Chapter 22 by yaofenji


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                                              W. Jean Kwon, Ph.D., CPCU
                         School of Risk Management, St. John’s University
                                                      101 Murray Street
                                               New York, NY 10007, USA
                                               Phone: +1 (212) 277-5196
  Risk Management and Insurance: Perspectives in a Global Economy

                      22. Nonlife Insurance

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Study Points

 Policies sold by nonlife insurance companies

 Selected nonlife insurance markets

 Nonlife insurance issues

Policies Sold by Nonlife Insurance Companies

Policies Sold

 Property insurance policies

 Life insurances policies
                                Check also Table 22.1 for OECD
 Package insurance policies                       classification

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

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

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

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.

Liability Insurance Policies

 General (public) liability insurance

 Automobile (motor) liability insurance
                                                    Refer to Chapter 10 (Legal
                                            Environment) for tort and Chapter 12
 Product liability insurance              for MNC-related liability risks such as
                                                                  product liability.

 Workers’ compensation insurance
   • Employer’s liability insurance

 Professional liability insurance
   • Errors and omissions insurance

Package Insurance Policies

 Homeowner's (householder’s) insurance

 Businessowner’s insurance

 Commercial multi-peril insurance

Selected Nonlife Insurance Markets Internationally

The Americas – the U.S.

 The importance of understanding the U.S. market
   • World’s largest nonlife market for decades
   • Highly competitive
      • 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

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

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

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

The Americas – the U.S.

 Issues
  •   State regulation          Chapters 5 & 6 discuss catastrophes.
                               Chapter 15 discusses catastrophe RM.
  •   Market consolidation
  •   Loss reserve adequacy
  •   Impact of catastrophes

Leading Nonlife Insurers in the U.S. (2007)

Leading Nonlife Insurers in Canada (2007)

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

 Products and distributions
   • The agency form of distribution dominates the Canadian nonlife
     insurance market.

 Issues
   • The government continues to regulate rating of automobile insurance

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

The Americas – Latin America

 Issues
  • Economic crisis
  • Many Latin American insurers have comparatively high expenses,
    making their products less attractive.

Leading Nonlife Insurers in Brazil (2008)

Leading Nonlife Insurers in Argentina (2007)


 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.
  • Bancassurance primarily in life insurance

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
   • Distribution dominated by exclusive agents
   • Guaranteed renewal features common in many nonlife insurance

 Issues
   • Coping with the E.U. single market policy

Leading Nonlife Insurers in Germany (2007)

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

 Distinctive markets or marketplaces
   • The London market
   • The Lloyd’s of London
   • International Underwriting Association of London

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
   • 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.

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

Insurance Transactions at Lloyd’s (Figure 22.1)


                                                    Lloyd’s of London

      CLIENTS                     Lloyd’s Brokers     FRANCHISEE
                                                                                           Corporate groups
                                                    Managing agents                              Private
                                                                        Member’s                  Private
      Personal                       Service                                                     (limited
                                    Companies                                                  liabilities)

                     Business Flow                                          Capital Flow

  Source: Lloyd’s of London []

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

Leading Nonlife Insurers in the U.K. (2007)

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

Leading Nonlife Insurers in France (2006)


 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

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.

Nonlife Insurance in Japan (Table 22.4)

Nonlife Insurance in Japan (Table 22.4)
(Net Premiums by Line, Updated)

Leading Nonlife Insurers in Japan (2006)

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

Mergers of Insurance Firms in Japan (Figure 22.2)

                                                       Several new mega mergers going on
                                                                                 in 2010

  Source: Japan General Insurance Association (2005)
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

Leading Nonlife Insurers in China (2007)

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

Leading Nonlife Insurers in India (2007)

Asia-Pacific – Australia

 Features
   • The world’s 10th largest
   • A sophisticated nonlife market composed of 112 insurers and 21
   • Insurance business locally and from overseas

 Products and distributions
   • Domestic motor vehicle insurance holds the largest share

Leading Nonlife Insurers in Australia (2008)


 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

Leading Nonlife Insurers in South Africa (2006)

Leading Nonlife Insurers in Egypt (2006)

Leading Nonlife Insurers in Morocco (2007)

Nonlife Insurance Issues

Nonlife Insurance Issues

 Liberalization and deregulation

 Coping with catastrophes

 Solvency
   • Solvency II
   • RBC

Discussion Questions

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?

Discussion Question 2

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

   • Types of insurance products

   • Growth rates

   • Regulatory environments

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”?

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.


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