POLICY ADMINISTRATION

This is another departmental description that may involve overlap with other sections or departments mentioned above or below. The general areas of concern here may be:

(a) General or Life insurance? : this is a most important question, since the policy document with each has a very different significance. With general insurance, technically there need not be a policy (although there almost invariably is) and it is seldom necessary to produce the original policy document when making a claim. With life insurance, however, the contract is non-cancellable by the insurer, and the policy documents are required to be produced at the time of a claim.

(b) Life insurance policies: as mentioned above, these must be produced when a claim is made. A mistake in a life policy is potentially much more serious than with General Business, especially since the policy may be assigned to another person and/or used as collateral with a loan and any assignees are expected to be relying on the veracity of the policy.

(c) New business procedures: especially with Life business (as noted) the process of verification and checking, both for factual accuracy and errors in document preparation, is very important. With any class of business, it is important that the policy should be prepared and issued as efficiently and as impressively as possible, for reasons that are obvious.

(d) Other procedures: this topic embraces such matters as error handling, policy correction, endorsement preparation and renewal procedures. With life insurance, once more, the great importance of the actual payment of the first premium must be considered. In other classes, the contract may commence without the receipt of a premium (often a non-marine policy requires that the insured ‘has paid or agreed to pay the premium’). With life insurance, the usual practice is that the existence of the contract depends upon the first premium being received.

CLAIMS
Once more, there are significant differences between Life and General Business claims. Specifically, the implications include:

(a) Life insurance claims: obviously, there will only be one death claim. It is quite essential for the claims handler to check each claim with the utmost care, as all sorts of considerations are involved, such as: (i) possible disputes or complications, for instance, problems may arise when the primary beneficiary cannot be traced, or more than one person lodges a claim as alleged assignees; (ii) possible outstanding policy loans; (iii) possible assignment, so that the claimant is not the original policyholder; (iv) uncertainties over actual death or the identity of the deceased; (v) dividend/bonus considerations with participating/with-profit policies. For similar reasons to those pertaining to underwriting (see 4.5 above), life insurance claims handling is frequently centralised.

(b) General insurance claims: the range of different types of claims is much wider than with life insurance. Also, it is quite possible that the amounts involved are enormous. Therefore, equal care should be taken in verification, although most claims being relatively small, the work is much more likely to be decentralised, sometimes with fairly junior staff having some degree of authority in claim settlement.

[Example: Claims may be relatively trivial, such as the loss of a camera, or exceedingly complex, such as a major explosion at a large power station.]

(c) Common features: there are two areas that must be the subject of attention in all insurance claims. These are: (i) Liability: is the insurer liable under the policy? When dealing with liability insurance, it must also be ascertained whether the insured is liable at law to the third party claimant. (ii) Quantum: how much is payable with the claim? With life insurances, it is usually pre-determined, but with other classes of business, this could involve complex and sometimes bitter discussion. (d) Significance: it has been said that an insurer stands or falls on the way it deals with its claims. There is truth in the remark and the insurance intermediary will want to know and feel confidence in the support he looks for in this area.

REINSURANCE
This is not an area where the insurance intermediary is likely to have a close association, but he should be aware that reinsurance is very important to the insurer. The aftermath of the September 11 terrorist attack is a testimony to this saying.

(a) Definition: insurance used to transfer all or part of the risk assumed by an insurer under one or more insurance contracts to another insurer, who may be referred to as a reinsurer in relation to such a transaction.

(b) Reasons: The major reason for buying reinsurance is security. It is very likely that an individual insurance claim is payable from the assets of the insurer, but it may be very inconvenient (and even costly) to produce large amounts of cash at short notice, since assets will mostly be in investments. A reinsurance contract may be so arranged as to entitle the reinsured to an immediate claim payment by the reinsurer in the event of a valid direct claim (i.e. a claim from the original insured) exceeding a pre-determined figure, even before the reinsured has actually paid the direct claim.

Another important reason for reinsurance is to increase an insurer’s ‘underwriting capacity’, which means the ability to accept proposed business with in mind all risk management considerations. Having reinsurance means that some risks may be accepted which might otherwise have to be declined in part or total.

(c) Methods: This does not concern insurance intermediaries, unless they handle reinsurance matters on behalf of insurers or reinsurers.

(d) Effects for the Insured: Reinsurance has no direct effect for the policyholder. He is not entitled to know, and probably has no need to know, that his insurance is being reinsured. That is a matter entirely between the insurer and the reinsurer(s). The insurer is always directly liable to the policyholder for the full amount payable under the contract irrespective of the financial condition of its reinsurers. Reinsurance, however, does give an added security that the insurer will be able to pay!

ACTUARIAL SUPPORT
An actuary may be thought of as a highly skilled mathematician. His particular expertise is not only in the collation and presentation of numerical information, but also in projecting and predicting future trends, based on available data and assumptions. It will immediately be understood, therefore, that such an expert has a very important role to play in insurance. Some specific observations:

(a) Life insurance: more than any other class of business, life insurance depends upon mathematical calculations (although they are very important to all classes). It is essential for the life insurer to know mathematical facts about mortality (death statistics) and projected interest earnings, for example.

Note: 1 The Insurance Companies Ordinance requires all insurers who carry on long term business to appoint a qualified actuary, acceptable to the Insurance Authority. 2 This Ordinance also requires long term insurers to carry out a valuation of all assets and liabilities at least once a year. This is perhaps the most important function of the actuary.

(b) General insurance: Their expertise, especially with long-tail business (insurance where claims arise and develop over a long period of time until, say, 5 years or even more after policy expiry, e.g. liability classes), is extremely valuable. This is particularly true when having to calculate outstanding claims reserves required. The Office of the Commissioner of Insurance requires motor and employees’ compensation insurers to annually conduct actuarial review of their reserves relating to such statutory classes of business.

Note: A corresponding term, ‘short-tail business’, refers to business where claims are mostly settled within a relatively short space of time after arising, e.g. motor (own-damage) and fire insurance.

(c) Generally: the application of an actuary's skills is very obvious in such areas as premium rating, the calculation of reserves and the valuation of liabilities.