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The Big Picture :
Insurance Industry and Insurance
Company Operations
Chapter 5 & 6, Rejda (2014)
“People who work for insurance companies
do a lot more than sell insurance.”
-- Insurance Information Institute
Global Insurance Industry in
2015 Swiss Re, Sigma, No.3/2016
• In 2015 insurance companies wrote USD4,554 billion in
premiums worldwide , with life insurance accounting for
55.6% and non-life for 44.4%. Life insurance recorded a
4.0% increase and non-life insurance increased by 3.6%.
• Around 82.4% of premiums derived from the advanced
markets, where on average 8.1% of GDP or US$3,440
per capita was spent on insurance. In the emerging
markets an average of just 2.9% of GDP or US$135 per
capita was spent on insurance.
• On a global average, 6.2% of GDP goes on insurance.
• Worldwide average per capita insurance spending is
$621.2
24-2
Total premium volume in USD in 2015
Ranking Economy
1
United States
2
3
4
5
6
7
8
9
10
19
Premium volume
(in millions of USD)
2015
$1,316,271
Japan
449,707
PR China
386,500
United Kingdom 320,176
France
230,545
Germany
254,644
Italy
194,735
South Korea
153,620
Canada
114,968
Taiwan
95,979
Hong Kong
45,748
Change (in %)
nominal
(in USD)
3.6%
-5.6
17.7
-5.2
-14.5
-16.4
-15.3
-3.3
-9.5
0.4
11.6
Share of world
market 2015
(in %)
28.90%
9.88
8.49
7.03
5.06
4.68
3.62
3.37
2.52
2.11
1.00
24-3
Life insurance premium volume in USD in 2015
Ranking
1
Economy
2
3
4
5
6
7
8
9
10
United States
Japan
United Kingdom
PR China
France
Italy
South Korea
Germany
Taiwan
India
14
Hong Kong
Premium volume
(in millions of USD)
2015
Change (in %)
nominal
(in USD)
Share of world
market 2015
(in %)
$552,506
343,816
214,492
210,763
150,143
145,292
98,4218
96,725
79,627
56,675
4.0%
-5.7
2.4
19.1
-14.1
-14.1
-2.9
-18.4
0.6
5.6
21.81%
13.57
8.47
8.32
5.93
4.93
3.88
3.83
3.14
2.24
41,255
11.9
1.63
24-4
Non-life insurance premium volume in USD in 2015
Premium volume
(in millions of USD)
2015
Ranking
Economy
1
2
3
4
5
6
7
8
9
10
15
41
United States
PR China
Germany
Japan
United Kingdom
France
Canada
Netherlands
South Korea
Italy
Taiwan
Hong Kong
$763,766
175,737
136,170
105,891
105,685
80,402
65,637
62,810
55,402
40,189
16,352
4,494
Change (in %)
nominal
(in USD)
3.3%
16.0
-14.7
-5.4
-5.8
-15.3
2.2
-15.3
-4.0
-18.7
-0.7
8.2
Share of world
market 2015
(in %)
37.81%
8.70
6.41
5.24
5.23
3.98
3.25
3.11
2.74
1.99
0.81
0.22
24-5
Macroeconomic indicators in 2015
Ranking Economy
1
2
3
4
5
6
7
8
9
10
United States
PR China
Japan
Germany
United Kingdom
France
India
Italy
Brazil
Canada
22
34
Taiwan
Hong Kong
Population
(millions)
GDP
(billion USD)
GDP per capita
(thousand USD)
321.4
1,376.8
126.5
81.7
65.2
66.3
1,313.0
61.1
208.1
35.8
$18,089
10,811
4,156
3,354
2,849
2,422
2,086
1,814
1,772
1,552
$56.3
7.9
32.9
41.1
43.7
36.5
1.6
29.7
8.5
43.4
23.4
7.3
506
309
21.6
42.5
24-6
Insurance density: premiums per capita in USD in 2015
Ranking Economy
1
2
3
4
5
6
7
8
9
10
53
Total
business
Cayman Islands $12,619
Switzerland
7,370
Hong Kong
6,271
Luxembourg
5,401
Finland
4,963
Denmark
4,914
Netherlands
4,763
United Kingdom
4,358
United States
4,095
Taiwan
4,094
PR China
281
Life
business
$ 514
$4,078
5,655
3,535
4,049
3,513
1,051
3,292
1,719
3,396
153
Non-life
business
$12,105
$ 3,292
616
1,866
913
1,401
3,712
1,066
2,376
698
128
24-7
Insurance penetration: premiums in % of GDP in 2015
Ranking Economy
Total
business
Life
business
Non-life
business
1
2
3
4
5
6
7
8
Cayman Islands
Taiwan
Hong Kong
South Africa
Finland
South Korea
Japan
Netherlands
20.2%
19.0
14.8
14.7
11.9
11.4
10.8
10.7
0.8%
15.7
13.3
12.0
9.7
7.3
8.3
2.3
19.4%
3.2
1.5
2.7
2.2
4.1
2.5
8.4
9
United Kingdom
10.0
7.5
2.5
10
40
Denmark
PR China
9.4
3.6
6.7
1.9
2.7
1.7
24-8
HK Insurance Business Statistics
• As at 30 September 2016, there were 161 authorized
insurers in Hong Kong, of which 94 were pure
general insurers, 48 were pure long-term insurers
and the remaining 19 were composite insurers.
– Now
• In 2014, total gross premiums of Hong Kong
insurance industry increased by 13.3% to HK$339.3
billion, representing about 15.04% of the Hong
Kong Gross Domestic Product.
– Now
24-9
Largest HK Insurers (Life)
http://www.oci.gov.hk/stat/index05_14.html
L13 Total Long Term In-Force Business in 2014
Rank Name of Insurers
CompanyLimited
1Rank
AIA International
Abbreviated Name
Life (2001)
Premium
($M) & Market
AIA International
1 American International AssuranceHSBC Life
2 HSBC Life (International) Limited
(18.2%)Hong Kong Limited
3 Prudential
42 China
Insurance
(Overseas)
Company
AXALife
China
Region
Insurance
Limited
53 Manulife
(International) Limited
Manulife
6 AXA China Region Insurance Company
4 (Bermuda)
HSBC Life
Limited
7 BOC Group Life Assurance Company Limited
5 Prudential Assurance
8 Hang Seng Insurance Company Limited
9 FWD Life Insurance Company (Bermuda)
Subtotal
Limited
10 Sun Life Hong Kong Limited
Market Total
Sub-total
Others (remaining insurers)
Market Total
Office Market
Premiums Share
$m
Share
47,139
10,336
%
15.9
46,803
Prudential (HK) Life
36,108
China Life
6,751 (11.9%)27,393
15.8
12.2
9.3
Manulife5,980
(Int’l) (10.5%)
21,043
AXA China (Bermuda)
17,114
7.1
5.8
FWD Life
5.7
4.1
3.6
5,607 (9.9%)
BOC Group Life
16,809
3,535
(6.2%)
Hang Seng Insurance
12,158
10,584
32,209 (56.6%)
Sun Life Hong Kong
6,925
56,858 (100%)
2.3
81.8
18.2
24-10
100.0
Largest HK Insurers (Non-life)
http://www.oci.gov.hk/download/AR2014.pdf
Figure 2.16 Top 10 Insurers by Overall Gross Premiums in 2013
Gross
Premiums
Market
Share
$m
3,501
2,615
2,094
1,784
1,782
1,713
1,423
1,416
1,409
1,082
%
8.4
6.3
5.0
4.3
4.3
4.1
3.4
3.4
3.4
2.6
Total Gross Premiums Written by Top 10 Insurers in 2013
18,819
45.2
Corresponding Figure for 2012
16,077
40.9
Ranking of Insurers
1. AXA General Insurance Hong Kong Limited
2. Zurich Insurance Company
3. Bupa (Asia) Limited
4. Bank of China Group Insurance Company Limited
5. China Taiping Insurance (HK) Company Limited
6 . AIG Insurance Hong Kong Limited
7. QBE Hongkong & Shanghai Insurance Limited
8. Asia Insurance Company, Limited
9. CNOOC Insurance Limited
10. MSIG Insurance (Hong Kong) Limited
24-11
Insurance Companies...
• … are an efficient way to participate in large
pools,
• … thereby offering individual purchasers the
risk reduction made possible by the law of
large numbers.
• Insurers also provide value-added services
such as loss control, claims processing, etc.
24-12
Overview of Private Insurance in
the Financial Services Industry
• The financial services industry consists of:
– Commercial banks
– Savings and loan institutions
– Credit unions
– Life and health insurers
– Property and casualty insurers
– Mutual Funds
– Securities brokers and dealers
– Private and state pension funds
– Government-related financial institutions
24-13
Exhibit 5.1 Assets of Financial
Services Sectors, 2010 ($billions)
24-14
Insurance Industry…
• Changes in industry structure
– Consolidations
• The number of firms has declined due to mergers and acquisitions
– Convergence
• Existing financial institutions now sell a wide variety of financial
products that earlier were outside their core business area
• Changes in Distribution Patterns
– Agents compensation: commission to fee system
– Internet
– Bancassurance
• Changes in Forms of Coverage
– E-risk coverage
– Terrorism coverage
24-15
Types of Private Insurers
• Size of the insurance market, 2010
– Life and health insurers: 1061
• These insurers sell life and health insurance
products, annuities, mutual funds, pension plans,
and related financial products
– Property and casualty insurers: 2689
• These insurers sell property and casualty
insurance and related lines, including marine
coverages and surety and fidelity bonds
24-16
Exhibit 5.2 Top Twenty U.S. Life/Health Insurance
Groups by Revenues, 2010 ($ millions) =>Now
24-17
Exhibit 5.3 Top Twenty U.S. Property/ Casualty
Companies by Revenues, 2010 ($millions) =>Now
24-18
Types of Private Insurers
• Stock Insurance Companies
• Ownership and governance: owned by stockholders
• Status of the policyowner: contracts are nonassessable
• Dominant in the property and liability industry
• Mutual Insurers
• Ownership and governance: owned by policyowners
• Dominant in the field of life insurance
• Changing corporate structure of mutual insurers
because of mergers, demutualization, and formation of
mutual holding companies
• Others: Reciprocal exchanges; Lloyd’s of London; Blue Cross and Blue
Shield Plans; Health maintenance organizations (HMOs); Captive insurer;
etc.
24-19
Types of Private Insurers
• A stock insurer is a corporation owned by
stockholders
– Objective: earn profit for stockholders
• Increase value of stock
• Pay dividends
– Stockholders elect board of directors
– Stockholders bear all losses
– Insurer cannot issue an assessable policy
24-20
Types of Private Insurers
• A mutual insurer is a corporation owned by the
policyowners
– Policyowners elect board of directors, who have effective
management control
– May pay dividends to policyowners, or give a rate reduction in
advance
– There are three main types of mutual insurers:
• An advance premium mutual is owned by the policyowners; there are
no stockholders, and the insurer does not issue assessable policies
• An assessment mutual has the right to assess policyowners an
additional amount if the insurer’s financial operations are unfavorable
• A fraternal insurer is a mutual insurer that provides life and health
insurance to members of a social or religious organization
24-21
Types of Private Insurers
• The corporate structure of mutual insurers is
changing due to:
– An increase in company mergers
– Demutualization, in which a mutual company is
converted into a stock insurer by:
• Pure conversion
• Merger
• Bulk reinsurance
– The creation of mutual holding companies
• A holding company is a company that directly or indirectly
controls an authorized insurer
24-22
Exhibit 5.4 Mutual Holding Company
Illustration
24-23
Alternative Modes of Demutualization
24-24
Agents and Brokers (1/3)
• An agent is someone who legally represents the principal
and has the authority to act on the principal's behalf
• Authority may be:
– Expressed
– Implied
– Apparent
• The principal is legally responsible for all acts of an agent
when the agent is acting within the scope of authority
24-25
Agents and Brokers (2/3)
• A property and casualty agent has the power to
bind the insurer
– A binder provides temporary insurance until the policy is
actually written
• A life insurance agent normally does not have the
authority to bind the insurer
– The applicant for life insurance must be approved by the
insurer before the insurance becomes effective
24-26
Agents and Brokers (3/3)
• A broker is someone who legally represents the
insured, and:
– solicits applications and attempts to place coverage with
an appropriate insurer
– is paid a commission from the insurers where the
business is placed
– does not have the authority to bind the insurer
• CUHK’s current broker: AON
24-27
Insurance Company Operations
• Rating and Ratemaking
• Underwriting
• Production
• Claims settlement
• Reinsurance
• Alternatives to Traditional Reinsurance
• Investments
• Other Insurance Company Functions
Rating and Ratemaking
• Ratemaking refers to the pricing of
insurance and the calculation of insurance
premiums
– A rate is the price per unit of insurance
– An exposure unit is the unit of measurement
used in insurance pricing
premium  rate * exposure units
– Total premiums charged must be adequate for
paying all claims and expenses during the
policy period
Rating and Ratemaking
– Rates and premiums are determined by an actuary,
using the company’s past loss experience and industry
statistics
– Portrayal of actuaries as math–obsessed, socially
disconnected individuals with shockingly bad
comb–over 97.28892 percent incorrect
SoA News Release
– Actuary in the Future
– Actuaries also determine the adequacy of loss reserves,
allocate expenses, and compile statistics for company
management and state regulatory officials.
Underwriting
• Underwriting refers to the process of selecting, classifying,
and pricing applicants for insurance
• A statement of underwriting policy establishes policies that
are consistent with the company’s objectives
• The underwriting policy is stated in an underwriting guide,
which specifies:
–
–
–
–
–
Acceptable, borderline, and prohibited classes of business
Amounts of insurance that can be written
Territories to be developed
Forms and rating plans to be used
Business that requires approval by a senior underwriter
Underwriting Principles
• The basic principles of underwriting include:
– Attain an underwriting profit
– Select prospective insureds according to the
company’s underwriting standards
• Reduce adverse selection against the insurer
• Adverse selection is the tendency of people with a higher-thanaverage chance of loss to seek insurance at standard rates. If
not controlled by underwriting, this will result in higher-thanexpected loss levels.
– Provide equity among the policyholders
• One group of policyholders should not unduly subsidize another
group
Steps in Underwriting
• Underwriting starts with the agent
• Information for underwriting comes from:
–
–
–
–
–
The application
The agent’s report
An inspection report
Physical inspection
A physical examination and attending
physician’s report
– MIB report (Cf. HK’s MIB report)
Steps in Underwriting
• After reviewing the information, the underwriter
can:
– Accept the application and recommend that the policy
be issued
– Accept the application subject to restrictions or
modifications
– Reject the application
• Many insurers now use computerized underwriting
for certain personal lines of insurance that can be
standardized
Underwriting Considerations
• Other factors considered in underwriting
include:
– Rate adequacy
– Availability of reinsurance
– Whether policy can or should be cancelled or
renewed
Production
• Production refers to the sales and marketing
activities of insurers
– Agents are often referred to as producers
– Life insurers have an agency or sales department
– Property and liability insurers have marketing
departments
• The marketing of insurance has been
characterized by a trend toward professionalism
– An agent should be a competent professional with a
high degree of technical knowledge in a particular area
of insurance and who also places the needs of his or
her clients first
Production
• Several organizations have developed
professional designation programs for
insurance personnel:
– The American College: CLU, ChFC
– The American Institute for Chartered Property
and Casualty Underwriters: AICPCU
– Certified Financial Planner Board of Standards,
Inc.: CFP
– National Alliance for Insurance Education &
Research: CIC
Claim Settlement (… ICCB)
• The objectives of claims settlement include:
– Verification of a covered loss
– Fair and prompt payment of claims
– Personal assistance to the insured
• Some laws prohibit unfair claims practices, such
as:
– Refusing to pay claims without conducting a reasonable
investigation
– Not attempting to provide prompt, fair, and equitable
settlements
– Offering lower settlements to compel insureds to
institute lawsuits to recover amounts due
Types of Claims Adjustors
• Major types of claims adjustors include:
– An insurance agent often has authority to settle small
first-party claims up to some limit
– A company adjustor is usually a salaried employee who
will investigate a claim, determine the amount of loss,
and arrange for payment.
– An independent adjustor is an organization or individual
that adjusts claims for a fee
– A public adjustor represents the insured and is paid a
fee based on the amount of the claim settlement
Steps in Claim Settlement
• The claim process begins with a notice of loss, typically
immediately or as soon as possible after a loss has
occurred.
• Next, the claim is investigated
– An adjustor must determine that a covered loss has occurred and
determine the amount of the loss
• The adjustor may require a proof of loss before the claim is
paid
• The adjustor decides if the claim should be paid or denied
– Policy provisions address how disputes may be resolved
• Claims adjustors as detectives?
Reinsurance
• Reinsurance is an arrangement by which
the primary insurer that initially writes the
insurance transfers to another insurer part
or all of the potential losses associated with
such insurance
– The primary insurer is the ceding company
– The insurer that accepts the insurance from the
ceding company is the reinsurer
– The retention limit is the amount of insurance
retained by the ceding company
– The amount of insurance ceded to the reinsurer
is known as a cession
Reinsurance
• Reinsurance is used to:
– Increase underwriting capacity
– Stabilize profits
– Reduce the unearned premium reserve, which
represents the unearned portion of gross premiums on
all outstanding policies at the time of valuation
– Provide protection against a catastrophic loss
– Retire from business or from a line of insurance or
territory
– Obtain underwriting advice on a line for which the
insurer has little experience
Alternatives to Traditional
Reinsurance
• Some insurers use the capital markets as an alternative to
traditional reinsurance
• Securitization of risk means that an insurable risk is
transferred to the capital markets through the creation of a
financial instrument, such as a catastrophe bond or futures
contract
• Catastrophe bonds are corporate bonds that permit the
issuer of the bond to skip or reduce the interest payments if
a catastrophic loss occurs
– Catastrophe bonds are growing in importance and are now
considered by many to be a standard supplement to traditional
reinsurance.
Investments
• Because premiums are paid in advance, they can be
invested until needed to pay claims and expenses
• Investment income is extremely important in reducing the
cost of insurance to policyowners and offsetting
unfavorable underwriting experience
• Life insurance contracts are long-term; thus, safety of
principal is a primary consideration
• In contrast to life insurance, property insurance contracts
are short-term in nature, and claim payments can vary
widely depending on catastrophic losses, inflation, medical
costs, etc
Exhibit 6.1 Growth of Life Insurers’ Assets
Exhibit 6.2 Asset Distribution of Life
Insurers, 2010 ($5.3 trillion)
Exhibit 6.3 Investments, Property/Casualty
Insurers, 2010 ($1.32 trillion)
Other Insurance Company Functions
• Information systems are extremely important in the
daily operations of insurers.
– Computers are widely used in many areas, including
policy processing, simulation studies, market analysis,
and policyholder services.
• The accounting department prepares financial
statements and develops budgets
• In the legal department, attorneys are used in
advanced underwriting and estate planning
• Property and liability insurers also provide many
loss control services
The lighter side of insurance...
• Suppose you are a personnel manager of an
insurance company. Does your organization
struggle with the problem of properly fitting
people to jobs?? Here is a handy hint for
ensuring success in job placement...
• Take the prospective employees you are
trying to place and put them in a room with
only a table and two chairs. Leave them
alone for two hours, without any instruction.
At the end of that time, go back and see what
they are doing.
25-49
Insurance Job Placement...
• If they have taken the table apart in that time, put
them in Loss Control.
• If they are counting the butts in the ashtray, assign
them to Finance.
• If they are screaming and waving their arms, send
them to Claims.
• If they are talking to the chairs, Personnel may be
a good spot for them.
• If they are sleeping, they are Management
material.
25-50
Insurance Job Placement...
• If they are writing up the experience, send them to
Underwriting.
• If they don’t even look up when you enter the room,
assign them to Risk Management.
• If they try to tell you it's not as bad as it looks,
send them to Marketing.
• And......if they’ve left early, put them in Sales.
ACTUARIAL JOKES (?!)
http://www.actuarialjokes.com
25-51