Can you explain how an insuarance company works?

I have an interview, it is in the HR department so I am not supposed to know finance but I guess it would be an advantage...
I am not completely stranger to the field,having worked in administration for years, still I would like to know something more specific...something to impress!

Thank you

An insurance company has three main branches - Sales, Claims and Underwriting. Working in HR - you will probably be assisting employees in all 3 branches.

Sales - this department is made up of your agents, sales managers and their staff. Frequently, agents are hired as independent contractors. Because of this - the benefits they receive or do not receive may differ from the other 2 branches. They are usually paid by commission. Some may receive a base + commission. Their job is to sell policies. In essence - the sales department - sells the promise that the insurance company will full fill the terms of the policy contract in exchange for the premium payment.

Claims - this department is made up of adjusters, appraisers, claims managers and clerical staff. Their main job is to investigate, negotiate and settle/deny claims in accordance with the policy terms and state law. The claims department - full fills the promise sold by the agents. Folks in the claims department are usually employees of the insurance company.

Underwriting - this department determines which risks to take on (who to insure) and the rates. Frequently rates are determined by actuaries. Usually the rates have to be approved by the state - Insurance companies can't charge what ever the heck the fill like charging. The rate charged will be based on your "risk". "risk" is the likelihood that you will incur a loss. The underwriting also develops new policies to be offered by the sales department. Folks in the underwriting department are usually employees of the company.

Sources of income: an insurance company has 2 main sources of income - premium paid and investments. Most of the money that is paid by policy holders (premiums) are paid back out on claims. This is called the loss ratio (dollars in/dollars out).

An insurance company will have an extensive investment portfolio. The revenue from this is what pays for supplies, buildings, salaries, re-insurance, and any other type of expense an insurance company incurs. After expenses - if there is anything left over - this is going to be re-invested. Most of an insurance companies "profit" comes from its investments - not premium payments.

From a benefits perspective - all the insurance companies I have worked for - offered some type of retirement - usually including a 401K - health benefits and life/disability insurance.

I have also never heard of any of the other departments having a problem with the employees of the HR department. I've called my HR department lots of times to ask really stupid questions about my health benefits - flex spending plan. I've found them to be great to work with.

Hope this helps.
Good Luck to you.

Very basic expanation:

Many people pay into a fund which is set up to compensate victims of a specific "event".

The cost of the compensation is calculated.
The probability of the "event" happening is calculated.
Therefore it is possible to estimate how much this "event" will cost the fund over a set period of time.
The number of members of the fund is calculated (or actually known if it's well established).
The cost of the "event" is shared amongst the members who pay subscriptions (insurance premiums) into the fund.

The ammount payed in per month is not enough to cover the estimated cost of the "event" if it happened every month.

The monthly premiums are calculated so that the total payed in will cover the ammount payed out to cover the "event" when it does actually happen (plus some left over as fund profit). Remember that the probablility of it happening over a set period of time has been calculated.

The members (customers) stand a very good chance of actually paying more in premiums than they would lose if the "event" happened to them.
The longer you go without an accident or burglary or fire etc. then the greater your chance of actually paying more in premiums than you'd receive in a Claim.

However, that is gambling that you will never have to claim, or that you would never suffer a catastrophic loss (like your house and contents being destroyed). Likewise, the insurance companies are gambling that you will never have a loss.
Remember that the profits don't all go into shareholders or directors pockets. Modern insurance companies have to keep enormous reserves to float themselves across unexpected catastrophes like the recents flooding etc. Also, some claims are without any legal ceiling, such as some death claims.

That's a very simple but basically accurate description of how insurance works.

If you're going to work in HR be prepared to be unpopular with their "victims", i.e. the other employees.
Good luck.

Insurance companies take the premiums that customers pay and invest them to make money off the interest.

Insurance is a system of pooling of losses. People exposed to same risks shared the loses, this is the theoretical version. Eg 100 houses worth 100,000 in an area exposed to flood risk -Risk=uncertainty of losses-and sttistics based on PAST LOSS EXPERIENCE shows 2 hoses every year totally dameaged due to flood. Thus contribution per member is 2 x 100,000/100=2000.The contribution by each is called pure premium Insurance companies are commerical organisations. They include management expense, reserve for contingency and profit with pure premium and then its caled Gross premium. When loss occured due to an insured peril- cause of loss- ins co pay the exact compensation. No body will be allowed to make a profit out of a loss. Hence depreciation etc is charged for New ofor Old and recovery rights have to be transfered to ins co.

An insurance company accepts 'risks' from people, and charge them a premium depending on the likelihood and magnitude of the loss that they might suffer. In effect people change the uncertainty of a large loss into the certainty of a small loss.

Insurance companies then take in more money than they expect to pay out - but the clients can afford this money. They have to work out;

Pure risk losses: i.e. the amount they have to pay in claims
Administration costs: - the amount they pay to staff and other similar costs
Commission/ Advertising costs (Even though Direct Line do not pay money to agents they sure as hell pay a lot to advertising companies)
An element of profit.
A contingency load to reduce the chance of a catastrophic loss.

They also take into account that they will earn interest between receiving the premiums and paying the claims.

You will often see 'combined loss ratios' : this is the ratio between income and expenditure expressed as a percent (without taking into account other earnings. If the ratio is less than 100% the company is making an underwriting profit.

"They take your money and then when you claim they do everything in their power to ensure that they don't pay out what they promised they would."

GET OVER YOURSELF!!!

Why do people always have to say stupid things like this? An insurer is legally obliged to pay a claim if it's valid.

They take your money and then when you claim they do everything in their power to ensure that they don't pay out what they promised they would.

Good answer so far, but they'll also include so many conditions and caveats that getting a payment out of 'em is more difficult than advertised. After all, they're in business to make money.

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