fall 2008 version professor dan c. jones fina 4355 handouts, problem

Fall 2008 VersionFall 2008 Version

Professor Dan C. Jones

FINA 4355

Handouts, Problem

Risk Management and Insurance: Perspectives in a Global EconomyRisk Management and Insurance: Perspectives in a Global Economy

22. Nonlife Insurance22. Nonlife Insurance

Professor Dan C. Jones

FINA 4355

Handouts, Problem

3

Study PointsStudy Points

Policies sold by nonlife insurance companies

Selected nonlife insurance markets

Nonlife insurance issues

Policies Sold by Nonlife Insurance Companies

5

Policies SoldPolicies Sold

Property insurance policies

Life insurances policies

Package insurance policies

Check also Table 22.1 for OECD classification

6

Property Insurance Policies – Common AspectsProperty Insurance Policies – Common Aspects

Nature and propertyReal (immovable) vs. personal (movable) properties

Tangible vs. intangible properties

Property lossesDirect vs. consequential (indirect) losses

Nature of covered perilsNamed-peril policy

All risks policy

Basic form

Broad form

Special form

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Property Insurance Policies – Common AspectsProperty Insurance Policies – Common Aspects

Nature of indemnificationActual cash value (ACV)

Replacement cost (reinstatement value)

Economic (use value) of property

Market value

PricingCharacteristics of the covered property, such as construction, occupancy, protection, exposure and location

Scope of insurance requested

Limit of insurance along with

Deductible, coinsurance, and other optional coverages

8

Property Insurance Policies – TypesProperty Insurance Policies – Types

Fire insurance

Commercial property insurance

Consequential loss insurance

Industrial all-risk insurance

Contractors’ (builders) all-risk insurance

Boiler and machinery

Fidelity/crime insuranceComputer fraud insurance

Employee dishonesty

Extortion

Forgery or alteration

Theft and robbery

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Property Insurance Policies – TypesProperty Insurance Policies – Types

Insurance for self-propelled propertyInsurance for motor vehicles

Insurance for ships

Insurance for aircraft

Insurance for property being transportedCargo insurance

Insurance for transportable property

Inland marine insurance in the U.S.

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Liability Insurance PoliciesLiability Insurance Policies

General (public) liability insurance

Automobile (motor) liability insurance

Product liability insurance

Workers’ compensation insuranceEmployer’s liability insurance

Professional liability insuranceErrors and omissions insurance

Refer to Chapter 10 (Legal

Environment) for tort and Chapter 12

for MNC-related liability risks such as product liability.

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Package Insurance PoliciesPackage Insurance Policies

Homeowner's (householder’s) insurance

Businessowner’s insurance

Commercial multi-peril insurance

Selected Nonlife Insurance Markets Internationally

13

The Americas – the U.S.The Americas – the U.S.

The importance of understanding the U.S. marketIt has been the world’s largest nonlife market for decades.It remains highly competitive

Encourages experimentation in product development, methods of distribution and general business practices

The size and complexity of many U.S. risks demand the capacity and expertise of the global insurance and reinsurance markets.

FeaturesRanks second in per capita expenditures and first on premiums as a percentage of GDP

The U.S. per capita spending for private health insurance the world’s highestU.S. businesses and families spend more on liability insurance than do the citizens of any other country

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Features (continued)A fast growth in recent years, especially after September 2001

A market prone to natural catastrophic losses

More than 2,500 nonlife insurance companies compete.

About 800 or so insurers are independent.

Products and distributionsVirtually any type of nonlife insurance is available.

Insurers use multiple distribution channels to reach their customers.

Brokers also figure prominently in the market.

Table 22.2

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Distribution of Premiums in the U.S. Distribution of Premiums in the U.S. (Table 22.2)(Table 22.2)

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Distribution of Premiums in the U.S. Distribution of Premiums in the U.S. (new, 2006)(new, 2006)

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IssuesState regulation

Market consolidation

Loss reserve adequacy

Impact of catastrophes

Chapters 5 & 6 discuss catastrophes. Chapter

15 discusses catastrophe RM.

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Leading Nonlife Insurers in the U.S. (2006)Leading Nonlife Insurers in the U.S. (2006)

Source: International Insurance Factbook

19

The Americas – CanadaThe Americas – Canada

FeaturesShares some similarities with the U.S. market

As noted earlier, Canada maintains a dual regulatory system.

Nonlife insurance accounts for 36% of the Canadian insurance market.

Products and distributionsThe agency form of distribution dominates the Canadian nonlife insurance market.

IssuesThe government continues to regulate rating of automobile insurance premiums.

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Leading Nonlife Insurers in Canada (2006)Leading Nonlife Insurers in Canada (2006)


21

The Americas – Latin AmericaThe Americas – Latin America

FeaturesTwo groups

The Caribbean (developed insurance markets)

Other countries (including Argentina, Brazil, Chile, Colombia, Mexico, and Venezuela)

A high growth potential

Many Latin American governments have privatized insurers and opened their markets

to foreign interests.

Products and distributionsTraditional intermediaries (brokers and agents) and employees of insurance companies dominate the markets

Bancassurance introduced in selected countries

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The Americas – Latin AmericaThe Americas – Latin America

IssuesEconomic crisis

Many Latin American insurers have comparatively high expenses, making their products less attractive.

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Leading Nonlife Insurers in Brazil (2006)Leading Nonlife Insurers in Brazil (2006)


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Leading Nonlife Insurers in Argentina (2006)Leading Nonlife Insurers in Argentina (2006)


25

EuropeEurope

FeaturesConsists of big three markets – Germany, the U.K. and France

Rich history and tradition that are reflected in the markets

Gained more attention globally with the creation of a single E.U. market

Bancassurance primarily in life insurance

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Europe – Germany Europe – Germany

FeaturesThe world’s second largest nonlife insurance market233 insurers and 47 reinsurersCreation of Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority or BaFin) in 2002

Products and distributionsWorkers’ compensation as part of the government’s social insurance programDistribution dominated by exclusive agentsGuaranteed renewal features common in many nonlife insurance contracts

IssuesCoping with the E.U. single market policy

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Leading Nonlife Insurers in Germany (2006)Leading Nonlife Insurers in Germany (2006)


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Europe – the U.K.Europe – the U.K.

FeaturesInsurers generate business from accepting domestic risks and overseas risks.

Table 22.3

The world’s third largest nonlife insurance market

886 insurers including 50 composite insurers

Foreign-owned companies generated about 40 percent of premiums written

Distinctive markets or marketplacesThe London market

The Lloyd’s of London

International Underwriting Association of London

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The London MarketThe London Market

An international insurance centerSpecializes in large accounts and target risks such as MAT and hard-to-place business

Comprises insurance and reinsurance companies and Lloyd’s syndicates

It is a subscription market in that the coverage needs are often satisfied by a group of insurers or reinsurers on a collective basis.

Insurance brokers play a crucial role.

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Lloyd’s of LondonLloyd’s of London

A marketplace for 64 syndicatesNames

Underwriting members

Generated about one-half of their business from direct insurance for risks situated mainly in North America and Europe

Reconstructed to regain reputation and financial strengthAdding limited liability corporate and individual members

Creation of Equitas to manage run-off nonlife liability business

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Insurance Transactions at Lloyd’s Insurance Transactions at Lloyd’s (Figure 22.1)(Figure 22.1)

Source: Lloyd’s of London [www.Lloyds.com]

CLIENTS

Commercial

Personal

Lloyd’s Brokers

Service Companies

FRANCHISEE

Managing agents

Syndicates Member’s agents

MEMBERS

Corporate groups

Private individuals (unlimited liabilities)

Private individuals

(limited liabilities)

Business Flow Capital Flow

FRANCHISOR

Lloyd’s of London

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Nonlife Insurance in the U.K. Nonlife Insurance in the U.K. (Table 22.3)(Table 22.3)

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Leading Nonlife Insurers in the U.K. (2006)Leading Nonlife Insurers in the U.K. (2006)


34

Europe – France Europe – France

FeaturesThe fifth largest nonlife insurance market globally

470 insurers, including AXA and Groupama

Products and distributionsCompany employees and agents dominate.

Brokers still strong in commercial business

Bancassurance not as successful as in life business

35

Leading Nonlife Insurers in France (200Leading Nonlife Insurers in France (20055))


36

Asia-PacificAsia-Pacific

FeaturesCountries in various economic development stages

Middle East probably with least developed insurance markets

China and India continue to grow

The potential impact of WTO agreements in several countries

37

Asia-Pacific – JapanAsia-Pacific – Japan

FeaturesThe world’s fourth largest nonlife insurance market

But, the local market is heavily skewed toward the life business

Products and distributionsCompulsory automobile liability insurance (CALI) and voluntary automobile insurance account for more than 50% of the nonlife insurance business. Table 22.4

Offer maturity-refund policies, which get less popular mainly due to the higher cost as compared to non-refund policies

The agency system generates 90% of direct premiums.

Mainly females

Brokerage systems emerge.

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Nonlife Insurance in Japan Nonlife Insurance in Japan (Table 22.4)(Table 22.4)

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Leading Nonlife Insurers in Japan (2006)Leading Nonlife Insurers in Japan (2006)


40

Asia-Pacific – JapanAsia-Pacific – Japan

IssuesReforms in the financial services market

Discussed in the life insurance chapter

Competition in the third sector

Dominance of a few local companies which have become bigger through a series of mergers and acquisitions

Figure 22.2

Management of catastrophic loss exposures

Earthquakes and earthquake insurance

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Mergers of Insurance Firms in Japan Mergers of Insurance Firms in Japan (Figure 22.2)(Figure 22.2)

April 2005

Meiji General Yasuda Life General Meiji Yasuda Life General

Yasuda Fire & Marine Nissan Fire & Marine Sompo Japan Insurance

Dai-ichi P &C Taisei Fire & Marine

April 2002 December 2002

July 2002

April 2002

Tokio Marine & Fire Nichido Fire & Marine Millea Holdings

Tokio Marine & Nichido Fire

October 2004

October 2001

Mitsui Marine & Fire Sumitomo Marine & Fire Mitsui Sumitomo Marine & Fire

Source: Japan General Insurance Association (2005)

42

Asia-Pacific – ChinaAsia-Pacific – China

FeaturesThe nonlife insurance market grew an average at 10.8% per annum between 1993 and 2003

But, still with low consumption and market penetration ratios

Products and distributionsNew products are being added

IssuesContinuous market reforms

Full compliance with the WTO accession agreement

Transparency

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Leading Nonlife Insurers in China (2006)Leading Nonlife Insurers in China (2006)


44

Asia-Pacific – IndiaAsia-Pacific – India

FeaturesThe world’s 27th largest for 2005

Low insurance penetration and consumption

The market opened in 1999 following the creation of the IRDA

Public insurers dominate

Products and distributionsNew products being added

IssuesRestriction on foreign ownership of local insurance companies

Stringent investment regulation

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Leading Nonlife Insurers in India (2006)Leading Nonlife Insurers in India (2006)


46

Asia-Pacific – AustraliaAsia-Pacific – Australia

FeaturesThe world’s 10th largest

A sophisticated nonlife market composed of 112 insurers and 21 reinsurers

Insurance business locally and from overseas

Products and distributionsDomestic motor vehicle insurance holds the largest share

47

Leading Nonlife Insurers in Australia (2006)Leading Nonlife Insurers in Australia (2006)


48

AfricaAfrica

FeaturesExtremely low insurance consumption and penetration (exception: South Africa)Northern Africa relatively active

Products and distributionsMinimum in most countriesIslamic insurance increasingly available in Northern Africa

IssuesNumerous economic, social and political problems in multiple parts of the continentCatastrophes – earthquakes, floods, draughts and cyclonesCompulsory reinsurance cession to state-owned reinsurers, African Re or both

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Leading Nonlife Insurers in South Africa (2006)Leading Nonlife Insurers in South Africa (2006)


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Leading Nonlife Insurers in Egypt (200Leading Nonlife Insurers in Egypt (20055))


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Leading Nonlife Insurers in Morocco (2006)Leading Nonlife Insurers in Morocco (2006)


Nonlife Insurance Issues

53

Nonlife Insurance IssuesNonlife Insurance Issues

Liberalization and deregulation

Coping with catastrophes

Solvency

Discussion Questions

55

Discussion Question 1Discussion Question 1

This chapter discussed several key issues that affect nonlife insurance operations on a global basis. How do these issues interact with each other and how could they affect the way that corporations manage their risks?

56


Compare the nonlife liability insurance markets in developed countries and developing countries with respect to the following:

Types of insurance products

Growth rates

Regulatory environments

57


Distribution systems are a key component of any nonlife insurance market.

Compare the distribution systems used in two countries of your choice or in the U.S. with those of Japan.

In your opinion, will nonlife insurance be transacted using the “information highway”?

58


Privatization and deregulation are “mega-trends” in many of the nonlife insurance markets in the developing world. Discuss the challenges facing insurance executives of established domestic insurers in those markets.

fall 2008 version professor dan c. jones fina 4355 handouts, problem

Documents

global insurance

aircraft insurance

omissions insurance

ships insurance

limit of insurance

nonlife insurance companies

motor vehicles insurance

private health insurance