Chapter 2 – Insurance Company Structure

Introduction

Insurance companies have had to strategize to handle business environments that are constantly changing. Members of the industry are familiar with an environment of uncertainty, risk, and change, so they are prepared to adapt and be flexible. Some believe that a structure that supports corporate agility can help an organization like an insurance company survive and prosper in turbulent times.

The purpose of insurance is threefold:

1. Peace of mind

2. Financial security

3. Prevention of losses (risk management)

This threefold purpose brings focus to the role and significance of risk management. An increasing number of insurance courses are available on risk management, given its importance in the ever-changing world of such liabilities as terrorism, climate disasters, and cyber crime. Many insurance companies and brokerages now have risk managers, chief risk officers, and vice presidents of risk management or loss control, as it is increasingly important to be aware of the risks ahead to plan a good strategy.

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The risk manager of the future is in charge of acquiring new business, protecting existing business, and predicting losses—that is, claims. Risk managers will be asked for strategic insights incorporating a complete range of their skills, including risk buying, managing enterprise risk and loss control initiatives, and helping the organization navigate through periods of uncertainty. As Canadian Underwriter notes, “Risk managers are entering a new era that emphasizes their strategic thinking skills. Increasingly they will be asked to provide valuable risk insights that will help guide their organizations through an uncertain future.”^[1]

Many insurance companies have gone through mergers, acquisitions, and other transformations to meet the changing market. These evolutions have resulted in certain corporations having quite complex and sometimes convoluted structures. Due to these factors, and because there are so many players in the marketplace, a great variety of corporate structures can be observed. This section describes the typical organizational structure of a Canadian insurance company and its various departments.

Organizational Structure

Companies in any industry must choose some way of organizing themselves to operate as efficiently as possible to succeed in a highly competitive marketplace. Insurance companies depend on factors specific to the insurance industry to do this.

The structure of an organization depends on at least the following:

• How power and control are distributed

• How well operational systems are integrated between departments and others

• How communication works

• How well services are coordinated

• The size of the company

The main operational structure of any company often comprises three main areas of shared services:

1. Administration

2. Sales and marketing

3. Finance and accounting

The elements of underwriting, claims, and actuarial are unique to insurance operations. Each may form its own department, as shown in Exhibit—A Traditional Insurance Company’s Organizational Structure. Many of the administration and support functions found in P&C insurance companies are similar to those in other business environments. These include human resources, information technology, compliance, legal, and office management and services. The number of departments will depend on the size of the insurance company and the number of executives responsible.

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Exhibit

A Traditional Insurance Company’s Organizational Structure

Insurance companies, whether stock or mutual companies, are often organized as traditional pyramid structures, which are top down, as illustrated in Exhibit—A Traditional Insurance Company’s Organizational Structure. The advantage of this type of structure is that there is ample opportunity for promotion. The disadvantage is that it may be time-consuming to go through the hierarchical levels for approvals. Another type of organizational structure is a flat structure, which includes a team that makes approvals and decisions. The disadvantage of this structure is that there is less opportunity for promotion.

Some areas in the organizational structure are common to all businesses:

• Human resources

• Information technology (projects, software procurement and development, and management)

• Administration (legal, compliance, security, actual property administration, operation assets, and outsourcing jobs)

• Sales and marketing (broker operations, budgets, sales, product development, and focus groups)

• Finance and accounting (investments, accounts)

Departments unique to insurance companies include the following:

• Underwriting (the corporate underwriting department and the branch underwriters)2-6

• Claims (the corporate claims department; the adjusters for accident benefits, bodily injury, and property and auto damage claims; the risk management and loss control departments; and the special investigations unit)

• Actuarial (pricing and reserving departments)

Human Resources

Generally, the human resources department of an insurance company is responsible for the following:

• Recruiting new staff members and providing workforce planning in cooperation with department heads, helping to identify the skill sets and experience required for a given position, advertising available positions, working with independent recruitment firms, vetting resumes, conducting initial interviews, and conducting or guiding exit interviews

• Overseeing the company’s payroll, helping supervisory staff manage individuals’ performance, and recommending appropriate incentive programs to reward superior performance and encourage personal growth

• Monitoring labour regulations and making appropriate recommendations to management for policies and guidelines

• Ensuring human rights laws are followed

• Keeping employee records and maintaining salary administration systems

• Developing surveys

  • For example, an insurance company may survey each of its departments on an annual basis to ensure that the business is being run properly and to check for actual or potential problems or problematic behaviours

• Developing, guiding, and implementing whistleblowing policy in cooperation with department heads

• Managing exit interviews

• Designing and administering employee benefits programs

• Helping to administer the company pension plan and ensuring that it is in compliance with laws and guidelines

• Counselling employees on career development or workplace issues

• Helping to develop onboarding, training, education, and productivity improvement programs

• Working with managers on the development of employee performance reviews, goals, and objectives

• Working with management to achieve the responsibilities of the audit and conduct committees

Workforce Planning

Insurers need to decide how many employees are required to achieve their objectives; what experience, expertise, or skills they should have; and how they should be distributed within the company. Projecting staff requirements requires that senior management consider growth projections, the effects of technology and automation, and the requirements of middle management and supervisors.

The manager’s role in determining staffing needs requires careful analysis; it can often be a balancing act. For example, an underwriting manager needs to determine how much premium each underwriter can handle effectively. If an underwriter is required to handle too much premium, the quality of underwriting may fall below company standards. If the underwriter handles too little premium, the company might face an expense drain. Such an expense drain2-7may be acceptable in the short term if the company is planning for future premium growth and needs experienced staff in place to handle that growth. As decisions are made about where growth should occur, plans must follow to support the action, such as hiring more support staff.

Support staff allow underwriters and claims adjusters to concentrate on underwriting and claims handling; administrative and other tasks can be delegated to a support person. The people in support units are responsible for managing centralized email boxes, sorting and delivering direct mail, retrieving and managing files from abeyance, inputting and maintaining account data, and otherwise assisting underwriters and claims adjusters.

Information Technology

Information technology (IT) departments handle computer systems and management information. IT can be centralized in head offices or be divided among departments or branch offices. IT may provide technical assistance or arrange for that assistance from external sources. The department is responsible for developing and maintaining the systems that collect and process information. And, while each business has a different technology need and stack, typical systems include those that automate rating, underwriting, and policy issuance in collaboration with other departments such as corporate underwriting, actuarial, and operations. Additionally, an IT department may develop and maintain the electronic communication systems that link insurers with branches, agents or brokers, and policyholders. Some IT departments have analysts and programmers who write and maintain the company’s own software. Other IT departments purchase this service from an external or third-party software provider.

The IT department is also charged with initiating innovative projects to keep up with competition and technology advancements, as well as software management. Sometimes technology procurement is a separate department that may be connected with the finance department. This is a very important section as it manages the software being used. Procurement is the process of finding and acquiring goods and services from external suppliers, often through tendering or bidding processes. Whichever department is responsible for technology procurement, it must secure the best possible price for the technology while ensuring that its quality is not compromised.

IT departments manage software and hardware issues in the organization. They provide technical assistance and are charged with initiating special projects.

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Technology and Management

Controlling the likelihood of data entry error is a concern for insurance companies because such errors lead to incorrect management information system (MIS) reports. This, in turn, can lead to a faulty management decision. MIS reports are used by management to gauge the effectiveness of an operation.

For managers, computer systems and networks provide a tool to monitor performance measures, helping them to gauge the success or failure of each unit and identify problems to correct. In terms of underwriting, technology allows the company to record or assess the following data:

• Rate adequacy

• Risk selection

• Retention of business

• Number of submissions received, quoted, and bound

• Profit-and-loss reports for producer networks

• Profit-and-loss reports for each underwriting unit

Similarly, on the claims side, the following data is recorded:

• Specific information about each loss

• Reserve amounts

• Reserve development

• Expenses

• Claims tags for reinsurance purposes

• Tags for larger reserves

• Any other specific information a company chooses to monitor

Administration

Office management services, which may also be known as the administrative, facilities management, or office logistics department, are generally responsible for ensuring that appropriate levels of support are provided to the line functions.

This department is responsible for, among other things, providing the premises, furniture, equipment, supplies, and services needed to keep the business functioning effectively. Some of these services may include compliance, legal, inventory control, document storage and retrieval, printing, cleaning, maintenance, mail, and telecommunications.

In more modest operations or in branch offices, the office manager may not be a separate role. In some cases, an individual who also has responsibilities on the technical business side, such as an underwriting or claims manager, will also act as the office manager.

Sales and Marketing

The goal of the sales and marketing department is to institute sales and marketing plans that respond to the needs of the customer. Doing so may include researching customer needs through surveys and focus groups consisting of customers, brokers and other companies or vendors, designing products and services to respond to those needs, and finally, directing the sales effort. P&C companies operate in a crowded marketplace. Some focus on developing new models and strategies to communicate with customers, shareholders, regulators, media, and others.

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In a corporate structure, marketing may include any combination of the following roles: corporate marketing, public relations, media relations, publicity, advertising, and events management. In a traditional broker-based insurance company, the insurer’s marketing department mediates relations between its underwriters and producers
. The marketing department identifies, qualifies, and manages relationships with producers on behalf of the insurer. It is this department’s responsibility to both communicate the company’s philosophy and practices to the producer and screen them for compatibility with the company. Marketing is responsible for setting up and monitoring the original contract with the producer and setting up annual budgets. This department is also responsible for the performance management of the producer, including cancellation and ensuring that all the terms of the broker or agency contract are followed.

If there is an issue with the producer’s business—if, for example, the producer’s loss ratio exceeds acceptable levels or the risks being submitted do not fit the insurer’s risk appetite—the underwriter and the sales and marketing manager will work together to resolve the problem. While the assigned underwriter or underwriting units may contribute, the sales and marketing department will still be primarily responsible for maintaining relations with the producer in most cases.

In contrast, some companies choose to assign full production responsibility to their underwriters. Allowing these employees to identify and then market to producers is seen as an effort to control the business the company writes. This approach can be effective, especially when dealing with large, complex accounts; the underwriter acts as the producer’s “account manager” and has the authority to set terms and conditions as well as to bind coverage for the account. Producers in this type of structure deal exclusively with the risk decision maker and have direct access to them.

Finance and Accounting

The finance and accounting department is responsible for the following functions:

• Maintaining accounting records

• Producing financial statements

• Preparing income tax returns

• Handling accounts payable and receivable

• Managing cash flow

• Being responsible for, or supporting, reinsurance management

• Managing licensing for the company at the federal and provincial and territorial levels

• Working with investments to ensure prudent conditions are applied (this position may be outsourced)

• Ensuring compliance with the Office of the Superintendent of Financial Institutions (OSFI) for federally licensed insurers or with the provincial or territorial regulatory body for provincially or territorially licensed insurers

• Ensuring compliance with the Personal Information Protection and Electronic Documents Act (PIPEDA) and other applicable privacy laws

• Working with the actuarial department to share results

• Producing the company’s annual reports for its shareholders or mutual policyholders (after auditor approval)2-10

• Maintaining records of unearned premium reserves and loss reserves (known respectively as “liability for remaining coverage” and “liability for incurred claims” under the new international financial reporting standard, IFRS 17, which came into effect in Canada in 2023)

• Preparing reports for regulators

Regulatory-driven reporting ensures that companies hold adequate capital and reserves to maintain solvency and stability. The accounting department will also handle statistical reporting to governments and various trade organizations if the company does not have a separate statistical department.

The job of finance and accounting has become quite complex as companies—particularly the domestic entities of foreign-owned insurers—find that they must report results in many different ways. For example, insurers may have to prepare several reports: one according to Canadian statutory requirements in accordance with International Financial Reporting Standards (IFRS) 17 reporting standards, one for companies with a head office based in the US that still uses the Generally Accepted Accounting Principles (GAAP) standards, and one in a company’s own internal methodology.

Investment Management

A company’s investment department manages its investment portfolio. This function is critical, particularly since 2003 was the first year since 1978 that a collective underwriting profit was earned by the Canadian property and casualty insurance industry. Prior to 2003, most insurers depended on investment income to produce an overall profit. Achieving a profit permits the company to pay dividends to shareholders and provides the capital needed to finance growth. Dependence on investment earnings makes insurers more vulnerable to the unpredictable securities market and fluctuating interest rates.

It is becoming increasingly common for insurers to outsource the management of their investment portfolios to a third-party investment expert or, in the event that the company is the domestic arm of a larger, usually global, institution, an affiliated investment manager. A federally regulated company may even outsource the task to another country if it receives approval from OSFI.

Departments Unique to Insurance Companies

Insurance companies also have underwriting, claims, and actuarial departments as part of their operational structure. These departments are important to the running of an insurance business. The makeup and organization of these departments is quite detailed.

The levels and chain of authority must be considered when organizing a department. For an underwriting department, consideration is given to such measures as premium level and account size. In a claims department, relevant factors may include reserve amounts and the complexity of the claims. Ideally, a company tends to seek a balance of authority and responsibility in each employee so that they can make decisions and be accountable for those decisions.

There should be a balance between authority levels and the functional processes of a department so that employees can possess appropriate autonomy. When authority is properly delegated, employees are empowered to handle most of the business themselves. If the authority of most staff is so limited that no decision can be made without involving the next level of management,2-11employees are not likely to develop, and the level of productivity may suffer. Policyholders may view the company negatively if they perceive it to be difficult to deal with or slow to react, and they could choose to take their business elsewhere.

Efficient and effective procedures should be developed to govern how questions and decisions travel from one level of authority to the next. These procedures may depend on the reason for a referral or the complexity of the issue. A decision from higher authority may ultimately be required. In the case of larger, more complicated risks, formal programs may be required wherein a standing underwriting committee, comprising people from the claims, financial, actuarial, and loss control departments, is involved in the approval process.

To some extent, certain limits to authority are required in any company. Employees must respect the risk management controls implemented to protect the company. Risk management controls could involve limits to the types of coverage the company writes, limits to the locations of risk, and limits to both individual and aggregate coverage levels.

For example, company policy might state that head office must view manuscript wordings, since they may need to be reviewed by the company’s corporate legal and underwriting departments. This process would ensure that a manuscript’s wording in one jurisdiction does not conflict with the wording of another jurisdiction. Certain situations require consistency in the company’s approach; restricting authority is a way to ensure that the company can accomplish this goal.

Authority to purchase reinsurance should also be considered. How authority is distributed reflects the company’s overall strategy and whether it embraces a centralized or decentralized structure. For example, in some companies, the placement of all treaty reinsurance is controlled by its head office. Other companies allow the individual unit responsible for the business to place treaty reinsurance on its programs (for example, a trucking program for local moving companies). Similarly, the branch unit may be granted authority for facultative reinsurance placement, or it may be centralized.

Underwriting

Each company organizes its underwriting differently:

• Some companies organize the underwriting in departments of new business, renewals, endorsements, cancellations, and underwriting analysis, having specialists in each. Reinsurance is the responsibility of the manager and underwriter of that risk.

• Some organize underwriting staff (which may include exclusive agents for direct writers
  ) by new business versus existing business or, in other words, sales versus service. Selling and servicing often require different skill sets to perform optimally; staff allocation to these departments should consider the strengths, skill sets, and experiences of each individual.

• Some organize according to groups of brokers. This may include having a portfolio manager, analyst, senior underwriter, and other underwriters handling a broker group. The portfolio manager manages the group and may work with the analyst to conduct broker audits, underwriting audits, and overall monitoring of the group. They may also handle specialty lines business. The senior underwriter may handle the remaining new business and any concerns from the brokers as well as the reinsurance needs of the business; the other underwriters may handle the renewals, the endorsements, and the cancellations. The groups of brokers may be organized in different ways:2-12

  • Geographically

  • By broker size, and by whether they are national or regional brokers

  • By premium—either overall premium dollar volume or premium account volume

  • By number of accounts

  • By program

  • Based on complexity of risk

  • Alphabetically

The underwriting department is structured to ensure that risks submitted to the company meet its standards of acceptability and that an appropriate premium is charged. To that end, the underwriter must develop full and accurate information on risk characteristics and analyze the risks for each potential insured; from this information, they can decide whether to issue a policy and on what basis. Overall, the risks of an insured must fall within the target markets determined through strategic planning. The task of underwriting also involves steps to minimize risk through loss prevention and control activities.

Underwriting at Head Office

While the makeup of a head office’s underwriting department can vary, it usually consists of upper management and a number of seasoned technical underwriters. The head office underwriting department develops guidelines in accordance with the company’s strategy and plans. It is the underwriter’s job to lend expertise and technical assistance to the branch office underwriting units.

Aside from their corporate responsibilities, technical underwriters may perform audits on the company’s branch units to ensure compliance with corporate directives and best practices. Additionally, they may provide education and training to the branch office units’ underwriting staff.

Head office underwriters may also provide several weeks of onboarding and training to the branch unit’s new recruits on such areas as the company’s risk appetite
, underwriting guidelines, binding authority, risk referral and declination rules, and other underwriting policies and processes. They may also instruct how to navigate the underwriting manual and line guide and how to handle automated and manual underwriting in policy systems. Through this training, new hires become aware of the technical experts they can consult in their future underwriting tasks. Sometimes “work buddies” are assigned to new hires during or after training to ensure new hires have a strong support system.

Underwriting at the Branch or Region

In a branch or regional structure, each office is run by a branch manager; however, its departments may report to both the branch manager and to head office. Some inherent conflicts exist in the lines of reporting within a regional or branch office structure.

For example, in a typical branch or regional structure, underwriters report directly to their underwriting manager, who reports to the branch manager. The branch manager reports to the regional director, who reports to the vice president of operations at head office. However, depending on the size of the company, the underwriting manager may report directly to the regional director. As the branch manager is omitted from the line of reporting for underwriting in this structure, it could produce a conflict: Although the branch manager runs the branch office and is accountable for the branch’s performance, they have little to no authority or responsibility for the underwriting function.

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In another example, regional managers who are responsible for production and underwriting may also be responsible for profit and loss in the branches. With underwriters generating revenue while claims people create costs, underwriters may feel undue pressure from the regional managers to generate more revenue by accepting less-than-satisfactory risks. Again, this may produce a conflict in the line of reporting: Such a conflict between the interests of underwriting managers and regional managers may affect the company adversely.

There can also be conflict between underwriting management and branch or regional management over shared resources, where underwriting management has neither authority over staff nor the right to evaluate their performance. One way to resolve this type of conflict can be to have branch or regional management retain direct authority over staff but allow underwriting management to have an indirect role in evaluation by inviting its comments about staff performance. Companies often maintain parallel lines of direct and indirect reporting to solve issues of control between underwriting and location-based management.

Organizing by Line of Business

The lines of business the company has decided to write can influence the structure of an underwriting unit. If an underwriting department handles all the traditional lines of insurance, the department might be organized into separate property, casualty, and automobile units, each employing monoline underwriters with skills specific to that line of business. Some companies, however, employ multiline underwriters that handle all categories of insurance. Typically, such organizations have a very narrow and specific underwriting focus, pursuing just a few classes of risk.

Risks that present low hazards and generate small premiums are often first assessed against a template—this is known as the “box” approach. The template, or box, comprises eligibility criteria that determine whether a risk will be accepted. If the risk is declined, it may still be passed to an underwriter for handling. Certain companies use a call centre for this type of business; others allow producers whose computers are networked to their insurers’ systems to enter risk details and receive an immediate quote. In either method, the template or “box” approach keeps the costs of underwriting smaller risks to a minimum and allows underwriters to spend their time on more complicated risks that generate larger premiums.

Underwriting Specialty Lines

Insurers that offer specialty lines of insurance (for example, professional or errors and omissions liability, directors and officers liability, equipment breakdown, surety, agricultural, crime, marine, and aviation insurance) may opt for a higher degree of centralization in their underwriting than insurers that do not offer specialty lines.

The unit assigned to underwrite specialty lines may be determined by who has the most expertise, whether that person is located at a branch or at the company’s head office. Alternatively, an insurer might leave the underwriting analysis to the branch office underwriters and only ask the experts at head office for guidance and comments as needed and to authorize the branch underwriter’s recommendation.

Companies that deal with complex risks that require actuarial contributions, financial review, engineering, manuscript wording, or other functions typically found only in the head office may be handled by a specialty underwriting department. This department’s responsibilities may be directed toward assisting the branch underwriters with coordination, management, and the oversight of certain activities that are more difficult to do over a vast distance.

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Technology in Underwriting

Traditional underwriting often meant that insurance applicants were subject to in-person risk assessments. During the COVID-19 pandemic, however, risk assessments could no longer be done in person, and so other ways were sought. New technologies introduced helped automate underwriting processes, including technologies that leveraged artificial intelligence (AI), such as machine learning (ML), generative AI, and robotic process automation (RPA).

AI has been introduced into many industries in the last decade, and it has led to technological advancements and operational efficiencies. There are several subsets of AI, including generative AI which has shown immense potential in reshaping industries. While AI can enhance something that already exists, generative AI can create something brand new.

Many insurance companies have expressed interest in increasing their investments in these types of technologies, which can assist underwriters in automating tasks of a more administrative nature, freeing them up to accomplish more complex underwriting and risk assessment tasks. Introducing these technologies may affect the structure of the underwriting department: It may mean requiring fewer underwriting assistants but more underwriters and other technical specialists who can manage and best utilize the technologies. It may also require coordination and support from the IT, actuarial, legal, compliance, and finance departments.

Managing Claims

The claims department is structured to best investigate and document the circumstances under which claims occur, to determine whether a policy covers the event, to set a reserve for the estimated expected cost of each claim, to set up a scope of work for repair or rebuild, and to initiate payment of the claim when established criteria for distributing funds are met.

Insurers often use a combination of strategies to organize the claims function of their company to suit the particular circumstances of each case. For example, they may decide to use local staff adjusters where the highest frequency of claims occur and hire independent adjusters or appraisers in more rural areas as needed. Alternatively, the insurer may assign staff to handle routine claims and assign independent adjusters to handle more complex claims. Using an independent adjuster occasionally in a remote geographical area is more cost-effective than hiring a staff adjuster to cover a vast territory where only a few claims occur. Unless there is a concentrated volume of claims in such an area, it may not be feasible to have a staff adjuster or appraiser travel great distances.

With more frequent extreme weather events occurring, insurers may have built catastrophic loss adjusting teams that handle catastrophic loss events. These teams set up command centres near the event to manage their insureds’ needs for immediate claims support. Savings are realized by the insurer as it does not need to engage a team of independent adjusters, which can often be more expensive than using internal staff. There is also a customer experience benefit: Adjusting teams already in place can quickly meet customer needs by assigning resources immediately to assist insureds.

Organization of the claims department is usually what works best for the company in cost-effectiveness and maximum service provided. There are several ways in which it can be organized:

• It can be organized like underwriting with personal lines (auto and property) in order of size. For example, claims up to $5,000 are handled by a specific unit. Claims over $5,000 and up2-15to $50,000 are handled by another unit, and so on. It can be the same type of breakdown for commercial lines.

• It can be organized under accident benefits, bodily injury, property claims, auto claims, business property, and business auto according to size. Adjusters may need qualifications to approve certain levels and amounts depending on the province or territory in which they operate or in which the claim occurred.

• It can also be organized by role. For example, staff adjusters could be responsible for adjusting some claims and external independent adjusters responsible for adjusting others. As well as for geographical reasons, claims could be assigned by line of business, claim size, or authority level. Claims adjusting may also be outsourced to other external parties, such as third-party administrators, which are contracted by the insurer to provide claims processing. If a managing general agent (MGA) is used to underwrite risks for the insurer, claims from those risks might be adjusted by the claims department of the MGA on behalf of the insurer.

• A special investigations unit (SIU) can be a unit by itself running parallel with the other claims departments. Some companies have an SIU within each division in claims. The SIU investigates claims for suspected insurance fraud and often works to detect, deter, and educate about fraudulent activity.

Using In-House or Independent Claims Professionals

Example—Assign-It-Out and Retain-It compares the loss expenses of two fictional insurance companies. The Assign-It-Out Insurance Company outsources much of its loss-handling work to independent firms, whereas Retain-It uses its own staff adjusters, appraisers, and lawyers to handle most of its claims-handling functions. Differences in their operating expenses can be expected.

One can assume that a company will consider staff adjusters only when it has an adequate volume of claims to justify the ongoing expense. A company that generates a uniform volume of losses can justify the expense of handling claims internally. When deciding whether it is economical to handle claims internally, a company must examine the consistency of the volume of losses as well as the type of business written. Several factors could influence a company’s management to handle a loss with its own staff (anticipating long-term benefits) rather than employ short-term attempts to control costs.

Since property wordings for personal and commercial lines vary between companies, staff adjusters have the advantage of concentrating on the forms their company sells. This familiarity tends to improve the quality and consistency of coverage decisions made by staff adjusters. Independent adjusters must deal with many insurers, and therefore do not have the same opportunities to become familiar with any single insurer’s policy. Staff adjusters also have an advantage because it is easier for a company to instill a claims philosophy in its own employees than in independent adjusters who deal with the philosophies of many different insurers. Should new policy wordings be introduced, it is more cost-effective for a company to retrain a small, easily defined group of staff than any number of independent adjusters from various firms.

Alternatively, certain conditions within a company may encourage management to choose to outsource its claims rather than have staff on-site, even if there is a high enough volume and concentration of work. Hiring, training, and supervising staff can be considered too great of a commitment of time, money, and resources; or, the company’s long-term goals may envision substantial changes to the business with a corresponding change in the need for additional staff.

When hiring new employees, a company may prefer entry-level staff and train them over time to become loss adjusters. However, this strategy may not be appropriate for a smaller operation or for niche market companies requiring highly trained staff with experience.

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In automobile insurance, managers often decide to assign claims to independent automobile appraisers for the reasons outlined above. An insurer may decide not to assign appraisers on claims under a certain threshold amount to save on appraisal fees. However, consideration must be given to the effects of such a strategy on indemnity levels. A savings realized on appraisal fees may be lost because of higher indemnity payments.

Technology in Claims

Technology that can reduce the cost of property claims and allow consistency in costs is also being procured or developed in some organizations. For example, Symbility Property is software that can reduce the cost of claims in general. The software works between the company, which maintains the data (maintaining consistent cost of lumber, cement, roofing, labour, and so on across the board), and the contractors, who submit the appraisals. The contractors use the software to do their diagrams and record what is needed to indemnify the loss, and the software automatically sets the claims cost. This greatly reduces fraud and overpayment of labour costs. This is an excellent strategy in reducing claims costs.

Other technologies being introduced to automate claims processing and loss adjusting include AI chatbots that use machine learning technology to adjust and settle less complex claims without the need for human adjustment, and drones that can capture images of loss faster in hard-to-reach locations.

Like in underwriting, adoption of these technologies may mean that insurance companies will have to rethink their claims department structure. Fewer claim assistants may be required, as these technologies handle more administrative tasks, and more loss adjusters and technical specialists may be required to maintain these technologies.

Actuarial Function

Two main types of actuaries are used within insurance company operations:

1. Pricing actuaries are responsible for analyzing data and performing calculations to determine pricing for insurance policies.

2. Reserving actuaries determine the amount of money to be held in bulk claims reserves. The bulk reserves include provisions for claims that have been incurred but not yet reported (IBNR) to the company and adverse claims reserve development—the amount by which the ultimate cost of claims may exceed the reserve. They are responsible for monitoring an insurer’s overall financial situation and alerting management if financial regulatory requirements are not met.

In a small insurance operation, the pricing and reserving actuary may be the same person. The insurer may not have its own actuary and may outsource the role to a third-party actuarial consultant with approval from the Office of the Superintendent of Financial Institutions. In a larger operation, the functions may be split between two or more employees.

Technology in the Actuarial Function

Like their counterparts in the underwriting and claims functions, new technologies will also affect actuaries. Technologies that use AI and ML are often being used today in the actuarial function, along with low code programming tools. AI systems and tools can improve current risk modelling2-18by having the capability to analyze significantly more data points and provide unanticipated insights from that data. Robotic process automation (RPA) is not yet being used, though a report by the Society of Actuaries believes that there is opportunity in the future.^[2]

1 David Gambrill, “Tomorrow’s Risk Manager: Purchaser, Protector, Predictor,” Canadian Underwriter, April 1, 2018, https://www.canadianunderwriter.ca/features/tomorrows-risk-manager-purchaser-protector-predictor/ (accessed October 20, 2023).

2 SOA Research Institute, “Emerging Technologies and Their Impact on Actuarial Science,” October 2021, https://www.soa.org/4aa625/globalassets/assets/files/resources/research-report/2021/2021-emerging-technologies-report.pdf (accessed September 28, 2023).

Introduction

The term corporate governance signifies how a corporation directs itself and how control of this process is managed. This can mean different things to different people, but there are some essential concepts to consider. Corporate governance encompasses the process, structure, and information used to manage a company and the means by which the board of directors and senior management are held accountable for their actions.

Corporate governance includes determining the conditions whereby a firm’s directors and managers are obligated to act in the interests of a firm and its shareholders. Also, it determines the means by which managers are accountable to capital providers for the use of assets. One must consider corporate governance in the context of laws and customs applicable to the situation in question. A company generally establishes its charter and bylaws for itself.

How a company is structured affects how it is governed; structure defines relationships and the distribution of rights and responsibilities among the board of directors, managers, and shareholders. Thus, the structure of an organization defines the rules and procedures for corporate decision making, how company objectives are set, and how those objectives will be attained and monitored.

Management Structure

A company’s structure determines the distribution of rights and responsibilities among four groups of participants—the board of directors, managers, employees, and shareholders or stakeholders. The corporate decision-making process arises from this structure.

Industrial enterprises are traditionally hierarchical, operating in a pyramid structure. Flat or networked structures are more common in this changing economic environment that recognizes information and knowledge as wealth-creating assets in addition to labour and capital. More traditional structures employ vertical decision making, but in flatter structures distributed decision making is used. This results in internally focused top-down governance for companies with a pyramid structure, and both internally and externally distributed governance for flat or network-structured companies. When one refers to a traditional structure, a top-down pyramid-based operation is usually implied.

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Diversity, Equity, and Inclusion

Whatever form the management structure takes, the company should ensure that employee diversity, equity, and inclusion (DEI) is a key objective. Every employee or potential employee should feel welcomed and included throughout the company. Studies have shown that increasing DEI helps a company recruit top talent and improves employee engagement and retention (thus helping to reduce the insurance industry’s talent gap); it also attracts consumers, helps to address concerns arising from conscious consumerism and stakeholder capitalism, and improves competitive advantage and long-term financial performance.

DEI needs to be present at the top level of an insurance company’s management structure: Increasing diverse representation within the corporate board of directors will have a trickle-down effect to the manager and employee levels.

Business Plans

Every insurance company prepares a strategic business plan, which may influence what the management structure looks like. Usually, this plan spans a three- to five-year period and includes the following:

• Reasons for taking a certain direction

• Analysis of target markets and opportunities

• Plans to address those markets and opportunities

• Lines and types of business the insurer plans to pursue

• Analysis of competitors, showing both threats and opportunities and outlining plans to address them

• Definition of what success looks like over that time period

• Overall strategy for achieving success that includes a discussion of critical assumptions, including those that underlie

  • claims handling;

  • valuation of reserves and exposures;

  • pricing;

  • underwriting;

  • expenses; and

  • policy retention.

Business plans also include contingency plans that address the worst-case and other adverse scenarios that a company might have to face.

Degree of Hierarchy

All organizations and their departments operate with some degree of hierarchy. There is always someone in charge and a distribution of authority in diminishing degrees between members of a group. However, the degree of hierarchy can vary from strongly hierarchical—like a ladder, with lines of reporting going up and lines of command going down—to slightly hierarchical, almost a flat structure, in which employees have enough authority to discharge the majority of their responsibilities without seeking approval from those in senior management positions.

An organizational structure that promotes communication flowing from more to less senior employees and vice versa is theoretically the most useful. Management is responsible for planning for the future, but employees dealing each day with the company’s customers, producers, and vendors often have valuable information about the current state of the company.2-20This information can become a valuable source of market intelligence to be channelled up the ladder of the organization.

What degree of hierarchy is best? The answer depends on the company and its management. Some think that a flatter corporate structure is more efficient because it limits the layers of management that issues must pass through before a decision can be implemented. Others think that, whatever its efficiency, such a structure is undesirable because it provides so few opportunities for employees to advance. Overall, it may sacrifice the overall effectiveness of the operation. Efficiency must be balanced against effectiveness.

When stark efficiency creates an environment that is uninspiring, the culture and spirit of the company will suffer; eventually, this will take its toll on operations. A structure that is sensitive to the creative forces within people will tend to improve the productivity and comfort of the work environment. Whether a department is strongly or slightly hierarchical, growth by adding employees obliges management to reassess the span of control held by each manager.

The span of control managerial principle asserts that limiting the number of employees reporting to the same individual improves certain parts of an organization’s performance but comes with additional cost. There is no agreement among most organizations as to what the optimal span of control should be. The manager’s span of control will be affected by the nature and style of the organization and the type of work to be produced, among many other considerations.

Managing Workflow

The way that an insurer prefers to write business may affect the structure it chooses for each department, especially in terms of underwriting. For example, the department’s structure may be designed so that more experienced underwriters handle all new business submissions while less experienced underwriters are responsible for most of the renewal business. The juniors—that is, those new to underwriting—may handle the endorsements and cancellations.

Still, there is more to managing workflow than deciding who will do which tasks. Procedures must consider how underwriters receive submissions. For example, an insurer may work with an electronic version of a document, original hard copies, applications originating from online company portals, information inputted directly into insurer systems through broker management system integration, or a combination of several formats.

When underwriting submissions are received, they may be recorded in a tracking system to ensure that another office or unit within the company is not working on the same account. Accounts may also have to pass a preliminary assessment, whether manually or through automated pre-qualification tools, before they can be worked on in earnest.

When coordinating workflow, staff must be sufficiently organized to promote not only efficient but also effective processing of business. It may be beneficial to list all the processes that must be performed in underwriting new and renewal business and then review that list to determine how each task can be performed most efficiently and by whom. Customer journey mapping is a useful exercise that goes through the various aspects of workflow to assess the customer experience at each point in the journey to help determine where gains can be made. The insurer should aim to make the best use of each employee’s skills, whether in technical or clerical functions, to provide the best agent, broker, and customer experience.

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Degree of Centralization

A company conducting business in a number of territories may have branch or regional offices located in each of the major areas where it operates. It is also possible for the company to have a centralized operation, where much of the business is conducted from one main location. The degree to which a company is centralized is related to its degree of hierarchy; more hierarchical organizations also tend to be more centralized. Still, the degree of centralization and reporting structure are different in each company. See Exhibit—Advantages and Disadvantages of Centralization and Decentralization.

Since the COVID-19 pandemic, many companies in the industry have moved primarily to a hybrid or fully remote work model, which has reduced the influence of the office-first model. These new work models will have an impact going forward in how the organizational structures of insurance companies are designed. Different operational configurations and reporting structures may have to be tested by companies to see what works best.

Exhibit

Advantages and Disadvantages of Centralization and Decentralization

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Branch Management

Many of the functions performed at the head office of a company may also be performed at the branch level, but on a smaller scale. The degree to which this occurs depends on whether the company is centralized or decentralized.

In decentralized companies, branch operations primarily emphasize underwriting, claims, marketing, sales, and customer service. Because employees of branch offices meet directly with brokers and policyholders, branch employees are a valuable source of feedback on marketplace conditions, competitor behaviour, and customer satisfaction.

Centralized companies often restrict underwriting and claims authority, policy issuance, finance, and accounting to head office, retaining only a sales and customer service presence at their branches or call centres.

Branches can be formed along two lines: by geography or by product line. The most common way to accomplish this is by region, or geographically. Doing so allows an insurer to efficiently offer all of its lines of business at each location. An organization may find it more advantageous to form branches according to market segment, perhaps offering personal lines at one location and commercial lines at another. This is not very common, as it requires costly duplication of overhead costs such as rent, office equipment, and other support systems.

Multiple Companies

Depending on the mission, vision, or values that a company’s management has chosen, its goals may be achieved by establishing a single company. It is possible, however, that multiple companies within a single corporate structure will be required to provide flexibility in areas such as distribution channels, products offered, underwriting eligibility, underwriting criteria, and rating plans.

Establishing multiple companies allows an organization to use independent distribution networks (the broker and independent agency networks), as well as a direct sales force. Both offer access to a broader policyholder base, though they may also present some difficulties to the insurer. For example, the creation of multiple companies within a single corporate structure may generate a perception among brokers that the new corporation is using multiple companies to solicit business from them while directly competing against them with direct writing companies.

Having multiple companies within an organization allows for flexibility in the products that are offered as well as the types of risks targeted. For example, one company in the organization may sell just farm insurance, another in the organization may sell marine, and yet another may specialize in providing insurance for clients in a certain profession. It becomes possible to have different rating plans and underwriting rules. This is especially useful for regulated lines. It allows the multiple companies overall to capture a larger population. It also allows for differences in corporate structures: Mutual companies offer participating policies and stock companies offer non-participating policies. A single entity allows for only one or the other.

A company may choose to acquire a shell company (a company with the licences needed to operate but not much else) or an existing insurer with a book of viable, attractive business that fits the overall strategy for the company’s mission. For example, a company that sells personal- and commercial-lines business through brokers may purchase or create a shell company to sell group, affinity, or specialty insurance directly to clients.

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The decision whether to buy or to build an additional company requires the parent company to consider such issues as the cost and timing of building a new company versus the cost and timing of finding a suitable established company or shell company that fits the strategy of the corporation and is already licensed.

Having decided that it is cost-effective and timely, the entity may consider the following factors when buying a company:

• Fit with the purchaser—The fit is important in all aspects—not only in regard to the book of business but also as to how the culture of the purchased company and the expertise of its staff will integrate with the purchaser’s environment.

• Outstanding liabilities of acquired company—Outstanding liabilities could be of concern to the acquiring company. There may be a cost-effective way to protect the purchaser from adverse development. The purchaser may try to persuade the seller to retain its existing liabilities.

• Integration of companies—The purchaser must consider the overall situation to develop strategies in order to ensure a smooth transition. Some of the larger goals might include the desire to retain the purchased company’s book of business, staff, and distribution network.

• Computer system compatibility—Computer systems and technology stacks may need upgrading when acquiring a new company. The purchaser must compare its existing system to any acquired system to determine their compatibility. One system may have great flexibility or some other important attribute that might influence a buyer.

Stock Company and Cooperative Enterprise

There are two main categories of insurance companies:

1. Stock company—a company that operates for the profit of its owners; either privately held or publicly traded

2. Cooperative enterprise (also known as a mutual company)—a company that operates for the benefit of its members, who insure one another against the possibility of certain types of loss

Exhibit—Comparing a Stock Company and a Cooperative Enterprise on the next page shows comparisons between the two.

Stock Companies

An insurance company organized as a stock company has the same capital structure as any other capital enterprise: A number of individuals or corporations subscribe and contribute capital to form the legal entity known as a corporation. These subscribers, known as shareholders, have an equitable interest in the assets of the corporation and hope to make a reasonable profit on their investments.

Private stock insurance companies are responsible for much of the insurance written in Canada and throughout the world. Security to policyholders for assumed liabilities is represented by subscribed capital
 or paid-up capital
 and any surplus.

Generally, under a stock company system, policyholders contribute to a communal fund by paying premiums for their insurance. If premiums do not cover the liabilities of the insurer, then2-24the contributed capital of investors funds any shortfall. During the early operation of a stock company, this capital can be used to pay expenses; once the company has become established, it is anticipated that the insurer’s income will cover its expenses. In theory, if a company’s expenses exceed its income, it draws on its paid-up capital and accumulated surplus to cover the difference.

Exhibit

Comparing a Stock Company and a Cooperative Enterprise

Like the shareholders of any corporation, the shareholders of insurance companies anticipate a reasonable return on their investment in the form of dividends. However, unlike those who invest in other types of corporations (for example, manufacturers or retailers), stock insurers seek returns from both underwriting profits and investment income. For many insurers, their principal objective is to make a profit from underwriting, but they can also attract a considerable amount of investment income through returns realized on investment portfolios. Regardless of where a company’s profits come from, shareholders participate in those profits through distributed dividends. Any remaining profit is added to the company’s surplus.

Mutual Companies

A mutual insurer is a form of cooperative enterprise owned by its policyholders (also known as members). The association is formed for the purpose of insuring one another against the possibility of certain types of loss. It operates on a premium assessment plan or premium note plan.

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Under this type of plan, the mutual insurer’s participating policyholders are required to sign a premium note identifying the limit they would be responsible to pay should the company suffer a financial setback. The full premium is finalized when the insurer’s operating experience can be factored into it. If the company declares a loss, the policyholders will be assessed and a levy will be determined to make up the deficit, but only up to this agreed amount. Likewise, policyholders share profits among themselves. Today, profits are typically redistributed by reducing premiums rather than refunding each policyholder. Mutual insurers can be structured in a number of ways, and the structure of some (for example, farm or factory mutual companies) is very specialized. Factory mutual companies have focused on loss prevention and the mitigation of exposure to loss.

An insurer that starts as a pure assessment mutual can apply to the regulator to become what is known as a stock mutual company. Such a change allows a company to write policies for the public at large rather than exclusively with its own members. Thus, in this situation, each policyholder is not actually a member of the mutual company in the same way as under the pure assessment mutual system.

Introduction

Regardless of an insurance company’s overall functional setup, most operations still resemble a traditional corporate enterprise. Certain committees or groups may be set up voluntarily or, as in a board of directors, be mandated by statute. Not all insurance companies in Canada have a board of directors. Foreign insurers that trade out of Canadian branch offices do not each have a Canadian board of directors. When a foreign company’s head office is located outside of Canada, the law requires the appointment of a chief agent for the company to be licensed in this country. Some foreign insurers set up an advisory board whose primary concerns are the investments and financial matters of their Canadian operations.

Senior management leads a company by developing a philosophy or vision for the organization. A company formulates its mission statement to reflect its purpose and how it will conduct itself; through this, a company guides its growth with a focus. A typical insurer’s vision statement may assert the following:

• Customer-centric protection

• Exceptional service to all stakeholders

• Community and social responsibility

• Commitment to innovation in product and service design

Each company may choose a somewhat distinctive set of criteria to differentiate itself, and each will strive to make decisions that resonate with consumers. This section explores the role of a board of directors and how it helps the senior management team in developing and guiding the business.

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Board of Directors

A board of directors is a group of individuals chosen by the shareholders of a company to direct that company. Once the board is established, the group then selects and appoints its own chair—the person who will lead the unit. The board is generally responsible for hiring a chief executive officer (CEO) and a president, as well as other professional managers to run the day-to-day operations of the company. In a stock company, shareholders elect the board of directors, whereas in a mutual insurer, the board of directors is elected by the company’s members.

The most senior corporate officer of a company may be called the CEO, the president, or the general manager, among other titles. Labels such as these are not necessarily interchangeable; nor do they mean the same thing in every company. For example, in some companies, the same person holds the combined title of president and CEO; in others, these positions are held by two different people. Regardless of title, the senior officer is responsible for ensuring that policies set by the directors are carried out and that the company is well-run on a daily basis. The board oversees the company’s internal controls to ensure that objectives are met.

Board members may each have their own area of responsibility and report on its performance to the chair of the board. For example, one member may be responsible for human resources; another may be responsible for finance, investments, and audits; and a third member may be responsible for operations—underwriting and claims.

It is also the responsibility of the board to ensure that the company complies with guiding legislation and corporate bylaws. Mandatory annual filings made to the regulator point out whether or not a company is in compliance. Given the highly regulated state of the industry, there is often concern that too much time is spent on regulatory compliance, and that this is a drain on the company’s resources that makes it more difficult to concentrate on operating the company profitably. For automobile insureres, an additional concern is the constant change in provincial and territorial automobile insurance regulation, which has created an environment of unpredictability.

Legislation also requires that the board establish procedures to resolve conflicts of interest. These procedures sometimes include techniques for the identification of potential conflict situations.

A conflict of interest arises when a person’s own interests could potentially benefit from their corporate role and could therefore influence their approach to that role. For example, a board member’s corporate role includes an obligation to uphold the interests of the corporation; but a board member who is also a supplier to that corporation could be torn, in board decisions, between upholding the interests of the corporation and acting in the interests of the supplier. The fact that a conflict of interest exists does not necessarily mean that a corrupt act has occurred; it means that someone is in a position to exploit their professional role for their personal benefit at the expense of the interests of the corporation.

The Insurance Companies Act stipulates that federally regulated insurance companies have both an audit committee and a conduct review committee. Such committees are composed of board members. Exhibit—Audit and Conduct Review Committees outlines each committee’s role.

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Exhibit

Audit and Conduct Review Committees

Audit Committee

The role of the audit committee is to improve and make transparent the company’s financial reporting process. The board of directors may prepare terms of reference for the audit committee to clarify what specific duties are required of it that extend beyond the statutory duties. Committees differ somewhat in style and substance from company to company.

Public companies use management discussion and analysis reports (commonly called MD&A reports) to describe the process they use to test internal financial controls and to demonstrate transparency.

Insurance audit committees differ from those in other industries in several ways:

• They use terminology that is distinct from that used in other industries.

• They operate in highly regulated environments.

• They rely on actuaries to prepare estimates of future claim payments and to produce premium rates.2-28

• They must understand that policies are sold and revenues are collected well before costs are incurred, so products are priced before the claims costs are known.

• They must understand that claims reserving practices have a significant effect on financial statements.

• They must consider reserve adequacy concurrently with the risk of catastrophic loss.

• They must consider liabilities and investments for the long term.

Conduct Review Committee

The conduct review committee of a company is mainly concerned with conflict of interest issues that include self-dealing or related party transactions.

Other Committees

Other committees may also be formed by company boards as they see fit or as the need arises: executive committees, management committees, investment committees, compensation and pension committees, or mergers and acquisitions committees.

A company’s executive committee is usually responsible for the day-to-day management of the enterprise. Most often chaired by the president or CEO, it is usually made up of the heads (often the senior vice presidents) of the company’s major functional departments, business units, or profit centres.

The management committee’s mandate is to ensure proper implementation of corporate strategy within the committee members’ respective departments, business units, or profit centres. The committee comprises the company’s executive committee as well as other managers and supervisors. However, many companies, especially smaller ones, do not have a management committee.

The board generally exercises only a high-level form of oversight. Typically, corporate boards are involved in issues of ownership, strategy, financing, and mergers and acquisitions. How a board of directors actually oversees operations tends to vary widely from company to company. Some corporations hold very formal meetings. In contrast, other boards are more informal.

Risk Management Controls

Insurers put in place processes and policies for risk management and control to manage and mitigate the risks of their business activities. Also, doing so keeps track of their ability to comply with the governing statutes, regulations, and guidelines of the industry.

Some risks in question include those of product design and pricing, underwriting, and others that arise from the prospective insurer’s plans for its operations as well as that insurer’s technology and reputation. A company’s internal audit function oversees organizational and procedural controls. It is important that any audit function operate independently and reliably to ensure its effectiveness.

Plans must be in place to ensure that systems in the business continue to operate regardless of external events. The insurer must assess its IT operations to ensure that it can retrieve all data necessary to continue its operations and to meet its regulatory obligations.

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Multi-layered Goal-Setting

Based on input from the board of directors, executive management sets goals that filter down to its various departments, to the units within departments, and to each individual employee. The company’s goals are broken down into departmental goals, unit goals, and ultimately individual goals. Example—Goal-Setting: The Claims Department demonstrates how multi-layered goal-setting works.

Example—Goal-Setting: The Claims Department

A claims manager establishes departmental goals to respond to those set by executive management and the board of directors. These goals will address how to control claims and expense costs, express a target for any reductions in cost, set targets for customer satisfaction and the number of claims handled per adjuster, and respond to any audit issues. To meet these goals, the claims manager establishes the following objectives:

• Control the cost of damages and manage indemnity payments by ensuring that a certain percentage of collision losses are viewed by an automobile appraiser

• Reduce the average allocated loss expense per file by 10 percent

• Target an acceptable monthly ratio of opened to closed claims

• Reach a customer satisfaction level of a certain percentage

• Target a suitable audit result for the department to achieve

Units established within the claims department also develop goals to improve their performance. For example, a subrogation unit might choose to improve its overall recovery rate by two percentage points. Units concerned with handling new claims might choose to meet face-to-face with 95 percent of policyholders within 24 hours of a claim being reported. A special commercial claims-handling unit might choose to meet with particular risk managers biannually to improve relationships.

In each department where goals are set, individual goals are also formulated to meet the needs of each employee. Some of these goals might apply to an individual’s technical performance within the claims department and areas of personal growth (for example, educational goals that will affect the employee’s career path and improve their technical competence). Individual loss adjusters’ goals are subject to a performance review. Goals and objectives that were set and agreed upon the year before will be revisited to determine if they have been met.

The goals that are set must be SMART (specific, measurable, attainable, relevant, and time-bound) and set up for each group from the board of directors to individual contributor employees. Exhibit—Goal-Setting Hierarchy provides an overview of how this filters through an organization. Multiple goals are important to the company’s strategy. For example, a company’s board may set a goal to return to profitability through knowledge and service. Example—The Filtering of Goal-Setting in an Insurance Company demonstrates how a goal from the board is disseminated throughout an organization.

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Exhibit

Goal-Setting Hierarchy

Example—The Filtering of Goal-Setting in an Insurance Company

The board of directors at Target Insurance Company is not pleased with the recent profit and loss statements for the company. The statements show a marginal net income increase of 1.5 percent from the previous year. Basically, profits are flat, and that is of concern. In recent months, it became evident that something had to be done. The board feels that it needs to communicate and implement a better mandate for profit by increasing premium growth as well as implementing expense management initiatives or the company will have to start laying off employees.

The board and senior management agree that they need a new strategy. Therefore, the company sets out to increase profits. The following is the process that the board and senior management recommend the organization follow.

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COMPANY GOAL: Increase profitability through knowledge and service.

How can this be done?

• Allocate money for education and training to all departments to expand knowledge and training on customer service, products, software, and new technologies such as generative AI

• Hire outside consultants to audit and streamline the communication between the special investigations unit (SIU), claims, and underwriting to prevent and detect fraud more effectively

• Convene town halls (hybrid or virtual), publish newsletters, and maintain the company intranet to regularly communicate underwriting and claims results to employees

• Share with the company all the goals it wishes to achieve annually and its progress quarterly

• Discuss how profitability can impact return on investment (ROE) and profit-sharing, if applicable

DEPARTMENT GOAL: Improve knowledge and service in the specific functions.

How can knowledge and service be improved in specific departments?

• Underwriting

  • Enrol in continuing education courses to learn how to service clients better and attend seminars/symposiums/training on changes in insurance, including specifically emerging areas such as climate change, cyber risk, Internet of Things (IoT), the sharing economy, and artificial intelligence

  • Monitor legislative and regulatory changes and developments in fraud, and attend training seminars within the company to keep abreast of what is happening

  • Monitor development of new or enhanced products or endorsements offered in the industry, and monitor new loss trends that may impact policy wordings or require the development of further exclusions, such as communicable disease, pickleball liability, and exterior insulation and finish systems (EIFS) that add synthetic cladding to exterior property walls

• Claims

  • Continually analyze claims—help pinpoint problems that need to be resolved

  • Enrol in continuing education courses

  • Attend seminars and symposiums related to insurance issues, especially emerging claims trends such as flooding or other water damage, cyber liability, or social inflation (rise in claim costs over general rate of inflation due to increasing litigation costs and other trends), or insurance technologies for business process improvement (it is especially important to be on top of fraud for claims, so anything related to fraud investigation/cyber risk/identity theft would be helpful)

  • Claims adjusters should attend training seminars to keep abreast of changes and enhance their enabling skills (such as negotation and empathy)

  • The SIU should work with claims and underwriting to share communications on fraudulent claims trends2-32

• Sales and marketing

  • Ensure that different departments are aware of the changes in the industry and provide training seminars. For example, if offering a new cyber insurance product, communicate it to all brokers, underwriting staff, and claims staff so that all these stakeholders have updated knowledge to offer clients

  • Measure effectiveness of marketing communications to stakeholders by conducting surveys and requesting feedback

UNIT GOAL: Each unit in each department—for example, personal lines or commercial lines in underwriting or accident benefits, property damage, or bodily injury in claims—has its own goals.

• For example, the goals of a new business unit that underwrites personal property risks could be to ensure each new business risk that is accepted follows the underwriting guidelines and is profitable

• In an accident benefits claims unit, its goal could be to conduct monthly audits to ensure that all procedures are performed as well as could be and that file leakage
   is prevented

• In all units, goals could include ensuring a high quality of work through using control measures and regular performance audits

INDIVIDUAL GOAL: Employees may have individual goals set by the company, or they may need to set their own individual goals in collaboration with their manager. By holding themselves accountable to accomplishing their individual goals, employees can achieve success in their roles.

Composition of a Board

Some publicly traded companies stipulate in their bylaws that a certain number of external board members sit on their board. However, there are very few publicly traded property and casualty insurance companies in Canada.

The Insurance Companies Act sets out how a board of directors of a federally regulated insurance company must be composed. Members are restricted as to their affiliations, their residency, and whether they are employed by the corporation. Legislation limits how many directors on a board may be affiliated with the company and notes exceptions to the rules.

Half of the directors on the board of a foreign institution’s subsidiary and a majority of the directors on the board of any other insurance company must be resident Canadians. Even though a director is a Canadian citizen, they have to physically reside in Canada to qualify for the residency requirement. Only a certain percentage of a company’s directors may be employees of the company or one of its subsidiaries.

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A board of directors is made up of diverse people. The executives each have a role in directing the company.

Directors as Fiduciaries

Directors are fiduciaries
 ; they hold a special position of power that makes them subject to greater accountability to those they serve. Fiduciaries are subject to many legal and professional requirements.

Those who have entrusted their assets to a fiduciary are vulnerable. To recognize the power a fiduciary holds, society has created legal safeguards to raise the level of a fiduciary’s accountability. Essentially, fiduciaries must not take unfair advantage of the unbalanced relationship in a way that could be detrimental to those whose confidence they hold. They are expected to act with moral conscience, which includes the disclosure of any limitations, conflicts of interest, or other conditions that adversely affect their ability to perform. Directors are fiduciaries entrusted to look after the best interests of a corporation. The law outlines the duty of care required of them. They must act honestly and in good faith. Like all fiduciaries, directors must use care, diligence, and skill when exercising their authority. They hold the future of the corporation in their hands.

Together, the chair and the board are responsible for the broad policy of the company; that is, the rules and guidelines to be followed in the overall operation of the business. These rules and guidelines may include the following:

• Types of insurance and extent of coverage to be sold

• Territory in which the company will operate

• Underwriting policy

• Agency policy

• Investment policy

Federally regulated P&C companies must have a senior compliance officer, and the officer’s name must be filed with the Office of the Superintendent of Financial Institutions (OSFI) annually (and whenever there is a personnel change). As its title implies, this position is responsible for operating, guiding, and monitoring the company’s compliance program. Internal controls and policies ensure compliance with legislation and its guidelines. In the Canadian marketplace, it is common for the chief financial officer to also act as a senior compliance officer.

Summary

Companies in any industry must choose some way of organizing themselves to operate as efficiently as possible to pursue business excellence, including financial performance and customer experience (and in the case of insurance companies, to fulfill their promise to pay). Insurance companies depend on factors specific to the insurance industry to do this. The main operational structure of any company comprises administration, marketing, and accounting and finance. The elements of underwriting, claims, and actuarial are unique to insurance operations. Two main types of actuaries are used within insurance company operations: pricing actuaries and reserving actuaries.

The underwriting department is structured to ensure that risks submitted to the company meet its standards of acceptability and that an appropriate premium is charged. The risks of an insured must fall within the target markets determined through strategic planning. The task of underwriting also involves steps to minimize risk through loss prevention and control activities.

The underwriting function can be conducted through the main head office branch, or it can be managed at the branch or regional office. Technical underwriters may perform audits on the company’s branch units to ensure compliance with corporate directives and best practices. Underwriting can also be organized by agency or brokerage and line of business or specialty lines.

The claims department is structured to best investigate and document the circumstances under which claims occur, to determine whether a policy covers the event, to assign resources to mitigate and repair loss, to set a reserve for the estimated expected cost of each claim, and to initiate payment of the claim when established criteria for distributing funds are met.

New technologies are being adopted in the underwriting, claims, and actuarial departments, among other insurance operations, and these functions and their departmental structures are evolving as a result.

How a company is structured will affect how it is governed; the structure defines relationships and the distribution of rights and responsibilities among the board of directors, managers, and shareholders. All organizations and their departments operate with some degree of hierarchy. An organizational structure that promotes communication flowing from more to less senior employees and vice versa is theoretically the most useful.

A company conducting business in a number of territories will have branch or regional offices located in each of the major areas where it operates. The degree to which a company is centralized is related to its degree of hierarchy; more hierarchical organizations tend to be more centralized.

Many of the functions performed at the head office of a company may also be performed at the branch level but on a smaller scale. The degree to which this occurs depends on whether the company is centralized or decentralized. Depending on the mission, vision, and values that a company’s management has chosen, its goals may be achieved by establishing a single company.

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Under a stock company system, policyholders contribute to a communal fund by paying premiums for their insurance. If premiums do not cover the liabilities of the insurer, then the contributed capital of investors funds any shortfall. The shareholders of insurance companies anticipate a reasonable return on their investment in the form of dividends.

A mutual insurer is a form of cooperative enterprise owned by its policyholders (also known as members). Under this type of plan, the mutual insurer’s participating policyholders are required to sign a premium note identifying the limit they would be responsible to pay should the company suffer a financial setback.

A board of directors is a group of individuals chosen by the shareholders of a company to direct that company. Once the board is established, the group then selects and appoints its chair. The most senior corporate officer of a company may be called the chief executive officer (CEO), the president, or the general manager, among other titles.

The senior officer is responsible for ensuring that policies set by the directors are carried out and that the company is well-run on a day-to-day basis. It is the responsibility of the board to ensure that the company complies with guiding legislation and corporate bylaws.

The Insurance Companies Act stipulates that federally regulated insurance companies have both an audit committee and a conduct review committee. Such committees comprise board members. Other committees may also be formed by company boards as they see fit or as the need arises: executive committees, management committees, investment committees, compensation and pension committees, or mergers and acquisitions committees.

Some publicly traded companies stipulate in their bylaws that a certain number of external board members sit on their board. However, there are very few publicly traded property and casualty insurance companies in Canada. Federally regulated property and casualty companies must have a senior compliance officer, and the officer’s name must be filed with OSFI annually. In the Canadian marketplace, it is common for the chief financial officer to also act as a senior compliance officer.