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22.

Nonlife Insurance

Dr. Jan-Juy Lin


Dept. of Risk Management and Insurance
ETP course, CNCCU
Introduction

Policies sold by nonlife insurance companies

Selected nonlife insurance markets


internationally

Nonlife insurance issues

Discussion Questions

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Policies Sold by Nonlife
Insurance Companies
Classification of Non-life Insurance

Based on purchaser
Personal lines
Commercial lines
Based on the Object
Property
Liability
OECD (table 22.1)
Taiwan’s ?

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Property Insurance Policies – Common Aspects

Nature and property


Real (immovable) vs. personal (movable) properties
Tangible vs. intangible properties

Property losses
Direct loss
Reductions in property values caused by a loss event
Consequential (indirect) losses
Reductions in income or increases in expenses that
result from direct losses

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Property Insurance Policies – Common Aspects

Nature of covered perils


Named-peril policy
Indemnification to the insured only if the cause of loss
is “named as covered”
All risks policy – by exclusion
Basic form
 Named-peril coverage for damage
Broad form
 Broader coverage than the basic form
Special form

All-risks coverage for damage (with exclusion)

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Property Insurance Policies – Common Aspects

Nature of indemnification
Actual cash value (ACV)
Replacement cost less depreciation in value
Replacement cost (reinstatement value)
At the time of loss to replace the property with the
same kind of like-kind
Economic (use value) of property
Lost of utility associated with damaged property
Market value

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Property Insurance Policies – Common Aspects

Pricing
Characteristics of the covered property, such as
construction, occupancy, protection, exposure
and location (for Fire Insurance, Public Liability)
Scope of insurance requested
Limit of insurance along with
Deductible, coinsurance, and other optional
coverages
Different meaning of “coinsurance” Insight 22.1

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Property Insurance Policies – Types

Package policies / multi-line policies


Cover both direct and indirect property
exposures plus
financial obligations and
legal expenses arising from the insured’s
legal liability for injuries to others or
damage to their property.
eg. Homeowner policy

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Property Insurance Policies – Types

Fire insurance
Cover 2 perils: fire. Lighting

Commercial property insurance


For large business, both movable and immovable
business property

Consequential loss insurance (business income


insurance)
For specific indirect losses form an insured peril
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Property Insurance Policies – Types

Industrial all-risk insurance (special risk insurance)


All-risk contracts of high-value movable and
immovable properties

Contractors’ (builders) all-risk insurance (CAR)


For damage during the course of construction

Boiler and machinery


For the direct physical losses from an explosion

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Property Insurance Policies – Types

Fidelity/crime insurance – for employee dishonesty


& Criminal acts
Fidelity bond/ insurance
Computer fraud insurance
Employee dishonesty
Extortion
Forgery or alteration
Theft and robbery

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Property Insurance Policies – Types

Insurance for self-propelled property


Insurance for motor vehicles – covering the direct
loss of or damage to their vessels

Insurance for ships – when the term “marine


insurance” is used, the policy provides both hull
insurance and insurance on the vessel’s cargo.

Insurance for aircraft – for damage to the aircraft,


its equipment, its cargo

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Property Insurance Policies – Types

Insurance for property being transported


Cargo insurance – from the departure to the final
destination (international trade, risk of cargo)

Insurance for transportable property – including


items worn, carried from place to place,
temporarily removed

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Liability Insurance Policies

General (public) liability insurance


All-risks coverage for individuals and
organizations for their tortuous actions
NCCU campus need one?
Automobile (motor) liability insurance
Cover insureds’ legal liability to third party
CALI v. voluntary insurance
Product liability insurance
Pay claims on behalf of the insured made by third
party (desperately needed in China)
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Package Insurance Policies

Workers’ compensation insurance


Employer’s liability insurance
Civil law, Labor law, others?
Professional liability insurance
Errors and omissions insurance
Doctor, D&O, Lawyers, Engineers
Homeowner's (householder’s) insurance
Commonly cover loss of or damage to the
residence and its contents, consequential
expenses while the property is being repaired
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Package Insurance Policies

Business owner’s insurance


Commonly cover loss of or damage to the
business premises and its contents,
consequential expenses following a direct
property loss

Commercial multi-peril insurance


Covering both the property and general liability
loss exposures of large business

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Selected Nonlife Insurance
Markets Internationally
The Americas – the U.S.

The importance of understanding the U.S. market


It has been the world’s largest nonlife market for
decades.
It remains highly competitive
Encourages experimentation in product
development, methods of distribution and
general business practices
The size and complexity of many U.S. risks
demand the capacity and expertise of the global
insurance and reinsurance markets.

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The Americas – the U.S.

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

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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.

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The Americas – the U.S.

Products and distributions


Virtually any type of non-life insurance is
available.

Insurers use multiple distribution channels to


reach their customers.

Brokers also figure prominently in the market.

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

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The Americas – the U.S.

Issues
State regulation
Stated based, with differences in each of the
regulatory jurisdictions.
The National Association of Insurance
Commissioners (NAIC) strives toward
uniformity in regulation.
Major issue – rate regulation (deregulated is
key?) (Justification of rate control)

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The Americas – the U.S.

Issues
Market consolidation
A large number of relatively small insurers
Loss reserve adequacy
A lack of precision in their establishing loss
reserves
Impact of catastrophes
Significantly affected by natural catastrophes

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The Americas – Canada

Features
Shares some similarities with the U.S. market

As noted earlier, Canada maintains a dual


regulatory system.
Nonlife insurance accounts for 36% of the
Canadian insurance market.

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The Americas – Canada

Products and distributions


The agency form of distribution dominates the
Canadian non-life insurance market.

Issues
The government continues to regulate rating of
automobile insurance premiums.

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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.

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The Americas – Latin America

Products and distributions


Traditional intermediaries (brokers and agents)
and employees of insurance companies dominate
the markets

Bancassurance introduced in selected countries

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The Americas – Latin America

Issues
Economic crisis – led to the collapse of several
non-life insurers
Many Latin American insurers have
comparatively high expenses, making their
products less attractive.
With increasing bilateral and multilateral trade
agreements and more regional arrangements,
future competition promises to be even more
vigorous.

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Europe

Features
Consists of big three markets – Germany, the
U.K. and France
Rich history and tradition that are reflected in the
markets
Gained more attention globally with the creation
of a single E.U. market
Bancassurance primarily in life insurance

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Europe – Germany

Features
The world’s second largest nonlife insurance
market
Creation of Bundesanstalt für
Finanzdienstleistungsaufsicht (the Federal
Financial Supervisory Authority or BaFin) in 2002

Issues
Coping with the E.U. single market policy

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Europe – Germany

Products and distributions


Workers’ compensation as part of the
government’s social insurance program

Distribution dominated by exclusive agents

Guaranteed renewal features common in many


non-life insurance contracts

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Europe – the U.K.

Features
Insurers generate business from accepting
domestic risks and overseas risks. (insurance
export)
See Table 22.3
The world’s third largest nonlife insurance market
886 insurers including 50 composite insurers
Foreign-owned companies generated about 40
percent of premiums written

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

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The London Market

An international insurance center


Specializes in large accounts and target risks
such as MAT and hard-to-place business
Comprises insurance and reinsurance companies
and Lloyd’s syndicates
It is a subscription 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.

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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
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Insurance Transactions at Lloyd’s (Figure 22.1)

FRANCHISOR

Lloyd’s of
London
MEMBERS
CLIENTS Lloyd’s FRANCHISEE
Brokers Corporate
Commercial groups
Managing
agents Private
individuals
(unlimited
liabilities)
Syndicates Member’s
Private
agents
Personal Service individuals
Companies (limited
liabilities)

Business Flow Capital Flow

Source: Lloyd’s of London [www.Lloyds.com]

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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

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Asia-Pacific

Features
Countries in various economic development
stages
Middle East probably with least developed
insurance markets
China and India continue to grow
The potential impact of WTO agreements in
several countries

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Asia-Pacific – Japan

Features
The world’s fourth largest nonlife insurance
market

Non-life insurance density ranks 20th worldwide

The local market is heavily skewed toward the life


business

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Asia-Pacific – Japan

Products and distributions


Compulsory automobile liability insurance (CALI)
and voluntary automobile insurance account for
more than 50% of the non-life 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.
Brokerage systems emerge with a small size.
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Nonlife Insurance in Japan (Table 22.4)

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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
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Mergers of Insurance Firms in Japan (Figure 22.2)

October 2001

Mitsui Marine & Fire Sumitomo Marine & Fire Mitsui Sumitomo Marine & Fire

April 2002
Nichido Fire & Marine Millea Holdings
Tokyo Marine & Fire

October 2004

Tokyo Marine & Nichido Fire

July 2002

Yasuda Fire & Marine Nissan Fire & Marine Sompo Japan Insurance

April 2002 December 2002

Dai-ichi P &C Taisei Fire & Marine

April 2005

Meiji General Yasuda Life General Meiji Yasuda Life General

Source: Japan General Insurance Association (2005)


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Asia-Pacific – China

Features
A communist party, socialist state
PICC and its five subsidiaries are state-owned
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

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Asia-Pacific – China

Products and distributions


New products are being added
Depend heavily on agents for distribution
Q: What a non-life product must be available in
terms of international trade in China?
Issues
Continuous market reforms
Full compliance with the WTO accession
agreement
Transparency
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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

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Asia-Pacific – India

Products and distributions


New products being added

Issues
Restriction on foreign ownership of local
insurance companies
Stringent investment regulation

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Asia-Pacific – Australia

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

Products and distributions


Domestic motor vehicle insurance holds the
largest share

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Africa

Features
Extremely low insurance consumption and
penetration (exception: South Africa)
Northern Africa relatively active

Products and distributions


Minimum in most countries
Islamic insurance increasingly available in
Northern Africa

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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

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Nonlife Insurance Issues
Nonlife Insurance Issues

Liberalization and deregulation


Competition is increasing worldwide in both
developing and developed markets
Increased competition enhances social welfare,
and is best achieved by liberty, open, and
appropriately supervised markets.
Many developing nations are encountering the
challenge – from closed and strictly regulated
markets to new market deregulation

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Non-life Insurance Issues

Coping with catastrophes


Developing countries – depending greatly on
catastrophe reinsurance
Developed countries – the financial
consequences of catastrophes
Solvency
Some insurance lines are highly volatile and
notoriously difficult to price
Insolvency becomes a more critical issue in open
and competitive markets for regulators

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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?

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Discussion Question 2

Compare the nonlife liability insurance


markets in developed countries and
developing countries with respect to the
following:
Types of insurance products
Growth rates
Regulatory environments

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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”?

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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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