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Management Notes

Importance of Various Elasticity of Demand

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In the Determination of Gains from International Trade:

The gains from international trade depend, among others, on the elasticity of demand. A country will gain from international trade if it exports goods with less elasticity of demand and import those goods for which its demand is elastic.

The ‘terms of trade’ can be determined by measuring elasticity of demand in two countries for each other’s goods. In international trade, a country earns more profits by importing the commodities, which have elastic demand and exporting the ones, which have relatively less elasticities.

In the first case, it will be in a position to charge a high price for its products and in the latter case it will be paying less for the goods obtained from the other country. Thus, it gains both ways and shall be able to increase the volume of its exports and imports.

In the Determination of Government Policies:

The knowledge of elasticity of demand is also helpful for the government in determining its policies. Before imposing statutory price control on a product, the government must consider the elasticity of demand for that product.

The government decision to declare public utilities those industries whose products have inelastic demand and are in danger of being controlled by monopolist interests depends upon the elasticity of demand for their products.

In Dumping:

A firm enters foreign markets for dumping his product on the basis of elasticity of demand to face foreign competition.

In Price Determination of Factors of Production:

The concept of elasticity for demand is of great importance for determining prices of various factors of production. Factors of production are paid according to their elasticity of demand. In other words, if the demand of a factor is inelastic, its price will be high and if it is elastic, its price will be low.

In the Determination of Price:

The elasticity of demand for a product is the basis of its price determination. The ratio in which the demand for a product will fall with the rise in its price and vice versa can be known with the knowledge of elasticity of demand.

Helpful in Adopting the Policy of Protection:

The government considers the elasticity of demand of the products of those industries which apply for the grant of a subsidy or protection. Subsidy or protection is given to only those industries whose products have an elastic demand. As a consequence, they are unable to face foreign competition unless their prices are lowered through sub­sidy or by raising the prices of imported goods by imposing heavy duties on them.

In the Determination of Prices of Joint Products:

The concept of the elasticity of demand is of much use in the pricing of joint products, like wool and mutton, wheat and straw, cotton and cotton seeds, etc. In such cases, separate cost of production of each product is not known.

Therefore, the price of each is fixed on the basis of its elasticity of demand. That is why products like wool, wheat and cotton having an inelastic demand are priced very high as compared to their byproducts like mutton, straw and cotton seeds which have an elastic demand.

In Demand Forecasting:

The elasticity of demand is the basis of demand forecasting. The knowledge of income elasticity is essential for demand forecasting of producible goods in future. Long- term production planning and management depend more on the income elasticity because management can know the effect of changing income levels on the demand for his product.

In Price Discrimination by Monopolist:

Under monopoly discrimination the problem of pricing the same commodity in two different markets also depends on the elasticity of demand in each market. In the market with elastic demand for his commodity, the discriminating monopolist fixes a low price and in the market with less elastic demand, he charges a high price.

In the Determination of Output Level:

For making production profitable, it is essential that the quantity of goods and services should be produced corresponding to the demand for that product. Since the changes in demand is due to the change in price, the knowledge of elasticity of demand is necessary for determining the output level.

Management Notes

Business Economics Characteristics

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Business Economics is playing an important role in our daily economic life and business practices. In actual practice different types of business are existing and run by people so study of Business Economics become very useful for businessmen. Since the emergence of economic reforms in Indian economy the whole economic scenario regarding the business is changed.

Various new types of businesses are emerged, while taking the business decisions businessmen are using economic tools. Economic theories, economic principles, economic laws, equations economic concepts are used for decision making. On this ground students of commerce should know the importance of basic theories in actual business application. Hence the introduction of Business Economics becomes important to the students.

Professors H.C. Peterson and W.C. Lewis suggested that Business Economics must be considered as a part of applied microeconomics.

  • In Business Economics, the primary importance upon the firm, the environment in which the firm finds itself and the business decision that the firm has to take.
  • Business Economics is an application of microeconomics which focuses on the topics which are of much importance and interest. The topics include the theories of demand, production and cost, profit-maximising, the model of a firm, optimal prices of the advertising expenditures, government regulation etc.
  • Business Economics seeks to investigate and analyse how and why a business behaves. It looks at the implications of action, policies of the firm in which they operate and the economy as a whole.

Broadly there are two main branches of economics “positive” economics and ‘normative’ economics. Positive economics deals with “description” while normative economics deals with ‘prescription’. By building up propositions on the basis of a set of assumptions, positive economics tries to explain economic phenomenon.

Normative economics comments on the desirability of that phenomenon and suggests policy measures. Value judgments are, thus, pronounced in normative economics. In the words of Profs. Mote, Paul and Gupta: “Managerial economics is a part of normative economics as its focus is more on prescribing choice and action and less on explaining what has happened. Managerial economics draws on positive economics by utilizing the relevant theories as a basis for prescribing choices.”

Business economics not only seeks to investigate and analyse how and why businesses behave as they do but also the implications of their actions and policies for the industry in which they operate and, finally, for the economy as a whole. In this business environment, both internal and external factors work.

Macro Analysis:

Macro economics which deals with the principles of economic behaviour for the economy as a whole is also useful for business economics. A business unit operates within some economic environment which is in turn shaped by the behaviour of the economy as a whole. Therefore, business manager must know the external forces working over his business environment.

Normative in Nature:

Business economics is also called normative economics which prescribes standards or norms for policy making. Business economics is prescriptive rather than descriptive in nature. In economic theory, we try to explain economic bahaviour: in business economics, we try to prescribe policies for a business manager which are most likely applied to achieve his objectives. In economic theory, we build ‘laws’ such as the law of Demand and the Law of Diminishing Returns. In business economics we apply these laws for policy planning at the level of a firm.

Pragmatic in Approach:

Business economics is pragmatic in its approach. It does not involve itself with the theoretical controversies of economics. Yet it does not relegate the realities of business decision-making to the background by bringing in abstract assumptions. While economic theory abstracts from realities of the individual business units to build up its theories, managerial economics takes proper note of the particular economic environment in which a firm works.

Basis of Theory of Markets and Private Enterprises:

Business economics largely uses the theory of markets and private enterprise. It uses the theory of the firm and resource allocation of private enterprise economy.

Micro in Nature:

Business economics is micro-economics in nature. This is due to the study of business economics mainly at the level of the firm.

Generally, a business manager is concerned with problems of his own business unit. He does not study the economic problems of an economy as a whole.

Management Notes

Business Economics Role

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The vital role which business firms play in increasing social welfare is quite clear. It is due to the working of business firms that a high rate of economic growth has been achieved in the United States and other western countries.

Benefits of this economic growth have been widely shared. The high rate of economic growth has resulted in improving social well-being and removing poverty. To put in the words of Adam Smith, the father of economics, business firms have greatly increased the ‘wealth of nations’ (that is, the volume of output of goods and services) in the capitalist world.

The social benefits conferred by business firms on the communities are despite the fact that businesses work to maximise their profits or maximise the value of their firms. In their bid to maximise profits, business firms organise the work of production by engaging and combining the various productive resources and bringing about coordination between them. The suppliers of capital, labour, raw materials and other resources receive rewards from the firms for their contribution to the production of goods and services.

These business firms generate income and employment for labour, the owners of capital, land and other resources. This has greatly benefited them and contributed to their well-being. Besides, consumers too have gained from increasing quantity of goods and services produced by business firms for their consumption.

Apart from the gain to the resource owners and consumers, business firms contribute a good deal of revenue to the government. Taxes on profits (i.e. income of business firms), excise duties on their production, sales tax on the goods produced by them and other such taxes yield a lot of public revenue which are used by the Government to expand the services provided by it and to increase public investment for economic growth.

All the above mentioned contributions of business firms to economic growth and social well-being depend on the efficiency with which they use national resources and allocate them among products and services, A fundamental question that has been often raised is how business firms, which in their productive activities are guided by maximisation of private profits, work to increase social welfare.

The answer to this question was provided by Adam Smith, the author of now well-known classic ‘Wealth of Nations’. Advocating for a free-market system he clarifies the role of business in promoting social well-being despite the fact that it pursues the goal of profit maximisation.

Adam Smith argues that it is the profit-driven market system (also called price mechanism) that drives business firms to promise welfare though they work for private’s gain. It is worth quoting him. “Every individual endeveavours to employ his capital so that its produce may be of greatest value. He generally neither intends to promote the public interest, nor knows how much he is promoting it.

He intends only his own security, only his own gain. And he is in this led by an invisible hand to promote an end which was no part of his intention. By pursuing his own interest, he frequently promotes that of society more effectively than when the realty intends to promote it.

Business economist applies economics in decision­-making. He uses the tools of economic analysis in clarifying problems, in organizing and evaluating information and in comparing alternative courses of action. He is concerned with analytical tools that are useful, that have proven themselves in practice or that promise to improve decision-making in the future.

The economist is an expert model builder and this is the most important thing which the economic theorist can contribute to the work of management science. In management science it is important to be able to recognize the structure of a managed problem. The second way in which economic theory can help management science is to provide a set of analytical methods.

A managerial economist can become a far more helpful member of a management group by virtue of his studies of economic analysis, primarily because there he learns to become an effective model builder and because there he acquires a very rich body of tools and techniques which can help him to deal with the problems of the firm in a far more rigorous a far more proving an a far deeper manner.

The economic department is a relatively recent addition to corporate management in most developed countries of the world the business economist is an important member of the management group. This is possible so because he has developed a technique which can help the company to manage its business more efficiently.

Modern business is a very complex affair because organizations have become vast in size and they can be run only with a well coordinated management cadre specialized in different aspects of business. In the words of Prof. Galbraith it is management by technically.

A managerial economist is an important piece in this zig saw puzzle. In countries like ours businesses are small but the management is no more a one man show. It consists of a number of specialized personnel and the managerial economist has now become a familiar face.

Management Notes

Exposure to Perils

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A peril is a potential event or factor that can cause a loss, such as the possibility of a fire that could engulf a house. A hazard is a factor or activity that may cause or exacerbate a loss, such as a can of gasoline left outside the house door or a failure to regularly have the brakes of a car checked.

Risk, peril, and hazard are terms used to indicate the possibility of loss, and are often used interchangeably, but the insurance industry distinguishes these terms. A risk is simply the possibility of a loss, but a peril is a cause of loss. A hazard is a condition that increases the possibility of loss.

Peril means danger, and it has a connotation of imminent danger. A rockslide is a peril to anyone standing underneath the cliff when the rocks start sliding.

In insurance contracts, the perils that are covered are usually specified. Fire, wind, water, and theft, are the perils that are commonly listed. However, note that the language may indicate that the damage will not be covered in certain circumstances, such as if the insurance company finds that neglect by the insured caused the damage or made it worse.

This is the root cause of many disputes between insurer and insured. For example, the insurer may deny a claim for roof damage after a storm, citing owner neglect in not replacing an old roof.

Speculative risk differs from pure risk because there is the possibility of profit or loss, such as investing in financial markets. Most speculative risks are uninsurable, because they are undertaken willingly for the hope of profit. Also, speculative risk will generally involve a greater frequency of loss than a pure risk, since profit is the only other possibility. So, although many people take precautions to protect their lives or their property, they willingly engage in speculative risks, such as investing in the stock market, to make a profit; otherwise, a person could avoid most speculative risks simply by avoiding the activity that gives rise to it.

Legal risk is a particular type of personal risk that you will be sued because of neglect, malpractice, or causing willful injury either to another person or to someone else’s property. Legal risk is the possibility of financial loss if you are found liable, or the financial loss incurred just defending yourself, even if you are not found liable. Most personal, property, and legal risks are insurable

Personal risks are risks that affect someone directly, such as illness, disability, or death. Property risk affects either personal or real property. Thus, a house fire or car theft are examples of property risk. A property loss often involves both a direct loss and consequential losses. A direct loss is the loss or damage to the property itself. A consequential loss is a loss created by the direct loss. Thus, if your car is stolen, that is a direct loss; if you have to rent a car because of the theft, then you have some financial loss a consequential loss from renting a car.

Pure risk is a risk in which there is only a possibility of loss or no loss there is no possibility of gain. Pure risk can be categorized as personal, property, or legal risk. Pure risk is insurable, because the law of large numbers can be applied to estimate future losses, which allows insurance companies to calculate what premium to charge based on expected losses.

Static and dynamic risks are distinguished by their temporality. The possibility of loss is uniform over an extended period of time for static risks, so static risks are more predictable, and, therefore, more insurable. Dynamic risks change with time, making them less predictable and less insurable. For instance, the risk of unemployment changes with the economy, so it is difficult to predict what unemployment will be next year. On the other hand, the number of houses that burn down within a given year within a specific geographical area is steadier, not cyclical, and so is more predictable.

Management Notes

Insurance Customer Behavior

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Triggering moments

A common misperception is life events are point-in-time when, in fact, they are small journeys in a consumer’s life: “marriage,” for example, may begin with the decision to propose and may end with thoughts on future financial decisions (e.g., family planning), with the wedding itself as a step in the journey. Similarly, homeownership may begin with the decision to purchase and potentially end with the resale of the home itself.

To buy or not to buy

The decision to buy or not to buy life insurance goes well beyond life events and the helpfulness of advice. Non-buyers cite a variety of reasons for not purchasing insurance, including unclear benefits, complexity, and lengthy application process. There is a clear disconnect between prospective buyers’ views on short term financial goals and priorities and the potential longer-term financial benefits associated with purchasing life insurance.

Loyalty is good for business. Carriers that win the loyalty of their customers find that they stay longer, buy more products and recommend the company to their friends and colleagues. Higher loyalty means lower churn, and that can help companies reduce costs and expand margins.

Insurers have made concerted efforts in recent years to build customer loyalty. They’ve embraced digital platforms, retrained employees and started to redesign customer episodes. These initiatives can pay off. Our survey shows that insurers that concentrate on building loyalty can gain considerable ground as much as 20 percentage points in Net Promoter Scores over a three-year period. Conversely, insurers that lose focus can find their loyalty scores slipping by similar margins.

Insurer have to adapt the operating hours to service consumers specially in digital channels since users are “always” online and it is minutes of winning, the faster with adequate information respond wins.

Some organizations implemented Chatbot to interact with customers as first tier, some organization has dedicated team who support online customers with all enquiries. This is really depends on interaction and transaction volumes of each company to consider whether it is worth to invest on the dedicate team to support online consumers 24/7.

All these 3 keys behavior has definitely impact and affect insurance company especially at the pre-purchase stages. Moving forward, insurers do have to think ahead in offering products and services specially for online consumers which might also involve KYC, automate-underwriting approval, modular products for consumers to drag and drop, digital identity verification, and etc.

Management Notes

Common and specific terms in Life and Non-Life Insurance

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Life assured:

Life assured is the insured person. Life assured is the one for whom the life insurance plan is purchased to cover the risk of untimely death. Primarily, the breadwinner of the family is the life assured.

Life assured may or may not be the policyholder. For instance, a husband buys a life insurance plan for his wife. As the wife is a homemaker, husband pays the premium, thus the husband is the policyholder, and wife is the life assured.

Policyholder:

The policyholder is the one who proposes the purchase of the life insurance policy and pays the premium. The policyholder is the owner of the policy and may or may not be the life assured.

Sum assured (coverage):

Life insurance is meant to provide a life cover to the insured.

The financial loss that may arise due to the passing away of the life assured is generally chosen as a life cover when buying a life insurance plan. In technical terms, ‘Sum Assured’ is the term used for an amount that the insurer agrees to pay on death of the insured person or occurrence of any other insured event.

Policy tenure:

The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy duration.

The policy tenure decides for how long the company is providing the risk coverage. However, in the case of whole life insurance plans, the life coverage is till the time life assured is alive.

Nominee:

The ‘nominee’ is the person (legal heir) nominated by the policyholder to whom the sum assured and other benefits will be paid by the life insurance company in case of an unfortunate eventuality. The nominee could be the wife, child, parents, etc. of the policyholder. The nominee needs to claim life insurance, if the life assured dies during the policy tenure.

Premium:

The premium is the amount you pay to keep the life insurance plan active and enjoy continued coverage. If you are unable to pay the premium before the payment due date and even during the grace period, the policy terminates.

There are various options on how you can pay the premium; regular payment, limited payment term, single payment.

Policy tenure:

The ‘policy tenure’ is the duration for which the policy provides life insurance coverage. The policy tenure can be any period ranging from 1 year to 100 years or whole life, depending on the types of life insurance plan and its terms and conditions. Many a times, it is also referred to as policy term or policy duration.

Maturity age:

Maturity age is the age of the life assured at which the policy ends or terminates. This is similar to policy tenure, but a different way to say how long the plan will be in force. Basically, the life insurance company declares up front the maximum age till which the life insurance coverage will be provided to the life insured. For instance, you are 30 years old, you opt for a term plan with a maturity age of 65 years. That means the policy will have a coverage till you are 65 years old, which also means, the maximum policy tenure for a 30-year-old is 35 years.

Automobile Insurance Terminology

Requirements regarding auto insurance vary state by state, but the following definitions can be helpful for understanding the basics when shopping for auto insurance:

Insured: The person(s) covered by the insurance policy.

Premiums: The monthly or annual amount that you must pay in order to have the exchange for insurance coverage.

Deductible: The amount of money that you must pay out of pocket for damages sustained, such as in a collision, before your insurance kicks in and starts to make payments.

Collision Coverage: The type of coverage that pays for the damages to your vehicle sustained as a result of a collision with another vehicle or object.

Comprehensive Coverage: The type of coverage that pays for damage to your vehicle sustained as a result of fire, theft, vandalism, or various other stated causes.

Medical Payments Coverage: The type of coverage that pays for medical and funeral expenses for anyone covered under your insurance policy in the event of an accident, regardless of fault.

Uninsured Motorist Coverage: The type of coverage that pays for injuries, including death, which you and/or other occupants of your vehicle sustain as a result of a collision with an uninsured driver who is at fault.

Bodily Injury Coverage: The type of coverage that pays for medical expenses and/or funeral costs of other individuals injured, or killed, in an accident for which you are liable.

Health Insurance Terminology

The Patient Protection and Affordable Care Act enables more Americans to have access to quality, affordable health insurance. The federally facilitated marketplaces are just one place where people can compare plans. Here is some of the basic terminology for health insurance:

  • Insured: The person(s) covered by the insurance policy.
  • Deductible: The annual amount of money that you must pay out of pocket for medical expenses before your insurance kicks in and starts to make payments.
  • Premiums: The monthly or annual amount that you must pay in order to have the insurance coverage.
  • Co-payment: A flat fee that you must pay toward the cost of medical visits, your insurance provider pays the remaining balance. For example, you could be responsible for a $10 co-pay for each visit to the doctor.
  • Coinsurance: The percentage that you must pay to share responsibility for your medical claims after you meet your annual deductible.
Management Notes

Constituents of Insurance Market

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The insurance market has evolved from the establishment of the first automobile insurance policy to the various types of life insurance products that are available today. The insurance market has a structure that involves property and casualty insurers, life insurers as well as health insurers. Each of these types of insurers have regulations that apply to the policies that they provide. Insurers are regulated by a combination of state and federal laws, depending on the type of insurance they offer.

Common Ownership

Many insurance companies are under a common ownership in which one corporation has one or more insurance business that act as independent companies. The most common type of common ownership for an insurance company is when it is established as a captive insurer. A captive insurer can be formed to provide coverage for various types of business risks. The most common type of captive insurer provides reinsurance coverage. This is a type of insurance where multiple insurance companies share the same loss.

Mutual Insurance Companies

A mutual insurance company is a company owned by policyholders. This means that each policyholder is given a vote to decide who will sit on the board of directors. A mutual insurance company can sell types of insurance or only provide one type of product or service to their customers. The earnings from a mutual insurance company are distributed to policyholders in the form of dividends.

Health Insurance

The insurance market also contains companies that provide health insurance policies to individuals as well as employers in the form of a group health insurance policy. Companies that provide a group health insurance policy to an employer are regulated by a combination of federal and state laws. States can also provide health insurance to residents if it is unavailable from a private insurer because of cost or ineligibility.

Life Insurance

Property and casualty insurers can also provide types of life insurance. A life insurance company can be a mutual insurance company or part of a stock insurance company. Companies that provide life insurance usually offer financial products to their policyholders, such as annuities and certain types of mutual funds.

Stock Insurance Companies

A stock insurance company is a company owned by stockholders. Unlike a mutual insurance company, a stock insurer not only needs to protect its policyholders but also maximize profits for the company’s policyholders. A stock insurance company can pay dividends to stockholders but generally do not pay dividends to their policyholders.

Property and Casualty

Property and casualty insurers offer various types of insurance for individuals to purchase, such as automobile and homeowners insurance. A property and casualty insurer can also offer types of commercial insurance, such as a small business package, general business liability, umbrella policies and workers compensation. Property and casualty insurers are regulated by laws in each state where they sell policies.

Management Notes

Importance of Ethical Behavior in Insurance Sector

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The Insurance Institute encourages the highest professional and ethical standards in insurance and financial services worldwide.

The Council and membership of The Insurance Institute look to all members to meet these standards and to maintain the reputation of The Insurance Institute by following this Code of Ethics and Conduct (the Code). It sets down the principles which all members should follow in the course of their professional duties.

Members are obliged to comply with this Code. If they do not comply, this may result in the Institute taking disciplinary action against the member.

The key values which set the standards for the behaviour of all members in respect of the key stakeholders in sections 1 to 5 are:

(a) Behaving with responsibility and integrity in their professional life and taking into account their wider responsibilities to society as a whole. Acting in a courteous, honest and fair manner towards anyone they deal with. Being trustworthy and never putting their interests or the interests of others above the legitimate interests of their stakeholders;

(b) Complying with all relevant Laws (including the laws of the Institute) and meeting the requirements of all applicable regulatory authorities, and appropriate codes of practice and codes of conduct.

(c) Demonstrating professional competence and due care including:

Meeting the technical and professional standards relating to their level of qualification, role and position of responsibility;

Completing their duties with due skill, care and diligence;

(d) Upholding professional standards in all dealings and relationships;

(e) Respecting the confidentiality of information;

(f) Applying objectivity in making professional judgements and in giving opinions and statements, not allowing prejudice or bias or the influence of others to override objectivity.

Members should respect the traditions and cultures of each country in which they operate. They should carry out business in any country according to all applicable local Laws, Rules and Regulations. Where there is a conflict between local custom and thevalues stated above, the Code will act as a guide to help members act professionally.

A member operating in a professional capacity has duties, arising from these key values, to a number of different groups. Within these relationships a member should always act ethically and their behaviour and conduct should meet the following principles:

Relations with customers

Members will seek to earn and maintain the trust of their customers at all times and should:

  • Give fair and proper consideration and the appropriate priority to the interests and requirements of all customers. Obtain and provide relevant information, including all necessary documentation and respect the confidentiality of information;
  • Avoid conflict between personal interests, or the interests of any associated company, person or group of persons, and their duties to all customers;
  • Avoid conflict between any competing interests of one or more customer(s), stepping aside in one or all matters if such conflicts cannot be resolved;
  • Act at all times with due skill, care and diligence;
  • Act only within the limits of personal competence and any limits of authorisation;
  • Act in a financially honest and prudent manner, including ensuring the protection of any money and /or property held on behalf of customers;
  • Act openly, fairly and respectfully at all times, providing all customers with due respect, consideration and opportunity;
  • Be honest and trustworthy with customers and communicate with them in a clear, prompt and appropriate manner;
  • Provide suitable and objective recommendations to customers;
  • Comply with all Laws and Regulations regarding the supply of goods and services to customers;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential customer or provider, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, and which are not likely to conflict with duties to customers.

Relations in employment

Members should aim to ensure good relations with their employer and employees and should:

  • Avoid conflict between personal interests, or the interests of any associated company or person, and their duty to their employer;
  • Not make improper use of information obtained as an employee or disclose, or allow to be disclosed, information confidential to their employer;
  • Seek to be a responsible employer or employee and be honest and trustworthy at work;
  • Act openly, fairly and respectfully at all times, treating other employees, colleagues, customers and suppliers with equal respect, consideration and opportunity;
  • Aim to take every opportunity to improve their professional capability, knowledge and skills;
  • Accurately and completely account for and report in employer records all business dealings;
  • Not provide or accept money, gifts, entertainment, loans or any other benefit or preferential treatment from or to any existing or potential supplier or business associate, other than occasional gifts, entertainment or remuneration, which are provided as part of accepted business practice, provided this is not likely to conflict with any duty that is owed to their employer.

In addition, where a member holds a position of influence within an organisation they should:

  • Provide, or encourage their employer to provide, suitable arrangements for the internal review of decisions, policies and actions where an employee raises concerns of unethical behaviour. (Employees should not be penalized for raising matters of ethical concern even if this results in a loss to the organisation or a customer);
  • Incorporate, or encourage their employer to incorporate, ethical standards into the organization’s governance standards, including the development of an ethical code.
  • Not disclose any employer/organisational confidential or sensitive information in written assignments.
Management Notes

Management of Risk by Individuals and Insurers

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Insurance Risk Management is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer’s world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter’s in the market. Risk Management work typically involves the application of mathematical and statistical modelling to determine appropriate premium cover and the value of insurance risk to ‘hold’ vs ‘distribute’.

Risk = Probability x Severity

Probability is the likelihood of an event occurring, and severity is the extent and cost of the resulting loss.

Speculative Risk: Risks where the possible outcomes are either a loss, profit, or status quo. It includes things like stock market investments and business decisions such as new product lines, new locations, etc.

Pure Risk: Risks where the possible outcomes are either a loss or no loss. It includes things like fire loss, a building being burglarized, having an employee involved in a motor vehicle accident, etc.

Steps to Implement Risk Management:

  • Quantify and prioritize: Risk mapping is one way to do this. Essentially, you chart all of the identified risks on the map. The map will make you aware of those risks on which you need to focus. Work with your broker to make sure that you are covered for all of the appropriate risks and look for ways to prevent and mitigate these risks. The image on the right is a sample of a common risk map. However, risk maps are often altered to reflect organizational needs.
  • Risk identification: It is a good idea to chart your risks in a way that allows you to identify the more common and serious risks so that you know the areas to which you need to commit resources.
  • Be risk sensitive, not risk adverse: Being risk sensitive is not the same as being paranoid. Realize that there are risks associated with everything. Take a deliberate and methodical approach to dealing with risk, while at the same time being realistic.
  • Identify risk in business decisions: Identifying risks in business decisions is much the same as with the process of identifying any risk. The key is to be thorough and use all the sources available. These risks can be prioritized and mapped in the same way as all other risks.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick and mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.

Product or service issues

When customers feel that their product did not meet expectations, challenges and risks are inevitable.

Mitigation options:

  • Implement ERM software into your organization to prevent negligence claims.
  • Invest in professional liability insurance.
  • Conduct vendor due diligence to prevent third party providers from producing products or services that don’t meet your organization’s standards.

Property damage

Insurance companies are often concerned with protecting their clients’ physical assets, including their brick-and-mortar properties. While natural disasters and other events may not destroy property entirely, they always pose a significant threat to a business’ ability to operate normally.

Mitigation options:

  • Implement controls for mitigation and prevention.
  • Invest in adequate insurance coverage.
  • Develop a foolproof business continuity plan that is proactively communicated with your entire organization.
Management Notes

Operations of Insurance Companies

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The most important insurance company operations consist of the following:

  • Ratemaking
  • Underwriting
  • Production
  • Claim settlement
  • Reinsurance

Insurers also engage in other operations, such as accounting, legal services, loss control, and information systems.

Rating and Ratemaking

  • Rating is a process of multiplying a rate determined by actuaries by the number of exposure units, and then adjusting by various rating plans.
  • In life insurance, the actuary determines the premiums for life and health insurance policies and annuities also determine the legal reserves a company needs for future obligations.
  • In property and casualty insurance, actuaries also determine the rates for different lines of insurance and also determine the adequacy of loss reserves, allocate expenses, and compile statistics for company management and for state regulatory.

Rating and Ratemaking

  • Ratemaking refers to the pricing of insurance and the calculation of insurance premiums.
  • A rate is the price per unit of insurance.
  • An exposure unit is the unit of measurement used in insurance pricing, which varies by line of insurance.
  • The person who determines rates and premiums is known as an actuary. An actuary is a highly skilled mathematician who is involved in all phases of insurance company operations, including planning, pricing, and research.

Underwriting

  • The insurer’s underwriting policy is determined by top-level management in charge of underwriting.
  • The underwriting policy is stated in detail in an underwriting guide that specifies the lines of insurance to be written; territories to be developed; forms and rating plans to be used; acceptable, borderline, and prohibited business; amounts of insurance to be written; business that requires approval by a senior underwriter; and other underwriting details.

Insurance Service Operations services

Operating model enhancement: Assessing process, technology, and organization and performance management against other insurers as well the company’s own strategy and goals to help transform its operating model, including shifting of fixed costs to variable, shedding non-differentiating processes and technology, and increasing focus on growth, distribution, and product innovation objectives.

Streamlining legacy processes and supporting technologies: Identifying ways to help improve customer service, employee morale, and cost efficiencies by upgrading policy administration and other systems, streamlining processes, and creating an efficient customer experience across product lines and distribution channels.

Performance benchmarking: Evaluating carrier performance against industry leaders to identify areas for potentially improving operations and customer service quality while managing costs.

Improved inforce management: Leveraging data and analytic tools and techniques to support cross-sell and up-sell programs, help improve retention, and enhance risk selection capabilities.

Strategic underwriting: Helping insurers create a base of profitable customer relationships by executing more effective risk selection and sound underwriting decisions that help balance risk and price. We also help carriers grow the business by identifying potentially profitable and high-risk customer segments using predictive tools and analytic models.

Claims cost containment: Streamlining and automating claims administration, devising ways to anticipate potential claim losses, enhancing processes for managing third-party suppliers, creating processes to help improve litigation results, and employing advanced fraud detection processes to help mitigate losses.

Enterprise cost management: Developing sustainable, cost-effective approaches to managing resources in alignment with the company’s strategic goals, as well as striving to refine processes, simplify the organization, rationalize infrastructure, and improve spend management.

Potential bottom-line benefits

  • Improve profitability
  • Reduce operating expenses by up to 20 percent
  • Increase process standardization and compliance
  • Improve system reliability and accuracy
  • Lower underwriting loss ratios by up to 7 points in an 18- to 24-month time frame
  • Reduce claims costs through improved claims management
  • Improve system reliability and accuracy
  • Enhance the customer experience (for both policyholders and distribution partners)
  • Increase ability to adapt to changing customer demands
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