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 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
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).
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)
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.
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...
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