Insurance Operations

Insurance Operations refer to the systematic functions and processes through which insurance companies manage their business, focusing on spreading risk among individuals and industries over time and geography. This industry is vital for economic stability, as it allows policyholders—from individuals to large corporations—to protect themselves against financial losses resulting from various unforeseen events, such as accidents, natural disasters, or health issues. Insurance companies typically fall into two main categories: primary insurers that underwrite policies and pay claims, and reinsurance companies that support insurers in covering larger losses.

The operations involve complex tasks, including claims processing, risk assessment by actuaries, premium calculation based on potential risks, and adherence to regulatory standards, such as those set by the Health Insurance Portability and Accountability Act (HIPAA). Technological advancements have transformed claims processing from paper-based methods to efficient electronic systems, streamlining the workflow and enhancing accuracy. However, the industry faces significant challenges, including the impacts of global warming and increased terrorist activities, which complicate risk forecasting and claims management. Understanding these dynamics is essential for individuals and organizations seeking to navigate the insurance landscape effectively.

Published in: 2021

By: Erbschloe, Michael

Subject Terms

Insurance Operations

This article examines the complex business goals of insurance companies and how insurance company operations are managed. The insurance claims process is reviewed and the use of electronic claims filing services are examined. The role of the actuary in analyzing and forecasting risks and the impact their analysis has on the cost of insurance premiums is explained. Insurance industry regulation is reviewed and the purpose of the Health Insurance Portability and Accountability Act of 1996 (HIPAA) is explained. The impact of the future trends of global warming and terrorist attacks on insurance company operations is also examined.

Keywords: Catastrophes; Global warming; Insurance claims processing; Insurance industry regulation; Primary Insurers; Reinsurers

Insurance Operations

Overview

Insurance is a business practice that is designed to spread risk across industries and individuals as well as over long spans of time and different geographical regions. All of these elements have their own varied and unequal risks and exposures. Insurance companies sell policies and set premium rates for companies or individuals based on their potential risks or exposure. Premium rates are calculated taking into consideration current conditions, future events, and the likelihood that an event will result in a claim against the insurance policy that the insurer must pay.

Insurance has allowed large-scale societies to survive in that it provides a means to redistribute risks and loss across societal participants. Corporations, nonprofit organizations, small businesses, and individuals could easily be financially devastated if they did not have insurance available to them. Thus, insurance has become an industry which is key to the survival of modern economies.

Types of Insurance Companies

There are several types of companies in the insurance industry, but most of the companies fit into two major categories. There are primary insurance carriers (insurers) that provide insurance and pay claims if the policyholder experiences events, and losses occur, that are covered by their policy. Then there are insurance agencies and brokerages that, on behalf of the carriers, sell insurance policies to private companies, public or nonprofit organizations, or to individuals. In addition, there are companies that help to insure insurance companies known as reinsurance companies (Greenwald, 2001)(McDonald, 2009). Reinsurers are like insurance companies for insurance carriers and help the carriers cover losses under extraordinary circumstances.

Types of Insurance Policies

Insurance policies can be purchased to cover losses caused by accidents, theft of property, damage from fires, storm damage, medical expenses, or even the death of an individual. Life insurance can provide financial payments to beneficiaries of a deceased policyholder, most often spouses or children. Life insurance policies can also provide some income to people when they retire if the policies are designed to pay dividends to the policyholder. Disability insurance can assure an income to a person that is no longer able to work because of injury or illness. Health insurance helps to cover medical and other expenses resulting from accidents and illness. Liability insurance protects policyholders for injuries to others or for damage to property. Many automobile and homeowner's insurance policies cover both property-casualty and liability events (Nature of the Insurance Industry, 2009).

The financial goals of insurance companies are threefold.

First they strive to make an operational profit from year to year. T
Second, they must have the funds to pay claims for incidents that occur during a fiscal year.
Finally, the must have reserves to cover claims for years where larger losses are incurred such as a busy hurricane season, fires in the western United States, or even large-scale terrorist attacks.

The Role of Actuaries

Actuaries assist insurance companies in determining and managing risks. They evaluate the probability of events by applying mathematical and statistical knowledge and estimate the costs of uncertain future events including natural disasters such as tornadoes and hurricanes and numerous factors that can change the life expectancy of individuals. Actuaries analyze information from numerous sources including historical records, scientific reports, and statistical data from within an insurance company or in the insurance industry. A variety of professional actuarial organizations around the world set the standards and code of ethics by which actuaries work ("Actuaries call," 2007).

The Combining of Insurance & Financial Services

United States law changed during the 1980s and 1990s to allow insurance carriers and financial institutions, such as banks and securities firms, to sell a variety of products and services including insurance. Many insurance carriers began selling securities, mutual funds, and retirement plans. There were numerous corporate mergers between insurance carriers, banks, and securities firms during the last decade that expanded markets for both insurance and financial service companies by opening client bases and geographical areas. Many of those mergers are now being reconsidered as companies retrench after the 2008 economic downturn (Hofmann, 2008).

Regulation

The regulation of the insurance industry has become more complicated as federal laws changed that allowed insurance companies and financial service companies to cross promulgate their business activities. The future of insurance activity regulation is uncertain and complicated (Connolly, 2009). At present in the United States, insurance companies are regulated by states through state laws and usually under the supervision of a state insurance commissioner. There is a constant myriad of state legislation dictating what insurance companies can and cannot provide, which in turn impacts the premiums of policyholders living in the states were specific laws exists. ("State of regulation 2009," 2009)

HIPAA

In addition to the state level regulation of insurance company business practices, there are other laws that impact the industry. Most notably, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) places stringent requirements on insurance companies regarding the protection of individual health care information. The United States government through the Department of Health and Human Services (HHS) Office for Civil Rights and the Centers for Medicare and Medicaid Services help to enforce HIPPA rules by investigating complaints and working with organizations to remedy security problems. HHS has also fined insurance carriers for violations, which can become costly as well as embarrassing ("HHS enters," 2008).

The insurance industry provides an array of the usual types of jobs found in most organizations including administrative, human resource, information technology, sales, and marketing. However, there are also several types of positions that are unique to the insurance industry including claims adjusters, examiners, and investigators.

Applications

Processing Insurance Claims in the Electronic Age

When an insured party files a claim with their property and causality insurer, a claims adjuster assesses property damage, estimates repair costs, and determines how much the insurance company will pay for the losses resulting from an event. Similarly, when an insured party files a claim with their health insurance company, a claims examiner reviews the health-related claim to determine the validity of the claim, the appropriateness of the treatment, and how much the insurance company will pay towards medical expenses. If fraud is suspected in an insurance claim, an insurance investigator reviews the claim and, depending on the case, collects additional data, interviews policyholders, appraisers, or healthcare practitioners to assure the validity of the claim before the insurance company pays expenses or settlements ("Nature of the insurance industry," 2009).

The traditional claims processing operation of an insurance company was paper based and required a large white-collar workforce to review, approve, and take final actions on insurance claims. As computers became more widely used to support administrative functions, claims processors were tied to old style computer terminals as they reviewed record after record in the claims process.

A lot has changed over the last decade. Insurance carriers still require a highly trained workforce, but the work they do and how they do that work has changed considerably. Electronic claim processing systems provide a wide range of functions for the claims staff, field adjusters, service providers, and policyholders (Mahoney, 2008). Web portals, electronic data interchange, Extensible Markup Language (XML), Java and C++ programming languages, image management systems, and ruled-based processing tools are all now part of the claims processing arsenal (Pallarito, 2008)(Srinivasan & Kumar, 2008).

Technology can ease claims processing problems and reduce costs of processing insurance claims (Bailey, 2007). This is especially true when processing medical claims. In this field, there are many organizations that are involved in the treatment process including general practitioners (primary physicians), specialists in various fields of medial care, hospitals, pharmacies, and perhaps even rehabilitation or physical therapy providers. The key piece of information that all of these providers need is the insurance policy identification number of the policyholder receiving treatment.

In the event that a policyholder develops a health problem or suffers an injury they usually first go to their primary care physician which is often required by an insurance carrier. The primary care physician performs and examination and perhaps runs some tests. They then make a diagnosis and when necessary, refer the policyholder to a specialist. At that time, the insurance carrier is electronically billed for the services and notified of a referral for a specialist to further examine the policyholder. The bill for the co-payment, which is the share of the bill that the policyholder is financially responsible, is sent to the policyholder.

At this point the insurance carrier has the claim and can electronically process payment to the primary care giver for the examination and the test as well as review the diagnosis and referral to the specialist. The insurance carrier, or claims processing agency of the insurance carrier, has the opportunity to provide advance approval for the examination or test which the specialist will provide. In some cases, depending on the complexity or the nature of the referral, the insurance carrier can notify the policyholder and the specialists that the policy or the insurance carrier does not cover the recommended course of treatment.

Assuming that the insurance carrier approves the recommended course of action the specialists can be electronically notified of the approval and an appointment can be made with the policyholder. The specialist then has the policyholder's insurance policy number along with an approval notification from the insurance carrier and a case number or claim number. This allows the specialist to proceed with treatment. Upon completion of the examination or test by the specialists, information is provided through the electronic claims processing system to the insurance carrier as to the recommended treatment, or if an additional referral is required, along with billing information. The insurance carrier can then compensate the specialists and if the case warrants, pre-approve further treatment.

In the event that the policyholder then needs to be admitted to the hospital for surgery, an appointment can be made and electronic records establish that they contain information from a referring specialist as well as all of the necessary information the insurance carrier needs for claims processing. While in the hospital, a detailed record is kept for all charges incurred by the policyholder and upon discharge, the records are sent through the electronic claims processing system to the insurance carrier. The hospital and practitioners involved in the treatment can be notified of the amount for which they will be reimbursed and the amount of the co-payment required from the policyholder. The hospital sends a detailed statement to the policyholder with a bill for co-payment. The insurance carrier reimburses the hospital and practitioners and the policyholder pays the co-payment.

In many cases, there may also be requirements for aftercare of some sort or at least follow up examinations and a formal release by the surgeon or medical practitioner who has a lead role on the case. This information is likely sent to the insurance carrier along with the discharge statement and bill from the hospital. Upon a post operation examination, for example, the surgeon or lead practitioner electronically files a release, along with a bill, with the insurance carrier. All of this information is kept in an electronic record system at the insurance carrier with corresponding electronic copies kept by all of the physicians, clinics, and hospitals that were involved in the treatment process.

There also may be a need for pharmaceutical drugs. The policyholder takes written prescriptions to the pharmacy and provides their insurance policy number. The pharmacy verifies information on the prescription and electronically accesses information from the insurance carrier on the amount that will be paid for the prescription by the carrier. When the policyholder picks up the prescription, they pay their required co-payment and the insurance company is electronically notified that the prescription was provided and is billed for the carrier's amount. The pharmacy retains an electronic copy for the policyholder (their customer) and the insurance carrier maintains an electronic record for the claim for prescription costs.

This electronic trail may sound complex. However, compared to two or three decades ago when all of this activity was done using paper forms and telephones to verify information and get approvals, the electronic system is easy. It is also less time consuming, less expensive, and speeds the approval steps and the reimbursement steps. In addition, the electronic records can be readily available for future reference when needed.

Issue

How the Future May Change Insurance Operations

Catastrophic events can send the insurance industry into turmoil because of unexpectedly high levels of insurance claims. The industry certainly faces financial stress during periods of high payouts for insured losses. But widespread catastrophes such as repeated, damaging hurricanes during a season also strain the resources of insurance companies in other ways. It takes an army of adjusters and appraisers to inspect, estimate, process paperwork and agree on settlements when there are tens of thousands of claims in a short period of time. Severe weather and terrorist attacks have both proven to be a claims processing challenge for the insurance industry.

Global Warming & Weather

The topic of global warming has been under debate for well over two decades and a consensus of action is just starting to emerge. Data shows that global temperatures have increased over last 100 years and several different scientific organizations project that temperatures will continue to rise over the next century. Although weather is always somewhat difficult to predict, the research indicates that ongoing climate change is expected to have a negative impact on weather-related events, and thus the cost of insurance.

The more severe the weather is, a busy hurricane season for example, the more property damage and loss of life occurs and the more insurance companies have to pay out in claims. Weather events accounted for almost nine out of every ten dollars (88 percent) of property losses during the 25 years between 1980 and 2005. This amounted to about $320 billion dollars. Insurance companies paid about 75 percent of these losses — over $240 billion in claims. Of course not every year had the same level of losses. In 1987, weather damage resulted in only $2 billion and in 2005 it was about $75 billion ("Climate change," 2007).

Terrorist Attacks

Terrorist attacks, like severe weather, can cause extensive damage resulting in very large volumes and dollar amounts of insurance. Terrorist have become skilled at using make shift and contemporary weaponry but may eventually lean more towards the use unconventional weapons, such as nuclear, biological, chemical, or radiological devices that could cause even more wide spread damage and injury. In addition, the potential costs and risks of terrorism may be increasing (McCarthy, 2008).

Although it has been over seven years since the September 11, 2001 terrorist attacks in New York City and Washington D.C., many believe that instead of declining, Al Qaida is growing as a movement and growing in strength both in numbers of participants and resources available (Ruquet, 2008). The 2008 terrorist attack in Mumbai, India may result in a property-casualty insurance loss of over $600 Million. The four-day assault killed over 170 people, injured at lest 300 more people, and did extensive damage to many buildings (Hays & Ruquet, 2008).

The Mumbai attack, as well as other incidents since September 11, 2001 reminds security professionals as well as insurance company executives that such attacks can happen again. The insurance industry is certainly at risk if another attack were to occur and has worked to reduce insured risks or establish premiums that can help cover claims. Still, terrorism insurance is not held by most large companies and is considerably expensive for property owners in what are considered high-density urban areas that could be attractive targets for terrorists ("Terrorism insurance," 2008).

From the actuary to the fund manager to the claims processor, changes in the world around us such as global warming and the severe weather it brings and the new age of terrorism against civilian targets brings new challenges. These challenges require both good minds and hard work to overcome. About the time that these hurdles are passed you can probably count on new changes, thus new challenges, and thus the need for more good minds and more hard work.

Conclusion

Insurance is a service that most people probably take for granted. Companies and individuals may well complain when they receive their bill for the year's insurance premium on their buildings, homes, employees, automobiles, and even their lives. But when disaster strikes, be it small or large, the modern economic mechanism of insurance can save them from total destruction. Insurance can also save entire communities or cities by providing funds to rebuild and reestablish business, commerce, and social life.

The insurance industry is a complex system of insurance carriers, brokers and agents, and reinsurers that all play an essential role in the process of providing insurance to individuals, communities, states and even nations. Insurance companies must exist in order to maintain economic stability. When and where insurers cannot remain financially viable by selling policies to cover frequent events, such as in a flood plane, governments often create or subsidize insurance programs that, as in the private sector insurance business, are designed to redistribute risks.

The age of electronic communications and massive data processing systems has eased the burden on individuals needing to file claims to cover medical or other types of expenses. It has also allowed insurance carriers to respond more quickly to claims and to do so in a less expensive way than when the claims process was burdened with paper processing and frequent or extended telephone conversations.

The future will bring perhaps the greatest challenges that the insurance industry has ever faced. The process of global warming and the severity of weather that comes with it will present the industry with more complicated actuarial challenges and probably even greater volumes of claims process. The growing trend of random terrorist attacks will make it more difficult to set premiums and to plan the types of coverage that a single insurance company and perhaps all insurance companies will be able to offer. Both global warming and terrorism present great challenges for the economic stability as well as the profitability of the insurance industry.

Terms & Concepts

Actuary(ies): Professionals trained to assist insurance companies in determining and managing risks through the analysis of information from numerous sources including historical records, scientific reports, and statistical data from within an insurance company or in the insurance industry.

Beneficiaries: The persons or parties named by the holder of a life insurance policy to receive the policy benefit.

Health Insurance Portability and Accountability Act (HIPAA): A congressional act passed in 1996 that is designed to protect the health care information of individual patients from be compromised to unauthorized parties.

Insurance Agencies and Brokerages: Companies that can sell insurance policies to private companies, public or nonprofit organizations, or to individuals that are backed by primary insurance carriers.

Primary Insurance Carriers: Insurers that sell policies to individuals or companies to cover losses resulting from events covered by their policy, including health, automobile, life, property, or liability claims.

Reinsurance Companies: Reinsurers provide insurance to primary insurance carriers to help them cover losses that exceed their current balance sheet.

Bibliography

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Insurance Operations

On this Page

Subject Terms

Insurance Operations

Insurance Operations

Overview

Types of Insurance Companies

Types of Insurance Policies

The Role of Actuaries

The Combining of Insurance & Financial Services

Regulation

HIPAA

Applications

Processing Insurance Claims in the Electronic Age

Issue

How the Future May Change Insurance Operations

Global Warming & Weather

Terrorist Attacks

Conclusion

Terms & Concepts

Bibliography

Suggested Reading