1. Fall 2008 Version Professor Dan C. Jones FINA 4355 Handouts, Problem

2. Risk Management and Insurance: Perspectives in a Global Economy 22. Nonlife Insurance Professor Dan C. Jones FINA 4355 Handouts, Problem

3. 3 Study Points Policies sold by nonlife insurance companies Selected nonlife insurance markets Nonlife insurance issues

4. Policies Sold by Nonlife Insurance Companies

5. 5 Policies Sold Property insurance policies Life insurances policies Package insurance policies Check also Table 22.1 for OECD classification

6. 6 Property Insurance Policies – Common Aspects Nature and property Real (immovable) vs. personal (movable) properties Tangible vs. intangible properties Property losses Direct vs. consequential (indirect) losses Nature of covered perils Named-peril policy All risks policy Basic form Broad form Special form

7. 7 Property Insurance Policies – Common Aspects Nature of indemnification Actual cash value (ACV) Replacement cost (reinstatement value) Economic (use value) of property Market value Pricing Characteristics 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. 8 Property 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 insurance Computer fraud insurance Employee dishonesty Extortion Forgery or alteration Theft and robbery

9. 9 Property Insurance Policies – Types Insurance for self-propelled property Insurance for motor vehicles Insurance for ships Insurance for aircraft Insurance for property being transported Cargo insurance Insurance for transportable property Inland marine insurance in the U.S.

10. 10 Liability Insurance Policies General (public) liability insurance Automobile (motor) liability insurance Product liability insurance Workers’ compensation insurance Employer’s liability insurance Professional liability insurance Errors and omissions insurance Refer to Chapter 10 (Legal Environment) for tort and Chapter 12 for MNC-related liability risks such as product liability.

11. 11 Package Insurance Policies Homeowner's (householder’s) insurance Businessowner’s insurance Commercial multi-peril insurance

12. Selected Nonlife Insurance Markets Internationally

13. 13 The Americas – the U.S. The importance of understanding the U.S. market It 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. Features Ranks 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 highest U.S. businesses and families spend more on liability insurance than do the citizens of any other country

14. 14 The Americas – the U.S. 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 distributions Virtually 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

15. 15 Distribution of Premiums in the U.S. (Table 22.2)

16. 16 Distribution of Premiums in the U.S. (new, 2006)

17. 17 The Americas – the U.S. Issues State regulation Market consolidation Loss reserve adequacy Impact of catastrophes Chapters 5 & 6 discuss catastrophes. Chapter 15 discusses catastrophe RM.

18. 18 Leading Nonlife Insurers in the U.S. (2006) Source: International Insurance Factbook

19. 19 The Americas – Canada Features Shares 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 distributions The agency form of distribution dominates the Canadian nonlife insurance market. Issues The government continues to regulate rating of automobile insurance premiums.

20. 20 Leading Nonlife Insurers in Canada (2006) Source: International Insurance Factbook

21. 21 The Americas – Latin America Features Two 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 distributions Traditional intermediaries (brokers and agents) and employees of insurance companies dominate the markets Bancassurance introduced in selected countries

22. 22 The Americas – Latin America Issues Economic crisis Many Latin American insurers have comparatively high expenses, making their products less attractive.

23. 23 Leading Nonlife Insurers in Brazil (2006) Source: International Insurance Factbook

24. 24 Leading Nonlife Insurers in Argentina (2006) Source: International Insurance Factbook

25. 25 Europe Features Consists 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

26. 26 Europe – Germany Features The world’s second largest nonlife insurance market 233 insurers and 47 reinsurers Creation of Bundesanstalt für Finanzdienstleistungsaufsicht (the Federal Financial Supervisory Authority or BaFin) in 2002 Products and distributions Workers’ compensation as part of the government’s social insurance program Distribution dominated by exclusive agents Guaranteed renewal features common in many nonlife insurance contracts Issues Coping with the E.U. single market policy

27. 27 Leading Nonlife Insurers in Germany (2006) Source: International Insurance Factbook

28. 28 Europe – the U.K. Features Insurers 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 marketplaces The London market The Lloyd’s of London International Underwriting Association of London

29. 29 The London Market An international insurance center Specializes 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.

30. 30 Lloyd’s of London A marketplace for 64 syndicates Names 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 strength Adding limited liability corporate and individual members Creation of Equitas to manage run-off nonlife liability business

31. 31 Insurance Transactions at Lloyd’s (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

32. 32 Nonlife Insurance in the U.K. (Table 22.3)

33. 33 Leading Nonlife Insurers in the U.K. (2006) Source: International Insurance Factbook

34. 34 Europe – France Features The fifth largest nonlife insurance market globally 470 insurers, including AXA and Groupama Products and distributions Company employees and agents dominate. Brokers still strong in commercial business Bancassurance not as successful as in life business

35. 35 Leading Nonlife Insurers in France (2005) Source: International Insurance Factbook

36. 36 Asia-Pacific Features Countries 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. 37 Asia-Pacific – Japan Features The world’s fourth largest nonlife insurance market But, the local market is heavily skewed toward the life business Products and distributions Compulsory 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.

38. 38 Nonlife Insurance in Japan (Table 22.4)

39. 39 Leading Nonlife Insurers in Japan (2006) Source: International Insurance Factbook

40. 40 Asia-Pacific – Japan Issues Reforms 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

41. 41 Mergers of Insurance Firms in Japan (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. 42 Asia-Pacific – China Features The 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 distributions New products are being added Issues Continuous market reforms Full compliance with the WTO accession agreement Transparency

43. 43 Leading Nonlife Insurers in China (2006) Source: International Insurance Factbook

44. 44 Asia-Pacific – India Features The 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 distributions New products being added Issues Restriction on foreign ownership of local insurance companies Stringent investment regulation

45. 45 Leading Nonlife Insurers in India (2006) Source: International Insurance Factbook

46. 46 Asia-Pacific – Australia Features The world’s 10th largest A sophisticated nonlife market composed of 112 insurers and 21 reinsurers Insurance business locally and from overseas Products and distributions Domestic motor vehicle insurance holds the largest share

47. 47 Leading Nonlife Insurers in Australia (2006) Source: International Insurance Factbook

48. 48 Africa Features Extremely low insurance consumption and penetration (exception: South Africa) Northern Africa relatively active Products and distributions Minimum in most countries Islamic insurance increasingly available in Northern Africa Issues Numerous economic, social and political problems in multiple parts of the continent Catastrophes – earthquakes, floods, draughts and cyclones Compulsory reinsurance cession to state-owned reinsurers, African Re or both

49. 49 Leading Nonlife Insurers in South Africa (2006) Source: International Insurance Factbook

50. 50 Leading Nonlife Insurers in Egypt (2005) Source: International Insurance Factbook

51. 51 Leading Nonlife Insurers in Morocco (2006) Source: International Insurance Factbook

52. Nonlife Insurance Issues

53. 53 Nonlife Insurance Issues Liberalization and deregulation Coping with catastrophes Solvency

54. Discussion Questions

55. 55 Discussion 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. 56 Discussion Question 2 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. 57 Discussion Question 3 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. 58 Discussion Question 4 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.