1. 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

2. 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

3. Total premium volume in USD in 2015
Premium volume Change (in %) Share of world (in millions of USD) nominal market 2015
Ranking Economy (in USD) (in %)
1 United States $1,316, % %
2 Japan ,
3 PR China ,
4 United Kingdom ,
France ,
Germany ,
7 Italy ,
8 South Korea ,
9 Canada ,
10 Taiwan ,
19 Hong Kong ,
24-3 3

4. Life insurance premium volume in USD in 2015
Premium volume Change (in %) Share of world (in millions of USD) nominal market 2015
Ranking Economy (in USD) (in %)
1 United States $552, % %
2 Japan ,
3 United Kingdom 214,
PR China ,
France ,
Italy 145,
South Korea 98,
Germany ,
Taiwan ,
India ,
Hong Kong ,
24-4 4

5. Non-life insurance premium volume in USD in 2015
Premium volume Change (in %) Share of world (in millions of USD) nominal market 2015
Ranking Economy (in USD) (in %)
1 United States $763, % 37.81%
2 PR China ,
3 Germany ,
4 Japan ,
United Kingdom ,
France ,
7 Canada ,
8 Netherlands ,
9 South Korea ,
10 Italy ,
15 Taiwan ,
41 Hong Kong ,
24-5 5

6. Macroeconomic indicators in 2015
Ranking Economy Population GDP GDP per capita
(millions) (billion USD) (thousand USD)
United States $18,089 $56.3
PR China 1, ,
Japan ,
Germany ,
United Kingdom ,
France ,
7 India , ,
Italy ,
Brazil ,
Canada ,
22 Taiwan
34 Hong Kong
24-6

7. Insurance density: premiums per capita in USD in 2015
Ranking Economy Total Life Non-life business business business
1 Cayman Islands $12,619 $ $12,105
2 Switzerland , $4,078 $ 3,292
3 Hong Kong 6, ,
4 Luxembourg 5, , ,866
5 Finland 4, ,
6 Denmark 4, , ,401
7 Netherlands 4, , ,712
United Kingdom 4, , ,066
9 United States 4, , ,376
10 Taiwan 4, ,
53 PR China
24-7

8. Insurance penetration: premiums in % of GDP in 2015
Ranking Economy Total Life Non-life business business business
1 Cayman Islands % 0.8% %
2 Taiwan
3 Hong Kong
4 South Africa
5 Finland
6 South Korea
7 Japan
8 Netherlands
9 United Kingdom
10 Denmark
40 PR China
24-8

9. 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.

10. Largest HK Insurers (Life)
L13 Total Long Term In-Force Business in 2014
Rank
Name of Insurers
Abbreviated Name
Office Premiums
Market Share $m % 1
AIA International Limited
AIA International
47,139
15.9 2
HSBC Life (International) Limited
HSBC Life
46,803
15.8 3
Prudential Hong Kong Limited
Prudential (HK) Life
36,108
12.2 4
China Life Insurance (Overseas) Company Limited
China Life
27,393
9.3 5
Manulife (International) Limited
Manulife (Int’l)
21,043
7.1 6
AXA China Region Insurance Company (Bermuda) Limited
AXA China (Bermuda)
17,114
5.8 7
BOC Group Life Assurance Company Limited
BOC Group Life
16,809
5.7 8
Hang Seng Insurance Company Limited
Hang Seng Insurance
12,158
4.1 9
FWD Life Insurance Company (Bermuda) Limited
FWD Life
10,584
3.6 10
Sun Life Hong Kong Limited 
Sun Life Hong Kong
6,925
2.3
Sub-total
81.8
Others (remaining insurers)
18.2
Market Total
100.0
Life (2001)
Rank Company Premium ($M) & Market Share
1 American International Assurance 10,336 (18.2%)
2 AXA China Region Insurance 6,751 (11.9%)
3 Manulife ,980 (10.5%)
4 HSBC Life ,607 (9.9%)
5 Prudential Assurance ,535 (6.2%)
Subtotal ,209 (56.6%)
Market Total ,858 (100%)

11. Largest HK Insurers (Non-life)
Figure 2.16 Top 10 Insurers by Overall Gross Premiums in 2013
Ranking of Insurers
Gross Premiums
Market Share $m % 1.
AXA General Insurance Hong Kong Limited
3,501
8.4 2.
Zurich Insurance Company
2,615
6.3 3.
Bupa (Asia) Limited
2,094
5.0 4.
Bank of China Group Insurance Company Limited
1,784
4.3 5.
China Taiping Insurance (HK) Company Limited
1,782
6 .
AIG Insurance Hong Kong Limited
1,713
4.1 7.
QBE Hongkong & Shanghai Insurance Limited
1,423
3.4 8.
Asia Insurance Company, Limited
1,416 9.
CNOOC Insurance Limited
1,409
10.
MSIG Insurance (Hong Kong) Limited
1,082
2.6
Total Gross Premiums Written by Top 10 Insurers in 2013
18,819
45.2
Corresponding Figure for 2012
16,077
40.9
24-11

12. 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.

13. 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 13

14. Exhibit 5.1 Assets of Financial Services Sectors, 2010 ($billions)14

15. 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

16. 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

17. Exhibit 5.2 Top Twenty U.S. Life/Health Insurance Groups by Revenues, 2010 ($ millions) =>Now17

18. Exhibit 5.3 Top Twenty U.S. Property/ Casualty Companies by Revenues, 2010 ($millions) =>Now18

19. 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.

20. 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

21. 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

22. 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

23. Exhibit 5.4 Mutual Holding Company Illustration

24. Alternative Modes of Demutualization

25. 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

26. 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

27. Agents and Brokers (3/3) CUHK’s current broker: AON
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

28. Insurance Company Operations
Rating and Ratemaking
Underwriting
Production
Claims settlement
Reinsurance
Alternatives to Traditional Reinsurance
Investments
Other Insurance Company Functions

29. 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
Total premiums charged must be adequate for paying all claims and expenses during the policy period

30. 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 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.

31. 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

32. 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-than-average chance of loss to seek insurance at standard rates. If not controlled by underwriting, this will result in higher-than-expected loss levels.
Provide equity among the policyholders
One group of policyholders should not unduly subsidize another group

33. 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)

34. 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

35. Underwriting Considerations
Other factors considered in underwriting include:
Rate adequacy
Availability of reinsurance
Whether policy can or should be cancelled or renewed

36. 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

37. 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

38. 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

39. 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

40. 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?

41. 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

42. 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

43. 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.

44. 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

45. Exhibit 6.1 Growth of Life Insurers’ Assets

46. Exhibit 6.2 Asset Distribution of Life Insurers, 2010 ($5.3 trillion)

47. Exhibit 6. 3 Investments, Property/Casualty Insurers, 2010 ($1
Exhibit 6.3 Investments, Property/Casualty Insurers, 2010 ($1.32 trillion)

48. 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

49. 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.

50. 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.

51. 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 (?!)