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Classes of Business – Non Life Insurance - Insurance Managers


									 Captive Basics Course 2010
 Classes of Business

 The Commercial Insurance/Reinsurance Industry and cycle

 Cayman Captive regulation

Presented by Ruwan Jayasekera, CIMA
Classes of Business
                     Classes of Business


  Life Insurance         Non-Life Insurance (“General Insurance”)

 Term Life
 Endowment
 Whole Life
 Annuity            Fire – commercial, industrial, private property
 Unit-linked        Liability – Workers' comp, Med-Mal, D&O liab.,
 Universal Life     Professional liab, product liab., building construction
 Critical           liab.
                     Motor – own damage and 3rd party
 Group life         Marine, Aviation and Transport (“MAT”)
                     Accident & Health – PA, medical expenses
                     Financial insurance including Pecuniary loss
                   Classes of Business – Life Insurance

 Term – pays on death within the term

 Endowment – pays on survival to maturity date or on earlier death

 Whole Life – pays on death whenever it occurs

 Annuity – pays income (immediate or deferred) until death or for fixed term

 Unit-linked (variable Life Insurance) – premiums are invested into asset backed
funds that include a variety of investments and securities. The owner determines the
distribution of his funds among the different investment choices.

 Universal Life – combines term protection with savings component and provides
the flexibility to increase/decrease premium payments and coverage at different
intervals over the life of the policy.

 Critical illness/disability – pay a lump sum or income for duration of sickness or

 Group Life – provides yearly renewable term insurance for employees during the
term of their employment.
                                          Classes of Business
Cayman Islands Captives – Primary Classes of Business

                                                                Medical Malpractice
                                   2% 1%                        Workers' Compensation

                                                        35%     General Liability

                                                                Professional Liability

                                                                Automobile P.D. &

                                                                Credit Life

                                                                Products Liability

                                                                Deferred Variable

                                                                        CIMA website – March 2010
                 Classes of Business – Non Life Insurance

Medical Malpractice (“Med Mal”)

 Protect against liability lawsuits that arise from medical errors, alleged errors or
negligence in the treatment of patients by doctors, hospitals or other healthcare
professionals or facilities.

 Most states in the US require that doctors have Med Mal insurance, and doctors
may need it to see patients in a hospital.

 Physicians and hospitals buy this cover from commercial insurers and captives.

 doctor’s coverage is not generally experience-rated; rather, premiums are set
according to a physician’s speciality and geographic location.
                Classes of Business – Non Life Insurance

Workers’ Compensation (“workers' comp”)

 Protect against liability lawsuits stemming from workplace accidents. It provides
medical care to injured employees, along with compensation for lost income.

 A workers’ compensation system is established by the law and employers are
required to buy this cover.

 Workers are covered if they are injured while at work on the premises or
elsewhere, or in automobile accidents while on company business. They are also
covered in the event of work-related illnesses.

 The insurance pays regardless of who was at fault.

 Benefits of WC insurance vary by country/state, including the amount and duration
of medical services and rehabilitation.

 Premiums are tied to claims experience, hence workers’ comp also serve to
promote safety and health on the job.
                 Classes of Business – Non Life Insurance

General Liability (“GL”)

 Protects the insured in the event he is sued on types of claims that come within the
policy. Claims include accidents and injuries that occur to 3rd party on insured’s

 Includes payments to an injured person or to an owner of property that is
damaged. Can cover medical expenses and the cost of defending lawsuits.

 Do NOT cover loss of the insured’s own property under any circumstances.
                  Classes of Business – Non Life Insurance

Professional Liability

 This policy is meant for professionals to cover liability falling on them as a result of
errors and omissions committed by them whilst rendering professional service.

 It protects professionals who cause harm to a client due to incompetence, errors or
negligence. Legal defence costs are generally covered.

 Who needs it: engineers, lawyers, accountants, stock brokers, insurance
brokers/agents, financial advisers etc.

 Sometimes covers employees and even subcontractors
                 Classes of Business – Non Life Insurance

Fire – commercial, industrial, private property

 Covers buildings, fixtures and fittings, plant and machinery, stocks, furniture etc.
against fire and allied perils (e.g. explosion & riot) and the perils of nature
(lightening, earthquake, flood).

 Loss of business income or extra expenses incurred because of physical loss by a
covered peril to the insured’s property can also be covered.

 Premiums are based on business location, security features, fire hazards, whether
any construction is taking place on an insured’s site and financial stability.
                   Classes of Business – Non Life Insurance

Marine, Aviation and Transport (“MAT”)

 Highly specialised mkt. involving very large but infrequent claims. All but the
smallest risks will be co-insured/reinsured.

 Marine Insurance covers the loss or damage to hull and machinery of the vessel, cargo
and terminals. Cargo can be insured against loss or damage that could be caused during a
voyage, whilst in transit, from one point to another (inland transit), whilst being stored, worked
upon and until the final product is placed on board the vessel.

 Aviation Insurance covers damages to the aircraft, liability in respect of passengers,
baggage, cargo and mail carried on the aircraft, loss of earnings when an aircraft is laid-up
following accidental damage, group personal accident for both passengers and aircraft crew, a
public liability policy for promoters of air meetings and displays etc.

 Transport Insurance insures goods against loss, damage or delay in transit. Can also
include damage during loading, theft and negligence. Without insurance you have only the
minimum protection for your goods because freight forwarders and carriers typically have limited
liability in the event of loss, or damage or delay.
                   Classes of Business – Non Life Insurance

Financial insurance including Pecuniary loss insurance

 Covers loss from specific financial transactions and guarantees that investors in
debt portfolios receive timely payment of principal and interest or guarantees in the
event of default by the debtor or obligor. Financial guarantee insurances include:
mortgage indemnity insurances; performance bonds; residual value insurance.

 Mortgage Indemnity Insurance covers a mortgage lender for any loss incurred when
the mortgagor has defaulted and the property is sold for less than the amount of the loan.

 Performance Bonds, common in the construction industry, the surety protects the project
owner by guaranteeing that the contractor will perform his contractual obligations. If the
contractor defaults, the project owner calls upon the surety to pay damages (the additional costs
of completing the work) up to the amount of the bond.

 Residual Value Insurance protects a lessor against unexpected declines in the market
value of leased equipment (vehicles, aircraft, heavy machinery) upon termination or expiration of
the lease agreement. The insurance helps the lessor manage the asset value risk inherent in
                   Classes of Business – Non Life Insurance

Financial insurance including Pecuniary loss insurance

 Pecuniary means ‘relating to money’. Pecuniary loss insurances are those that
protect the insured’s financial rights or interest such as revenue or receivables. This
includes, business interruption insurance, book debts and fidelity guarantee.

 Business Interruption covers loss of gross profit following reduced turnover resulting
from, and occurring after, insured property damage. The gross profit indemnity enables the
business to pay its standing charges, including payroll, and recover its net profit during the
indemnity, the period selected as being the time needed to restore normal trading levels.

 Book debts provide insurance against inability to collect money owing, following the
destruction of books by an insured peril. Cover includes the cost of reproducing records and
tracing debtors. Bad debts, being a credit risk, are not covered.

 Fidelity Guarantee protects employers against financial loss from the dishonesty of
The Commercial Insurance/Reinsurance
        Industry and Cycle
                          Global Insurance Industry

 Total Insurance Premium in 2008 was US$4.3 trillion

 This premium is, 58% Life and 42% Non-Life

 Adjusted for inflation, premiums declined by 2% in 2008.

     Global life premiums fell by 3.5% in 2008, mainly driven by a sharp fall in the
    sale of unit-linked and single premium life insurance products in the
    industrialised countries.

     Non-life premiums decreased by 0.8% mainly due to lower demand for cover
    and softening rates.

 The insurance mkt. is characterised by cyclicality, the non-Life sector running out
of phase with the general economic cycle and Life sector tracks the economic cycle
more closely.

 Industry is based on 4 basic principles: 1) Risk aversion and indemnity, 2) Law of
large numbers, 3) Solidarity principle and 4) time value of money

 Insurance industry is highly regulated to ensure the interests of policyholders and
third party claimants are protected.
                                        Global Insurance Industry

                                                                                                                                                                                              Hurricane Katrina et al
                                                                                                                                                             Hurricanes Ivan, Charley et al
                              Insured catastrophe losses 1970-2009
in USD bn,
indexed to 2009



                                                                                                                                                                                                                        Hurricane Ike, Gustav
                                                                                                                       Winter storm Lothar

                                                                                      Northridge earthquake
                                                                   Hurricane Andrew

                                                                                                                                             Attack on WTC




           1970        1975            1980    1985        1990                         1995                                    2000                                                   2005

                  Earthquake/tsunami          Man-made disasters                                              Weather-related Nat Cats                                                                                                     Total

                                                                                                                                                                                              Source: Swiss Re “Sigma”
                                                           Global Insurance Industry

Global premium growth (adjusted for inflation) 1980 - 2008

       Real growth rates


































                                                   Non-Life                                Life                               Total

                                                                                                                                                                          Source: Swiss Re “Sigma”
                                          Insurance Cycle

                                                                        • new entrants  capital to the
                                                                        • increasing u/wing capacity
                                                                        • high competition
                                                                        • strong capital markets
Premium Income

                                                                        • favourable investment returns
                                                                        • cheap reinsurance

                    Soft Market            Hard Market




                 • large catastrophic claims
                 • inadequate premium                        Non-Life sector runs out of phase
                 • less competition as weak                  with the general economic cycle
                 insurers are forced out                     and Life sector tracks the economic
                 • unfavourable investment                   cycle more closely
                        Global Reinsurance Industry

Gross Reinsurance Premiums Assumed by
Line of Business in 2008

               2%              Property
                               Financial lines
                                                              Loss ratios by Line of Business






                                                     2003    2004     2005     2006     2007    2008

                                                     Combined ratio

                                                            Source: IAIS Global Reinsurance Market Report 2009
Global Reinsurance Industry

                   Source: IAIS Global Reinsurance Market Report 2009
              Factors affecting the (Re)insurance Industry

 Speed of economic recovery, or indeed the threat of double dip recession in some
  countries  suppress demand.
 Unemployment and financial difficulties  fraud and inflated claims
 The impact of global warming and climate change  unusual weather  frequent
  and severe natural catastrophes
 Significant D&O and professional indemnity claims arising from the financial crisis
 Potential terrorist attacks and man made catastrophes
 Tighter regulation and additional capital requirements
 Insurers trying to become efficient, selective and smarter
 Emerging markets in Asia, Africa and pockets of growth elsewhere  more
  demand for insurance

 Behavioral shift on the part of consumers from consumption to savings
 Poor investment returns  life policies less attractive as investment tools
 Policy lapses and early surrenders  losses for life insurers
 Rising standards of living  better mortality  good for term/endowment policies
 Rising standards of living  better mortality  bad news for insurers selling
 Demographics pointing towards an ageing population  demand increase
              Factors affecting the (Re)insurance Industry

 Reinsurers have been less affected by the financial crisis than have insurance
 Catastrophe experience within the next few years  profitability
 Strength of the equity markets  profitability
Cayman Captive regulation
                         Cayman Captive Regulation

CIMA’s Objectives

 Monitor Solvency
    Class “B” – Min. statutory/capital requirements

 Ensure compliance with relevant Laws & Regulations

 Protect consumers and investors by ensuring a prudent, safe and sound

 Cooperate with other Regulators to keep the insurance sector free from
  international crime

 Ensure regulation and supervision is in line with IAIS Core Principles
                        Cayman Captive Regulation

CIMA’s Performs:

     on-site inspections/off-site reviews
     monitoring of Licensee compliance
     prudential Meetings with all licensees
        • Class “B”s – once in 18-24 months

                                   CIMA’s Analyses and Approves:

                                          New licence applications
                                          Annual returns
                                          Business Plan amendments
                                          Director, Officer & Shareholder changes

CIMA examines:
     actuarial opinion and                   claims management
      assumptions                             investment policy
     coverage and exposures                  dividend policy
     fronting arrangements                   financial projections
     reinsurance structure                   Audited financial statements

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