As a 21 year old soon-to-be college senior, I have always been told that insurance was essential and I would nod my head in agreement even though I had no idea how it worked. The extent of my knowledge of insurance was that you pay a predetermined amount of money to a company every month and in the event that you had some kind of accident, they would be able to cover it for you. In a nutshell, yes, this description is accurate but there is much more that goes on during that process. My objective is to explain how an insurance company works in the simplest way possible so that everyone understands.
Underwriting
The underwriters of an insurance company are the ones responsible for writing policies for clients. Their job is to determine which clients to take on and how much coverage they will offer them. They also determine the premium – the amount of money to charge – during the duration of the policy. The premium is determined by the amount of risk that the underwriter is deciding to insure. For example, a house that was built in the 1960s with old wiring and old shingles will cost much more to insure than a brand new house. This is because the potential for a major property loss is much greater with the older house. This example might seem obvious, but much more goes into the underwriting process. Factors such as the distance to the nearest fire station, the presence of a pool, or the age of the residents in the house all play a role in determining the premium.
To ensure that they have a good understanding of the asset that they’re insuring, underwriters can order inspections. These inspections are conducted by professionals and the reports that they write are sent to the underwriter. If the underwriter sees any policy violations they can contact the insured individual to correct those issues, and if they decline to cooperate then the underwriter can issue a cancellation or they can non-renew the policy.
Overall, the underwriters are the ones who are responsible for writing the appropriate amount of coverage to the insured clients, while at the same time collecting enough premium so that the company has enough money to pay the claims that they receive.
Claims
The claims department is responsible for processing and paying claims made by insured customers. Put simply, the claims adjusters are the ones that you speak to when you need compensation for an insured loss that you have experienced.
This process starts by reporting the claim. For example, if you are in a car accident, you would report this to your insurance company as quickly as you can. A “first notice of loss” form is created and assigned to an adjuster who then begins to process the claim. They typically start by reviewing the relevant policy to determine whether or not there is coverage for the reported loss.
After the coverage is verified, the adjuster will typically reach out to the insured to get their side of the story. This not only helps the adjuster get a clearer sense of what happened, but it also gives them a chance to root out the possibility of insurance fraud. If the story that the insured tells the adjuster doesn’t make any sense, or the information doesn’t match what is stated on the first notice of loss form, then the adjuster can investigate further for the possibility of fraud.
If the adjuster doesn’t suspect any fraud, they will continue to process the claim by reviewing the police report of the accident. They will also examine photos of the scene and the damage to the vehicles to try to decipher who was responsible for the accident. Throughout this process the adjuster is constantly setting aside the amount of money they think would adequately settle a claim. This money is called the loss reserve and the amount changes when the adjuster discovers new information such as medical bills or more damage than they previously thought.
If the insured individual is found to be at fault then the adjuster must pay for the other party’s vehicle damage/medical bills as well their insured’s damage/medical bills up to the amount established in their policy. Conversely, if the insured individual is not found to be liable then the adjuster would pay for their vehicle damage/medical bills and then they would attempt to recover that money from the other party’s insurance company. This process is called subrogation.
Ultimately, once the liability has been established and the funds have been distributed, the claim has been processed and settled. However, this process can take months or years to be completed. In general, cooperation from all parties makes this process as quick as possible.
Accounting
The accounting department is responsible for processing payments as well as maintaining accurate financial statements for the company. They process checks from policyholders on a daily basis and they also make payments out to agents when they earn commissions.
Along with processing payments, the accounting department is also responsible for producing quarterly reports on the financial status of the company as well as yearly reports that are reviewed by state insurance bureaus. The quarterly reports are snapshots of the company’s financial status throughout the year so that management can track whether they are progressing or regressing and make real-time adjustments. The yearly reports are usually much more in-depth and some of them are sent to the state insurance bureau to be reviewed. These reviews are looked over by the bureau to determine whether or not the company is being financially responsible. If the company is found to be maintaining financial responsibility, their insurance rating can increase, which would help that company build more trust with their policyholders. If their reports show that they haven’t been responsible, their insurance rating could drop which can potentially cause policyholders to switch carriers.
In a nutshell, the accounting department is responsible for managing the company’s money so that they can responsibly grow and maintain trust with their customers.