Fall 2008 Version

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

2. Risk Management and Insurance: Perspectives in a Global Economy22. Nonlife Insurance Professor Dan C. Jones FINA 4355 Handouts, Problem

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

4. Policies Sold by Nonlife Insurance Companies

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

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

12. Selected Nonlife Insurance Markets Internationally

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 privatehealth insurance the world’s highest • U.S. businesses and families spend more on liability insurance than do the citizens of any other country

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

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

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

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

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

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

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

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

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. 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 marketin 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. 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. FRANCHISOR Lloyd’s of London MEMBERS Corporate groups Private individuals (unlimited liabilities) Private individuals (limited liabilities) Lloyd’s Brokers FRANCHISEE Managing agentsSyndicates CLIENTS Commercial Personal Member’s agents Service Companies Capital Flow Business Flow Insurance Transactions at Lloyd’s (Figure 22.1) Source: Lloyd’s of London [www.Lloyds.com]

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

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

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

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. 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. Nonlife Insurance in Japan (Table 22.4)

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

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. October 2001 Mitsui Sumitomo Marine & Fire Sumitomo Marine & Fire Mitsui Marine & Fire April 2002 Millea Holdings Nichido Fire & Marine Tokio Marine & Fire October 2004 Tokio Marine & Nichido Fire July 2002 Sompo Japan Insurance Nissan Fire & Marine Yasuda Fire & Marine December 2002 April 2002 Taisei Fire & Marine Dai-ichi P &C April 2005 Meiji Yasuda Life General Yasuda Life General Meiji General Mergers of Insurance Firms in Japan (Figure 22.2) Source: Japan General Insurance Association (2005)

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

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

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

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

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