Other Insurance Company Support Positions
There are other positions at insurance companies that operate behind the scene and can impact how you are treated as an insurance company policyholder. These positions support the infrastructure of insurance companies and can include Legal, Actuary, Subrogation, Internal Audit, Product Development, Information Technology and Management.
Legal
The Legal Department supports the Claims Department. It ultimately decides which claims should be fought (company position defended), which “outside” attorneys (independent, stand-alone law firms that represent insurance companies and their insureds) will be used in litigation support matters, and at what point a settlement should be considered. In my experience, most “internal” attorneys do not possess the same depth of legal courtroom expertise as those attorneys who practice law as a part of a law firm. Thus, outside attorneys usually represent the concerns of the insurance company in court.
Company attorneys may also provide support to Human Resources and other internal departments concerning setting of guidelines and policies, as well as providing guidance on internal claims and suits, such as Worker’s Compensation claims and employment-related practices suits for things such
as age discrimination. An ancillary reason that outside attorneys are used by insurance companies is to avoid possible conflict of interest claims by their insureds. If an insurance company uses its own attorneys to represent its insureds, it may be accused of acting in its own best interest—i.e., by trying to pay as little as possible for a claim, regardless of the merits.
An example of this would be a situation where an insurance company’s insured was sued as the result of negligent operation of a motor vehicle. If the injuries are substantial and the policy liability limits are low, the insurance company may not even want to spend money on defense of their insured. However, this exposes the policyholder’s personal assets. Courts have decided that the duty to defend is as important, if not more important, than the duty to pay for damages. Insurance companies may be able to “pay and walk,” but must be very careful in these situations.
Another reason outside law firms are used is because of the wide variety of subject matter expertise offered by external law firms. It is difficult for lawyers to be experts in all areas of law, thus, if expertise is required in special areas such as products liability, product recall, pollution, etc., attorneys are sought out who possess this specific expertise. Also, external attorneys have more experience in preparing for and presenting the insurance company’s position before a judge should the case move to trial.
Actuary
“Kill the actuaries” is the battle-cry of many underwriters and marketing representatives. The purpose of those in the Actuarial Department is to statistically analyze the rate structure of insurance policies by line of business (i.e., commercial property, commercial general liability, commercial automobile, homeowners and personal automobile) to decide whether a rate increase or decrease is needed, and if so, by how much.
Ratemaking is often a matter of massaging the numbers to say what you want them to say. For example, actuarial data for an insurance company’s State of Wisconsin homeowners policies (referred to as “book of business”) may call for an overall increase of 10% based upon statistics gathered by their Actuarial Department. This rate increase may be based on a review of the company’s income and expenses, where total premiums (income) received is compared to the company’s expenses. Insurance company expenses include claims paid, outstanding liabilities (known as “incurred but
not reported” or “IBNR” within the industry) and other company expenses such as payroll, benefits, overhead and profit.
This 10% rate increase recommended by Actuarial is then reviewed by Marketing and/or Underwriting (depending on where the responsibility for this task falls). Joint discussions are then held between these departments and senior management to determine the ultimate policy price increase that will be taken. Discussions may include areas such as statutory rate adequacy, marketing competitiveness, and future income and expense projections (including regulatory impact, time value of money, and soon).
Rate discussions are always a balancing act. The insurance company must charge enough money to stay solvent but cannot charge too much compared to its competition. If pricing gets too far above competitor pricing, the insurance company is likely to not only shut down new business income, but may also lose existing business on the books. The result is that profitability will suffer. An additional factor that insurance companies must keep in mind is that their best customers may leave (i.e., automobile policyholders with good credit ratings, good driving records and claims-free) if prices are raised too much. The customers who are left will be less profitable, which further deteriorates the insurance company’s bottom-line.
My experience is that a great deal of emphasis is placed upon marketing competitiveness during actuarial discussions. The Marketing Department often plays a lead role in discussions and is typically successful in convincing senior management that, although actuarial data may call for a 10% statewide increase, a lower percentage of increase should be implemented due to marketplace competitiveness.
Understand that the above example is quite simplified. In reality, much fine-tuning takes place during the ratemaking process. For instance, rates in one territory with poor experience may be supported (off-set) by another territory with good experience.
This means that, rather than taking a 10% statewide homeowners rate increase, insurance companies segment rate information using a multitude of factors. Using homeowners as an example, some of the factors considered include the age of the home, its value, the geographical territory, liability values, protection class and much more. As a result of this ratemaking process, the insurance company’s homeowner rates may ultimately decrease for homes located in Milwaukee, Wisconsin, but this will be offset by taking a 20% increase for homes insuredin Superior, Wisconsin. Therefore, the
desired net effect of a 10% overall increase for the insurance company as a whole is achieved.
Once new rates are agreed upon, the company files its rates with the Department of Insurance in the state(s) where the new rates will be in effect. Where a file-and-use law is in effect, the insurance company must submit its new rates before they become effective. Actual approval is not required before the rates are used. However, the Department of Insurance can disapprove the rates if they find them in violation of any statutes. To play it safe, insurers often wait until after the Department of Insurance has reviewed and approved their rates just to make sure that their company will not need to recall their new rates after they have been published and distributed to their agency sales force.
If a prior-approval law is in effect, all rates must be filed with the state’s Department of Insurance (Insurance Commissioner’s office) prior to use and must be formally approved or disapproved.
It cannot be over-emphasized that the setting of rates presents a difficult dichotomy for insurance companies. Regardless of what the mathematical models may say, the insurance company must compete in the real world against other companies trying to sell similar products. If an actuary suggests a rate increase of 20% and this puts the insurance company’s pricing structure at a total of 15% over marketplace competitors, very little additional new business is likely to be written. On the other hand, by completely ignoring the actuary’s findings, the company is jeopardizing its surplus (the funds available for paying future claims).
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