Insurance Processes

Quotation Process

Quote generation is a process by which the prospective insurer is given a tentative premium amount depending on the information provided by him/her. Quote only requires certain minimum information which is specific to line of business. This is sufficient data to rate the quote and provide a premium. If the insured chooses to accept the quote, the data from the quote is transferred to an application, thus eliminating duplication of data entry effort. A quote can be rated multiple times to arrive at the new premium based on a change.

When a quote is converted to an application, it asks for any information not available in the quote but required for the application, before it can be converted.

Some of the larger agents who do a lot of business with a carrier send the application data in electronic form, instead of faxing (or otherwise sending the physical application form) and manual data entry, thus minimizing chances of errors.

The application data entry process assigns a unique policy number that is the sole reference to the contract between the insurer and the insured. Each policy is further identified by a renewal number that is incremented at each renewal

Rating Process

Rating of a policy is the single most important and biggest component of an insurance policy administration process. Its accuracy and flexibility influences the survival of the insurance company. There are several rating tools in the market offering different levels of sophistication.

Each rating process is performed as of an effective date. The reason for this two-fold:

(A) Base premium rates, surcharge and discount factors, etc. are often maintained date-wise; periodically, these amounts may be revised in response to market feedback

(B) The elements of a policy may be active at different points in time, and not all elements should be rated on at all times

Rating is done prior to new business issuance, at endorsement and at renewal.

Billing Process

The insurer bills the insured at the intervals specified by the payment plan chosen on the policy. Each installment bill has a mailing date and a due date, which makes up the billing cycle. In addition, it may also have a grace period associated which ‘extends’ the due date of the bill. The bill’s amount is calculated from the total policy premium distributed across each bill. The method of distribution depends on the payment plan, for example, one method could be to allocate a certain percentage of the premium for the down-payment (or deposit) and spread the remaining amount equally on the rest of the installments.

In the event the insured defaults on a payment, a notice is sent informing him/her that insurance coverage will cease on a specified future date and the policy will be effectively terminated unless the required payment is made by that date. This future date is arrived at using a cancellation notice period. Cancellation Notices are legal documents, which must be mailed in time for the insured to send in the payment. Cancellation effective dates are adjusted so that the insurer will not have to extend coverage beyond the time that is already paid for (by a prior cash payment from the insured). In the event, the insured makes a payment before the cancellation effective date, the policy is reinstated.

Issuance Process

To treat a policy as a legal contract between the insurer and the insured, the application submitted by the insured has to be issued (that is when it is called a policy). Issuance is the most important step in a policy’s life cycle. It is at this stage that the application converts to a policy and a contract. Additional charges levied on the insured, such as policy fees, state taxes and surcharges, etc. are calculated at this time and added to the premium to compute the total payables. The issuance process also sets up all the installment bills for the policy, each with its own billing cycle and billable amount. Most installment plans are associated with a per-installment flat service charge or proportionate (to the unpaid premium) finance charge, which is added to the total bill amount. Each installment bill is scheduled as a future activity, to be processed on commencement of the corresponding billing cycle.

The policy issue is made official through a Policy Declaration that states the duration of the contract and the total premium of the policy along with the risk details. Another important document is the Identification Card that is construed as proof of insurance.

When a policy is issued, its entire premium is considered as written premium. A policy cannot be issued unless sufficient down-payment is received.

Payment Plan Process

Issuance of a policy also depends on the payment plan that the insured has opted for at the time of application entry. This payment plan dictates as to how many bills will the policy contain and as to how much percentage of premium (of the total premium) will be distributed on each bill. Payment plan also decides the date on which the bills are to be sent and the dates on which these bills will be due.

Endorsement Process

Endorsements are processes by which alterations are made to the policy profile. The changes precisely mean any kind of addition, modification or deletion of the attributes of any of the entities involved in the policy, or changes to the entities as a whole. Endorsements are usually requested by the insured, but occasionally the insurance carrier also carries out independent endorsements, mainly as a corrective measure.

When an endorsement increases the value of the written premium it is called an additional premium endorsement, while if it results in decrease of premium, it is called a credit endorsement. Any type of endorsement due to which there is a change in the policy premium is termed as monetary endorsement and the type of endorsement, which does not effect any change in the premium, is termed as non-monetary endorsement.

Monetary endorsements typically involve addition or deletion of coverages, discounts while non-monetary endorsements are typically name and/or address changes (Note: not all address changes are non-monetary, they may the zip code and consequently the rating territory, thus affecting the premium), payment plan changes or broker/commission percentage changes.

Endorsement processing usually entails re-evaluating the policy premium, and printing Amendment Declarations to advice of the change in the contract. Changes in account payables are adjusted on the installment bills or revised bills are set up. If no more bills remain, additional bills may be created. Debits and credits arising out of endorsements may be billed in different ways by different insurance companies, especially if the endorsement is back-dated; some may consider the debit/credit already earned and correspondingly adjust previously sent bills, some may apportion the debit/credit amount on any remaining bills, etc. The decision to do so depends on the market conditions and responses.

Cancellation Process

A policy may be cancelled manually or automatically. Manual cancellations (notices or terminations) accept some basic input about the transactions. Automatic cancellations can be performed for non-payment or underwriting edit check failure. The cash balance on every policy is checked periodically (prior to the next billing cycle) to assess sufficiency to cover the next approaching billing period. If the balance falls short of the required amount, a cancellation notice is send to the insured and changes the status of the policy. Underwriting cancellations are automatically carried out when the rating process recognizes that underwriting checks have failed.

Reinstatements Process:

Reinstatement is the reverse of cancellation. A policy can be reinstated whether it is under notice of cancellation or terminated. For example, if a policy is placed under notice of cancellation for non-payment, and the insured pays the defaulted amount before the termination date, the policy is reinstated. Similarly, the insurance company may reinstate the policy even after it has been terminated.

A policy may be reinstated manually or automatically. Automatic reinstatements can be performed only for non-payment. A policy can be automatically reinstated if the past due premium amount is received prior to the cancellation effective date or the check is post-marked (mailed by) prior to the cancellation effective date. There is no automatic reinstatement of a policy that is under notice for underwriting reasons, as they are subjective.

Renewals Process:

Every policy has an effective date and an expiration date. Once a policy expires, it is due for renewal.Some days before the actual expiration date, a Renewal Quote is sent to the insured advising him/her of any revised rates. Usually, the insured receives a renewal discount provided that he/she had a good record during the life of the prior term of his/her policy. Occasionally, the policy is found unfit for continued business, and the insured is sent a Non-Renewal Notice that advises him/her of the reasons for non-renewal. These 2 documents are mutually exclusive and mandatory.