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Development of Insurance: A Global Perspective

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  1. Insurance World Lecture Two Development of Insurance:A Global Perspective Northwest University Huixia Liu

  2. Contents • Insurance: developing in crisis • Insurance: integration and breakthrough in competition • Insurance: innovation against challenges • The status, potential and trends of China's insurance industry Northwest University Huixia Liu

  3. Insurance: • Developing in Crisis Northwest University Huixia Liu

  4. The 1st insurance Crisis: 18th-the early 20th Century • The 2nd insurance Crisis: 1970s-1980s • The 3rd insurance Crisis: the late 1970s-the mid 1990s • The 4th insurance Crisis: the late 1990s-presen Northwest University Huixia Liu

  5. The 1st insurance Crisis: 18th-the early 20th Century • During more than 200 years from 18th to the early 20th century, insurance was private oriented: • The operating agencies were a private • The motivation was for profit. • the insurers’ main customers were production enterprises, the rich people. Northwest University Huixia Liu

  6. The 1st insurance Crisis: 18th-the early 20th Century • Revealed some problems: • Limited insured subjects : only static risks were insured, which could make profits. Such fundamental risks as floods, earthquakes, etc were not covered. • The impact of the Industrial Revolution: the deterioration of working conditions for workers, work-related injuries increased, casualties increased, unemployment, so on and so that social problems. Northwest University Huixia Liu

  7. The 1st insurance Crisis: 18th-the early 20th Century • These risks could not be insured to protect the ordinary people’s basic living. Workers' strike movements broke one after another. There appeared serious social problems. Northwest University Huixia Liu

  8. The 1st insurance Crisis: 18th-the early 20th Century • Workers' insurance needs could not be met. The insurers put too much emphasis on their own economic, neglecting the social responsibilities. There appeared serious conflicts between insurers’ private economic benefits and social benefits. • The first insurance crisis broke in the history the insurance industry. Northwest University Huixia Liu

  9. The 1st insurance Crisis: 18th-the early 20th Century • Enlightens: To survive and develop, the insurance industry had to take their social responsibilities, play social roles, and participate in social management. Northwest University Huixia Liu

  10. After the first insurance crisis, there appeared some reforms in insurance: • In Germany, the Bismarck's government implemented labor insurance programs in 1880. • Workers' insurance coming into being to pay the loss of income and medical costs for workers and their families. The concept of “Workers' insurance” was later replaced by “social insurance” Northwest University Huixia Liu

  11. At that time, the United States took such measures as the following : • Established Workers Compensation in 1911 • Established Group Life insurance in 1912 • Enacted the Social Security Act (the Federal old-age insurance program in 1935) • Created such new insurance products as unemployment insurance, Federal deposit insurance, mutual mortgage insurance. the reforms resulted in the great changes in insurance industry: there exist the private insurance and social insurance. Northwest University Huixia Liu

  12. The 2nd insurance Crisis: 1970s-1980s • During 1970s and 1980s, there appeared the technological revolution, resulted in great social and economic changes in the industrialized. • Industrial economic form turn to a service. • Urbanization, the rural population gradually moved to urban areas, resulting in the large cities and metropolitan, megacities. • Increasing catastrophic risks Northwest University Huixia Liu

  13. The 2nd insurance Crisis: 1970s-1980s • “Mixed loss” and “catastrophic risks” appeared. The insurance industry once again was facing great challenges. • Moreover, the dynamic risks, catastrophe risk caused by technological progressed, especially some risks caused by environmental factors, psychological factors, and ethical problems. These social losses were unable to be solved also, some natural disasters as floods, earthquakes, typhoons, and some social losses caused by international trades were still vexing social problems. Northwest University Huixia Liu

  14. The 2nd insurance Crisis: 1970s-1980s • Who could solve these social risks? What is the function of insurance? • Spreading risks, compensating economic losses? • Stabilizing the social order? • If so, then how to solve such social risks caused by environmental, psychological, moral, and other factors? The second insurance crisis broke in the history the insurance industry. Northwest University Huixia Liu

  15. The 2nd insurance Crisis: 1970s-1980s • To solve the above mixed risks, it needs the joint efforts of all aspects to find some new solutions. • At this point, the United States had taken a number of innovative measures. For example, to address flood risk, the government encouraged and support the private insurers to start the business of flood insurance, and the federal government provided financial subsidies , technical , and also provides flood re-insurance. • In this way, the U.S. established earthquake insurance, nuclear insurance, export credit insurance. The whole society participated in the insurance. Northwest University Huixia Liu

  16. The 2nd insurance Crisis: 1970s-1980s • The so called “policy insurance” could solve the dynamic risks, catastrophic risks. The U.S. government to be inspired, and thus enforced it in practice. • The other States followed. • Nowadays, in most countries there existing a comprehensive insurance system, namely, private insurance, social insurance and policy insurance Northwest University Huixia Liu

  17. The 2nd insurance Crisis: 1970s-1980s • Enlightens: • The second insurance crisis and its comprehensive insurance system, once again showed us that the insurance could take social responsibility to solve social problems. That is insurance has the social management function. Northwest University Huixia Liu

  18. The 3rd insurance Crisis: the late 1970s-the mid 1990s In the late 1970s, the internal and external competition in insurance industry was fierce. Insurers began to look for the new ways to meet the customer's demands. the insurance practice had mostly gone through three stages, adopting such three ways: • In 1st stage, increased the insured’s returns. • In 2nd stage, motivated the salesmen by providing rebate • In the 3rd stage, developed new products to meet the needs of the insured. Such as a package of insurance, investment-linked insurance, including variable life insurance, universal life insurance, variable universal life insurance, etc., let the policyowners share in the surplus of the insurer. Northwest University Huixia Liu

  19. The 3rd insurance Crisis: the late 1970s-the mid 1990s • Aroused strong reaction from other financial institutions: competition between financial institutions. • Other financial institutions to take measures and adjust strategies: Northwest University Huixia Liu

  20. The 3rd insurance Crisis: the late 1970s-the mid 1990s • Direct measures: develop new financial products to compete with the insurance products, including: investing in stocks, real estate, high-tech industry, and large-scale infrastructure projects. • Indirect measures: provided the customers high returns and attract more. Northwest University Huixia Liu

  21. The 3rd insurance Crisis: the late 1970s-the mid 1990s The insurers take actions to respond to competitiveness: • The insurers initially increased the premium rate. Later, reduced the premium rate. • Two different ways, but the final result was the same, that was a tragic for insurers. • The internal and external competition lead to the bankruptcy of insurance companies. Northwest University Huixia Liu

  22. The 3rd insurance Crisis: the late 1970s-the mid 1990s • According to relevant statistics, from 1978 to 1994, more than 600 property and casualty insurance companies in the world became insolvent, among which, the United States accounted for 66%, the UK accounted for 7% , other Europe countries accounted for 4%, and the other regions accounted for 23%. In 1992 alone, there were more than 90 property and casualty insurance company declared bankruptcy. Northwest University Huixia Liu

  23. The 3rd insurance Crisis: the late 1970s-the mid 1990s This is the third insurance crisis in the history the insurance industry. • The first two insurance crisis were solved by creating new insurance products. Unlike the two previous crisis solution, the third insurance crisis was solved by some non-traditional insurance measures, including: mergers and acquisitions among financial institutions as well as mixed operators, such as bancassurance, captive insurance, insurance securities, insurance futures, and insurance options. Northwest University Huixia Liu

  24. Insurance: • Integration and Breakthrough • in Competition Northwest University Huixia Liu

  25. Mergers and Acquisitions(M&A):Integrating Advantages • During the mid-1990s, cross-border mergers and acquisitions of insurance companies was popular. M & A wave in the insurance industry swept around the world. • Major insurance companies, banks, securities institutions mergers and acquisitions in the United States, Britain, Germany, France, the Netherlands, and other countries. Northwest University Huixia Liu

  26. Mergers and Acquisitions(M&A):Integrating Advantages • Some financial institutions took the chance to expand the scale and the operating region, to increase market shares. • More examples of financial institution M&A Northwest University Huixia Liu

  27. Mergers and Acquisitions(M&A):Integrating Advantages • Why M&A? the reasons, the motivations, and the consequences • Expanding business in new industries or related new fields. • Obtaining a new management capabilities to achieve growth. • Restructuring through mergers and acquisitions faster than the speed of the internal investment adjustment, realizing economic synergies. ? Northwest University Huixia Liu

  28. Mixed Operation:Expanding Business • What does “Mixed Operation of Insurance Industry” mean? The contents??? • In the late 20th Century, there appeared a trend that banking, securities, insurance, mixed operation. Convergence of banking, securities and insurance capital, so that the three ranges had been expanded. Besides its own business lines, insurance companies managed the business of banking and investment Northwest University Huixia Liu

  29. Mixed Operation:Expanding Business • Insurance Giant • Bancassurance • Financial supermarket Northwest University Huixia Liu

  30. Mixed Operation:Expanding Business • Why mixed operation? • The advantages, disadvantages? ? Northwest University Huixia Liu

  31. Mixed Operation:Expanding Business • Mixed operation has changed the traditional insurance operation modes. • providing customers with comprehensive financial asset investment, risk management services • Seeking competitive advantages. • Achieving earning multi-diversification Northwest University Huixia Liu

  32. Deregulation: Freedom Development In the 1990s, most countries took financial reforms, relaxing insurance regulation. • In 1990, the European Union promulgated the fourth Act of liberalization of capital movement, with the liberalization of the insurance market conditions. In 1993, issued the second bank act. In 1994 promulgation of the third instruction of the property insurance and life insurance , established the framework of insurance market liberalization, encouraging the universal mixed operation between banking and insurance systems. Northwest University Huixia Liu

  33. Deregulation: Freedom Development • In 1986, UK took well-known financial “ The Big Bang. • In 1996, Janpan took financial reform plan, well-known "Tokyo Financial Big Bang. • In 1999, The U.S. passed the well-known Financial Modernization Act. Northwest University Huixia Liu

  34. Insurance: • Innovation against Challenges Northwest University Huixia Liu

  35. New Challenges • Since the end of the 20th century, the world insurance industry faces more challenges. The financial crisis broken in 2008 made the development of the global financial sectors worse. • The main challenges are as follows: Northwest University Huixia Liu

  36. New Challenges • Diversified insurance needs • More catastrophic risks • Increased Competition (within insurance industry, among financial institutions, between the international and domestic markets) • Underwriting profit margins shrinking • Mixed operation Northwest University Huixia Liu

  37. Evolution of the Financial Functions Derivative functions Main functions Risk management : Risk transaction Information transmission Corporate governance Macro –regulation: Guiding consumers Regional coordination Wealth redistribution Basic functions Risk spreading Resource allocation (core) Regulating economy service intermediary money Northwest University Huixia Liu

  38. Insurance Mixed Operation • From Insurance Mechanism turning to Financial Mechanism • From Insurance Market going to Capital Market • From Risk Warehousing changing to Risk Intermediary. Northwest University Huixia Liu

  39. Insurance Mixed Operation Increase in liability liquidity a. Underwriting b. Risk securitization c. Commercial loan d. Asset management e. Securities underwriting f. Securities distribution g. M&A consulting h. Settlement i. Bancassurance 商业银行 共同基金和养老基金 c 保险公司 投资银行/证券公司 h i d g f e b a Increase in capital intensiveness Northwest University Huixia Liu

  40. More Catastrophic Risks • Earthquakes • Hurricanes, typhoons, tornadoes洪水、雪灾 • Terrorism • Insurance Fraud • Relevant measures • Government policies and financial supports • Reinsurance • Catastrophe risk securitization Northwest University Huixia Liu

  41. Highlights: Property/Casualty Full-Year 2003 vs. 2002 Northwest University Huixia Liu

  42. P/C Net Income After Taxes1991-2003 ($ Millions) • 2001 was the first year ever with a full year net loss • 2002 ROE = 1.0% • 2003 ROE = 9.4% Northwest University Huixia Liu Sources: A.M. Best, ISO, Insurance Information Institute.

  43. ROE: P/C vs. All Industries 1987–2004E Northwest University Huixia Liu Source: Insurance Information Institute; Fortune

  44. P/C Industry Combined Ratio Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-04: 106.7 2001 = 115.7 2002 = 107.2 2003 = 100.1 2004E = 100.0* Northwest University Huixia Liu *2004 figures based on III Groundhog Survey, 2/04. Sources: A.M. Best; ISO, III

  45. Underwriting Gain (Loss)1975-2004F* $ Billions 2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio. *2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from III Groundhog forecast, 2/04. Source: A.M. Best, Insurance Information Institute Northwest University Huixia Liu

  46. Combined Ratio: Reinsurance vs. P/C Industry • 2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well. • 2003: Big improvement in primary and reinsurer segments Northwest University Huixia Liu Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

  47. Net Investment Income Investment income fell 1.3%in 2002 but rose 3.9% in 2003 Billions (US$) • History • 1997 Peak = $41.5B • = $40.7B • = $37.7B • = $37.2B • = $38.7B Northwest University Huixia Liu Source: A.M. Best, ISO, Insurance Information Institute

  48. US Insurers’ Asset Allocation, 1998-2002 (%) Northwest University Huixia Liu Source: Insurance Information Institute and A.M. Best Co

  49. Swiss Re Asset Allocation Shift: 1999-2003 Swiss Re’s fixed income portfolio increased to CHF 81 billion at the end of the first half of 2003, up from CHF 74 billion at year-end 2002. “Strong growth in fixed income portfolio reflects reallocation of funds from equity portfolios, cash inflows, market appreciation and two Admin Re transactions.” - Swiss Re Analysts’ Meeting, 08/29/03 Northwest University Huixia Liu *As of June 30, 2003 Source: Swiss Re

  50. Allianz Group Asset Allocation Shift: 1999-2003* Allianz’s equity exposure has reduced significantly since 1999. *As of September 30, 2003. Source: Allianz Group Financial Results 9M 2003. Northwest University Huixia Liu