Presentation On

“Insurer Ownership, Financial, & Operational Structure”

Presented To :

Mr. Abhishek Parikh,

Faculty Member,

V.M.P.I.M.

Ganpat University.

Presented By:

Hitendra Patel (71)

Hiren Mehta (57)

Kalpesh Joshi (51)

Pratik Modh (63)

Insurer Capital• With a typical insurance policy, the policyholder pays a

fixed premium to the insurer and the insurer promises to pay losses or benefits as provided under the terms of policy.

• This arrangement raises the question: If the premiums and investment income are insufficient to pay administrative costs and claim costs, who is obligated to pay the shortfall? Conversely, if premium revenue and investment income exceed the insurer’s costs, who receives the excess?

• The short answer to these questions is that the owners of the insurer are responsible for any shortfall and the owners have rights to any excess.

Ownership Sources of Capital

• Who owns insurance company capital?

• Who commits the capital to provide a cushion from which unexpectedly high claims costs are paid,

• Who has rights to excess funds when claims costs are lower than expected? There are two broad approaches to insurance company ownership.

• One approach is make the policyholders the owners; the other is to make investors the owners.

Types of Insurance company Ownership

• Mutual Insurers: – The common form of policyholder-owned insurer is called a mutual

insurer. – They are incorporated insurance companies that usually charge

fixed , advance premiums to policyholders. – Because policyholder usually can’t be assessed to pay unexpectedly

high claim costs, their liability for the insurer’s claim costs is limited to what they originally paid in premiums.

• Stock Insurers: – Stock insurers are incorporated insurance companies that are owned

by investors who have purchased the stock of the company. At its inception, a stock insurer issues shares of stock.

– There are large numbers of both mutual & stock insurers in the property-liability and life-health insurance industries.

– In order to achieve greater access to capital, a number of mutual insurers have converted to stock insurers and hybrid stock-mutual structures in recent years.

Cont…• Lloyd’s of London:

– It provides another example of investor ownership of insurers.

– Lloyd’s of London is not an insurance company, it is organization that provides a location and more importantly, a set of rules and procedures under which insurance business is transacted.

– The owners of the insurance organization that conduct business at Lloyd’s of London are called names.

– At Lloyd’s, insurance policies are sold through syndicates(groups) of names.

• Convergence of financial Service Providers:

– During the latter part of the 1990s, a number of analysts predicted that many insurance companies would be combined with banking and investment companies.

– It is combination of banking and investment companies.

Insurer Operations, Reinsurance, and Insolvency Risk

• Diversification of Underwriting Risk:

• Reinsurance:– Primary Function of Reinsurance:

– Types of Reinsurance:

Diversification of Underwriting Risk

• Underwriting risk- the risk that average claim costs will not differ from the amount expected when policies are sold.

• Insurers can reduce underwriting risk.

• Lower underwriting risk reduces the amount of capital needed for a given level of insolvency risk.

• A potential disadvantage of diversification is less focus on “core” coverages or geographic regions.

Reinsurance

• Reinsurance is the purchase of insurance by an insurer.

• “Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.”

Elements of Reinsurance

• Reinsurance is a form of insurance.• There are only two parties to the reinsurance

contract - the Reinsurer and the Reinsured - both of whom are insurers, i.e. entities empowered to insure.

• The subject matter of a reinsurance contract is the insurance liability of the Reinsured undertaken by it under insurance policies issued to its own policyholders.

• A reinsurance contract is an indemnity contract.

What Reinsurance Does

1. It converts the risk of loss of an insurer incurred by the reinsured under its policies according to its own needs.

2.It redistributes the premiums received by the reinsured, which now belong to the reinsured, according to its own business needs.

What Reinsurance Does Not Do

• Reinsurance is not coinsurance.

• Reinsurance is not banking – it is not the lending of money but it can have the same effect.

• Reinsurance is not a security.• Convert an uninsurable risk into an insurable risk.• Make loss either more or less likely to happen.• Make loss either greater or lesser in magnitude.• Convert bad business into good business.

Functions of Reinsurance

• Financing

• Stabilization

• Capacity

• Catastrophe Protection

• Services

Financing

• is growing and needs additional surplus to maintain acceptable premium to surplus ratios.

• Unearned premium demands reduce surplus.

• In a down cycle, underwriting results are bad and reduce surplus.

• Investment valuation negatively impacts surplus.

• Marketing considerations dictate that an insurer enter new lines of business or new territories.

Stabilization

• Marketing Consideration• Policyholders and stockholders like to be

identified with a stable and well managed company.

• Management Consideration• Planning for long term growth and development

requires a more stable environment than an insurance company’s book of business is apt to provide.

Capacity

• Refers to an insurer’s ability to provide a high limit of insurance for a single risk, often a requirement in today’s market.

• Reinsurance can help limit an insurer’s loss from one risk to a level with which management and shareholders are comfortable.

• Most states require that the maximum “net retention” from one risk must be less than 10% of policyholders’ surplus.

Catastrophe Protection

• Objective is to limit adverse effects on P&L and surplus from a catastrophic event to a predetermined amount.

• Covers multiple smaller losses from numerous policies issued by one primary insurer arising from one event.

Services

• Claims Audit

• Underwriting

• Product Development

• Actuarial Review

• Financial Advice

• Accounting, EDP and other systems

• Engineering - Loss Prevention

Reinsurance is Provided Through

A. Treatya. Covers classes or entire “books” of businessb. Reinsurer accepts as written by insurer as to

form, price and riskB. Facultative

a. Single Policy/Riskb. Reinsurer evaluates each risk and establishes or agrees to acceptance, form and pricec. Automatic or semi-automatic facilities

Types of Reinsurers

• Professional Reinsurers– Specialize in Reinsurance

– Are Licensed in at Least One State

– Derive Majority of Their Premium Income From Reinsurance

– Forms• Stock Company

• Mutual Company

• U.S. Branch of Alien Company

Types of Reinsurers

• Reinsurance Department of Primary Company

• Pools– Special Purpose

– General Purpose

• Lloyd’s of London

References

• Book:– RISK MANAGEMENT AND INSURANCE

CHAPTER:5. INSURER OWNERSHIP,FINANCIAL AND OPERATIONAL STRUCTURE,Page.75-95.

AUTHOR:HARRINGTON NIEHAUS

SECOND EDITION

TATA MCGRAW HILL EDITION

Thank You..