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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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22 nonlife insurance l.jpg

22. Nonlife Insurance

Dr. Jan-Juy Lin

Dept. of Risk Management and Insurance

ETP course, CNCCU

Introduction l.jpg

  • Policies sold by nonlife insurance companies

  • Selected nonlife insurance markets internationally

  • Nonlife insurance issues

  • Discussion Questions

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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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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 privatehealth 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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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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  • 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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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 marketin 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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Lloyd’s of London


Corporate groups

Private individuals (unlimited liabilities)

Private individuals (limited liabilities)

Lloyd’s Brokers


Managing agentsSyndicates




Member’s agents

Service Companies

Capital Flow

Business Flow

Insurance Transactions at Lloyd’s (Figure 22.1)

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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  • 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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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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October 2001

Mitsui Sumitomo Marine & Fire

Sumitomo Marine & Fire

Mitsui Marine & Fire

April 2002

Millea Holdings

Nichido Fire & Marine

Tokyo Marine & Fire

October 2004

Tokyo Marine & Nichido Fire

July 2002

Sompo Japan Insurance

Nissan Fire & Marine

Yasuda Fire & Marine

December 2002

April 2002

Taisei Fire & Marine

Dai-ichi P &C

April 2005

Meiji Yasuda Life General

Yasuda Life General

Meiji General

Mergers of Insurance Firms in Japan (Figure 22.2)

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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  • 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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  • 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

  • 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 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.