Risk Management and Insurance - Report Example

Risk Management and Insurance  Risk Management and Insurance The process of insurance entails fund pooling from various entities that are insured. Pooling of funds enables insurance companies to compensate the insured in case of a loss. Therefore, these entities receive their protection due to paying fees. Additionally, the fee depends on the seriousness and the rate of recurrence of an event. There are a number of legal requirements that must be met for a company to insure an individual; they include indemnity, insurable interest, and utmost good faith. Indemnity asserts that a company should compensate the insured up to the insured person’s interest in the event of a loss. Insurable interest states that the insured should suffer direct loss. Utmost good faith affirms that the insurer and the insured are united by a good faith bond of fairness and honesty. This paper will be an overview of the insurance market. Participants Regulatory Authorities The regulatory authorities supervise the insurance industry. The main responsibility for the financial regulation of the insurer is assigned to its state of domiciliary. Each state has a duty to oversee insurance regulation. Moreover, every state holds on to the obligation of market price regulation of every insurer working in its area. The National Association of Insurance Commissioners (NAIC) is used by the states to support and coordinate the regulatory activities. The regulatory authorities concentrate on the compliance by the insurers with prescriptions instead of their prudence and competence as regards financial risks and management (Dorfman, 2007). These authorities are more often than not a part of the government’s executive branch or have a constitutional right to undertake their obligations- with supervision from the legislature. Insurance Agents and Brokers Insurance agents and brokers deal with several insurers and in the process may act on behalf of the customer or insurer. In addition, they negotiate, sell, or solicit insurance for compensation. In other words, they act as the retailers in an insurance process. In some cases, the brokers and agents underwrite insurance on behalf of the insurers. The agents and brokers receive data from customers and do the required paperwork to understand what is to be underwritten. Additionally, the brokers and agents are responsible for compliance issues involving jurisdictions. They also help those who have acquired insurance to develop strategies of risk management that fit their risk outlines. Furthermore, they assist the insured in acquiring extra policies from various insurers. Insurance Underwriters Underwriters gather premiums from the insured and compensate any claims. Moreover, they ascertain the premium rates to be paid and the cover level for every policy. The guidelines in their underwritings show the risks that are insurable and if typical policy terms are applicable or if there is a necessity for specific conditions. Insurance makes the underwriters undertake independent applicants’ investigations – for example, background or credit checks. In addition, the underwriters assess the exposures and risks of potential clients. They make a decision on the client’s coverage, charge, or the need to insure the risk. Supply And Demand The law of supply and demand shows the relationship between services offered by the insurance companies and the demand, i.e. those who seek policies. In an insurance market, the cost of granting insurance cover depends on the purchaser’s identity. For example, a year’s cover of health insurance for an elderly person is more expensive than that of a young individual. Similarly, it is more expensive to provide insurance on vehicles to teenage persons than to the older ones. If an insurance company offers insurance cover to old people on the charge suitable for the young, it will encounter losses. This will appeal to old clients more than to the young ones. The different cost of insurance coupled with customers’ desire for low prices make insurance companies outline different premiums for separate groups, based on the risks involved. Since the purchasers’ identities affects the insurance cost, insurers should identify whom to give insurance and at what price. The law of supply and demand has made the cost of limiting risks to fall (Adams, 1995). Conversely, recession has made insurance demand shrink despite its considerable supply. Recession has led to a fewer number of businesses being insured.  Consumer Protection Courts The courts provide a platform for the insured to air their grievances in case of a breach. The court can make the insurer correct a situation if the insured has not been dealt with appropriately. The most common cause for legal action is if the insurer denies the insured person’s payment claim. This is when the insurer sues the insured for contract breach after a claim denial. Law The insurance law ascertains conduct rules. Article 24 of New York, for instance, proscribes straightforward abuse of clients. All laws of insurance protect the interests of clients. The insurance law governs an insurance company’s approval of policy forms, solvency, licensing of companies, rate regulation, and licensing of agents. Insurance Commissioner The insurance commissioner has the responsibility to interpret and enforce the insurance code of a state. For example, the New York’s insurance law permits the superintendent to exercise his or her duties, rights, and power, in relation to insurance in the state. The commissioner can investigate fraudulent activities and provide related evidence. Regulation Regulation refers to an organizational law that contains rights and distributes responsibilities. Unfair and Deceptive Policies and Practices Insurance contracts should make stipulated payments when they are required. Insurers depend on the agent or broker when entering into an insurance contract. Regulation subsists to prevent competitions that promote the sale of deceptive and unfair policies, claims, and sales practices. Insurance Availability Various insurances are required by law. In a competitive insurance market, the insurers compete by trying to sell all the services sought by consumers who are most profitable. This competition brings about redlining and various problems. Regulation limits selective competition that is disruptive. Reverse Competition Reverse competition and lack of regulation lead to higher prices for the insured. This is because the insurance companies compete to provide more compensation to agents or brokers, who are third parties, and this increases the prices the customers have to pay. Information for Consumers Purchasers’ awareness of benefits and prices of insurance services provides for true competition. The nature of costs and policies make the insured have limited information about the insurance policies. The presence of regulation guarantees that clients can access information that will enable them make knowledgeable decisions. Landmarks The year 1945 saw the US congress support insurance regulation by enacting the McCarran-Ferguson Act. The act asserted that there will be no law that will be enacted to supersede or impair the laws concerning insurance. This resulted in insurance regulation occurring at the level of states. Additionally, the Gramm-Leach-Bliley Service Modernization Act eliminated peculiarities between insurance companies, investment services, and banks. Other Acts that have had impacts on insurance regulation include the Patriot Act and Sarbanes-Oxley Act. National Association of Insurance Commissioners  The NAIC has tried to make national the features of insurance regulation in regard to federal involvement. Additionally, by accrediting state departments, the NAIC tries to achieve reforms associated with regulation. The NAIC has sustained balance by putting forward several reforms regarding centralization. This balance has put away the federal control threat without doing away with primacy of state regulation.  Regulatory Activities of State Insurance Departments Solvency The state insurance department tries to lessen individual and business loss if an insurance company turns out to be insolvent. They design data collection and analysis methods to judge the financial power of the insurer. Rate Regulation The department controls the rating plans and rates of selling insurance. Here, the insurance department ensures that the insurers comply with the insurance codes of the state. It further approves forms and plans concerning the rate of impact. Investment Regulation The department protects clients against unlawful and unfair insurance activities as regards investments. It confines insurers’ investment activities, wholesomely compelling that investments be secured. Regulation of Agents and Company Officers The state department regulates the practices and rates of insurers, brokers, or agents in the state. It is mainly concerned with protecting the interests of clients. It achieves this by regulating how insurers market and dispense their policies (Lencsis, 1997). It also ensures that the insurance process is open and fair. References Adams, J. (1995). RISK. New York: Routledge. Dorfman, M. S. (2007). Introduction to risk management and insurance (9 ed.). New Jersey: Prentice Hall. Lencsis, P. (1997). Insurance regulation in the United States: An Overview for business and government. Connecticut: Praeger. Read More