THE ORGANIZATION STRUCTURE OF INSURANCE COMPANY

Components of the Organizational Structure

Coordination of activities takes place through the organizational structure of the business. An effective organizational structure benefits a company by

           

• Enabling the business to assign responsibilities throughout the organization. A responsibility is a duty or task assigned to an employee. 
• Providing employees with the proper authority to meet their responsibilities. By authority, we mean the right of an employee to make decisions, take action, and direct others to fulfill their responsibilities.
• Providing a process for holding employees accountable for their job performance. Accountability means the employees are answerable for how well they use their authority and how effectively they carry out their responsibilities.
• Setting clear guidelines for the delegation of authority and accountability. Delegation is the process of assigning to another employee the accountability for completing a specific task.

The Organization Chart

An organization chart also shows the company’s chain of command, or the structure of authority that flows downward in the organization from the higher levels to the lower levels.

According to the principle of unity of command, each employee should be under the authority of only one person and be accountable to only that person. In today’s organization environment, however, insurance companies typically cannot adhere strictly to the unity of command principle.

Pyramidal Structure and Levels of Authority

The pyramidal structure illustrates that the authority in a company starts at the top with one person or a small group of people, Authority is then distributed through the chain of command to ever-larger numbers of people throughout out the company.

Policy owners or stockholders

The owners of a company- the policy owners in mutual companies or the stockholders in stock companies – are the ultimate source of authority over a life insurance company. Here the owners elect a board of directors and delegate their authority to the board.

Board of Directors

Is the primary governing body of a corporation. In representing the owners of the corporation, the board has a primary responsibility to review the activities and finances of the company and to set company policies.

A board member who holds a position with the company in addition to his position on the board is known as an inside director. A board member who does not hold another position with the company is known as an outside director.

Duties of the Board of Directors

           

• Setting the major policies for the firm.
• Evaluating the firm’s operating results.
• Authorizing major transactions, such as mergers and acquisitions.
• Declaring the dividends to be paid to stockholders/policyowners.
• Appointing the officers who operate the company.
• Setting the compensation for the firm’s top-level executives.

Company Management

Employees whose primary responsibility is to guide the work of other employees are said to be members of management. Their major functions include

           

·         Planning what should be done.

·         Organizing the human & technical resources to get the job done.

·         Influencing and directing the people during the work.

·         Controlling the work process so that work is performed in a satisfactory manner.

The most senior manager in a company, and the person located just beneath the board of directors is the CEO. In most companies, the CEO is also the company’s president.

A COO manages the day-to-day operations of a company and a CFO oversees an insurer’s financial management policies and functions. The CFO & COO report to the president. Also reporting to the president are executives known as vice presidents.        Below vice presidents in the chain of command are the company’s middle level managers. Managers are less involved in strategic planning and more involved in tactical planning, also called operational planning, which is the process of determining how to accomplish the specific tasks that need to be performed to carry out the organization’s strategic plans.

Centralized & Decentralized Organizations

In a centralized organization, top management retains most decision-making authority for the entire company. In a decentralized organization,

Top management shares decision making authority with employees at lower

Hierarchical levels.

Company policies and actions in a centralized organization tend to be consistent because one central, high-level authority makes the decisions. Also centralization reduces certain administrative costs because a single centralized department usually handles administrative services for the company. One advantage of a decentralized organization is that managers can respond quickly to situations because they have more authority to make decisions.

Line Units and Staff Units

A line unit, also called a production department or an operating department, is an area of an organization that produces or administers the firm’s products or services. In a life insurance company major line units include marketing, actuarial, underwriting, customer service, claim administration and annuity administration. A staff unit also called a service department, is an area that provides support services to line units and other staff units but does not itself produce or administer products and services. They include accounting, legal, compliance, human resources, and IT.

Line Authority, Staff Authority, and Functional Authority

Three important types of authority in an organization are line authority, staff authority, and functional authority.

Line Authority is direct authority over workers. It corresponds directly to the chain of command. Both line unit managers and staff unit managers exercise line authority over the employees that directly supervise.

Staff Authority is authority held by staff unit personnel to advise or make recommendations to line unit personnel. Staff authority is less concrete and is frequently directly upward.

Functional Authority is a staff unit member’s formal or legitimate authority over line units in matters related to the staff member’s functionality. One example is compliance officer who requires an individual life insurance product manager to change the wording in a new policy form so that it conforms to applicable insurance regulations.

Traditional Ways Insurers Organize Work Activities

Organization by Function

An insurance company that is organized by function differentiates its major divisions by the work that the divisions perform.

Organization by Product

A life insurance that is organized by product distributes work according to the company’s line of insurance products. A major division of the company administers each line of business and handles most of the functional activities for that line of business only. However a few functions such as investments, legal, compliance, and human resources – may be handled through centrally administered departments.

Organization by Territory

A company that is organized by territory determines its major divisions according to the geographic areas in which it operates. An insurer operating in several countries may have a separate division for each country.

Organization by Profit Center or Strategic Business Unit

Another way to organize a company is by profit center. A profit center is a line of business that [1] is evaluated on its profitability, [2] is responsible for its own revenues and expenses, and [3] makes its own decisions regarding its operations. In a company organized into profit centers, a unit or department that is not itself a profit center but that performs activities to support profit centers is known as cost center. Typical cost centers are HR, accounting, legal, compliance, and IT.

A strategic business unit (SBU) is an organizational unit that acts like an independent business in all major respects. An SBU [1] faces outside competition,[2] controls its own strategic planning and new product development, [3] has its own management, and [4] is responsible for its own costs & revenues. The head of a SBU is division vice president.

A disadvantage of the profit center/SBU approach is that it may lead to duplication of effort, particularly among support functions. To avoid such duplication, some insurers are organized that are organized by SBU have established shared services for one or more supporting functions. A shared service is a functional area that performs specified business processes for multiple SBUs and that shares accountability for the costs, timing and quality of those processes with the SBUs that it serves.

Alternative Organizational Shapes

Hourglass Organization

This structure consists of three basic layers with the middle layer being much narrower than the top and bottom layers. The top layer contains executives who are responsible for formulating the organization’s strategic plans. The middle layer consists of a small group of middle-level managers who coordinate the functions of the bottom layer, which typically consists of a diverse group of technical/professional employees. A distinguishing characteristic of the hourglass organization is that the middle-level managers are generalists, rather than functional specialists.

Cluster Organization

This structure is comprised of a number of work teams. Employees do not have permanent job responsibilities. Instead, they progress from team to team as projects warrant. Key to the success of this type of organization is hiring employees who have a wide range of technical skills and who can handle flexible work assignments.

Network Organization

This structure is designed for the coordination of subcontracted production and marketing operations. The company itself includes only a small number of employers, whose primary responsibility is administrative oversight.

Committees

To address cross-jurisdictional operations, most companies establish special committees to bring together a number of people, each of whom has other responsibilities within the firm. A permanent committee that company executives use as a source of continuing advice is called a standing committee. A company’s key executives and members of its board of directors make up several of the most important standing committees of any business.

An adhoc committee, also called a project team, work group, or task force, is a temporary committee that is established for a specific purpose, such as planning a new information system, establishing a subsidiary company, developing a new product, or revising the company’s accounting system