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Insurance Company Operations

The document is a textbook titled 'Insurance Company Operations' authored by Miriam A. Orsina and Gene Stone, focusing on the operations of life insurance companies, including their management, product development, marketing strategies, and regulatory compliance. It provides insights into various functional areas such as financial management, human resources, and customer service, primarily within the context of the United States but also includes international perspectives. The text has undergone extensive review by industry experts to ensure accuracy and completeness.

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99 views536 pages

Insurance Company Operations

The document is a textbook titled 'Insurance Company Operations' authored by Miriam A. Orsina and Gene Stone, focusing on the operations of life insurance companies, including their management, product development, marketing strategies, and regulatory compliance. It provides insights into various functional areas such as financial management, human resources, and customer service, primarily within the context of the United States but also includes international perspectives. The text has undergone extensive review by industry experts to ensure accuracy and completeness.

Uploaded by

inform.afo01
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
Miriam’A:-Orsina, FLMI, PCS; ARA, PAHM. Gene’Stone; FLMI, ACS, CLU: ; LOM egal Tsing Atianta, Georgia ‘wwiloinacorg Information inthis'text may hi been changed or updated since! publication date. For current “updates, visit wawlomaiorg. ‘LOMA 299 Text — INSURANCE COMPANY OPERATIONS ‘Authors: ‘Miriam A. Orsina, FLMI, PCS, ARA, PAHM. Gene Stone, FLMI, ACS, CLU ‘Manuserigt Editor: ‘Nicholas L. Desoutter, FLMI, PCS, AAPA ‘Exam Editor: Kelly W. Neeley, FLMI, ALHIC, ACS, AIA, PAHM Project Manager: Gene Stone, FLMI, ACS, CLU ‘Production Manager: Stephen J. Bollinger, ACS Copyeditor: Indexer: ‘Typesetters: ‘Mary Rusch “Amy Souwan Production Coordinator: Amy Souwan Print Buyer: Audrey H. Gregory, ACS Permissions Coordinator: _Iris F. Hartley, FLMJ, ALHC Administrative Support: ‘Mamunah Carter Natalie Sanders Cover Design: Kathleen Ryan, FLML, PCS, AIRC, AIAA, ARA, PAHM. Copyright © 2005 LOMA (Life Office Management Association, Inc.| All xights reserved. 13 12 11 10 09 08 07 09876543 ‘This text, or any part thereof, may not be reproduced or transmitted in any form or by any means, electronic or mechenical, including photocopying, recording, storage in an information retrieval system, or otherwise, without the prior written permission of the publisher. While a great deal of care has been taken to provide accurate, current, and authoritative information in regard to the subject matter covered in this book, the ideas, suggestions, general principles, conclusions, and any other information presented here are for general educational purposes only. This text is sold with the understanding that ir is neither designed nor intended to provide the reader with legal, accounting, investment, marketing, or any other types of professional business management advice. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging in-Publication Data Orsina, Miriam A.; 1958- Insurance Company Operations / Miriam A. Orsina, Gene Stone.~2n ed. Includes index.209.2 . 1. Insurance companies--Management. I. Stone, Gene, Il. Life Office Management Association. II. Title. F1G8075.8747 2005 368/,0068--de22 2004048790 ISBN 1:57974-209-2 Printed in the United States of America vi surance Commany Orerarions SRERSECEECE Aeon ETERS Preface ... Acknowledgments ... ‘Textbook Review Panel... LOMA Staff. Code of Professional jor LOMA Designees Introduction... ‘Using LOMA Study Aids.. : “Test Preparation Guide and Instructor's Kit. Using the Quick Review CD-ROM Accompanying This Text xxiii Seta eraee gesagt eetaiaeeaggC OSes Chapter 1: Life Insurance Company Operations ‘The Roles of Life Insurance Companies Providers of Financial Security... i é Financial Intermediaries .. sane 9 Life Insurance Company Operations : Integration Among Functional Areas .. Risk Management in Life Insurance Companies... Strategic Planning for Operations... : Strategic Alliances Outsourcing.. 22 8 7 Chapter 2: Competition, Regulation, and Ethics in the Life Insurance Industry .. : Competition in the Life Insurance Industry a Recent Reforms in the U.S. Financial Services Industry... Sources of Competition for Insurance Product Sales Regulation of the Life Insurance Industry Tsurance Regulators.. Areas of Insurance Regulation. Ethics for Life Insurance Companies. ‘The Importance of Ethics ee Improving Ethics in the Life Insurance Industry... Chapter 3: Life Insurance Company Formation and Restructuring. ‘The Corporate Structure of Life Insurance Companies 49 Requirements for Incorporation .. ae Incorporating in the United States Insurance Company Licensing Licensing of Life Insurance Companies i Stock and Mutual Life Insurance Companies suns Proportion of Stock Companies to Mutual Companies Participating and Nonparticipating Life Insurance Policies . Changing the Corp ‘Mergers and Acquisitions .. Holding Company Systems Demutualization ‘Mutual Holding Company Conversion... Chapter 4: The Organizational Structure of Insurance Companies .... Functional Areas in a Life Insurance Company Marketing..... eee Actuarial... Underwriting... ‘Customer Service Claim Administration Annuity Administration Investments ‘Accounting Information Technology Legal Operations Corapliance Human Resources ... ‘Components of the Organizational Stcucture ‘The Organization Chart Pyramidal Structure and Levels of Authority Centralized and Decentralized Organizations Line Units and Staff Units ‘Traditional Ways Insurers Organize Work Activities Organization by Function ssn. Organization by Product Organization by Territory Organization by Profit Center or Strategic Business Unit Alternative Organizational Shapes Committers orn Chapter 5: Marketing Activities and Strategies snes 100 ‘The Marketing Mix .. 101 Positioning.......... 103 Market Identification 0.00.0... ~ 104 Market Segmentaticn ....... » 104 ‘Target Marketing. 105, Conrets @® vii jit msumance Commnty OreRATIONS ‘Matching Products to Target Markets. ‘Marketing Information Internal Marketing Environment External Marketing Environment .. ‘The Marketing Plan ..... : - Developing the Marketing Plan Elements of the Marketing Plan... Communicating the Marketing Plan .. Control and the Marketing Plan.. Marketing Strategies for Company Growth . International Expansion... Chapter 6: Product Development Personnel Involved in Product Development .. Product Development Teams ... ‘The Product Development Process. Product Planning. E Comprehensive Business Analysis ‘Technical Design.. Product Implementation... : Sales Monitoring and Process Review... ‘The Importance of Effective Produet Development... Chapter 7: Pricing Insurance Products .. . 148 Setting Pricing Objectives and Strategies... 149 ‘Making Assumptions for Pricing “151 Investment Earnings and Interest Rates « 152 Cost of Benefits and the Mortality Factor. 153 sn 161 164 165 ‘The Loading Charge ... Bundled and Unbundled Pri Bundied Pricing for Life Insurance Bundled Pricing for Anmtities une Policy Reserves and Cash Values Profit-Testing Actuarial Assumptions Managing Pricing Results .... Favorable Deviations Adverse Deviations . ing... 170 Chapter 8: Product Distribution... 172 Distribution Systems ... 173 Personal Selling Distribution Systems .. 174 ‘The Sales Process... : ace 178 Agency-Building Distribution Systems. . 178 ‘Nonagency-Building Distribution Systems s.r 184 186 187 188 188 189) Financial Institutions Distribution Systems..... Broker/Dealets weconnev Banks Insurance Companies. Direct Response Distribution Systems Direct Response Distribution Activities. Distribution Channel Decisions.. Characteristics of Customers in Target Markets ‘Characteristics of the Products the Company Sells, Costs Associated with Each System baa Degree of Control the Insurer Intends to Exercise over Distribution Characteristics of the Insurer : Insurer's External Marketing Environment 0 192 194 194 195 195 196 196 Chapter 9: Home Office Support for Distribution Systems ..... 202 Support for Ageney-Building Distribution Systems Recruiting and Contracting Licensing and Training... Compensation Sales Support Technology Support. Support for Nonagency-Building Distribution Systems... Support for Financial Institutions Distribution Systems .. Broker/Dealers. Banks . ‘The Importance of Sound Underwriting .. Antiselection and Persistency Organization of Underwriting Underwriting Philosophy and Underwriting Guidelines Fundamentals of Individual Life Insurance Underwriting Risk Assessment Factors a Fundamentals of Group Life Insurance Underwriting Risk Assessment Factors Regulatory Requirements and Underwriting Unfair Discrimination... : Consumer Privacy ‘The Underwriting Process Field Underwriting... Reviewing the Application for Insurance .. Gathering Additional Information .. ‘Making an Underwriting Decision Reinsuring Excess Risk .. Basic Concepts of Reinsurancé Retention Limits comes @ ix x @D isummnice Commany Overarions Chapter 11: Customer Service .... Insurance Company Customers .. External Customers... Internal Customers Insurance Producers Who Provides Customer Service? Why Is Customer Service So Important? Effective Customer Service "The Changing Role of Customer Service Representatives, Customer Service Transactions for Individual Life Insurance and Annuities. Policyowner Information Changes Changes in Ownership of the Policy ‘Annuitant and Annuity Date Changes Beneficiary Changes . Premium Payment Changes Insurance Producer Changes. Life Insurance Coverage Changes. Fund Allocations for Variable Products Determining Life insurance Cash Values, Policy Loans, ‘and Policy Dividends .. Cash Surrenders and Wi Life Insurance Policy Reinstatements. Policy Replacement Customer Service Transactions for Group Life Insurance and AMBUItIES ween neetene Evaluating Customer Service... Evaluating the Timeliness of Customer Service. Evaluating the Quality of Customer Service Customer Relationship Management. ‘Technology and Customer Service Delivery Chapter 12: Claim and Annuity Benefit Administration .. “The Life Insurance Claim Administration Function ... Claim Philosophy. 5 . Claim Staff omen Regulation of Claim Administration ... ‘The Life Insurance Claim Decision Process ... Verification of Policy Status .. Verification of Coverage of the Insured. Verification of the Loss .. Verification of Policy Coverage of the Loss Handling Contestable Claims Making a Claim Decision Life Insurance Claim Investigation Claim Fraud... 7 Confidentiality Claims on Reinsured Policies Notification of Claim: Claim Decision: Administration of Annuity Policy Benefits .. Annuity Death Benefit Administration .. Annuity Payout Administration Chapter 13: Information Management .. ‘The Importance of Information Management Elements of Information Systems .. Hardware and Software Databases. Communications Technology . Security for Information Systems. ‘Types of Information Systems .. ‘Transaction Processing Systems. Decision Support Systems sm Expert Systems... Operations Support Technologies *» “Database Management Systems Document Management Systems . Automated Workdlow Systems. Electronic Commerce. Insurance Company Web Sites Business-to-Business e-Commerce .. Information Management for ete Company Functions ... Marketing. i New Business Processing ............. eee Customer Service .. Life Insurance Claim Administration Annuity Benefit Administration ... Chapter 14: An Overview of Financial Management ‘The Responsibilities and Organization of Financial Management . Basic Accounting Documents Balance She secon po Income Statement... Linking the Income Statement to the Balance Sheet Salyency snd Praicbiisy Solvency .. aa Profitability . fi Planning Financial Goals and Strategies .... Financial Goals Financial Strategies sn. ‘Measuring Financial Results contents @ xi at © sunsee Courter Oreusons ‘Managing the Insurer's Capital and Surplus Managing Cash Flows ‘The Effect of Cash Flows on Sol Asset/Liability Management Chapter 15: Managing Investments . Organization of Investment Operations. Establishing an Investment Policy investment Department Activities Returns on Insurer Investments .. Forms of Return ... Return and Risk .. Return, Inflation, and Deflation... Return and Diversification . Regulation of Insurer Investments Insurance Company Investments... ‘Buying and Selling Securities Bonds ... Stock ‘Mortgages Real Estat Policy Loans .. Investment Strategies... Chapter 16: Accounting .. Users of Accounting Information Internal Users External Users . : Organization and Responsibilities of the Accounting Department Financial Accounting 386 ‘Accounting Standard Financial Accounting Operat 390 Financial Reportin; 393 ‘Management Accounting . Budgeting. : 401 Cost Accounting “403 ‘Auditing 404 ET ages sess sez e ce eceee eee Chapter 17: Human Resource Management ee ‘Human Resource Planning .. Projecting Staffing Needs. Estimating the Labor Supply .. Planning for International Operations Cons Recruitment... Internal Recruitment . External Recruitment Employee Selection .. Application and Screening Pre-Employment Testing Employment Interviews Background Checks and Drug Test TrBIMINg rrr Performance Evaluation... Graphic Rating Scale Appraisal. Essay Appraisal Critical Incident Evaluation . Ranking .. Management by Objectives... 360-Degree Feedback «nnn Compensation ..... Pay Seales sn Benefits and Services... Employee Retention... Separation of Employees . ‘Chapter 18: Legal and Compliance Operations ....... Organization of Legal and Compliance Operations Responsibilities of the Legal Department... Incorporation and Changes in Corporate Structure. Product Development ... : Contracts on Product Distribution Claim Administration... Employee Relations . Litigation Regulatory Compliance... Prevention 431 Monitoring . Education and Training oan Solvency Compliance and Market Conduct Compliane 442 Market Conduct Compliance in the United States... 44a Glossary... 455 Index .... 507 © rset Commer OrexAMIONS Insurance Company Operations, Second Edition, describes how life insur- ance companies operate: how they conceive, develop, distribute, issue, and administer life insurance and annuities. In addition, the book examines the roles of various insurance company support functions, including infor- mation management, financial management, investment management, accounting, human resource management, legal operations, and com- pliance. Although the text focuses primarily on the United States, it includes information about life insurance company operations from vari- ous countries around the world. ——_— Acknowledgements ‘This text was created as a joint effort of professionals from insurance and financial services companies and LOMA staff. On behalf of LOMA and its membership, I would like to thank all the individuals who gave their time and energy and shared their knowledge and expertise with us as we developed this textbook. Textbook Development Panel Insurance Company Operations underwent extensive review by indus- try experts during both the initial development process and subsequent revision. The source materials, suggestions, and critical evaluations sup- plied by LOMA‘ text reviewers were essential to the book's acouracy and completeness. ‘The author of the first edition received valuable input from the follow- ing text development panel members: Robert Ahischwede, FLMI, CLU; Robert E. Beckoff, FLMI, ACS; John F. Brancato, FLMI; Roger W. Jolliffe, FSA, ECLA, FLMI, ACS, CEP; Bruce Lovett, FSA, MAAA; Lawrence B. Ruark, Ph.D., CLU, FLMI, ACS, AIAA, AIRC; Lloyd M. Spencer, Jr, FSA; Patricia E. Stevenson, FLMI, ACS, AIAA, AIRC; Linda Theodore, ASF, AIRC; and Sandi L. Weinberg, FLMI, ACS, AIAA, AIRC, HIA,. Numerous other industry experts reviewed selected portions of the text. Much of the work done by these reviewers continues into the second edition. ‘The second edition of the text underwent similar review by a panel of industry experts who reviewed and commented on the text's outline and chapters. For reviewing the entire text, answering numerous author ques- tions, and providing ideas and documents for supporting materials, we wish to thank the following individuals: * Victor A. Baty, CLU, ChEC, Consultant, Marketing and Market Research Presce xvii * Christopher C. Cook, FLMI, FALU, CLU, Managing Director, Life Underwriting Department, Travelers Life and Annuity, a member of Citigroup * Alan L. Fry, CLU, ChFC, CEP, FLMI/M, AAPA, PCS, President and Chief Executive Officer, e-Consulting Services, Inc., Retirement Planning Consulting * Sue Jacobson, FLMI, ACS, Manager, Contact Center, CUNA ‘Mutual Life Insurance Company + Karen A. Johnson, FLMI, ARC, AIRC, Second Vice President, ‘Metropolitan Life Insurance Company ‘+ Marjorie G. Kennedy, FLMI, CLU, Senior Accountant, Security Financial Life Insurance Company + Tim Kuraszek, FLMI, ACS, AIRC, HIA, ALHC, Independent Reviewer + Lawrence B. Ruark, Ph.D., CLU, FLMI, ACS, AIAA, AIRC, AAPA, ARA, State Filing Consultant, Sun Life Assurance Company of Canada (U.S.| + Patricia B. Stevenson, FLMI, ACS, AIAA, AIRC, AAPA, Compliance and Product Specialist, The Baltimore Life Companies We also thank the following individuals who contributed their time “and knowledge to the project by reviewing portions of the text: + Monica P. Arcos, FLMI, ARA, PFSL, Independent Reviewer + Khong Bee, Chartered Insurer, Head, Customer Service, Great Eastern Life * M. Steven Brotherton, [Link]., CLU, ChFC, Executive Benefits Specialist, Financial Consultant, AXA Advisors, LLC * Warren A. Carter, ASA, MAAA, Teachers Insurance and Annuity Association (retired), Recipient, 1991 FLMI Insurance Education Award + C. Joseph Dahl, FALU, CLU, FLMI, Vice President, Underwriting, Sun Life Financial + James B. Hiers Ill, FLMI, ALHC, HIA, ACS, Assistant Vice President, Munich American Reassurance Company xvii @_nsumce Compwey OPERATIONS. * Deborah L. Hunter, FLMI, CLU, ChFC, ACS, AIAA, AIRC, Compliance Specialist, Great American Financial Resources, Inc. + Patricia A. Jackson, J.D., LLM, Senior Counsel, Metropolitan Life Insurance Company « John H. Jones, Jr., FLMI, AALU, CLU, ChFC, Underwriter, USAA * Dave Rose, FLMI/M, ARP, Assistant Vice President, Information ‘Technology, Jefferson Pilot Financial + Ellen I. Whittaker, FLMI, Director, Fixed Income Investments, The ‘Guardian Life Insurance Company of America « Berry D. Wilson, CPA, CISA, FLMI, Head of Operational Risk ‘Management, ING Insurance Americas LOMA Staff Writing a LOMA textbook is a collaborative effort not only with our industry reviewers, but also with other LOMA staff members who gener- ously contribute their time and expertise. These individuals from Educa- tion and Training Products include Gene Stone, FLMI, ACS, CLU, Senior Associate, who was the author of the first edition of this text and, as Project Manager for the second edition, made numerous important con- tributions to the text and the entire revision process; Nicholas L. Desoutter, FLMI, PCS, AAPA, Senior Associate, who served as manu- script editor for the project, Susan Conant, FLMI, HIA, CEBS, PAHM, Senior Associate, who drafted one of the text chapters and provided advice on other sections; Joyce R. Abrams, |.D., FLMI, PCS, AAPA, AIRC, ARA, AIAA, PAHM, ALHC, HLA, MHP, Assistant Vice President; Mary C. Bickley, [.D., FLMI, CLU, AIRC, ACS, AIAA, PAHM, AAPA, Senior ‘Associate; Harriett E. Jones, J.D., FLMT, AIRC, ACS, Senior Associate; Jena L. Kennedy, FLMI, ALHC, ACS, PAHM, CLU, Assistant Vice Presi- dent; Monica R. Maxwell, J.D., FLMI, ACS, AIRC, ARA, ATAA, Senior Associate; and Elizabeth A. Mulligan, FLMI, PCS, AAPA, FLHC, AIRC, ‘ARA, AIAA, PAHM, Senior Associate. Thanks go to Mark Adel, FLMI, PCS, AAPA, AIRC, PAHM, Senior Associate, who developed the LOMA 290 Quick Review—Insurance Company Operations CD-ROM that accompanies this text. Also to be thanked are Mamunah Carter, Admin- istrative Assistant Ill, and Natalie Sanders, Administrative Assistant 1, who provided administrative support Individuals in the Examinations Department who contributed to the text include Kelly W. Neeley, FLMI, ALHC, ACS, AIAA, PAHM, Senior Associate, who served as the examinations editor, and Julia K. Wooley, FLMI, ACS, ALHC, HIA, MHP, Assistant Vice President. In LOMA’s Production Department, thanks g6 to Stephen J. Bollinger, ACS, Production Manager, who oversaw the production of the book and handled the technical development of the Quick Review, Amy Souwan, ‘who served as Production Coordinator, Allison Ayers, who performed the typesetting; and Mary Rusch, who developed the index for the text. Audrey H. Gregory, ACS, made all printing arrangements. Also to be thanked are Diana Eastman, who copyedited the text, and Iris F, Hartley, FLMI, ALHC, who obtained the permissions for use of copyright materials. Also deserving of thanks are the individuals in LOMA’s Information Center who provided valuable research services: Olivia Blakemore, ACS, ‘Technical Administrator; Mallory Eldridge, Research Analyst/Writer; and Janet Smith, Researcher. Talso want to thank Katherine C. Milligan, FLMI, ACS, ALHC, Vice President and William H. Rabel, Ph.D., FLMI, CLU, Senior Vice Presi- dent, both of the Education and Training Division, for the continuing ‘~sisupport and encouragement they provided throughout the project. Miriam A. Orsina, ELMI, PCS, ARA, PAHM. Atlanta, Georgia 2005 Prerace xix soe @B_srsuessce Company OPERATIONS Code of Professional Ethics for LOMA Designees ‘The code of ethics approved by the Council is stated below: Individuals earning LOMA designations shall adhere to LOMA’s Code of Professional Ethics, which consists of the following canons: ‘The Designee shall discharge all duties with honesty, integrity, objectivity, fairness, and professionalism. ‘The Designee shall deal with others in a manner in which he or she would want to be dealt with by others. ‘The Designee shall place the public interest above his or her own interest. ‘The Designee shall continually strive to master all aspects of his or her business and to improve his or her professional knowledge and skills. ‘The Designee shall diligently strive to ascertain clients’ best interests and seek to ensure that these interests are met. ‘The Designee shall respect clients’ privacy and the confidentiality of information they provide, within the constraints of the law. ‘The Designee shall comply with the spirit and letter of the law in all his or her activities, ‘The Designee shall hold his or her professional designation proudly and seek to enhance the reputation of the designation, as well as the financial services industry, in every way. sedi @_nsveance Comenney OreRar1 ONS ‘This text is designed for students who are preparing to take the examina- tion for LOMA 290—Insurance Company Operations—which is part of the Fellow, Life Management Institute (FLMI) Program. Each chapter in the text includes features designed to help you organize your studies, reinforce your understanding of the materials, and prepare for the exami- nation. As we describe each of these features, we give you suggestions for studying the material. + Learning Objectives. The first page of cach chapter contains a list of Jearning objectives to help, you focus your studies. Before reading each chapter, review these learning objectives. Then, as you read the chapter, look for material that will help you meet the learning objectives. + Chapter Outline. The first page of each chapter contains an outline of the chapter. Review this outline to gain an overview of the major topics that will be covered; then scan through the chapter to famil- iarize yourself with the presentation of the information, Looking at the headings and figures will give you a preview of how the various subjects relate to each other. + Key Terms, This text reviews and explains the key terms and con- cepts associated with life insurance company operations. Important terminology is highlighted with bold italic type when the term is defined, anda list of these key terms appears at the end of each chap- ter. All key terms also appear in a comprehensive glossary at the end of the book. As you read each chapter, pay special attention to the key terms. + Figures and Insights. Figures and insights that appear throughout the text illustrate and amplify the text’s discussions of selected important topics. Note that information contained in figures and insights may be tested on the examination for this course. * Glossary. A comprehensive glossary containing definitions ofall key terms appeats at the end of the book, Following each glossary entry is a number in brackets that indicates the chapter in which the key term is defined, The glossary jncludes references to important equiva- lent terms and acronyms. ‘The text and study aids for LOMA courses may be revised periodically. ‘To ensure that you are studying from the correct materials, check the current LOMA Education and Training Catalog for a description of the texts and study aids assigned for the examination for which you are preparing, Life Insurance Company Operations @ After reading this chapter, you should be able to Deseribe the different types of financial institutions that comprise the financial services industry Describe the roles that life insurance companies play in the financial services industry List the essential operations that all life insurance companies undertake Explain the concepts of risk and risk management Explain the purpose of strategic planning for life insurance companies Explain how insurers use strategic alliances and outsourcing as part of strategic planning for operations Using LOMA Study Aids LOMA has prepared study aids designed to help students prepare for the LOMA.290 examination. LOMA recommends that you use all of the study aide available for this course. Studies indicate that students who use LOMA study aids consistently perform significantly better on LOMA. examinations than students who do not use these study aids. Test Preparation Guide and Instructor's Kit Inaddition to this book, LOMA‘s Test Preparation Guide (TPG) for LOMA 290 is assigned reading for students preparing for the LOMA 290 exami- nation. Used along with this textbook, the TPG will help you master the course material. The TPG includes practice exam questions, a full-scale sample examination in both paper and electronic format, and answers to every question in the TPG, LOMA has also prepared an Instructor's Kit for LOMA 290, designed to help company instructors prepare to teach preparatory classes for the ‘LOMA 290 examination Using the Quick Review CD-ROM Accompan' This Text “The CD-ROM found on the inside back cover of this text contains the LOMA 290 Quick Review—Insurance Company Operations, which gives you an overview of the materials found in this text. The Quick Review is designed for instructors and students for the LOMA 290 examination. Ss twermooucion GB vodit roviding life insurance protection and wealth accumnlation tools for millions of customers around the world requires the skills, energy, and creativity of the many people who work for life insurance companies. Simply defined, a life insurance company is a company that underwrites and sells life insurance, which is insurance that provides protection against the economic loss caused by the death of the person whose life is insured. However, many insurance companies that sell life insurance also sell other insurance products, such as annuities, health insurance, and even property/casualty insurance. An annuity is a legally enforceable written agreement between an insurance company and a policyowner under which the insurer promises to make a series of periodic payments to a named person in exchange for a premium or a series of premiums. For some life insurance companies, an- nuity sales generate more premium revenue than do sales of life insurance. Because annuities are such an important product for many life insurance companies, this text includes information about annuities as well as about volifesingbrance, “The purpose of this course is to describe how life insurance companies operate: how they are formed and organized; how they conceive, develop, distribute, issue, and administer life insurance and annuities; and the roles of their support units in achieving corporate success. By reading this book, you will learn what life insurance companies do and how they do it. You will understand the big picture of life insurance company operations and also many of the details that make up the big pieture. If you are an employee ofa life insurance company, this book will help you see how the work you perform fits into the entire scope of your company’s business. You will learn how your individual efforts affect your company’s relationships with its customers and its overall performance. Throughout this text, when we use the term insurance products, we are xeferring to both life insurance and annuities. In some instances, we specify ““ife insurance” or “annuities” to indicate that the discussion applies to one type of product, but not to the other. The term policies refers to both life insurance policies and annuity policies unless we specify “life insur- ance policies” or “annuity policies.” Similarly, the term policyowners refers to both life insurance policyowners and annuity policyowners unless we specify otherwise. Occasionally, we refer to a specifi type of life insurance or annuity. Figure 1.1 reviews some types of life insurance and annuities that are mentioned in this text. - - This chapter provides an overview of life insurance company roles and operations. It also describes risk management and strategic planning con- siderations for life insurance company operations. To help illustrate some of the concepts involved in life insurance com- pany operations, this book includes a series of narratives involving a 12002, annuity prem. ums cecounted for the Largest percentage (53 percent) of USS. life insurers’ premiams. However, in Taiwan, life insurance ac. ‘counted for 79 percent of life insuzers’ coral Premiums. ssebbec ee Life insurance products can be classified as term life insurance, cash value life insurance, or endowment life insurance. + Term life insurance provides coverage during the period specified in the policy. The death benefits payable only i the insured dies during the period specified. «Cash valuelife insurance, also known as permanent life insurance, provides coverage throughout the jnsured's lifetime and includes a savings element, which is known as the policy's cash value. Many: ‘cash valve life insurance policies guarantee that the policyowner will earn at least a specified rate of interest. Variable life insurance is a form of cash value life insurance in which the face amount and cther values may vary, reflecting the performance of the investment subaccounts selected by the policyowner. Variable life insurance policies do nat guarantee either investment earings oF 2 minimum cash value. «Endowment life insurance provides a policy benefit payable either when the insured dies or on Stated date if the insured is stl alive on that date. Endowment insurance isa popular product outside the United States_- particularly in countries in Southeast Asia—where tax laws treat it favorably. ‘Annuities are categorized as immediate or deferred based on when the insurer begins making periodic annuity payments. «An immediate annuity provides periodic income payments that are generally scheduled to begin cone annuity period —usvally one month or one year—after the date on which the policy is purchased. {mnmediate annuities are often used to convert a lump-sum payment into an income stream. + Undera deferred annuity, periodic income payments are scheduled to begin more than one annuity period-—often many years —after the date on which the policy is purchased. Deferred annuities are brimariy used to accumulate savings, but they give the policyowner the right to receive a periodic income after the accumulation phase. Annuities are classified as fixed or variable according to the type of guarantees they offer. + Under a fixed annuity, an insurer guarantees no loss of the principal amount invested—that is, the premiums paid-and the minimum interest rate that will be applied to premium payments, «A variable annuity is an annuity under which the amount of the policy's accumulated value and/or the amount of the periodic income payments fluctuate in accordance with the performance of ene or ‘more specified investment funds. a “Annuities can also be classified according to the payout option chosen by the policyowner to indicate how the insurer should distribute the policy's accumulated value. + A life annuity provides periodic payments for atleast the lifetime of the annuitant + An annuity that provides periodic payments for a stated period of time, regardless of whether the annuitant is living at the end of the period, is calied an annuity cer ‘CHAPTER 1; LiFe INSURANCE Commun Orsearions «=» @_ 5 hypothetical U.S. insurer—the Best Friend Life Insurance Company—as well as its employees, distributors, and policyowners. We call these narratives Best Case Scenarios. These scenarios are not meant to portray actual events ox the specific procedures of any particular life insurance company. The scenarios demonstrate typical activities of life insurance companies, home office personnel, and distributors as they provide financial protection for their customers. For an introduction to Best Friend and certain characters whom we will revisit throughout the book, read Best Case Scenario 1.1. The Roles of Life Insurance Companies Life insurance companies are an important component of the financial services industry, which consists of financial institutions that offer prod- ucts and services to help people, businesses, and governments meet their ‘Tom Carpenter, age 31, is an air- tive employers, Tom and Maria entafford to send Christina to col- plane mech: r receive group term life insurance lege? Tom and Maria decided it ine. His wife, Maria, coverage with a benefit amount was time to address. these »- 15231 year-old optometrist. Their equal to twice their annual sla- concerns, ‘combined annual household in- ries. Also, both of their employ. Through a referrat fromm Game & $125,000. They own a ersofferataxdeferted retirement another parentat Christina's day hhome on which they make 2 savings plan, to which-Tom and care center, the Carpenters monthly mortgage payment: Fi. Maria eack‘contribute 5 percent obtained ‘the name-of 1 teen months ago, Tom and Maria of theirigross salaries through’[Link]/'a-distibutor of eastance bad their frst child

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