Effective organization is fundamental to an insurer�s ability to develop and manage a life insurance operation that serves the needs of its insurance-consuming public on a sound and profitable basis. Successful organization includes these four elements:

However, there is no one best organizational structure suitable for all life insurers all the time. Companies differ substantially in size, objectives, range of products, geographical areas of operation, and so forth. Furthermore, the exact form of any organizational pattern depends on the circumstances of the company�s formation and evolution and on the personalities involved. Since most life insurance in force today is written by commercial life insurance companies, the following material on the internal organization of life companies is focused primarily on commercial insurers.

Subject to constitutional, statutory, and regulatory constraints, and to the company charter or bylaw authorizations and limitations, the stockholders in a stock company and the policyowners in a mutual company are a commercial life insurance company�s ultimate source of authority. However, they usually do not direct the actual operations of their company but elect a board of directors to whom they give the authority for the company�s conduct.

Authority can be defined as the right to control, command, and decide or otherwise settle issues. Most organizations have various levels of authority. At each level those possessing authority delegate specific responsibilities to their subordinates to make decisions and take certain actions. There are typically four levels of authority: the board of directors, executive officers, managers, and supervisors.

Board of Directors. The stockholders, or the policyowners if the insurer is a mutual company, elect and when necessary may replace the insurer�s board of directors. The minimum number of directors is usually specified in the company�s charter and sometimes by state law. The board and its various committees are the highest level of authority in the company.

Board members represent the interests of those who elected them. The board establishes corporate policy, appoints the chief executive officer and other executives of the company, delegates to them whatever authority and responsibilities it deems appropriate, holds them accountable for the performance of their responsibilities, evaluates company results and finances, fosters long-range planning, authorizes major transactions such as acquisitions or mergers, and declares dividends. The board meets periodically, approves or disapproves recommendations of its committees and company officials, and considers important matters concerning the conduct of the business.

To facilitate the exercise of its responsibilities and maintain closer and more frequent contact with key company operations, the board is usually divided into a number of standing committees. Committees handle whatever actions need to be taken between board meetings. The committees report to the board.

To enable the committees to perform their functions efficiently, one or more executive officers are often assigned to each committee. These officers are responsible for bringing background information, proposed recommendations, and the matters requiring committee action to each committee�s attention. Not uncommonly, an executive officer is empowered to act for a committee between meetings on any matters within the committee�s authority and to report his or her action at the next committee meeting.

The number of board committees and the scope of their duties vary from company to company. However, they commonly include the executive committee (sometimes called the insurance committee), the investment committee (sometimes referred to as the finance committee), the audit committee, the tax committee, and sometimes a claims committee.

The executive committee focuses on matters bearing on the insurer�s general business. It deals with overall company policy, lines of business sold, territories in which the company operates, policies affecting company employees, other matters not assigned to a different committee of the board, and long-range planning.

The investment committee establishes the insured�s investment policy, including the types of investments in which company funds are to be placed and the allocation of assets among the different types of investments (bonds, stocks, mortgages, and real estate). Although day-to-day investment activities are conducted by the insurer�s investment department, the committee oversees all investment practices; the investment department proposes major investment transactions, which are then subject to committee approval or disapproval. The committee may also select the banks into which company funds are to be deposited and determine the amount of funds to be maintained in each account. The audit committee oversees the insurer�s accounting operations, supervises internal and external audits, and reviews the company�s periodic financial statements. One of its primary functions is to ensure the integrity of the financial information used by the board in its decision-making activities and made available to outsiders, including federal and state regulators. The committee is also responsible for retaining a professional, independent outside auditing firm to perform periodic audits. (Internal audits may be conducted by the company�s own accounting personnel.) Since this committee serves as the guardian of the integrity of the insurer�s financial reports, company officers do not normally serve as members. Some states bar them from doing so.

The tax committee analyzes and evaluates the tax implications of various company policies, programs, and practices. It also keeps abreast of any relevant tax legislation.

The claims committee exercises general control over the payment of claims. This includes determining policy as to questionable or contestable claims.

Although it usually places considerable reliance on management recommendations, the ultimate responsibility for the insurer�s legal and ethical conduct rests with the board. Simply rubber stamping management recommendations and actions may therefore result in personal liability for board members. With several insolvencies and the questionable management conduct of several property, casualty, and life insurance companies over the past decade, the responsible exercise of the board�s authority has become a sensitive and important issue that board members cannot afford to ignore.

Executive Officers. The second level of authority within a life insurance company is its executive officers. Although the board has the highest level of authority, it vests broad administrative authority over the company in a chief executive officer (CEO), typically the president or chairman of the board. The CEO is primarily responsible for the selection, termination, and supervision of his or her subordinate officers and department heads.

The executive officers, usually vice presidents or senior vice presidents, report to the CEO and are responsible for carrying out company policies and general company management. In addition to serving on board committees and being part of the executive management team, executive officers usually have authority over a major division of company operations.

Managers. The third level of authority in a typical life insurance company is the managerial level. Company managers at this level focus on a particular phase of the company�s activities, rather than on the operations of the insurer as a whole or a broad division of the company. These officers are responsible for translating company policy into plans for day-to-day operations and making decisions on matters within the scope of authority delegated to them.

Supervisors. Supervisors occupy the fourth level of authority. They manage the daily activities of subdivisions in various departments, directly supervise nonmanagement employees, and implement their manager�s plans.

The people a manager directly supervises represent the manager�s span of control. The number of subordinates one manager can effectively supervise depends on a variety of factors. The simpler and more repetitive the tasks, the more people a manager can supervise easily. The greater the skills and competence of the manager and his or her subordinates, the broader the span of control the manager can handle. The higher the rate of turnover among subordinates (and therefore the need for more training) and the more widely dispersed subordinates are, the narrower the span of the manager�s control. Whether a manager�s span of control is broad or narrow, however, every employee should know for whom he or she works and to whom he or she is accountable.

A company utilizing broad spans of control requires fewer levels of management. Communication tends to be better. Decisions can be made more quickly because several levels of management are not involved. However, a flat (fewer levels of management) structure may result in managers or supervisors being responsible for more activities or people than they can effectively manage. By contrast, if a company adopts a narrow span-of-control philosophy, each supervisor or manager oversees only a few subordinates. Although this can enhance supervision, it may also boost company expenses because of additional management layers and increase communication problems from the top of the company down to the lower levels and from the lower levels up to the top. Historically, insurance companies have leaned toward several, rather than few, levels of management and narrow, rather than broad, spans-of-control. Recently, however, many insurers have begun to organize (or reorganize) to reduce the number of levels between the company president and entry-level positions.

A life insurance company�s successful operation depends on the performance of several basic functions. Products must be developed and made ready for sale. A system to sell products must be created and implemented. Customers must be serviced. Claims must be paid. Funds received must be invested in a way that ensures the availability of sufficient funds to meet the insurer�s obligations when they become due. An insurer may be organized in a variety of ways to perform these functions.

Traditionally, life insurers have been organized on a functional, product, or geographical basis, or a combination of these organizational formats.

The term function refers to a distinct type of work, an element or step in a process, or some aspect of operations or management requiring special technical knowledge. Organization by function involves allocating closely coordinated activities to a single unit or department. The major functional areas of a life insurance company are marketing, actuarial, underwriting, customer service, claim administration, accounting, investments, legal, human resources, and information systems. A company organized by function establishes a separate department to perform each of these functions.

Organization by product involves allocating work according to the products sold. Each line is administered by a major division of the company (for example, ordinary, group, or industrial insurance). Consequently, each division assumes responsibility for various functional activities with respect to that product, although some functions, such as investments, might continue to be handled centrally.

Under organization by territory, responsibilities are allocated to divisions in the company based on geographical areas. A company may divide its operations by states or regions. If the insurer does business in Canada, there may be a United States division and a Canadian division. Within each territorial division, the insurer may further divide its operations by functions and/or by products.

In recent years, other forms of organization have emerged. Some insurers now organize their activities around profit centers�segments of the company that control their own revenues and expenses and make their own decisions about operations. (Segments that are not profit centers are service centers, which provide support to the profit centers.) The profit center approach focuses on improving efficiency by controlling costs and thereby becoming more competitive and profitable. Profit centers tend to be organized by product since the insurer�s product lines are the prime generators of the company�s revenues. Since each profit center is responsible for its own readily measurable performance, one benefit of this approach is that decisions can be made lower in the organizational chain. Possible disadvantages of the approach are a lack of coordination between different elements of the company, duplication of efforts, and lost economies of scale.

Since life insurers have traditionally been organized on a functional basis and since certain functions need to be performed regardless of the form of organization, this section will briefly describe a functionally organized insurer. Keep in mind, however, that the following discussion is not intended to depict an actual company. It is presented to illustrate the functional form of organization. In addition, numerous interdepartmental committees can be employed to better coordinate activities as between departments.

The marketing/agency department is responsible for the sale of new business, the conservation of existing business, and providing field services to policyowners. The department supervises the activities of the insurer�s field force; recruits, selects, and trains agents; and conducts market analysis, advertising, and sales promotions. It also works with the actuarial and legal departments to develop new products, policy forms, and agent-company contracts.

The primary responsibility of the actuarial department is to see that the company�s insurance operations are conducted on a sound financial basis. This includes determining appropriate premium rates and establishing adequate policy reserves. The department generally handles the insurer�s mathematical operations, develops new policies and forms (including nonforfeiture values), analyzes earnings, provides statistical data from which the annual dividend scale is established, and conducts mortality, lapse, and other studies. The chief actuary and other company officers are jointly responsible for the accuracy of the annual financial statements required by the various insurance departments, especially the portions relating to policy liabilities and other items determined by actuarial calculation. Actuaries also typically participate in corporate strategic planning.

The underwriting department establishes standards for the acceptance or rejection of applicants for insurance and for applying these standards to ensure that the actual mortality the company experiences does not exceed that assumed in calculating the premium rates. Underwriting relies on medical underwriting judgment as to good health and lay underwriting judgment as to other factors relevant to an applicant�s insurability. The home office underwriting department collaborates with medical and actuarial personnel in establishing general underwriting standards, is responsible for communicating matters concerning the selection of risks to the field force, and may be responsible for negotiating and managing reinsurance agreements (agreements through which the company transfers some or all of an insurance risk or risks to another insurer).

The customer or policyowner services department furnishes home office services to the insurer�s field force and to customers, including policyowners, beneficiaries, and employees. Customer service personnel fulfill requests for information, assist in interpreting policy language, answer questions about policy coverage, and make changes requested by policyowners (new addresses, beneficiary designations, or mode of premium payments, for example). The department also computes and processes policy loans, nonforfeiture options, and dividends. In some companies the department processes commission payments to the insurer�s agents, sends premium notices, and collects premium payments.

The claim administration department processes the claims against the company. Claim examiners review the claims filed by policyowners or beneficiaries, verify their validity, and authorize payments to the proper persons. Claims denied may result in litigation.

The accounting department establishes, supervises, and maintains the insurer�s accounting and control procedures. It maintains the company�s general accounting records, controls receipts and disbursements, oversees the company�s budgeting process, and administers the payroll. It performs audits both in the field and in the home office. In conjunction with the actuarial department, the department prepares the financial statements used both internally and submitted to the regulatory agencies. The comptroller is one of the officers who certify the accuracy of the annual financial statements required by state insurance departments. The accounting department is also responsible for matters concerning federal, state, and local taxes. It may, in addition, perform various expense analyses and other statistical operations not undertaken by the actuarial department.

The investment department implements the insurer�s investment program under policies established by the board of directors and under the supervision of the investment committee. The department constantly evaluates existing and new investments, recommends whether to hold or sell, and may negotiate with brokers, investment bankers, or directly with borrowers. Authorized members of the department buy and sell stocks, bonds, mortgages, real estate, and other assets. The investment department also advises the president and the board about possible acquisitions and mergers.

The legal department is responsible for the insurer�s legal matters, including compliance with federal and state laws and regulations. This encompasses not only traditional general corporate and insurance law but also antitrust, securities, labor, pension, and tax law. The legal department evaluates current and proposed legislation and regulations affecting the company. It advises on questionable claims, oversees litigation, performs a variety of legal activities relating to the insurer�s investment transactions, works with the accounting and auditing department to determine the company�s tax obligations, and participates in the development of policy forms, agents� contracts, investment transactions, and other contractual forms used by the company.

The human resources department handles matters concerning the insurer�s employees. The department develops company policy on hiring, training, and dismissal of employees. It ascertains appropriate levels of compensation, assures compliance with federal and state employment laws, and administers employee benefit plans.

Over the last 30 years or so, the computer has become an indispensable tool in life insurance company operations. The information systems department develops and maintains the company�s computer systems. It assists other departments in developing or buying the computer systems and software they need to furnish information, maintain records, and administer products. The department also maintains company records in computerized files, provides data for the preparation of financial statements, and conducts analyses of various systems and procedures used throughout the company.

A company may appoint a number of interdepartmental committees to coordinate the activities of various departments or to conduct an activity that falls outside a particular department�s domain or requires input from two or more departments. The following are examples of committees that various insurers might establish: a marketing committee to evaluate the need for product revisions or new products; a budget committee to prepare the annual budget (the ultimate budget is subject to approval by the board of directors); a corporate communications (often called public relations) committee to coordinate company activities on advertising, publicity, and public relations; a research committee; and a human resources committee to provide interdepartmental coordination with the human resources department in such areas as personnel policies and training.