Insurance Overview – Principles, Practices, Processes & Organization

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INSURANCE OVERVIEW – PRINCIPLES, PRACTICES, PROCESSES & ORGANIZATION

Document Change Control Create Application Extensions Technical Design-Document Control-Change Record

Change Record Date Author Version Change Reference 28-Jun-11 S.R. Vijai 1.0 Initial version

Reviewers Name Date S.R. Vijai

Approval

Created By: Creation Date: 28-Jun-11

Approved By: Approval Date:

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Table of Contents 1 INSURANCE – PRINCIPLES ...... 4 1.1 FUNDAMENTAL CONCEPTS ...... 4 1.1.1 Risk ...... 4 1.1.2 Peril...... 4 1.1.3 Hazard...... 4 1.1.4 Risk management ...... 4 1.1.5 Risk management process ...... 6 • Identifying and Analyzing loss exposures ...... 6 • Examining Loss Risk Management Techniques ...... 6 • Selecting the most appropriate technique...... 6 • Implementing the most chosen technique ...... 6 • Monitoring and modifying the Risk Management Program...... 6 1.1.6 Benefits of risk management ...... 6 1.2 DEFINITION OF INSURANCE ...... 6 1.2.1 Essential Elements of Insurance ...... 7 1.2.2 Peculiarities of Insurance ...... 7 1.3 PRINCIPLES OF INSURANCE ...... 7 1.3.1 Essentials of Contract ...... 7 1.3.2 Insurance Contract – Principles ...... 7 2 INSURANCE – PRACTICES ...... 8 2.1 INSURANCE – HISTORY ...... 8 2.2 GENERAL STRUCTURE OF INSURANCE MARKET PLACE ...... 9 2.3 OVERVIEW OF FLOW OF DOCUMENTS / INFORMATION ...... 10 2.4 PRODUCT STRUCTURE AND TYPES ...... 13 2.4.1 Product Structure ...... 13 2.5 REGULATORY MECHANISM ...... 14 2.5.1 Role of insurance regulator ...... 15 2.5.2 Rate regulation - ...... 15 2.5.3 The European Insurance and Occupational Pensions Authority (EIOPA)...... 16 2.5.4 Country specific regulators ...... 16 2.5.5 Insurance Providers in Europe ...... 16 2.5.6 Types of insurance providers ...... 18 2.5.7 Ratemaking ...... 19 2.5.8 The insurer’s solvency ...... 19 2.5.9 Solvency surveillance ...... 19 2.5.10 Consumer Protection ...... 20 2.6 TYPES OF INSURANCE ...... 20 3 INSURANCE – PROCESSES ...... 22 3.1 PRODUCT DEVELOPMENT & ACTUARIAL ...... 23 3.2 SALES AND MARKETING ...... 23 3.3 N.B. AND UNDERWRITING: ...... 23 3.3.1 Underwriting – Information Processing ...... 23 3.4 SERVICE AND POLICY ADMINISTRATION ...... 25 3.5 CLAIMS: ...... 25 3.5.1 Claims – Information Processing ...... 25 3.6 ENTERPRISE OPERATIONS ...... 26 3.6.1 Investment ...... 26 3.6.2 Reinsurance and Co-insurance...... 26 3.6.3 Reinsurance ...... 27

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3.6.4 Why reinsurance? ...... 27 3.6.5 Proportional (Pro-Rata) Reinsurance ...... 27 3.6.6 Non-Proportional Reinsurance ...... 27 3.6.7 What is reinsurance program? ...... 28 3.6.8 Core reinsurance process ...... 28 3.6.9 Additional Critical Operations ...... 28 3.6.10 Reporting ...... 28 4 THE ORGANISATION OF INSURANCE INDUSTRY ...... 29 5 ROLE OF IT IN INSURANCE INDUSTRY ...... 31 6 FINANCIAL RATIOS ...... 33 7 REFERENCES ...... 34

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1 INSURANCE – PRINCIPLES 1.1 Fundamental Concepts 1.1.1 Risk It is a condition arising out of uncertainty leading to a possibility of adverse deviation from a desired outcome. Speculative – possibility of loss, gain, no change Pure – possibility loss or no change but no possibility of gain Dynamic – Resulting due to changes in economy. Static - not linked with economy Fundamental – effecting a large section of society, impersonal in origin & consequences and are beyond control of individuals. Particular - felt by individuals Pure and static risk, which entails the possibility of financial loss, can only be insured. In insurance the term Risk is used for a peril against which a property / person is insured e.g. fire or accidental death and also for the property / person protected by the insurance. 1.1.2 Peril Peril is a cause of loss e.g. Fire / Windstorm etc. 1.1.3 Hazard Hazard is a condition – which may create or increase the chance of a loss arising from a given peril or under a given condition. Physical – physical conditions E.g. „highly inflammable substance Storage hazard‟ Moral – dishonesty of character E.g. non-disclosure of Storage of highly inflammable substance Morale – careless or indifferent attitude e.g. not providing special fireproof enclosure to the Storage of highly inflammable substance as insurance will cover the losses. 1.1.4 Risk management Definition – The identification, analysis and economic control of risks, which can threaten the assets or earning capacity of an enterprise Risk Management is a procedure to minimize the adverse effect of a possible financial loss comprising of Identifying potential sources of loss, Measuring the financial consequences of the loss, Using controls to minimize actual losses or their financial consequences It is a scientific approach to deal with the pure risks faced by individuals and business. It involves following steps Risk Identification:

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How the assets or earning capacity of an enterprise is under threat? What are the potential threats of the enterprise‟s existence to its environment? Risk Analysis & measurement : Involves Information gathering, Analysis of past experience, severity & frequency of risk, predicting potential size & cost of risk in terms of monetary cost, human cost –pain & suffering. Selection of approach & technique to deal with risk: o Approaches: Risk control  Techniques: Avoidance, Reduction Risk Finance  Techniques: Retention, Transfer, and Share Identification of Physical Risk control & minimization steps: Pre – loss reduction and post loss reduction Implementation of Decision Evaluation & review: accommodating change & improvement of mistakes.

Treatment Strategies Tools

Avoid Do not own Don’t stay Control Reduce Safety Devices Segregation

Identify Planning Transfer Risk Strategy Insurance Government Pooling

Self-Insurance Finance Retain Absorb Deductibles

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1.1.5 Risk management process • Identifying and analyzing loss exposures • Examining Loss Risk Management Techniques • Selecting the most appropriate technique • Implementing the most chosen technique • Monitoring and modifying the Risk Management Program 1.1.6 Benefits of risk management Coping more effectively with financial disasters Enjoying greater peace of mind Reducing expenses Improving image in community

1.1.6 Insurable risk - characteristics • Unexpected Loss should be unforeseen and accidental. Wear & Tear would not qualify as insurable risk • Definite It should be possible to ascertain the time and place and cause of loss for the risk it should be difficult to falsify • Substantial Risk should be large enough to create financial hardship to be justified as insurable risk • Calculable It should be possible to assign a financial value to the loss • Predictable There should be large number of potential insured to predict future losses • Affordable The risk should not be catastrophic so that premiums are not prohibitively high. e.g. Nuclear Accidents are usually excluded

1.2 Definition of insurance Risk management plan that, for a price, offers the insured an opportunity to share the costs of possible financial loss through an insurer. It is a system by which a common fund is created by contribution by various parties (exposed to same risk), to make good the financial loss suffered by a few (due to the operation of risk) who contribute to this fund. o E.g. 100 motor cars (of insured value $30000) are insured for $ 1000/- premium pa. Of this one of the cars could get stolen and a few would have minor accidents. So for a cost of $1000 the one unfortunate insured could get reimbursed from this common pool. The system where the losses suffered by a few are spread over many, exposed to similar risk It is a contract between the two parties whereby one party called insurer undertakes in exchange for a fixed sum called premium, to pay the other party called insured a fixed amount of money on the happening of a certain event.

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1.2.1 Essential Elements of Insurance • Capacity of parties • Insurance contract consideration • Legality of contract • Agreement between parties • Offer & Acceptance

1.2.2 Unique features of Insurance contracts The product of this industry is only a “Promise”. The „Product‟ comes into existence only after the contract is complete. Product can be tested only after certain period & that to happening of a contingency. Contract of good faith. Potential for customer abuse. Insurance regulation need & types. The payment of claim is the primary function of an insurance company. Two sources of Income: Premium & Investment. Should be viewed as trustees of public money. Is most essential part of national economy?

1.3 Principles of Insurance 1.3.1 Essentials of Contract Definition: It is an agreement between two or more parties to do or to abstain from doing an act & which is intended to create a legally binding relationship. Essentials: Intention to create legal relationship. Offer and acceptance Consideration Capacity to contract Certainty of terms Consensus as idem ( a genuine meeting of minds) Legality of purpose Possibility of performance 1.3.2 Insurance Contract – Principles 1.3.2.1 Utmost Good Faith – Uberrimae Fidei Definition: A positive duty voluntarily to disclose, accurately & fully, all facts material to the risk being proposed, whether requested or not. The breach of duty may be of two types Misrepresentation – either innocent or fraudulent Non – disclosure – either innocent or fraudulent (called concealing of material fact) Another facet of U.G.F. is „Reciprocal Duty‟ – the duty of disclosure rests on both the parties This applies equally to both the insurer and insured.

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1.3.2.2 Insurable Interest Legal right to insure arising out of financial relationship recognized under law, between the insured & the subject matter of Insurance Essentials Some property, life, limb, potential liability etc. capable of being insured Which must be subject matter of insurance The relationship of subject matter & insured – recognized by law. Insured must benefit from safety of subject matter & prejudiced by its loss. Subject matter is in fact the name given to the financial interest, which the insured has in the subject matter.

Indemnity Definition: A financial compensation sufficient to place the insured in the same financial position after a loss as he was before the loss. In practical terms, Insured‟s interest in the „subject matter‟ of insurance is insured. So after the event, he should be compensated to the extent of his‟ interest. This will prevent the insured to make profit out of insurance.  Contribution prevents recovering more than a loss despite having more insurance policies  Subrogation means the transfer of rights and remedies of the insured to the insurers

Proximate cause Definition: the active efficient cause that sets in motion a train of events which bring about a result, without intervention of any force started & working actively from a new and independent source. If there are two or more causes of loss the proximate cause of loss needs to be an insured peril for the claim to be tenable.

2 INSURANCE – PRACTICES 2.1 Insurance – History The Insurance is probably as old as the Trade practices & thus Insurance began with the marine Insurance. The roots of insurance can be traced back to ancient civilizations in Egypt, Babylonia, Phoenicia, India, China & Greeks and Romans. Traces of Insurance related activities from 11th Century by Danish Merchants, evidences of marine insurance in Venice in 1255, in Pisa Italy 1388. The first comprehensive code of insurance laws in Barcelona of 1435 AD However, the Insurance as we know of today & as some kind of well-organized effort came into existence in London by 1688. It began in Edward Lloyd's Thames-side coffeehouse in Tower Street in the City of London. Here the wealthy individuals in the coffeehouse would each take a share of a risk, signing their names one beneath the other on the policy together, with the amount they agreed to cover. (For this reason, they were known as 'underwriters'- Lloyd‟s underwriter).

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The origin of fire insurance can be attributed to the losses suffered due to great fire of London 1666 and to a man called Nicholas Barbon who opened an office "to insure buildings." The roots of Life insurance can be tracked to the ancient practices of Greece and Rome, where people came together in burial societies that paid funeral costs out of monthly dues. Health and burial insurance evolved extensively under a mutual plan without profit considerations in the Anglo-Saxon and German guilds of the middle Ages. Our earliest record of true life insurance with "insurable interest" dates back to 1430 in Genoa and, among other things had to do with the lives of pregnant wives.

2.2 General Structure of Insurance market Place

Institutions Banks / Affil. Groups / Dealers Surveyor & Assessor

Agent

Web Tele-Sale

Broker Broker & Pools Consultant

Re -Insurer INS 3 INS 2

This section covers the major entities in Insurance Market place, there can be entities not mentioned here and local variations as well but those would be part of detail study. Also the nomenclature also would vary depending on geographies.

Customer : Individual / Family / Business Organization / Industry Insurer : Providers of Insurance can be of following type o Proprietary / Public company o Mutual Company & co-operatives o The Lloyd‟s underwriters o Captive Insurer o Government etc. Agent: an individual or firm representing an insurer & is remunerated in the form of commission expressed as a percentage of the premium procured.

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Broker: an individual or firm deemed to be professional, who represents the customer & gives advice to obtain the proper cover. Receives brokerage expressed as a percentage of the premium from the insurer. Consultant : Similar to brokers but are remunerated in the form of fee from the customer o In addition to the above there are other “Channel Partners” like call center representatives, aggregators, financial advisors, independent agents, etc who also act as intermediary in the insurance business. Institutions: Like banks, affiliated groups & dealers may also take part in insurance business transactions Surveyor & Assessor: They do not take part in the business procurement cycle but are integral part of Insurance market. They provide professional services for at the time of Inception & assessment loss at the time of claim, by charging professional charges. They can be engineers, lawyers, Accountants, Doctors etc. as the case may be. Reinsure: The company, which underwrites the business, underwritten by an insurer. This may be viewed as Insurance of Insurance.

2.3 Overview of flow of documents / information

5 b

CERTIFICATE 1 PROPOSAL 5 a 2 FORM COVER NOTE QUOTE 5 3 POLICY PREMIUM RECEIPT 4 6 7 CHANGE ENDORSMENT 8 8 REQUEST RENEWAL NOTICE

This overview covers simplified and general practices, there are local variations to these and the nomenclature would vary depending on market and Line of Business.

1. PROPOSAL FORM: Proposal is an application for providing insurance cover. It can be verbal, written or in the printed format as provided by the Insurance co. It is to give the relevant material information about the risk proposed for insurance. The form provided by the company usually contains propose o Name : o Address: o Profession/Occupation : o Previous & Present Insurance: o Loss Experience: o Proposed Period of Insurance o Description of risk: ( Varies as per Type of Insurance - example of property) o Occupation of the property

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. Construction . Communication / Segregation to other high risk property . Fire alarms / Extinguishers &/ or Other safety devices . Type & mode of entry restrictions to the property . Description of the contents – make / no/ Sum insured / location etc. . Sum Insured o Declaration : . The correctness about the information . Duty of Utmost good Faith o Assignment / Nomination o Signature / Date / Palace o Recommendation of Agents / Broker remarks It contains varies largely as per the Class of Insurance and as per the practices of the insurance company & regulatory laws.

2. QUOTE : Premium payable / converge details / exclusions etc

3. PREMIUM: Cash / Cheque / Demand Draft / Bank Guaranty / Cash Deposit

4. RECEIPT: Is the proof of the receipt of payment & in many cases proof of cover o Details payment made o Some of the Details of risk o Some of the Details of Documents to be issued

5. This has three parts Cover Note, certificate and Policy out of these issuance of first two i.e. Cover note & certificate depends on practices followed o COVER NOTE: Is a document issued in advance of the policy. It is issued as proof of cover when the policy is being finalized. It is of temporary nature & will be replaced by the policy when it is issued. It is subject to the same term & conditions of the policy. It normally incorporate: . Serial Number . Name & Address of the Insured . Sum Insured . Period of Insurance and validity of Cover-note . Risk Covered & Description of Risk . Rate & Premium ( If not finalized Provisional) . Signature / Date / Palace

o CERTIFICATE: In cases like Motor or Marine in addition to policy a certificate is required by the police, port, custom & other registration authority. The certificate will contain most of the information of the policy but avoid the terms & conditions etc. which is related to the contract of insurance.

o POLICY: This formal document, which provide an evidence of the contract of insurance. This document is stamped the amount of which varies as per the class of insurance. The policy wording is adequately

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fixed by the regulatory authorities or by the Company. The policy may be divided into following sections . The heading: Name & address of insurer . The preamble or recital clause: this section recites to the parties to the contract. It makes reference to the declaration made in the proposal form & also of the premium . Operative or insuring clause: This clause sets out the essence of the contract. It specifies the perils insured and the perils excluded. The sum Insured or other limits of liability are listed. . The schedule: This section contains all the information applicable to particular contract which include Policy No Address & name of the Insured Date of issue & Period of insurance Details of risk Rate & premium . Conditions: These are the conditions expressly mentioned which are to adhered to apart from the implicit conditions for the contract to be in force. There are some warranties also. . Attestation and Signature clause: The signature of authorized signatory & seal

o CHANGE REQUEST: Any change to the insured item is intimated to insurer to incorporate that in the contract. The format and content of this request would depend on type of change but it would be a detail description and always would be initiated by insured.

o ENDORSMENT: This is the document to incorporate any changes in the policy terms & conditions or other aspects like sum insured, location of risk, change in period etc. may be at the inception of the policy or during the operative period.

o RENEWAL NOTICE: Reminder for the renewal sent to insured before the expiry of the policy. Incorporates relevant particulars of the policy, the premium payable & last date of payment.

6. CLAIM FORM: This is a formal request for payment under policy after the occurrence of the loss. The contents of claim form vary with each class of business. In general it is designed to elicit full information regarding the circumstances of the loss : o Details of the accident o Chronology of the incidence o Details of policy o Relevant documents substantiating the claim o Undertaking by the insured for Correctness of the information

7. REPORTS / RETURNS: Insurance depends heavily on information & it is processing there are no reports to be generated, some of which are mandatory under the regulations. A few prominent types are

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o Underwriting Returns: For reporting the business underwritten during a specific period, these can be based on S.I. / period / location / class / type of property etc. o Claims Returns: for reporting, the claim registered / settled during a specific period these can be based on Claim amt. / cause / period / location / class / type of property etc. o Accounting Reports: For reporting, the business transacted during a specific period these can be based on premium / claim settled Claim amt. / documents issued / source of business-agent/broker etc. o Product wise Reports: Reports detailing the products sold (policies) during specific period can be based on Type of business / S.I. / Location / source of business-agent/broker etc. o Perils wise reports etc.

There are many more documents transacted but we will restrict to these only for the time being. 2.4 Product Structure and types By and large, Insurance practices all over the world are similar, as the exposure to risk is rather same worldwide. However, there are differences some aspects and most glaring aspect is the products structures and their classifications. 2.4.1 Product Structure Here we would be considering only the common streaks of product structure and avoid details as the product design is very complex and distinct study area.

Typically, the Insurance „product‟, provides cover against one or more named perils, referred as „Coverage‟. In case of life Insurance, generally there is one major cover namely; death and other covers are added as riders e.g. funeral expenses. Whereas the Non Life products, cover more than one peril and are generally packaged as „Basic‟ and „additional‟ coverage. In both types of Insurance the „cost‟ of product is driven by the main coverage or Basic coverage and riders or additional coverage attracts additional charges. Also some discounts are offered if insured opts out of part of major risks covered. Listed below are the examples of Property and Auto products, to give you an idea. Property (Also known as Fire) : The covers normally include o Basic Covers . Fire . Lightning . Explosion/Implosion . Aircraft Damage . Riot, Strike, Malicious and Terrorism Damage . Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation . Impact Damage-by Rail/ Road vehicle or animal by direct contact not belonging to or owned by the insured . Subsidence and Landslide including Rock slide

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. Bursting and/or overflowing of Water Tanks, Apparatus and Pipes . Missile Testing operations . Leakage from Automatic Sprinkler Installations . Bush Fire o Coverages can be added with additional premium . Architects, Surveyors and Consulting Engineer's Fees . Debris Removal . Deterioration of Stocks in Cold Storage premises due to power failure following damage due to an insured peril. . Forest Fire . Impact Damage due to Insured's own Rail/Road Vehicles . Spontaneous Combustion . Omission to insure additions, alterations or extensions. . Earthquake (Fire and Shock) o Coverages can be opted out with reduction in premium . Storm, Cyclone, Typhoon, Tempest, Hurricane, Tornado, Flood and Inundation . Subsidence and Landslide including Rock slide Auto (Also known as Motor) o Basic Covers . Own Damage: by accident, fire, lightning, self-ignition, external explosion, theft, malicious act, riot and strike; terrorism; earthquake, flood, cyclone and inundation . Liability for third party: injury/death, third party property and liability to paid driver o Additional coverages with additional premium . loss/damage to electrical/electronic accessories . PA cover for drivers, insured, any named or unnamed passengers o Coverages can be opted out with reduction in premium . Earthquake, flood This is indicative list; in reality the products can have different packaging. This packaging dependent on market forces, regulations and ancillary services. The cost of product – premium, is proportional to the coverages offered by the product. 2.5 Regulatory Mechanism Insurance regulations are at Federal and/or state level in each country in EU. License is required to market the product. Most countries have common regulations to protect consumer interest such as • Free look period • Grace period • Claims procedures • Guaranty (in case of bankruptcy) • Indisputability Primary objectives of insurance regulation are • Rate Regulation • Solvency surveillance

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o Improved risk sensitivity o Improved market sensitivity o Improved supervision of groups o Improved transparency o Common EU intervention tools o Reduced cross-subsidy o Rationalization of the existing regime • Consumer protection 2.5.1 Role of insurance regulator Provides the specialized policing and statutory controls required to manage financial institutions of this magnitude and niche business of risk management • To protect the interest of consumers. • To bring about speedy and orderly growth of the insurance industry for the benefit of the common man and to provide long term funds for accelerating growth of the economy. • To set, promote, monitor and enforce high standards of integrity, financial soundness, fairness, transparency and competence in insurance markets. • To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. • To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices. • To build a reliable management information system to enforce high standards of financial soundness amongst market players. • To take action where such standards are inadequate or ineffectively enforced 2.5.2 Rate regulation - The Rate Regulation is required because • Insurers develop insurance rates that affects most people, the laws of nearly all countries give the insurance commissioner the power to enforce regulation of insurance rates • To ensure that rates are adequate • To ensure that rates are not excessive • To ensure that rates do not induce unhealthy competition • An Actuary analyzes data on past losses and expenses associated with losses and combining this with other information develops insurance rates. In other words, an actuary is a person who uses complex mathematical methods and technology to analyze loss data and other statistics to develop system for determining insurance rates. • Insurance Rating Laws are: • Prior approval laws • Flex rating laws • File and use laws • Use and file laws • Open competition (no-file laws) • State-mandated rates

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2.5.3 The European Insurance and Occupational Pensions Authority (EIOPA) EIOPA is part of the European System of Financial Supervision consisting of three European Supervisory Authorities and the European Systemic Risk Board. It is an independent advisory body to the European Parliament and the Council of the European Union. EIOPA‟s core responsibilities are to support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries. EIOPA is based in Frankfurt am Main, Germany. Website - https://eiopa.europa.eu/

2.5.4 Country specific regulators In addition to the above there are regulators in each country which are as below UK - The Financial Services Authority (FSA) Denmark - Financial Supervisory Authority (Denmark), (Finanstilsynet in Danish) France - Autorité des marchés financiers (AMF) Finland - Financial Supervisory Authority, (FIN-FSA Finanssivalvonta in Finnish) Poland - Polish Financial Supervision Authority (KNF) Portugal - Portuguese Securities Market Commission (CMVM) Germany - Federal Financial Supervisory Authority (BaFin - Bundesanstalt für Finanzdienstleistungsaufsicht) Italy - Institute for the Supervision of Insurance (ISVAP) Netherlands - Netherlands Authority for the Financial Markets (AFM - Autoriteit Financiële Markten in Dutch) Spain - Insurance sector regulator (life and general) - Insurance Compensation Consortium (Consorcio de Compensación de Seguros, CCS) Sweden - Swedish Financial Supervisory Authority {Finansinspektionen (FI)} Switzerland - Swiss Financial Market Supervisory Authority

2.5.5 Insurance Providers in Europe

INSURANCE COMPANIES IN U.K. Aviva insurance U.K. Car Insurance Company: Zurich Insurance Tesco finance and insurance IMG Insurance management Group, INC Virgin Money insurance UK health insurance Company Chase Templeton Ltd. INSURANCE COMPANIES IN GERMANY AMB Generali Allianz Hanover RE Munich Re INSURANCE COMPANIES IN ITALY Assicurazioni Generali Unipol Assicurazioni Alleanza Assicurazioni

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Ras Tutela Giudiziaria Lloyd Adriatico INSURANCE COMPANIES IN FRANCE Stuart Collins insurance Maxwell insurance. AON Insurance for expatriates in France QBE France Chubb insurance Company of Europe INSURANCE COMPANIES IN POLAND Ergo Hestia Insurance INSURANCE COMPANIES IN FINLAND Alandia Bolagen Sampo Life Tapiola Group Non Life Insurance Companies in Finland: Garantia Fennia- the Insurance Specialist Store Clements International INSURANCE COMPANIES IN DENMARK Genworth Financial QBE Nordic Aviation Clements International INSURANCE COMPANIES IN SWEDEN Alecta Insurance AMF Pension Insurance Skandia Liv Insurance Robur Insurance LF Liv Insurance Handelsbanken Liv Insurance AFA Sjuk Insurance Trygg-Hansa Insurance LF Sak Insurance LF Stockholm Insurance LF Goteborg Insurance AGRIA Insurance INSURANCE COMPANIES IN SWITZERLAND Swiss Life Swiss RE Zurich financial Services SWinterther Switzerland Clements International INSURANCE COMPANIES IN SPAIN Cllaghan insurance Clements International Horizon Consultants INSURANCE COMPANIES IN THE NETHERLANDS Aegon ASR Nederland Atradius Cardif

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Centraal Beheer Delta Lloyd Group Eureko Fortis (finance) ING Group Interpolis Nationale-Nederlanden Onderlinge van 1719 u.a. SNS Reaal Stad Rotterdam Verzekeringen Tvm (insurance) INSURANCE COMPANIES IN PORTUGAL Clements International AXA Portugal Global Seguros Generali Tranquilidade 2.5.6 Types of insurance providers Types Purpose for formation Legal form Ownership Method of operation

Stock insurer To earn profit for its Corporation Stockholders The board of directors, elected stockholder by stockholders, appoints officers to manage the company. Mutual Insurer To provide insurance Corporation Policyholders The board of directors, elected for its owners by policyholders, appoints (policyholders) officers to manage the company Reciprocal To provide reciprocity Unincorporated Subscribers Subscribers choose an attorney- insurance for subscribers (to cover association (members) in-fact to operate the reciprocal. exchange (inter- each other’s losses insurance exchange) Lloyd’s of To earn profit for its Unincorporated Investors The Committee of Lloyd’s is London individual investors and association the governing body and must its corporate investors approve all investors for membership.

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2.5.7 Ratemaking Rate making is the process insurer use to calculate the rates that determine the premium for insurance coverage A Rate is the price of insurance for each unit of exposure. The rate is multiplied by number of exposure units to arrive at the premium. A Premium is the periodic payment by an insured to an insurance company in exchange for insurance coverage Premium Charged is based on:- • Probable loss payments • Predicated administrative expenses • Margin for error • Profit margin and Contingency • Insurance company analyzes history and • Uses rate classification system to evolve • Premium 2.5.8 The insurer’s solvency The ability to pay claims in the event of occurrence of losses depends upon financial condition of the insurer. Its assets, liabilities and policyholder surplus measure the financial position of the insurance company at any particular time. Assets - These are property both tangible and intangible in nature, owned by an entity, in this case an insurance company. These include money, stocks and bonds, buildings, office furniture equipment and accounts receivable from agents, brokers and reinsurers. Admitted Assets - Assets which can be converted into cash immediately Non-admitted Assets - Assets which cannot be converted into cash immediately 2.5.9 Solvency surveillance Solvency surveillance is the process conducted by state insurance regulators of verifying the solvency of insurance companies and determining whether the financial condition of insurers enables them to meet their obligations and to remain in business in the long term. Insurance Company Examinations Insurance Regulatory Information Systems (IRIS) Liabilities Loss Reserves Unearned Premium Reserves Policy Holder‟s Surplus Total Admitted assets – Liabilities

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New regulation Solvency II will be based on economic principles for the measurement of assets and liabilities wider scope of creating a single market across EU. Risk will be measured on consistent principles and capital requirements will depend directly on this. A solvency capital requirement may have the following purposes: To reduce the risk that an insurer would be unable to meet claims; To reduce the losses suffered by policyholders if a firm is unable to meet all claims fully; To provide early warning to supervisors so that they can intervene promptly if capital falls below the required level; and To promote confidence in the financial stability of the insurance sector Often called "Basel for insurers," Solvency II is somewhat similar to the banking regulations of Basel II. The proposed Solvency II framework has three main areas (pillars): Pillar 1 consists of the quantitative requirements (for example, the amount of capital an insurer should hold). Pillar 2 sets out requirements for the governance and risk management of insurers, as well as for the effective supervision of insurers. Pillar 3 focuses on disclosure and transparency requirements

2.5.10 Consumer Protection To protect Insurance consumer, the Insurance regulators take following activities • Licensing Insurers • Licensing Insurance company representatives • Approving Policy forms • Examining market conduct • Investigating consumer complaints • Having ombudsman to monitor quick redress of grievances

2.6 Types of Insurance Insurance is normally divided in two broad categories as long-term insurance – mainly ‘Life Insurance’ and short-term – mainly ‘Non-Life Insurance’. Some of the differentiating factors are: In Life Insurance, the sum assured is payable after happening of certain event (death or Term completion) – in Non-life the event may or may not happen & if it does not, then the sum insured is not paid to the insured. Life Insurance, covers natural death i.e. the event is a certainty – non-life covers only uncertain / accidental events. In Life Insurance Installment in premium payment is a regular feature in life whereas it is rarely practiced in non-life. The risks covered in life Insurance has much less variety as compared to non-life risks The subject matter or Insured Item is always human being in Life Insurance, where as in Non – life virtually anything that can potentially lead to pecuniary losses are covered

Non Life Insurance business is normally issued for twelve months or shorter duration. There can be some longer versions available in this class. The below mentioned classification is not exhaustive and there are other

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classifications as well e.g. personal / commercial etc. The normal divisions include o Property (Also known as Fire) : o Marine – Cargo & Hull o Miscellaneous o Personal Accident ( Also known as Disability or Casualty) o Health (US versions -HMO / POS / FFS / MSA / PPO / HIPPA / CORBA ) o House Holders (US versions – HO-1/ HO-2/ HO-3/ HO-4 etc.) o Liability Insurance – Product / Public liability / professional indemnity o Theft & Burglary / Fidelity / Money in Transit o Aviation o Engineering

Another way of classification uses following classes o Personal – Property / Auto etc. o Commercial – Property / Auto / Marine/ Aviation / Engineering etc. o Health – Health Insurance

Life Insurance covers are normally for longer duration (except for some term policies).Types of life insurance: Following is one of the classifications of life insurance, there are other types of classifications as well o Term life Insurance: This type of insurance provides risk cover only during the term. The sum insured is payable only in the event of death during the term. In case of survival there is no payment from the insured. In this sense, it is like non-life Insurance. The variations available . Increasing / Decreasing (SI) plans . Convertible Term Policy . Guaranteed term o Endowment Insurance: An endowment is very much like a savings plan, which provide for the payment of policy money on survival of specific period. In case of death the policy money is not payable . Endowment Insurance . Joint Life endowment plans . Money back endowment . Marriage / education endowment Plans . All most all the life insurance plans are combination of both term insurance element & pure endowment elements in different proportions. o Whole life: This is effectively a long term insurance where the protection is available throughout the life of the insured. . Limited payment whole life – premium payable up to a certain period o Annuities: The risk of living too long is covered by these plans & hence called up-side-down application of life insurance premium. These plans pay a certain amount at a fixed periodicity - yearly / monthly after a certain years of payment of premium.

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. Immediate Annuity – payments starts immediately / cease after death . Deferred Annuity - payment starts after specified period . Immediate Annuity Certain- payment starts immediately & is guaranteed up to specified period even after death to the beneficiary. o Group Life Insurance: In the group insurance, the contract is with the employer/ group. A single master policy is issued covering all the members, as per agreed terms. The individual covered under the policy is not party to the contract. The group negotiates the amount & terms of insurance.

Another way of classifying of Life insurance considers following classes o Pure Insurance: . Term . Whole Life o Investment . Endowment . Universal Life . Variable Life . Universal variable . Unit Linked o Long Term . Pensions . Annuities

3 INSURANCE – PROCESSES Following are the Key business processes of insurance company Product Development & Actuarial: Ensures that new innovative products are offered to clients Sales and Marketing: Sells products/generates demand and positioning in marketplace New Business and Underwriting: Classification, acceptance (or rejection) rating/pricing of risks and concluding new contracts Policy administration and Customer Servicing: Handles the “back office” functions such as issuing polices and servicing in force polices Claims: Ensures that the company fulfills its contractual promise to provide protection Additional Critical Operations: Additional critical operations include risk management, compliance, investment and reinsurance, and support functions These processes are detailed further in following sections. Out of these the two most important processes are discussed in much detail

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3.1 Product Development & Actuarial The product (Promise) made available on market by insurance companies, is a culmination of very complex computations and is a highly specialized study area. This process comprises of following functions: . Price and profitability research of new products . Demand analysis for new products . Product design . Current book displacement . Product and rate plan filings . Product implementation and roll out

3.2 Sales and Marketing . Identify target markets . Liaise with product development to establish demand for new products . Analyze customer base . Build brand awareness for products . Execute distribution strategy

3.3 N.B. and Underwriting: The New Business process comprises of new proposal submission, U/W & Policy issuance. Underwriting is a process of selecting risks for insurance and determining in what amounts and on what terms the insurance company will accept the risk. The important aspect is maintaining the profitability of entire book of business. The steps & activities normally involved . Submission . Rating / Underwriting . Premium computation . Contract finalization 3.3.1 Underwriting – Information Processing The information processing in U/W mainly involves The inputs o Proposal forms o Rates / Rate-tables o Premium payments o Risk related information supported by DMV data . CREDAI/CRISIL reports . Income/Sales tax returns to substantiate turnover in case of business insurance . Customer related info Marital status Age Health Occupation Vocation, etc Habits

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The process o Calculation of premium o Selecting Terms / Conditions / Excess / Deductibles etc. The output o Receipt of premium o Policy / endorsement o Underwriting reports / returns Following is simplified depiction of the process

POLICY CUSTOMER RULES & CONDITIONS

RULES & CONDITIONS RULES & AND CONDITIONS PREMIUM PREMIUM RISK SPECIFICATIONS RISK SPECIFICATIONS UNDERWRITING PROCESS RISK SPECIFICATIONS PREMIUM

RULES & CONDITIONS

APPLICABLE RISK RATE SPECIFICATIONS POLICY

TARIFF / RATES POLICY DB

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3.4 Service and Policy Administration This key function refers to “Back office” functions and include: Policy issuance - both new and renewals Bills, collects and reconciles premiums Issuing changes, often known as endorsements, to existing policies e.g. o Address change o Change in Sum Insured o Change in coverage‟s o Change in beneficiary o Any other change which may or may not affect the premiums paid Conducts premium audits to verify payrolls, sales and other rating and business operation information Loss control specialists advise the insured on procedures they can implement to reduce frequency and severity of losses 3.5 Claims: Claim is a request for payment of insurance policy benefits following the occurrence of a loss due to covered peril. The steps & activities normally involved FNOL – First Notice of Loss Claim adjudication - Investigate losses and negotiate settlement Claim payment – Ensure fair and prompt payment of claims to those who suffer insured losses Make surrender and maturity payments on life policies 3.5.1 Claims – Information Processing The information processing in claim process involves The Input o Claim form o Policy details & limits o Premium details o Surveyor / adjuster report The Process o Documents required o Surveyor / adjuster allocation o Payability o Amount payable The Out put o Claim note o Cheque of claim amount Following is simplified depiction of the process

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CLAIM CUSTOMER PAYMENT SURVEYOR / ADJUSTER

DOCUMENTS REQUIRED SURVEY POLICY REPORT DETAILS & DOCUMENTS LIMITS CLAIM REQUIRED FORM

CLAIM FORM CLAIMS PROCESS CLAIM FORM CLAIM FORM POLICY DOCUMENTS DETAILS PREMIUM REQUIRED & DETAILS LIMITS

RULES / REGULATIONS POLICY DB

3.6 Enterprise Operations Actually this Key Function, comprises of many important functions 3.6.1 Investment Investments provide additional income that may be needed to pay claims. 3.6.2 Reinsurance and Co-insurance Reinsurance is an important process in Insurance market. Though it cannot be seen as a subsystem of Insurance, it is an auxiliary process, which is very important for smooth functioning of the basic insurance. As discussed earlier Insurance is based on the principle of „spreading of risk‟. The insurance companies stretch the same principle further by insuring the risks assumed by them with other companies. This process is known as „Reinsurance‟.

Co-insurance: refers to arrangements between insurance companies whereby they share the risk and premium for large risks. This arrangement is followed in some high value and complex situations. (The term „Co-insurance‟ is also used in another context especially, in US Auto market which signifies self insurance i.e. co-insurance in US means sharing of risk between the insured and insurer e.g. if a car is valued at $8000 and insured wants to insure this for a value of $6000 then he/she is the co-insured for $2000).

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3.6.3 Reinsurance The insurance companies assume a large quantum of risk on their books during the course of their business Insurance companies, in turn, share these risks with other risk carriers The process of such secondary risk sharing is called reinsurance The contracts which define primary and secondary risk sharing are entirely independent of each other, with the insured or the reinsurer not having any lean on each other (unless specific clauses are added). In the Reinsurance parlance, the primary insurance companies are called Cedants as they cede a part of the risk to reinsurance companies by paying a premium. Act of ceding the risk by insurance companies is called cession A Reinsurance company can also cede a part of its risk to another reinsurance company and this is called Retrocession Retrocessionnaire is the reinsurance company that provided reinsurance to another reinsurance company There could be a chain of retrocession as each reinsurance company in the chain cedes a part of its risk to another reinsurance company Retrocession recoverable is the amount of money that a reinsurance company is to receive from another reinsurance company for their share of a claim. 3.6.4 Why reinsurance? Provides capacity Creates financial stability Allows release of capital for alternate uses Facilitates insuring of natural perils which would otherwise be uninsurable Ensures solvency after catastrophic losses Provides insurer support for underwriting of new / unknown risks. There can be several levels of reinsurance agreements Typically, reinsurance is taken in a different part of the world 3.6.5 Proportional (Pro-Rata) Reinsurance In Proportional Reinsurance, a Reinsurer assumes a certain proportion of the risk Typically, the Reinsurer also receives the same proportion of the original premium received by the ceding company and accepts the liability of the same proportion of any resultant losses during the lifetime of a contract Most treaty business is undertaken on a proportional basis Since insurance company incurs some cost on initial acquisition and administration of the business, the reinsurance company pays for part of this as ceding commission Level of ceding commission is one of the most important factors in determining the profitability of the business 3.6.6 Non-Proportional Reinsurance In Non-Proportional Reinsurance, the primary insurer retains much of the risk up to a certain point (deductible or excess) and then seeks to reinsure any remaining risk over and above that point

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Premium to be passed to the Reinsurer depends on the likelihood of loss in the layer being passed to the Reinsurer Typically the risk passed on differs from the original risk of the primary insurer 3.6.7 What is reinsurance program? Primary insurers usually meet the reinsurance needs by designing a suite of reinsurance arrangements with multiple reinsurers to manage the surplus which it has over the retention. Such package of reinsurance agreements is called a program Process of designing and placing a reinsurance program Decide retentions (risk / category / business line…) Finalize the type and limits of various reinsurance arrangements Identify potential markets for the placements Finalize the placements 3.6.8 Core reinsurance process Insurer finalizes the reinsurance program and draws out slips, then a broker indentifies and approaches potential markets, the reinsurer evaluates the offer and provides written lines, the broker negotiates the terms if necessary. The insurer considers written lines and signs down if necessary and sends periodic accounts and settlement. The broker compiles and co-ordinates settlements and reinsurer receives accounts and settlements/ settles accounts if necessary. 3.6.9 Additional Critical Operations Risk Management, IT, Actuarial, Finance/Accounting and Compliance 3.6.10 Reporting Insurance is the most data intensive industry and hence reporting is very crucial function. The reporting happens at many levels and involves information flow between many internal depts. and external agencies. The information processing for reporting involves Input Inputs o Policy details o Premium details o Claim details o Payment details o Channel partner details The Process o Report generation in predetermined formats The Output o Underwriting Returns o Claims Returns o Accounting Reports o Product wise Reports o Perils wise reports etc. o Renewal reports o New policy data o Reinsurance treaty status reports o Probable maximum loss reports of large risks o Risk Accumulation reports for catastrophe loss assessment

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4 THE ORGANISATION OF INSURANCE INDUSTRY 4.1 General Organizational & other aspects The organizational setup & thus the flow of information in the insurance industry do show variation across companies, markets and geographies. However, certain factors, which largely influence both the organizational setup & information flow, are mainly common throughout the world. Greater need to store & process information: o Insurance business relies heavily on the records & the information o Number o Frequency o Complexity - of reports required is more. Legal nature of the product: o Insurance is a legal contract o Transacted mainly by the parties (agents & buyers) who are not legal professionals. o Emphasis on the details of the insurance documents to be precise & uniform. Regulatory Authorities : o Should work as the trustee of public money. o Monitor if there are opportunities of customer abuse & legal disputes. o To control these factors there will always be some kind of regulatory system, though its nature & extent may vary. Hierarchical structure for accepting risks & settling claims: „Insurance‟ is a promise to pay certain amount in future on occurrence of some events. Before making the promise the company needs to be sure of; it‟s financial capacity, the promise to be within the frame work of its rules / regulation and will not lead to utter financial disaster. These facts lead to a hierarchical structure for o Acceptance of a risk, fixing acceptance limits at each step of hierarchy, to maintain company‟s profitability o Control over settlement of claims, fixing sanctioning limits at each level of hierarchy, to check the fraudulent intentions The hierarchy culminates into lot of documents and Information interchanges between various offices. Re-insurance / Co-insurance: Spreading of risk is the principle behind insurance & insurance companies extend upon this principle by further spreading the risk. o Sharing of the risk amongst them called Co-insurance o Further, insure it called Re-insurance.

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4.1.1 Structure of Insurance Organization

ACCTURIAL & REGULATORY OTHERS AUTHORITY

CO – RE - CORPORATE INSURER OFFICE INSURE R

CONTROLING OFFICE e HI r a hr c y

BRANCH OFFICE

AGENTS BROKERS

Though the organizational structures, across companies, this n oversimplified & generalized structure is depicted only to give an idea 4.1.2 Financial Aspects As with any business, insurance follows the usual maneuver of accounting & finance. But as insurance is a business of bearing liability, the company should be financially strong enough to honor its promises. Due to this and other aspects of insurance discussed so far there are some peculiarities of the insurance business‟ financial aspects which are different from others businesses, a few of them are listed bellow are 4.1.2.1 The shareholder’s fund: It comprises of Paid-up share capital of the company General or free reserves Balance of the profit & loss carried forward 4.1.2.2 Capital: The regulatory authorities / law normally decide the minimum capital required to start insurance business. They also may stipulate a limit for foreign holdings. Normally the paid up share capital of the company is related to the risk inherent in an insurance co. E.g. Canada – Minimum Continued Capital & Surplus Requirements - MCCSR, in USA – Rate-Based Capitalization - RBD, in Japan the ministry of finance governs it as per the Insurance business law of 1 April 1996. In INDIA, it is Insurance Regulatory & Development Authority – IRDA – IRDA Act of 1999. As per the provisions of this law currently if any foreign

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insurance company, it has to enter as a joint venture of Indian & foreign company and foreign insurance company‟s capital is caped at certain % of the capital. 4.1.2.3 General or Free reserves: An insurer will require strengthening the capital base with general or free reserves. Some countries make it compulsory to transfer a certain minimum amount every year, until the total reserve reaches a certain percentage of the paid up capital. 4.1.2.4 Solvency: Solvency is the ability to pay debts & policy benefits when they come due. Solvency margin is the amount by which the assets of the insurer exceeds its liabilities & will form part of the insurer‟s shareholder‟s fund. Methods of valuation of assets & liabilities of an insurer are prescribed in the insurance regulation. The regulation stipulates the minimum solvency margin an insurer must maintain at all times. 4.1.2.5 Deposits: A certain amount, which is required to be placed with the government, which can be used in the event of event of failure of an insurer to meet it, is obligations under insurance policies. This deposit will be refunded after certain criterion is fulfilled which indicates that the liabilities under all the policies are provided for. 4.1.2.6 Profits of Insurance Business: In insurance business Profit are of two different types Underwriting Profits: earned on the business transacted i.e. when earned premium exceeds claim paid or outstanding. Investment Profits : Are earned on the investment made by the company 4.1.2.7 Premium: Premium must be sufficient to: Cover the Expected claim Create a reserve for outstanding claim Provide for acquisition costs commission / brokerage Management cost: Salaries / office cost / stationary /advertising etc. Provide for tax liability of the insurer Provide for contingencies & profit margin Commercial Considerations Offset Inflation Accommodate Interest Rates Accommodate Exchange rates Withstand the Competition

5 Role of IT in insurance Industry

An insurance company is a Network of people and technologies within and outside the firm working as an ensemble to achieve desired results efficiently. The “Network” uses Information Technology.

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Successful firms leverage their technologies through their imaginative application to products, business and markets for expanding their revenue base. Service efficiently in terms of customers and other stakeholders in the business. 5.1 Role of IT in: Product development Helps Analyzing Market data Design the Product Price the Product Customize the Product Profit Testing with multiple benefit options Valuation of Liability, Reserving Enables for Experience Analysis (Mortality, Expense, Withdrawal, Lapse, Morbidity, Claims, etc in life and past loss, risk class experience, location and demographic exposure for P&C Distribution Product Promotion Campaign management Quote, Bind and Sell Online portals to browse/buy Email Mobile alerts for new products and Premium payment Demographic, Economic & Geographic data for Personalization of the sales process Sales Illustration Best choice of plan at POS Online downloads of latest brochures from remote locations Efficiency and flexibility in agency and brokerage operations New Business and Policy Administration . Application submission, checking for completeness and accuracy of data submitted . Application Screening . Imaging and Electronic documents . Indexing and document clustering . Jet Underwriting . Online client instructions acceptance . Electronic interaction with Customer e.g. e-forms . Making logical decisions on data input using rules engines based on predefined criteria . Presenting information to clients . Decision support software . Tele underwriting . Electronic Premium Invoice . Electronic Premium Collection Claims Claims Notification – FNOL Claim registration and coverage check Claims Screening Claims assessment and Investigation

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Claim Analysis Claims Calculation Claims Payment Status Update, reserve closure, accounting Decision support software and reporting Data warehouse for consolidation of claim information Passing of claims data to underwriters for decision at the time of New business or renewal Intelligence System for fraud prevention Secure transaction system

6 Financial ratios Financial performance of an Insurance Company measured in two ways : • Profitability • Insurer should generate enough profit to survive • Solvency • Adequate resources to meet its financial obligations Premium Income • Written premium • Premiums on policies put into effect or written during a given period • Earned Premium • Portion of written premium that applies to the part of the policy period that has already occurred. • Unearned premium • Portion of written premium that applies to the part of policy period that has not yet occurred. • Investment Income • An insurance company collects premiums from its policyholders and pays claim to its policyholders. From the time of premium collection to claim payment the insurer handles large amount of money. It is invested to generate additional income while maintaining liquidity to run operations. Thus the additional income generated is Investment Income. • Losses and Underwriting Expenses • The major expenses incurred by insurance company are claim payments for insured who has suffered losses and costs incurred in handling these losses.

• Paid Losses • Incurred Losses • Acquisition expenses • Loss Reserves • General Expenses • Loss Expenses • Taxes and fees • Other Underwriting Expenses • Investment Expenses

Gain or Loss from Operations

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a. Net Underwriting gain or loss = Earned Premium – Losses – Underwriting Expenses b. Overall gain or loss from operation = Net Investment gain or loss + Net underwriting gain or loss c. Net Income before taxes Financial Statements Balance Sheet – It is a type of financial statement that shows the company‟s financial position at a particular point of time and includes the company‟s admitted assets, liabilities and policyholder surplus Income statement - It is a type of financial statement that shows the company‟s revenues, expenses and net income for a particular period, usually one year. Profitability Ratios Loss Ratio = Incurred Losses (including loss expenses) / Earned Premium

Expense Ratio = Incurred U/w expenses /Written premium Combined Ratio = Loss Ratio + Expense Ratio Investment Income Ratio = Net Investment income / Earned Premium Capacity Ratio = Written Premium / Policyholder‟s surplus Overall Operating Ratio = Combined Ratio – Investment income ratio

7 References Useful web sites International Websites www.loma.org www.aicpcu.com www.iii.org www.ambest.com http://www.insurancenewsnet.com/

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www.acord.org www.lloyds.com www.insure.com www.insweb.com www.insurancetech.com http://www.asiainsurancereview.com https://secure1.insweb.com/learningcenter/default.htm

Indian websites: http://www.insuranceinstituteofindia.com/ www.bimaonline.com