurance company operations require a tremendous amount of integration, cooperation, and coordination among an insurer’s functional areas. Typical functional areas are
- Marketing
- Actuarial
- Underwriting
- Customer Service
- Claim Administration
- Annuity benefit administration
- Information Technology
- Investments
- Accounting
- Human Resources
- Legal
- Compliance
Employees who establish life insurance underwriting guidelines and risk selection classifications cannot do their work without statistical information from the actuarial staff. Insurers that have a high level of coordination among functional areas will be in the best position to operate smoothly, provide customers with outstanding products and services, and prosper long into the future.
Risk Management in Life Insurance Companies
Companies in all industries are exposed to various types of general business risks, including
- Market Risk, which is the risk that changes in market interest rates, securities prices, or foreign currency exchange rates.
- Credit Risk, which is the risk that a debtor of the company will fail to fully meet a financial obligation.
- Liquidity Risk, which is the risk that the company will be unable to obtain necessary funds to meet its financial obligations on time without incurring unacceptable losses.
- Legal Risk, which is the risk that new laws, regulations, or court opinions will have negative impact on the company’s operations.
- Strategic Risk, which is the risk that the company will not implement appropriate business, plans and strategies needed to adapt to changes in its business environment.
- Operational Risk, which is the risk that the company will experience financial loss as a result of [1] deficiencies in company systems, business processes, personnel, or internal controls or [2] external events that disrupt or have negative impact on its business processes.
Two important categories of risk for life insurance are
- Premium rate risk is the risk that insurer will set the premium rates on a product either too low to generate enough revenue to cover the product’s claims and other expenses or too high to compete with similar products.
- Underwriting risk is the risk that the insurer will approve inappropriate amounts of life insurance coverage for proposed insured’s, approve unacceptable applications, or decline acceptable applications.
Risk Management is the practice of systematically identifying risk, assessing risk, and dealing with risk. Failure to identify and effectively manage risks hinders an insurer’s chance of success, and severe mismanagement of risks can even put the company out of business.
Strategic Planning for Operations
Planning is the process of preparing for the future by establishing appropriate goals and formulating the strategies, tactics, and other activities necessary to achieve those goals.
Strategic Planning is the process of determining an organization’s major long-term corporate objectives and the broad, overall courses of action that the company will follow to achieve these objectives. Strategic planning for operations considers questions such as
· Should we sell a line of business?
· Should we acquire another company?
· Should we change the corporate form of the company?
· Should we expand the current whole life insurance product line or create a new product line?
· Should we begin selling variable annuity products in a new region?
· Should we use a different type of distribution channel to sell our products?
· Should we revise our life insurance underwriting philosophies and guidelines?
A strategic plan covers a fairly long time horizon, such as three or five years.
Strategic Alliances
A strategic alliance is a relationship involving the sharing of risk and rewards by two or more independent firms that are also pursuing strategic goals.
Life insurers often enter strategic alliances to
- Gain access to new markets
- Gain new distribution channels
- Improve the profitability of existing operations
- Improve customer service
- Enhance a product line
A joint venture is a contractual agreement by two or more otherwise independent parties to work together on a specific project for a specified time period.
A partnership is a contract between two or more parties that agree to pool their funds and talents and share in the profit and loss of the enterprise.
Outsourcing
Operations commonly outsourced by life insurance companies include
· Distribution functions such as personal selling distribution channels.
· Information management functions such as website devt. and maintenance.
· Life insurance underwriting functions such as the collection of underwriting information.
· Life insurance claim administration functions such as claim investigation and claim processing.
· Customer service functions.
· Financial management functions such as tax reporting.
· Human resources function such as payroll administration.
· Legal/Compliance functions such as the filing of policy forms with regulatory functions.
Outsourcing Decisions
Before deciding whether to outsource a particular operation, an insurer considers the following factors:
· The insurer’s own ability to perform the operation efficiently, effectively and cost-affectively.
· The importance of immediate implementation of a new operation.
· The availability of start-up capital.
· The importance of control over the operation.
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