Insurance

2010 Deloitte MCS Limited
Agenda
Time Topic Sign Off
09:00 09:30 Introduction & Insurance Basics
Craig Russell
09:30 10:15 General Insurance Overview
Craig Russell
10:15 11:00 Lloyds of London Life Insurance Overview Andrew McNeill
11:00 11:15 Break -
11:15 12:00 Insurance Broking Jamie Lamont
12:00 12:45 Life Insurance Overview William Conner
12:45 13:15
Lunch -
13:15 14:00
GI Processes Finance
John Middlemiss
14:00 14:45
GI Processes Underwriting & Actuarial
Rakhee Chatwani
14:45 15:30
GI Processes Claims
Andrew Ward
15:30 15:45 Break -
15:45 16:15 Regulation Solvency II / FSA
Vikki Jones Parry,
Craig Russell
16:15 - 17:00 Project Spotlight
Craig Russell, Vikki Jones
Parry, Jamie Lamont, Graham
Robertson
17:00 DRINKS / Wrap Up
1
Insurance 101 Introduction
and Insurance Basics.
FSI Industry Training
Introduction
3
This section of the course aims to provide an overview of insurance, looking at the various types of insurance
and an understanding of how insurance companies function.
Over the next hour or so we will aim to provide and understanding of:
Purpose and function of the
insurance industry
Different types of insurance
companies, lines of business and
their differences
How an insurance company is
structured and the roles that
each department performs
How the current insurance
market looks and market cycles
How insurance companies make
money and the flow of cash
Why do we need insurance?
What is Insurance?
Insurance is a risk transfer mechanism where the insurer, in return for a premium, agrees to
compensate the insured for the loss experienced if a particular event should happen
Insurance exists because people need security. They want to travel, to operate businesses and to
own homes; but with each of these activities there arises the possibility of loss. Insurance provides
financial compensation. It does not remove risk: a car may still be in an accident, or a factory
may still burn down; but the cost that has been incurred by the risk becoming a reality can be
covered by the insurance industry
5
The earliest references to insurance can be
traced to the beginning of the fourteenth
century, when the merchants and bankers of
from Lombardy introduced to Britain the practice
of insurance for marine and overland
transportation risks
Today the insurance is providing protection and
financial compensation against such diverse
occurrences as loss or damage to satellites, to
computer installations and for political risks such
as hijack and ransom
Why do we need insurance?
Protect against unforeseen events
Legally obliged (e.g. car insurance)
Required for other reasons (e.g. mortgage contractual obligations)
Mitigate risk
To sleep soundly
Free up capital
Business confidence
Reducing reliance on state support
Reducing the occurrence of risks
Catastrophe protection
Many other reasons
6
What do we insure?
Motor
House contents
Buildings
Health / life
Travel
Payment protection on credit
cards / mortgage etc.
Extended warranties on electric
goods
Mobile phones
7
Marine cargo, hull, specie,
energy, war
Aviation hull, liability, cargo
Motor commercial, fleet
Property buildings & contents,
political risk, accident & health,
business interruption, terrorism
Liability employers, contract,
product, errors & omissions,
professional indemnity
Aerospace
Non-Marine political, kidnap &
ransom, transactional
Speciality - fine art, bloodstock,
hacker, celebrities
Contingency event cancellation,
non-appearance,
death/disablement
Explaining risk and insurance
Insurance exists to cover the financial consequences of an event which is undesired by the
insured person or organisation these events are called pure risks
Core to risk are elements of uncertainty, unpredictability or danger
The level of risk is assessed in terms of likelihood and severity
Risk often refers to the subject of insurance (e.g. property) or the type of insured peril
(e.g. fire)
Pure risks can be measured in monetary terms and refer to the possibility of a loss
Insurance is a risk transfer mechanism where the insurer, in return for a premium,
agrees to compensate the insured for the loss experienced if a particular event should
happen
8
Explaining perils
Insurance companies generally label a particular risk as a peril: the actual event that
causes a loss or damage.
Examples of perils:
Fire
Flood
Earthquake
Windstorm
Theft
Accidental Damage
Insurance companies will also detail
the primarily cause of the loss.
Example causes of loss:
Fire Arson
Fire Non-arson
Fire Smoke Only
Flood By sea
Flood By river
9
What are the different types of
insurance?
Insurance Lines of Business
The insurance market can be considered in terms of Life and Non-Life insurance business
Life insurance companies sell long-term life insurance, annuities and pensions products
Non-Life insurance is also called General Insurance or Property & Casualty Insurance
and typically comprises any insurance not determined to be long-term
Most of the large Composite Insurers will work across Life and Non-Life
11
Example products:
Pensions
Annuities
Life Insurance
Example products:
Pensions
Annuities
Life Insurance
Life Insurance Life Insurance
Example products:
Property
Motor
Travel
Liability
Example products:
Property
Motor
Travel
Liability
General Insurance (Non-Life) General Insurance (Non-Life)
Types of Insurance Companies
12
General
Insurance
Companies
General Insurance companies offer the following types of products:
Motor
Property
Liability
Professional Risks
Marine Aviation and Transport (MAT)
Composite
Companies
Composite insurers offer a mix of General (Non-Life) and Life products.
Examples include:-
Aviva
AXA
Zurich
Health Service
Organisations
Health service organisations offer care to individuals on a pre-arranged basis:
Most people are enrolled with a health care provider through an employer
group health plan (e.g. BUPA)
Some health care providers are organised by life insurance companies (e.g.
Pru Health)
Life Insurance
Companies
Life Insurance companies offer the following types of products:
Life insurance to protect against the risk of (unexpected) death or disability
Health insurance to protect against the costs of medical expenses
Annuity products that are generally used to protect against the risk of
outliving retirement assets (e.g. pensions)
Types of Insurance Companies
13
Captive
Insurance
Companies
A Captive Insurance Company is an insurance company that is owned and
operated by the organisation it insures:
Captives will normally set up a reinsurance programme for losses over a
certain level (i.e. catastrophe insurance).
Captives are often domiciled in tax havens (e.g. Bermuda).
Insurance
Exchanges
Insurance Exchanges are:
Comprised of groups of individuals or companies carrying out underwriting
activities in a real market.
The underwriters share facilities and operate under a common attorney in
fact.
Self Insurers
Self-Insurers are Companies that choose to cover their own losses:
Typically money is set aside to provide a loss fund.
Technically this is not insurance.
Example: A company with a large company car fleet regularly puts aside a
sum of money to pay for loss or damage to their motor cars.
Reinsurance
Companies
Reinsurance Companies offer the following types of products:
Risk carrier for other insurance companies (reinsurance).
Risk carrier for other reinsurance companies (retrocession).
Used as an effective risk management vehicle for other risk carriers.
Exercise: Put these insurance companies into the most appropriate type
14
General Insurance
Companies
Composite
Companies
Health Service
Organisations
Life Insurance
Companies
Reinsurance
Companies
How do insurance companies make
money?
16
Premiums and Claims
INSURANCE
COMPANY
CUSTOMER
premiums
claims
17
Investment Income and Expenses
INSURANCE
COMPANY
premiums
claims
INVESTMENTS
Equity
Bonds
Deposit A/cs
CUSTOMER
EXPENSES
Commission
Acquisition
General
Tax
18
How insurance companies make money
Premium
Underwriting Expenses
(operations,
commissions etc.)
Losses
(paid and reserves, loss
adjustment expenses)
Underwriting
profit/loss
Profit/Loss
+
-
=
+
Investment
Income
=
Underwriting Ratio = Underwriting Profit or Loss / Premium
A company can still make a profit even if they have an underwriting ratio over 100%
because of Investment Income
The Underwriting Ratio and Investment Income determine if the insurance company makes
a profit or loss
Combined Operating Ratio (COR) = Underwriting Ratio + Investment Ratio
On a Combined Operating Ratio basis, a sub 100% ratio means that the business is truly
profitable, whereas over 100% indicates that the business is a drain on the companys
resources
19
Key Performance Indicators for Insurance Companies
The insurance industry monitors key financial metrics
The key ratio to understand is combined ratio. This is the ratio of how much the
company spends (claims and operating costs) divided by the amount the company
brings in (premium income)
Commissions
Premiums Written
Commission &
Brokerage
Expense
Vendor and Other
Underwriting
Related Costs
Premiums Written
Other
Acquisition
Expense Ratio
General Expenses
Premiums Written
General
Expense Ratio
Taxes
Premiums Written
Tax Incurred
Ratio
Expense Ratio
Cost of Acquiring
& Managing Premium
Premiums Written
Claims Paid +
Change in Reserves
Premiums Earned
Losses Incurred
Ratio
Loss Adjustment
Costs
Premiums Earned
Loss
Adjustment
Expense Ratio
Loss Ratio
Cost of Losses &
Adjusting Losses
Premiums Earned
Dividend Ratio
Dividends to
Policyholders
Premiums Earned
Gain or Loss on
Core Insurance Operations
(Under 100 = Gain on Underwriting)
(Over 100 = Loss on Underwriting)
Investment Income
Premiums Earned
Combined
Operating Ratio
Overall Profitability of Company
(Under 100 = Profit)
(Over 100 = Loss)
Investment
Income Ratio
Underwriting
Ratio
20
Intro to Reinsurance
What is reinsurance?
The insurance of insurance
Spreading of risk
Solvency
Increasing market share
Why do insurance companies purchase reinsurance?
Capacity
Balance and Diversification
Stability of Earnings
Solvency Protection, Catastrophe Protection
Financial Results Management
Expertise of Reinsurer
21
Intro to Reinsurance: Spreading the Risk
A reinsurance company insures risks from by a primary insurance company
The reinsurer assumes the risk, the reinsured company, or cedant, cedes the risk
The reinsurer has a contract with the cedant but not the cedant's clients
INSURANCE
COMPANY
REINSURANCE
COMPANY
Reinsurance
Recoveries
Premiums
Reinsurance
Premiums
CUSTOMER
Claims
22
Intro to Reinsurance: Different Types and Contracts
Treaty Reinsurance
Covers a set of subject policies for a
given period of time
Subject policies are often defined in
terms of lines of business, e.g. "all
commercial auto liability policies" or
"all homeowners policies"
Quota Share Reinsurance Contract
A fixed percentage of the premiums
and a fixed percentage of the losses
are ceded to the reinsurer. For this
reason, quota shares are called
proportional reinsurance
Excess of Loss Reinsurance Contract
The reinsurer covers losses in excess
of an attachment, so the recovery is
not directly proportional to the
cedant's loss
Facultative Reinsurance
Covers a single underlying insured
Unlike a treaty, facultative ("fac")
reinsurance is underwritten by the
reinsurer one account at a time.
Functions within an insurance
company
24
Key Functions of an Insurance Company
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Insurance Company
Underwriting
Investment &
Reinsurance
Actuarial
Policy
Administration
Claims
Sales/Marketing
Risk
Management
Customer Facing
Functions
Support
Functions
There are 9 key internal insurance functions: Underwriting, Claims, Sales and
Marketing, Policy Administration, Actuarial, Risk Management , and Investments &
Reinsurance. These split broadly into Customer Facing and Support categories.
25
Functions of an Insurance Company (1/2)
Underwriting
Underwriters underwrite risks on behalf of the insured:
Identifying and underwriting the most profitable risks
Classifying the risks appropriately into rating categories
Ensuring profitability of the overall book of business.
Sales/Marketing
Generates revenue for the insurance company through various distribution
channels by offering various insurance products to customers
Selling products, managing sales force and distribution channels
Identifying sales needs and target markets and building brand awareness
Liaising with product development to establish demand for new products
Policy
Administration
Handles the back office functions, including:
Issuing policies New Business and Renewals
Issuing bills and collecting premiums
Making changes, often known as endorsements, to existing policies
Claims
Ensures the insurance company fulfils its promise to provide protection by:
Investigating losses and negotiating settlements
Ensuring fair and prompt payment of claims to those who suffer losses
Making surrender and maturity payments on life policies.
26
Functions of an Insurance Company (2/2)
Actuarial
Actuaries are responsible for managing the interplay of cash flows:
Setting premium levels to ensure price represents the risk
Support product development and rating engines
Calculating the amount of premium that must be kept in reserve
Calculating the amount of capital needs to hold to maintain solvency
Investments &
Reinsurance
Ensures the financial stability of an insurance company through:
Investments, which provide additional income that may be needed to pay
claims and cover unexpected losses
Reinsurance, which provides protection against catastrophic losses
Risk
Management
This function takes responsibility for loss control
Loss control specialists advise the insured on procedures they can implement
to reduce frequency and severity of losses
Catastrophe modellers analyse and predict the impact of large events on the
insurers book of business
27
The Interdependence of Insurance Operations
Actuarial
Loss
Control
Underwriting
Marketing Claims
Setting Loss Reserves
Claims Data Coding
Product Development
Competitive Analysis
Market Information
Target Markets
Eligibility Criteria
Eyes & Ears
Risk
Improvement
Selling
LC
Services
Identify
Problem
Exposures
LC Services
Needed
Conditions
Prior to Loss
Good Claims Service
Advance Notice of Denials
Interpret
Coverage
Intent
Class &
Rating
Systems
Exposure
Problems
Current Insurance market
29
UK Insurance Market Overview
The UK insurance industry is the largest in Europe and the third largest in the world,
accounting for 11% of total worldwide premium income
It employs 313,000 people. This is almost a third of all financial services jobs,
and twice as many as employed in both motor vehicle manufacturing and in the
electricity, gas and water supply sectors combined
Source: ABI, UK Insurance Facts Sep 2009
30
General Insurance Market Overview
Source: Association of British Insurers, UK Net Written Premium 2008
Premium (m)
2008 (2007) 2008 (2007)
1 (1) Aviva 5,415 5,855
2 (2) RBS Insurance 4,646 4,544
3 (3) AXA Insurance 2,979 2,969
4 (4) RSA 2,569 2,604
5 (5) Zurich Insurance plc 2,227 2,172
6 (6) BUPA 1,608 1,546
7 (7) Allianz Insurance 1,213 1,404
8 (18) AIG UK 1,029 324
9 (8) HBOS 964 800
10 (9) NFU Mutual 835 800
11 (10) Fortis Insurance 729 723
12 (11) Lloyds TSB Insurance 628 609
13 (22) Munich Re 608 270
14 (12) Brit Insurance 438 459
15 (15) QBE Insurance Group 413 386
16 (16) Groupama Insurance Company 402 380
17 (17) LV = 399 336
18 (14) CIS General Insurance 375 396
19 (13) Barclays insurance 348 436
20 (19) QUINN-direct 315 292
Total Net Written Premium (m): 33,799 32,859
Share of Largest 5 Companies: 52.77% 55.34%
31
Life Insurance Market Overview
Source: Association of British Insurers, UK Net Written Premium 2008
Premium (m)
2008 (2007) 2008 2007
1 (4) Aviva plc 10,028 9,759
2 (1) HBOS Financial Services 8,695 11,941
3 (3) Alico 8,016 10,717
4 (5) Legal & General Insurance 7,841 8,416
5 (9) Prudential Insurance 7,643 5,969
6 (6) Aegon 7,227 7,859
7 (7) Lloyds TSB Group 6,353 7,254
8 (8) AXA Insurance 6,167 6,907
9 (64) Zurich Financial Services 2,890 -312
10 (2) Standard Life 2,780 11,339
11 (12) Friends Provident 2,685 2,310
12 (11) Old Mutual 2,589 3,862
13 (13) HSBC Insurance 2,416 2,231
14 (15) Canada Life 1,917 1,809
15 (16) Royal London Mutual Insurance Society 1,811 1,619
16 (10) Swiss Re 1,013 5,002
17 (17) Cardif Pinnacle 865 1,083
18 (14) Resolution 742 2,171
19 (23) Hartford Life 707 455
20 (27) LV = 677 277
Total Market 87,248m 107,823m
Share of top 5 companies 48.40% 48.95%
32
Market Consolidation
The insurance market has shown a lot of consolidation in previous years. This
trend appeared to have reached a plateau until 2009 when the tie up
between Lloyds TSB and Halifax Bank of Scotland created bancassurer Lloyds
Banking Group, expected to be the largest Life Insurance provider, and
second largest Insurance Group of 2009.
This has continued in 2010 with the recent news that UK based insurer
Prudential will acquire AIGs Asia Pacific life insurance business AIA. This is to
take advantage of Asias growing insurance market and could be a trend set
to continue.
There also continues to be consolidation in the UK broker market with the
likes of Towergate, Oval and Giles making acquisitions in 2009.
33
Market Forces
Increasing competition destroying
shareholder value; commercial lines the
weakest performer
New entrants (mainly foreigners)
Powerful large international competitors
Greater focus and specialisation to win;
emergence of value chain specialists
Squeeze on small, mid size players
Increasing acquisitions to drive growth;
organic growth minimal to modest
Competition
Business rules innovation
Reengineering and outsourcing
Improved customer information
capture and integration
Internet opening up personal sales/
business exchanges for commercial
Technology
Corporate globalising driving
dynamics in middle/large corporate
insurance
Growing cross border
mergers/alliances
Growing foreign presence in local
markets
Globalisation
Global deregulation
Elimination of cartels
Reduction in cross financial services
entry barriers
Solvency 2
Regulatory Behaviour
Aging population with improved risk profile; sophisticated
corporate risk managers
Increasing risk appetite of customers driving self insurance
growth
Improved monitoring of customer behaviour
Weakening customer loyalties
Customers
Multi-channel distribution;
increasing use of direct, banks and
internet
Shrinking pool of agents/brokers
Leveraging the Internet
Workforce
Emerging Growth
Opportunities
Changing
Business
Models
Changing
Industry
and Market
Structure
34
Insurance Industry Cycle Definition
Periodic expansion and contraction of market conditions, usually dependent on industry
profit (real, perceived, or anticipated), affecting availability and affordability of the product
of insurance.
There is an insurance cycle where:
Strong premium level creates good profits for insurers
New capital is attracted to the market by the large profits
The market has greater competition and the extra supply causes premium levels to drop
Underwriting becomes unprofitable and insurers make losses
These losses force capital out of the market
Reduced supply pushes up the equilibrium price of insurance
Premium levels rise and the cycle starts again
Also called underwriting cycle, profit cycle, market cycle.
Market Cycles
35
Characteristics of changes in the market
Focus is on production
Oversupply of the product
Carriers cut price to attract business
Terms and conditions are loosened to
provide more coverage at less cost
Business moves from E&S to standard
The industry loses money
Prices begin to rise
Terms and conditions are tightened
Underwriting discipline returns
Supply of insurance, especially in more
difficult lines, decreases
The standard market gets out of
unprofitable classes
E&S business increases
Soft Market Hard Market
Hard Market - a sellers market in which insurance is expensive and in short supply
Soft Market - an environment where insurance is plentiful and sold at a lower cost
36
Insurance Cycle Features
During periods of weak premiums insurers have to make a decision about whether to
write business for profit or for market share.
The former means turning down renewals where premiums are not high enough and can
damage relationships with brokers, which can be painful when the market recovers.
The latter causes losses in the short term in the hope of larger profits in the long term,
but if the downturn is long the insurer may not survive until the upturn.
When rates of return on investments were high many insurers survived on their
investment income, i.e. ran their core insurance business at a loss and treated it as a
source of assets to invest.
When an insurer is in difficulty it can go into run-off and stop writing new business. In
this situation insurers tend to reduce costs and become more sceptical when paying out
on claims.
Examples of large scale economic, environmental, and business losses that have had a
significant impact on the insurance market are:
September 11
Hurricane Katrina
Enron
Insurance 101 GI.
General Insurance
Overview
General Insurance Distribution
General insurance is predominantly sold
through Brokers or Direct.
This is a big change from 1998 when 54%
of people bought through a broker.
The last ten years has also seen a rise in
distribution through bank and building
societies from less than 5% to 17%.
The distribution of GI Is forever changing
the most recent development being the
rise of the aggregator.
39
Who Sells Products and How they are Distributed
Insurance aggregators websites
Insurance aggregators do not take any risk themselves
but act as an intermediary between insurer and
customer.
There are currently four big players: gocompare.com,
Confused.com, moneysupermatket.com and
comparethemarket.com.
They display prices from numerous (but not all) brands
and allow easy comparison for the consumer.
Minimal information is needed from the customer to
provide a quote saving time and effort.
HOWEVER
Aggregators tend to provide low quality business to
insurer as few customer details are validated.
Aggregators have led to intense price competition
between insurers, particularly in the motor market.
Both of these facts have significantly dented insurer
profitability in markets where products are seen as
generic, leading to a backlash against aggregators.
In addition it has been suggested that headline quotes
on the websites are wildly inaccurate, resulting in
wasted time.
40
Rise of the Aggregators
Premiums of 33.8 billion in 2008. This breaks down
as:
Motor - 10.7bn
Property - 8.8bn
Accident & Health - 3.8bn
General Liability - 3.8bn
Other - 5.8bn
Payments to policyholders in 2008 amounted to 22
billion. This includes:
Motor - 8.7bn
Property - 4.8bn
Accident & Health - 3.2bn
General Liability - 2.7bn
Other - 2.6bn
.
41
The UK GI Market
Premiums and Payments
Claims by insurance type 1998 - 2008
Premium by insurance type 1998 - 2008
42
Outlook for 2010 GI Market
The industry hoped for a harder market in 2009 that did not materialise. It now expects
2010 to be the year in which the underwriting profit is favoured over market share, for two
main reasons:
minimal investment returns mean underwriting losses are no longer viable;
the majority of available reserves have already been released.
However, insurers and reinsurers still have adequate capital meaning price competition may
remain. Coupled with a potential improvement in returns from the stock market this may
dampen any rate increases.
It is not certain that any increase in rates will translate to improved results for insurers. This
is due to a decline in risk size caused the economic downturn, specifically:
increased unemployment;
decreased business volumes;
the view of insurance as an needless expenditure.
If no improvement materialises more market withdrawals are expected, as seen with HSBC
Insurance who put their motor business into run off in 2009.
A continued rise in claim volumes seems inevitable across the industry. Personal lines will be
affected by a continuing increase in fraud, whilst commercial lines are expected to suffer
from reduced maintenance and a rise in crime / vandalism caused by vacant premises.
43
Outlook for 2010 GI Market (continued)
This creates a need to improve claims handling departments, but may also bring about an
opportunity for brokers to expand their claims management functions and earn substantial
income.
Many are predicting an aggregator crunch over the next year caused by the sheer number
of price comparison sites that cannot be sustained by the market. This is compounded by
the fact that insurers are pressing aggregators to alter their business models, to reduce
costs to insurers and improve underwriting results from aggregator generated business.
A tough year is also predicted for consolidators and broker networks as pressure is put on
the their high commission payments, and insurers start to favour smaller independent
brokers. Many of these consolidators are also saddled with large debts from previous
acquisitions which may cause trouble in 2010.
General Insurance
Products
Products
In the UK, General Insurance is broadly divided into three areas:
Personal Lines, Commercial Lines and Lloyds of London
45
General
Insurance
General
Insurance
Lloyds of London
Deals with extremely large and complex risks including
satellites, oil tankers, football players, supermarkets and
famously Tina Turners legs!
Given the individual nature of these risks they need bespoke
underwriting to work out how they should be insured
See the Lloyds section for more detail
Lloyds of London
Deals with extremely large and complex risks including
satellites, oil tankers, football players, supermarkets and
famously Tina Turners legs!
Given the individual nature of these risks they need bespoke
underwriting to work out how they should be insured
See the Lloyds section for more detail
Commercial Lines
Sold to businesses from small corner shops to large
corporations
Has to cover not only the business premises, contents and
fleets but also insures the interruption to business and liability
of employees and products
Commercial Lines
Sold to businesses from small corner shops to large
corporations
Has to cover not only the business premises, contents and
fleets but also insures the interruption to business and liability
of employees and products
Personal Lines
Sold to individuals like the home and car insurance that you
buy for yourself
Sold in large quantities
Covers your home, car, pets, loans etc.
Personal Lines
Sold to individuals like the home and car insurance that you
buy for yourself
Sold in large quantities
Covers your home, car, pets, loans etc.
Personal Lines Insurance
Some Examples of Personal Lines Insurance:
Automobile
Homeowners
Secondary/Seasonal Home
Mobile Home
Boat/Yacht
Jewellery/Fine Arts/Collections/Firearms
Umbrella/ Excess Liability
Travel
46
Commercial Lines
Some Examples of Commercial Lines Insurance:
Property Lines
Financial Lines
Casualty
Marine
Political Risks insurance
Credit insurance
Contingency insurance
Livestock Insurance
47
48
General Insurance: Difference between Commercial and Personal Lines?
When an accident happens at the home, you can make a claim on your personal insurance
for damage to your house and contents. For a business there is a lot more that go wrong!
Scale: a business often has more than just one property and a whole fleet of vehicles
E.g. a supermarket chain with numerous outlets and a large fleet of delivery vans
Nature of Business: the type of business and stock that a business manages can have a
significant influence on the scale of the risk
E.g. an oil company faces a wide range of challenges in drilling off-shore and
transferring crude to refineries
Business Interruption: if an incident affects a business property, an insurer needs to help
fix the building, they also support a business for the loss in trading
E.g. During the Carlisle floods a supermarket building was unaffected but their car park
was flooded and they had to submit a large claim for their trading losses due to business
interruption
Liability: businesses need to ensure that if something goes wrong with their product or an
accident affects their employees in the workplace, that they can help cover the damages
E.g. Famously the Ford Pinto fuel tank was positioned too high, which meant that rear-
end collisions often resulted in the tank exploding. Businesses need cover the damages
and legal costs that can arise from such defects
Commercial Lines
Description of GI Commercial Lines
Insurance Business is often termed long-tail or short-tail
Long-tail business describes a risk that may have claims notified or settled long after
the policy has expired (e.g. liability risks)
Short-tail business describes a risk where all claims are likely to arise and be settled
within the policy period or shortly after (e.g. claims for physical damage)
The main classes of business that may be transacted are:
Marine insurance
Aviation insurance
Property insurance
Liability insurance
Other insurance
Marine insurance
Marine insurance provides an indemnity against losses whilst a vessel is at sea or whilst a cargo is at
risk during a maritime transit
Marine insurance can be broken down into three categories:
Insurance of hulls
Provides cover against perils
of navigable waters including
fire; explosion; violent theft;
jettison; piracy; earthquake;
accidents in loading; contact
with other structures
Policy is subject to a
deductible an amount or
percentage of any claims is
borne by the insured
Insurance of cargo
Covers physical damage to, or
loss of, goods whilst in transit
It is impractical to insure
shipments individually, so
insurers offer long-term
contracts, popularly:
Open cover an agreement
between merchant/ shipper
and insurer under which all
movements in a certain time
period are insured
Cargo policies are freely
assignable because often
goods are bought and sold
whilst in transit
Energy insurance
Presents some of the
industrys most complex risk
management challenges
Generally written in the marine
market because the
exploration and production
elements are often offshore
drilling platforms
But property insurers may also
deal with onshore energy
facilities
Typical coverage involves a
mix of exposures, which may
include business interruption
and liabilities that arise from
this sector, as well as property
physical damage
Aviation insurance
Aviation policies are purchased by a range of buyers, including commercial airlines, component and
airframe manufacturers, airport operators and private owners
Standard aviation policies cover:
Loss or damage to aircraft
Legal liability to third parties other than passengers
Legal liability to passengers
The London market also insures space risks covering satellites and other space vehicles. Risk is usually
split between launch risk and in orbit risk and cover can be purchased separately or as a package.
A range of other aviation risks are insured, including:
Products legal liability covering the legal liability of manufacturers or repairers
Airport liability
Cargo
Loss of licence covering aircrew who lose their licence, in the event of being unfit through accident
or illness
Loss of Use covering loss of earnings following an aircraft being laid-up for repairs
Personal Accident for passengers or aircrew
Property insurance covers physical loss or damage to property
The main classes of property insurance are:
Fire additional perils can be added on for a premium e.g. chemical explosion (no fire needed)
Business Interruption extension to cover the financial consequences of a loss, such as loss of
earnings or additional expenses incurred re-establishing/maintaining the business
Theft following entry to or exit from the premises by forcible and violent means
Money
Jewellers block one of the first non-marine classes developed at Lloyds, to protect stock on
premises, in vaults or in transit
Bankers blanket bond covers all bankers insurance needs, including counterfeit currency loss,
forgery and damage to office and contents
Builders and contractors
Fine Art
Property insurance
Liability insurance
Liability insurance protects the insured in respect of their legal liability to others
Liability can arise through negligence, breach of contract or breach of statutory duty
The main types of liability insurance available are:
Public liability (third party) insurance policies are issued for all classes of business and trades
Employers liability (EL) and workers compensation (WC) insurance EL insurance is a legal
requirement in the UK, whilst WC policies are provided outside the UK to a number of countries with a
no-fault system of compensation
Products liability insurance covers liability for injury or damage caused by goods manufactured,
constructed, altered, repaired, serviced, treated, sold, supplied or distributed
Professional indemnity insurance covers liability for professional negligence causing financial or
personal injury to clients
Directors and officers (D&O) liability insurance used to recover costs and resulting damages of
action brought against a company and/or its past or present directors and officers for wrongful acts
Other insurance
There also exist a wide range of other insurance products, in many cases requiring specialist knowledge and
An entrepreneurial approach. The market leader for many of these products is Lloyds of London:
Political Risks insurance offers protection to businesses trading internationally against the risk of
financial losses resulting from foreign government interference or the non-performance of a
contract by a contracting party. Contract frustration insurance is one example, covering against
the cost of a contract being unilaterally terminated by a foreign government or frustrated due to
political perils.
Credit insurance policies provide cover to a lender against default or insolvency of the contracting
counter-party
Intellectual Property insurance protects patents, copyrights, trade and service marks, businesses
and creative artists
Contingency insurance provides cover where an organisation or business has a financial interest in
an event taking place, or not taking place. These events are known as contingencies. Examples
include Cancellation, Non-Appearance (of a key performer) and Products Recall.
Livestock Insurance provides cover against the death of animals as a result of accident, illness or
disease. Cover is also available for stud animals and breeding stock, for non-performance, infertility or
birth defects
Insurance 101 Lloyds.
History of Lloyds
History of Lloyds
Founded in the 17
th
century City of London at the
coffee house owned by Edward Lloyd near the
Thames;
Lloyds coffee house was in existence by 1688, and
was frequented by merchants, or underwriters
(they would sign their names at the foot of the
insurance contracts) and ship-owners;
Lloyd supplied shipping information through
publishing a news sheet called Lloyds News
superseded by Lloyds List, Londons oldest
newspaper;
Lloyds coffee house developed as a marketplace
for insurance provided by individuals in 1771 a
committee was formed which placed the running of
Lloyds into the hands of the insurance fraternity
Lloyds of London is the worlds leading specialist insurance marketplace through which
London market insurance is written
Eminence and importance in global markets
Lloyds is now the worlds leading insurance and reinsurance market and enjoys a
unique status in the global insurance industry, offering a marketplace for those risks that
cannot easily be placed in local markets, including policies that may contain complex
features.
It has recently moved into emerging markets with Lloyds Reinsurance Company
receiving formal approval in China (2007) and Lloyds being authorised as the first
admitted reinsurer in Brazil (2008).
Structure of Lloyds
Lloyds Structure
Lloyds is not an insurance company but a Society of members
Members, often known as capital providers, accept insurance through syndicates on a
separate basis
Each syndicate is managed by a managing agent, responsible for employing the
underwriting staff and managing the syndicate
Members agents are responsible for bringing in suitable new members to join syndicates
*covered in next 2 sub-sections
Lloyds participants
There are two classes of people and firms active at Lloyd's
Members or providers of capital, that form syndicates
Agents, brokers and other professionals who support the members, underwrite the risks,
and represent outside customers
Members of
Lloyds
Historically, rich individuals (Names) backed policies written at Lloyd's with all of
their personal wealth (unlimited liability)
Since 1994, Lloyd's has allowed corporate members into the market, with limited
liability
The losses in the early 1990s devastated the finances of many Names and scared away
others
Today, individual Names provide only 10% of capacity at Lloyd's, with corporations
accounting for the rest
No new Names with unlimited liability are admitted the importance of individual Names
will continue to decline as they withdraw, convert (generally into LLPs) or die
Lloyd's members conduct their insurance business in syndicates
Syndicates tailor solutions to respond to the specific risks of the client base
Syndicates compete for business, offering choice, flexibility and continuing innovation
Syndicates cover all or a portion of the risk and are staffed by underwriters
Managing
Agents
Managing agents sponsor and manage syndicates
They canvas members for commitments of capacity and create the syndicate
They employ the underwriting staff
The managing agent must be a company specifically established for the purpose of
managing a syndicate, and it may not carry out any other function
A managing agent may be responsible for more than one syndicate
Lloyds participants
Members
Agents
Members' agents coordinate the members' underwriting and act as a buffer
between Lloyd's, the managing agents and the members
They were introduced in the mid 1970s and grew in number until many went bust there
are now only three left: Argenta, Hampden and LMAS (which has no active names)
It is mandatory that unlimited Names write through a members' agent
Lloyds Brokers
Outsiders, whether individuals or other insurance companies, cannot do
business directly with Lloyd's syndicates they must hire Lloyd's brokers, who
are the only customer-facing companies at Lloyd's
Lloyd's brokers shop for customers' policies among the syndicates, using their
specialist knowledge to negotiate competitive terms and conditions for clients
There were 162 firms of brokers working at Lloyd's (as at July 2006), many of
whom specialise in particular risk categories
Each Lloyd's broker is required to demonstrate an understanding of the Lloyd's market,
as part of Lloyd's assessment of its suitability to be accredited as a Lloyd's Broker
Any local broker can access the expertise and resources of Lloyd's by making
contact with an accredited Lloyd's broker
Integrated
Lloyds Vehicles
An Integrated Lloyds vehicles (ILV) is a company which owns a corporate
member of a syndicate and the managing agent of that syndicate
Some members did not like the traditional structure when they became admitted as
Lloyds members the insurance companies did not want to rely on the underwriting
skills of syndicates they did not control, so they started their own
Some ILVs allow minority contributions from other members, but most now try to operate
on an exclusive basis
Duties of managing and members agents
Lloyds underwriting agents (managing and members agents) are either limited
companies or partnerships and act on behalf of the members
A members agent provides the following services
Guides new members through the application process
Undertakes administration of the affairs of existing members
Assists members to comply with applicable rules and requirements relating to their Lloyds affairs
Advises members as to the syndicates in which they should participate
Places the member on syndicates subject to their agreement and purchase of capacity
Acts as a liaison between the Corporation of Lloyds, managing agents and the member
Each Lloyds syndicate is managed by a managing agent, as a franchisee their duties
include:
Determining the underwriting and reinsurance policy for each managed syndicate
Appointing and supervising the active underwriter of the managed syndicate(s), and associated
underwriting, claims, administrative and accounting staff
Accepting risks on behalf of the syndicates
Managing the reinsurance programme
Agreeing and paying claims on behalf of each managed syndicate
Determining the appropriate levels of reserve and premium for the reinsurance to close
Producing the annual accounts of the syndicates, reflecting profits and losses made
Making a syndicate quarterly return to Lloyds to give an indication of the progress of all open years
these figures are the total cumulative amounts for premium and claims for open years and a forecast
for each closed year
Each managing agent has a standard managing agents agreement with each member on
its managed syndicate, setting out the powers and duties to be provided
Key players
As at 31
st
December 2008 Lloyds was home to 51 managing agents running 80 separate
syndicates
(Source: Lloyd's Quick Guide 2009)
Parties involved
An important competitive strength lies in the number, diversity and expertise of the
competing insurers
The London market enables close ties to be formed between buyers, brokers and insurers,
and facilitates access and the flow of information amongst all participants
It also contains an unrivalled pool of service providers such as leading law firms, IT
support and professional bodies
Brokers can find the capacity and capability required for
the underwriting of virtually any type of risk
Brokers know the strengths and specialisms of the
underwriters and can tap the combined underwriting
capacity for all market sections
The judgements on rates and terms of Lead
Underwriters are followed by other insurers in London
and other global market
Lloyds market structure
Lloyds market structure encourages innovation, speed and better value
Lloyds members underwrite in syndicates on whose behalf professional underwriters
accept risk
Supporting capital is provided by investment institutions, specialist investors,
international insurance companies and individuals
Lloyd's brokers bring business to the market the risks placed with underwriters
originate from clients and other brokers and intermediaries all over the world
Brokers have immediate
access to decision-makers,
which means that answers on
whether a risk can be placed
are made quickly, enabling
the broker to provide fast,
good value solutions
Lloyds Market Association
The Lloyds Market Association (LMA) represents underwriting businesses in the Lloyds
market
It was formed in 2001 by merging five previously independent associations:
Lloyds Underwriters Association
Lloyds Underwriters Non-Marine Association
Lloyds Aviation Underwriters Association
Lloyds Underwriting Agents Association
Lloyds Market Association
Through the LMA the interests of Lloyds syndicates and managing agents are promoted
for decisions that affect the market
The mission of the LMA is to provide a single voice for the Lloyds market and a range
of quality services including representation, information and technical services
Reinsurance to close
A Lloyd's accounting practice, known as 'reinsurance-to-close, means that current
members can be liable to pay for historical losses
Members officially join a syndicate for 1 year only the 'Lloyd's annual venture
the syndicate would commonly re-form for the next calendar year with more or less the
same membership and the same identifying number
A syndicate therefore appears to have a continuous existence, but in fact there are
numerous separate incarnations, each one a unique trading entity that underwrites
insurance for 1 year only
Claims take time to be reported and paid, so Lloyd's practice is to wait 3 years before
closing a year and declaring a profit and loss result
For example, a 2003 syndicate will declare its results at the end of December 2005 the
syndicate's members are paid any underwriting profit in 2002 in proportion to their
participation, but have to reimburse the syndicate during 2006 for their share of any
underwriting loss
Part of the result includes setting aside reserves for future claims payments for
claims that have been notified but not yet paid, and estimated amounts required for
'incurred but not reported' claims
The estimation process is difficult and can be inaccurate in particular for liability (or
long-tail) policies
Reinsurance to close
The reserve for future claims liabilities is set aside in a unique way the syndicate buys a
reinsurance policy to pay any future claim
The premium is the exact amount of the reserve the syndicate transfers liability to
pay future claims to a reinsurer this is 'reinsurance-to-close' a transaction that
allows the syndicate to be closed, and a profit or loss declared
The reinsurer is always another Lloyd's syndicate usually the succeeding year of the
same syndicate, the membership of which might be the same or might have changed
Liability for past losses is therefore transferred until it reaches the current syndicate
A member joining a syndicate often picks up liability for losses on policies written
decades before the arrangement works if the reserves have been correctly estimated,
and the appropriate reinsurance-to-close premium paid every year
However sometimes this has not been the case for example with the surge in
asbestos, pollution and health hazard (APH) losses in the 80-90s the amounts of
money transferred from earlier years by successive 'reinsurance-to-close' premiums
were insufficient, and the current members had to pay the shortfall
Lloyds governance
The Lloyds Act 1982 repealed many of the provisions of earlier Acts and provided for the
establishment of the Council of Lloyds, charged with overall responsibility for and control of
the Lloyds market
As Lloyds is a society, its activities are governed by statute, principally Lloyds Acts
1871 to 1982, and parts of the Financial Services and Markets Act 2000
The Council is chaired by the Chairman of Lloyds and is responsible for ensuring that
the Society acts in accordance with the above acts
The Council comprises 18 members: 6 working members, 6 external members and 6
nominated members (one of whom is the Chief Executive Officer)
Society members who occupy
themselves with the business
of insurance at Lloyds by a
Lloyds broker or underwriting
agent, or did so immediately
before retirement
Working member External member
Society members who are not
working members
Include both elected corporate
entities (who nominate a
representative for the council)
and individual external
members
Nominated member
Not society members
independent persons regarded
as non-executive council
members (except the CEO)
Appointments are made by the
council and confirmed by the
Governor of the Bank of
England
Lloyds governance
Introduction of the franchise business model was accompanied by changes to Lloyds
corporate governance structure, which included the establishment of the Franchise Board
In respect of a number of its functions, the Council acts through the Franchise Board
Members are appointed by the council and drawn from inside and outside the Lloyds
market
It sets the franchise strategy and has further policy, planning and budgetary
responsibilities
Chain of security
Lloyds has a unique capital structure, which is often presented in the form of a chain of
security, underlying policies underwritten at Lloyds
Members are only liable for the portion of the policy that they have subscribed to, called
several liability the Society of Lloyds is not legally liable for claims arising from
insurance contracts
Lloyds chain of security has developed to ensure that the valid claims of Lloyds
policyholders will always be met
In 2007 the Secure Chain of
Security 2007 was released by
Lloyds with 3 links (previously 4)
and comprising 2 elements
requirements for the financial
resources that members must
possess and arrangements for
assets to be held centrally
Chain of security
Consists of members
premium trust funds (PTFs),
managed by the managing
agent
Premiums and other monies
paid into PTFs
Payments from PTFs only
made to meet permitted
trust outgoings
Members cannot receive
profits from PTFs until
underwriting account has
been closed
The first link The second link
Consists of members funds
at Lloyds (FAL)
Comprise 3 trust funds
where members assets may
be held the Lloyds
deposit, the special reserve
fund, and the personal
reserve fund
Assets must be readily
realisable, and equal the
members net FAL
requirement (minimum
capital ratios = 35%)
The third link
Consists of Lloyds central
assets, including Lloyds
Central Fund
Lloyds Central Fund is
available at the discretion of
the Council to ensure that
claims are met if members
are unable to meet their
liabilities
Members contribute each
year based on a percentage
of their allocated premium
limit
Financial resources requirements Central assets
Trading at Lloyds
Underwriting process Lloyds
Underwriting is the process by which an insurer assesses the acceptability and the transfer
value of a risk for a price to be paid by the insured
The underwriter is an individual, who acts on behalf of the insurer
After consideration of the facts presented, the underwriter offers terms of insurance if
these are accepted, the underwriter accepts the risk in exchange for a premium
Within Lloyds, underwriters work for a syndicate and sit at the syndicates box in the Lloyds
building brokers usually walk up to them, and present a slip containing the details of
cover requested by their client
The underwriter assesses all the facts available and, if willing to accept transfer of the
risk, adds the details of the terms, conditions and premium required on the slip
Underwriters have personal terms of reference they are only able to underwrite certain
classes of business and are limited by a maximum line size per risk, which is a cap on
the value of risk they can accept on any one slip
Underwriters are on risk, in other words the risk has been transferred to them:
if they subscribe a line to the slip, unless the slip is over-subscribed (in which case the
extent of commitment is determined when the broker stops adding lines to the slip)
if a slip is placed Subject to Acceptance, No Risk (SANR), which occurs when the
assured has gone to a number of brokers for quotes, but in this case the assured is not
bound to the slip
if an underwriter subscribes a line after the attachment date, and an event giving rise to
a claim has already occurred (unknown to the insured or the broker)
Subscription market
The subscription market refers to the process whereby insurance risks are placed among
more than one syndicate/company there will normally be one syndicate that leads for
the subscription market, while the others follow
The purpose of a subscription market is to spread the risk
The Leading Underwriter will be approached due to their reputation and expertise in the area
and will underwrite the terms which govern the contract of insurance
It is important they have the confidence of other underwriters they normally
underwrite a substantial line (although not always the largest percentage) of the total
risk (e.g. 40% of 100%), and will be liable for the same percentage of any subsequent
claims (i.e. 40%)
The Following Underwriter(s) will underwrite an equal or smaller portion of the remaining
percentage of risk (e.g. 13% of 100%)
They have to decide if they wish to accept the terms outlined by the leader if they do,
they still have to assess the risks using the same care and consideration as if they were
leading
Due to their market share position, the following underwriter(s) may not receive full
policy data from the broker/cover holder
Broking in the Lloyds market
Brokers essentially act as intermediaries between the Insured and Insurer
They also represent the interests of customers and act a professional advisor on
insurance matters
All brokers must be formally regulated by the FSA or another national regulator to trade
At Lloyds, business can only be underwritten when placed by Lloyds brokers, who
must accredited by Lloyds to trade with Lloyds syndicates
To achieve Lloyds accreditation, brokers must fulfil the following:
Provide a business plan explaining the classes of business they trade & a three-year
forecast of how much business they expect to trade with Lloyds
Obtain Errors & Omissions insurance, which provides cover for breach of duty of care
this will be directly related to how much the broker gets paid (net retained
brokerage)
To trade in the London market, each broking firm has to sign a Terms of Business
Agreement (TOBA) with every insurer that it transacts business with
A TOBA outlines the way in which the broker operates, what services it provides
and how it is remunerated
When dealing with Lloyds syndicates, a separate TOBA is required for each managing
agent
Unique features of Lloyds market transactions
The London market has a number of unique features, compared to other insurance and
reinsurance markets around the world, including:
The journey of a slip/policy in the subscription market
Lloyds brokers seek a lead underwriter, and hand over a London Market Principles (LMP
slip) setting out the details of a request for cover (see example later in this sub-section)
The underwriter will subscribe a proportion and signify terms and the premium on the
slip (known as the written line) any subsequent underwriters on the same slip are
bound to the same terms and premium
The broker takes this document and creates a cover slip for the client, summarising the
cover a full policy document will then be created, either by the broker or by Xchanging
Ins-sure Services, to be sent to the client (with a copy sent to the underwriter)
Premiums will usually be paid by the broker through Xchanging
Methods of Conducting Business Most transactions take place face-to-face, but some are
accepted through binding authorities, line slips and direct dealing
Binding Authorities Lloyds brokers may approach cover holders rather than go straight
to the underwriter (Delegated underwriting explained in Underwriting sub-section)
Line slips an agreement between a group of underwriters and a Lloyds broker for a
specific class of business certain underwriters may accept the risk on behalf of the
whole group
Direct dealing Lloyds managing agents may establish service companies to deal with
the public, as extensions of the syndicate they offer insurance processing and related
services
Unique features of Lloyds market transactions
Proposal Forms are questionnaires used by underwriters to obtain information before
underwriting risks, usually for personal lines they are handed to the underwriter by the
broker
Contract Certainty is vital for the London market to deliver the service customers demand
and to remain competitive all terms must be agreed before inception and
documentation delivered promptly
When the potential insured has made a proposal, via the broker, to the underwriter and
the underwriter accepts the proposal, terms have been agreed and the premium has
been paid, then there is a contract
As it is not always possible to create a policy document as soon as the terms have been
agreed, brokers in the London market may issue the insured with a cover note,
summarising the details of the cover, to be followed promptly by the Policy document
Policy documents elaborate on the details and conditions placed in the wording slip they
must construct the wording from the original terms and conditions
Policy documents can be created by the broking firm, or by Xchanging Ins-sure Services
LMP slip with schedule Information
For open market transactions, the broker provides a schedule detailing the aggregate
information that makes up the risk
For example the geographical and structural information about each building in an
insurance policy for a commercial property portfolio
For binding authorities, London market insurance companies collect information about
premium and/or claims over a defined period
This provides a 'snapshot' of the compliance and underwriting and operational
performance of a Binder and is called a bordereau an LMP slip of this kind is shown
below
List of
Insured
Period of
cover
Gross premium
paid by insured
Deductions
Net premium (after
deductions)
Signing slip for Xchanging
The broker creates a cover slip for the client, summarising the cover
a full policy document will then be created, often by Xchanging Ins-sure Services, to be
sent to the client
An example of a signing slip for a policy written through a DUA is shown here:
Policy
reference no.
Gross premium
before deductions
Settlement due
date for broker
Net premium to
Insurer after
deductions
Commission to
cover holder
Amount of
Brokerage
deducted
Insurers unique
market reference
3 letter Broker
Acronym & Code
Name of insured
Handling claims payments
Settlement of Lloyds claims is subject to the requirements of the Lloyds claim schemes
Depending on the inception date of the policy, settlement may be governed by Lloyds
1999 Claim Scheme, or the Lloyds 1999 Claim Scheme (Amended)
Schemes include specified duties for leading underwriters and detail the involvement of
Xchanging Claims Services (XCS) in the claims handling process
XCS is a claims agreement party for subscription business placed at Lloyds
The Claims Loss Advice and Settlement System (CLASS) is being trialled to manage claims
in the company market
This system allows claims advice, reports, reserves and settlements to be disseminated
faster, but depends on the use of Electronic Claim Files
83
Introduction to London Market
Notification comes from the insured
to the broker there may be a
claims notification clause, giving
specific methods or timescales for
making a claim
The broker creates a claims advice
and send this to the leading
underwriter and any other
agreement parties, including XCS
An expert (loss
adjuster/surveyor/lawyer) is
appointed as necessary by the
leading underwriter and XCS to
review the claim
Claims Notification Claims Submission
The broker checks that the insured
has met all premium payment
obligations and policy
conditions, then submits the claim
to the underwriter
The obligation is usually on the
insured to prove a loss has been
suffered
The insurer must be satisfied that a
number of conditions have been
met, e.g. that the cover was in force
at the time of the loss; and that the
quantum (amount) of the claim is
correct
Claims Settlement
The amount payable depends on
the extent of loss or damage and
the nature of the cover provided
XCS process the settlement,
triggering a payment to the
nominated payee, via the Lloyds
Central Settlement System
In the case of company market
claims, the completion of the
CLASS process will trigger the
payment to the nominated payee
Nominated payees can be brokers,
policyholders, 3
rd
party
administrators or cover holders
Lloyds statistics
Market performance
In 2008 Lloyds was markedly unaffected by the economic climate, in contrast with the rest
of the financial sector
Consistent growth in capacity over the
past five years.
Higher levels of catastrophes and
attritional claims partially offset by
currency movements and prior year
releases
Profitable core underwriting from
specialty business, unlike large
parts of the retail market.
Lloyds Syndicates
(Source: Lloyd's Close Up 2006)
The number of syndicates operating at Lloyds has consolidated in recent years in line with
global insurance trends
Syndicates have increasingly transformed into to multi-line businesses.
The reduction in syndicate numbers can also be attributed in part to the changing profile of capital
providers Names have traditionally tended to support a spread of syndicates, whereas corporate
members have gravitated towards underwriting through a single syndicate
Key players and market share
8 corporates provide 50% of the capital to the London market
(Source: Lloyds of London)
Insurance 101 - Brokers.
Introduction
89
This section of the course aims to provide an overview of intermediaries, their roles in the market, the
different types and what they do.
This module will aim to provide and understanding of:
Why Brokers are needed
Trends in the Market
What Brokers do and how they
make money
What Brokers value
What Brokers do and how they
make money?
Who Does What? (Non Internet Channels of Distribution)
91
Independent
agent
Independent agents represent more than one company (about six on average).
Ownership of renewals means that the agent and not the company owns the client list. If a
company terminates the independent agent, the agent retains control of the business and
is free to switch it to another company.
Exclusive
Agents
Exclusive Agents represent only one company. In the exclusive agency system, the
company and not the agent owns the client list.
Direct writers Direct Writers do not use agents but instead use company employees who sell insurance
by telephone.
Brokers A Broker represents the buyer, while the agent represents the Insured, providing
specialized services to business clients.
Additional Broker Distribution Segments
92
Segment Definition
Nationals Intermediaries with a national and international presence, typically publicly
listed.
Consolidators Leading consolidators and network aggregators, excluding insurer owned
brokers.
Insurer owned brokers Brokers wholly owned or where a controlling interest is owned by an insurer.
(SBJ is owned by AXA)
Large regional brokers Next top 30 independent brokers.
Other brokers Remaining brokers and intermediaries.
Bancassurance & affinity Banks, building societies and affinity organisations distributing commercial lines
insurance.
Direct Direct commercial insurance arrangements between consumers and insurers.
Other Company agents, tied agents, and other historical arrangements.
The terminology below is also used to describe various distribution segments:
Whos Who
UKs 10 Largest Insurance Brokers 2009
Rankings are based on 2009 Insurance Times Top50Brokers report:
93
Rank
CY (PY)
Company
Revenue
000
1 (1) Aon 686,760
2 (2) Marsh 472,900
3 (4) Willis 461,176
4 (3) Saga / AA Insurance Services 450,000
5 (5) Jardine Lloyd Thompson 448,500
6 (6) Towergate Partnership 372,200
7 (7) Swinton 278,925
8 (8) BGL Group (Budget) 261,427
9 (11) HSBC Insurance Brokers
(since bought by Marsh)
146,300
10 (10) Bluefin Insurance Services 140,000
How are Brokers Paid?
94
Brokers are paid for the services provided to clients, usually through a brokerage, which is
calculated based on a percentage of the premium:
This is not paid directly to the broker, but is deducted from the premiums paid (this does not make the
broker an agent of the insurer the broker is acting on the behalf of the client).
The fact that a broker receives remuneration, and the amount involved may need to be disclosed by
the broker at the outset of their principal/agent relationship, depending on the type of business.
Brokers may also receive a fee paid directly by the insured this is often subject to a specific legal
agreement.
The broker may also earn a commission, although this should only be with the Insureds full
knowledge.
Where a broker is operating a binding authority (acting under delegated authority from insurers),
they may also receive payment for managing this scheme.
Brokers may also earn remuneration for providing additional services:
Carrying out property, liability, health and safety risk surveys.
Advice on alternative risk transfer methods.
Advise Insureds on New insurers on the market and what they offer.
New types of insurance cover.
Setting up and managing captive insurance companies.
Advice on changes to health and safety regulation where it may affect the client.
Commission
An insurance agent or broker is normally paid on commission:
Paid by the insurance company where business is placed
Billed into the premium of the risk
Ranges from 8 to possibly 20%, depending on the relationship
In addition, some companies provided contingent commissions/ overriders a fee
paid on the basis of the profitability and volume of the brokers portfolio rather than the
individual risk
This commission practice led to brokers colluding with top insurance companies
to fix prices and divert business towards favoured accounts, rather than acting
in the best interests of their clients. n investigation in 2004 by New York
Attorney General Eliot Spitzer led to worldwide changes in commission practices
95
Bid Rigging:
Spitzer alleges that many large insurers have been complicit in Marshs
schemes. They have paid hundreds of millions of dollars for Marsh to steer
business their way, he says. At times, says the complaint, the insurance
companies have gone much further, colluding with Marsh to rig bids and
submit false quotes to unwitting clients.
Changes in Regulation and Disclosure
96
FSA Confirms industry guidance status over disclosure:
The FSA has formally confirmed Industry Guidance status on the market solution in
respect of conflicts of interest, disclosure and transparency in the commercial insurance
sector for brokers.
What this Means
Although not compulsory, the guidance has been given confirmed status by the FSA,
meaning that before considering any enforcement action the regulator will take into
account whether the firm was following the guidance appropriately
Commercial customers will receive clear and accurate information regarding
intermediaries services and how they are remunerated
Transparency as respects the level of commissions earned as well as overriders
Customers will be alerted where there is a chain of intermediaries involved in arranging
the cover
Why are Brokers/ Intermediaries
Needed?
The Role of the Broker/ Intermediary
98
Adequate Exposure Protection
Brokers ensure that the customer does not
end up with unnecessary cover, or even
worse- without the cover they really do
need!
Expertise
Brokers understand coverages that are
needed and the nuances of policy wordings.
Niche markets require Broker knowledge
on coverage availability
Decreased Costs
Brokers have knowledge of the marketplace
and the ability to negotiate competitive
premiums
Commercial Insureds may have multiple
policies. Brokers manage day to day
issues, allowing the Insured to focus on
their business
Policy Management
Intermediaries play a crucial role in advising their clients on the right coverage needed for their operations, finding
them the best premium, and providing support during a claim. They represent the interests of customers and act a
professional advisor on insurance matters. All brokers must be formally regulated by the FSA or another national
regulator to trade.
It is difficult for the Insured to understand
the complex nature of Commercial risks, or
have the ability to discern among the many
insurance products available
Complexity in Commercial Lines
Who owns the customer relationship?
99
Customer
Insurer
direct relationship
direct relationship
Agent
liaise
Distribution Network
100
Commerce
The Buyers
(The Insured)
Brokers
Agents
Internet
Aggregators
Intermediaries
The Sellers
(The Insurers)
Captive insurance
companies
General Insurance
companies
The State
Industry
The Public Direct
The above diagram shows a picture of how sales/ distribution channels in the UK are
organised. Insurers sell either sell directly to Buyers or through Intermediaries.
Traditionally intermediaries such as brokers, agents and consultants used to be the only types
of distribution channels.
Today there exist a plethora of channels in the marketplace and we have seen a dramatic rise in
direct insurance from the emergence of internet channels.
Distribution Channels: General vs. Long Term Insurance
The following pie chart displays the breakdown of distribution channels used in General and Life Insurance in 2008.
Despite the growth of different distribution channels, Independent intermediaries remain the most popular
distribution channel for General Insurance:
101
The broker and other intermediary channel is far more important for General
Insurance
Distribution Channels: Personal vs. Commercial Insurance
The following pie chart displays the breakdown of distribution channels used in Commercial Insurance in 2009. Despite
the growth of different distribution channels, Independent intermediaries remain the most popular distribution
channel for Commercial Lines of business:
102
The broker and other intermediary channel is far more important for commercial
lines
Trends in the Market
104
Current Industry Trends
Replace, leverage or outsource
fragmented legacy
environments
fragmented legacy
environments
Growing demands of global
regulation increasingly
requiring back office
investment
Growing demands of global
regulation increasingly
requiring back office
investment
Changing product mix Changing product mix
Ongoing industry consolidation
and M&A
Ongoing industry consolidation
and M&A
Adopting flexible plug and
play distribution channels and
better intermediary integration
Adopting flexible plug and
play distribution channels and
better intermediary integration
Increasing number of Broker
networks
Increasing number of Broker
networks
The Insurance marketplace is increasingly competitive. Flexibility and responsiveness will be
the key imperatives for insurers and brokers going forward.
Requirements
for flexibility
and
responsiveness
Distribution Future Features and Trends
105
Customer Alignment
Ease of Doing Business
Strong Risk Management
Product Proposition
Clearly defined target market
Well defined TCF policy
Target market understood, segmented
Sales and submission processes
Service
Adviser support
Quality Management Framework
Control systems well defined
Market competitive range
Aggregation capabilities
Own brand + selective additions
Reward Structure
Media
Technology Support
Recruitment and Training
Meet requirement for low cost
Balance incentives and career building
Aligned to TCF and quality business
Multi-media
Telephone, internet, limited face-to-face
Technology to support sales and service
Business support services
Clearly specified recruitment brief
Training aligned to multi-media and TCF
H
i
g
h
High Low
Control
P
r
o
f
i
t
a
b
i
l
i
t
y
Todays distribution
Entrepreneurial, high commission
Limited use of technology
Low persistency
Customer loyalty to distributor
Poor control environment
Providers left to pick up pieces
Tomorrows distribution
Structured recruitment and training
Low cost advisers, efficient processes
Face-to-face the exception
Optimal use of technology
Provider ownership of customer
Value proposition for consumer clear
Strong control environment
Aligned to new regulatory themes
L
o
w
Current topics in the Broker world
106
I- Market
Brokers role in Commercial Insurance
Consolidation in the Broker Landscape
Distribution and Future Trends
107
Market Share of Top 5 Companies (%)
S
w
i
t
z
e
r
l
a
n
d
L
u
x
e
m
b
o
u
r
g
Distribution Channels in the UK Insurance Market - iMarket
iMarket is an e -commerce portal which allows brokers to have online access to insurance
products and services in the UK. It facilitates access to13 commercial classes by filling in a
single data capture form.
It has the following key benefits:
- Simple Single sign-on access to a range of insurers to find most competitive quote.
- Quick - Ability to issue policy cover immediately.
- Cost-effective - Reduction in amount of paperwork and administration time.
Currently ten insurers have joined: Allianz, Aviva, AXA, Brit, Fortis, Groupama, MMA, NIG,
Royal & Sun Alliance, Zurich and the underwriting agency iPrism.
Over 3000 brokers have now signed up to iMarket representing around 70% of UK brokers
Three major broker software houses are partners of iMarket - Acturis, Insurecom and
Software Solutions Partners / Sirius. IT has recently been criticised for slow take-up but
has developed common standards in the industry.
The challenge for brokers is to ensure that they are adding value through their advice and
expertise, so that they can clearly differentiate their offering from that of the direct
channel. This is particularly true in the lower end of the market, where products are more
likely to be commoditised, and advice less likely to be needed.
Consolidation in the Broker World
108
Significant
Consolidation
within Broker
Marketplace
Significant
Consolidation
within Broker
Marketplace
Aging Broker Population Aging Broker Population
Increasing Compliance Costs Increasing Compliance Costs
Commodisation of Small Commercial Lines Commodisation of Small Commercial Lines
Current pressure on Broking firms have forced some to sell or merge in the effort
to remain solvent. The following are examples of these trends:
Current pressure on Broking firms have forced some to sell or merge in the effort
to remain solvent. The following are examples of these trends:
Broker networks offer the following to independent insurance brokers: Broker networks offer the following to independent insurance brokers:
Enhanced Commission Rates - Ability to negotiate enhanced commission rates with some of the leading
insurers due to combined buying power
Specialised Products - Brokers have access to a range of specialist insurance products
Virtual Head Office - Benefit from services of in house professionals in Compliance, Marketing, HR, IT
Access to a Larger Panel of Insurers Networks offer Brokers exposure to more insurance companies
Other Lines of Business
109
Distribution in the Health and Life markets Distribution in the Health and Life markets
Health Insurance:
Those intermediaries specialising in general insurance (home, motor, travel), which may or may not include health insurance,
still tend to call themselves insurance brokers
There is a category of professional insurance intermediary specialising in health insurance, known as health insurance
intermediaries or medical insurance intermediaries
Life Insurance:
Those specialising in financial advice (life, pensions, investment) are commonly known as IFAS - independent financial
advisors. Some, but not all, arrange health insurance
Health Insurance:
Those intermediaries specialising in general insurance (home, motor, travel), which may or may not include health insurance,
still tend to call themselves insurance brokers
There is a category of professional insurance intermediary specialising in health insurance, known as health insurance
intermediaries or medical insurance intermediaries
Life Insurance:
Those specialising in financial advice (life, pensions, investment) are commonly known as IFAS - independent financial
advisors. Some, but not all, arrange health insurance
Retail/ Joint Ventures/Affinity/Corporate Partner:
Many retail outlets are now selling insurance: Tesco, Sainsbury, Argos, Homebase. This is to capitalise on their relationship
with their customers and the strength of their brand
Look closely at the small print and it mentions the underwriter: AXA, Norwich Union, UK Insurance
There are various arrangements behind these products
Direct Channel
Buying straight from insurer via internet or phone
Brand strength and marketing spend are key to success in this market e.g. Direct Line, Churchill
Brokers
High street branches, internet and call centres (e.g. Swintons)
Products usually have a wider risk footprint than those sold direct
Broker can add an additional layer of expertise/ understanding of the risk
Retail/ Joint Ventures/Affinity/Corporate Partner:
Many retail outlets are now selling insurance: Tesco, Sainsbury, Argos, Homebase. This is to capitalise on their relationship
with their customers and the strength of their brand
Look closely at the small print and it mentions the underwriter: AXA, Norwich Union, UK Insurance
There are various arrangements behind these products
Direct Channel
Buying straight from insurer via internet or phone
Brand strength and marketing spend are key to success in this market e.g. Direct Line, Churchill
Brokers
High street branches, internet and call centres (e.g. Swintons)
Products usually have a wider risk footprint than those sold direct
Broker can add an additional layer of expertise/ understanding of the risk
Distribution Channels Distribution Channels
Distribution Market - Recap
Brokers continued to dominate the distribution of commercial insurance
National Brokers have lost distribution market share to the direct channel, chain brokers and
Telebrokers.
Brokers are forecast to see a 1% decline in market share by 2011
More than one-third of brokers are currently members of a network, making the
broker network a well-established phenomenon in the market.
The acquisition of the Broker Network by consolidators such as Towergate and the
continuing purchases of brokers by insurers such as AXA, mean that the battle for control of
distribution is warming up. The result will likely see the considerable power of the
broker channel continue to consolidate into the hands of just a few major players.
As broker power grows, insurers are likely to find their premium rate increases
constrained by broker demands for high commission rates as well as strong
competition in the market continuing to postpone the inevitable hardening of rates.
110
What Brokers Value
Service Levels
According to a Datamonitor Survey conducted in 2007 AXA, Norwich Union and RSA have the most
opportunity to improve their broker service levels:
112
Source: Datamonitors Commercial Insurance Broker Survey
H2 2007
Sowhat DO Brokers want?
What Brokers Want - Service
113
Knowledgeable
staff
Timeliness
Accuracy
Ease of doing
business
Drivers Requirements
Experienced teams with local knowledge
Staff to understand the business and have a realistic knowledge of the brokers process and
requirements
Quick Turn around time within the brokers requested timeframe (i.e. documentation for MTAs
and Quotes)
Timely communication; status updates provided on the progress of the Quote
Documentation is right the first time
Underwriter has clarity from the onset around what the particular the particular task entails
Renewal terms to be provided 21 days before inception
Provide deductible options on the quote to save time going back after initial negotiation with
Insured
Urgent response treated as a priority
Provide concise documentation
Consistent level of service across all locations
Offshore staff to have technical insurance knowledge.
What Brokers Want - Channels
114
Flexibility
Access to the correct service/ product offering
Access to underwriters according to complexity level of the request (online systems only used
for very specific/simple cases)
Broker able to transact more business online; Increased service offering for unusual risks
Timeliness
Straightforward end to end process when obtaining online quote
Quick systems for online quoting; user friendly online application forms.
Importance of
personal
contact
Brokers need the access to underwriters to discuss the specifics of more complex accounts.
Interpersonal contact is necessary in order to address the needs of the client
Incoming calls should be answered within the first several rings
What Brokers Want - Communication
115
Relationships
Stability within the senior management
Individual staff that are handling a specific line of business in a specific location need to
understand the impact their work has on the overall client and broker relationship
Brokers able to maintain long term relationships with underwriters
Local
representative
responsive
Incoming calls answered within several rings
Local teams to provide highest level of service at all times
Knowledge
Share across
Branches/
Departments
As the first point of contact, the Business Development Manager needs to know who to
contact to have issues resolved
Frequent and effective communication within the various business units; Full client records
and broker background available to every underwriter across all locations
Each individual to have a strong understanding of roles and responsibilities that are handled in
each area/ location
Insurance 101 Life and Pensions.
Life and Pensions - Overview
History
An industry based on mortality and illness where did it come from?
117
The first recorded form of Life Insurance is evident in ancient Rome. Wealthy individuals got together to
form burial clubs. These provided lavish funerals and money for dependent families in the event of the
death of a member
Bet your Life?
In the 1700s gambling on lives was a popular pastime in the UK
Modern Life Insurance is linked to the Gambling Act of 1774 - The Act banned the purchase of insurance
on lives in which the policyholder did not have a real and documented financial interest
The Act legitimised the industry and stimulated the development of the science behind it
What is Life Insurance?
Life insurance is a contract between the policy owner and the insurer, where the insurer
agrees to pay a sum of money upon the occurrence of the insured individual's or
individuals' insured event. In return the policy owner agrees to pay a premium
To be a life policy the insured event must be based upon the lives of the people named in
the policy. Insured events that may be covered include:
Serious Illness
Death
Retirement
Life policies are legal contracts and the terms of the contract describe the limitations of the
insured events. Specific exclusions are often written into the contract to limit the liability
of the insurer; for example claims relating to suicide, fraud, war, riot and civil
commotion
Life-based contracts tend to fall into two major categories:
Protection Policies - designed to provide a benefit in the event of specified event,
typically a lump sum payment
Investment Policies - where the main objective is to facilitate the growth of capital by
regular or single premiums
118
Product Characteristics
The key three characteristics of life products are;
119
Protection
Income
Saving
Life assurance and Life insurance are used interchangeably
Key differences between life insurance and other products:
Long-term business
Amount and timing of payments are uncertain
Uneven pattern of profits, with frequent capital strains at issue
Total profits not known until end of contract
The profits are recognised in any year depending on estimates of future performance
and statutory reserving requirements and GAAP applied
Actuarial reserving - for the above reasons. Need to be prudent and recognise a
future potential liability and not take all of the profit relating to written business up front
120
Key Features
Life Insurance Distribution
Life Insurance is predominantly sold
through IFAs with whole of market scope
Only 6% of Life Insurance is sold direct
121
Who Sells Life Products and How they are Distributed
Premiums of 131 billion in 2008, a 29% decrease over
2007
Life premiums decreased by 27% and pension
premiums by 30%
Payments to policyholders in 2008 amounted to 181
billion, a 6% increase on 2007. This includes:
Around 87 billion or 239 million per day
paid out in benefits to pensioners and long-term
savers, or in death and disability benefits
Around 93 billion of transfers of pension funds
to other insurers or pension fund managers
.
122
The UK Life Market
Claims by insurance type 1998 - 2008
Premium by insurance type 1998 - 2008
What products are sold
in Life Insurance?
124
Term Insurance - a policy under which the benefit is paid on occurrence of the insured event during the
term of the policy e.g. death, critical illness, income protection
Whole of Life - a policy under which the benefit is paid, in full or in part, on the insured event (e.g. death)
or early surrender e.g. single premium bond
Endowment - a policy under which the benefit is paid in full or in part on survival to specified date or prior
death or prior surrender - e.g. mortgage endowment, personal pension
Individual personal pensions
Group personal pensions
Annuity - a policy under which income is paid during the lifetime of the insured and / or beneficiary (e.g.
spouse)
Effectively only 4 products
Life and Pensions - Products
Surpluses, bonuses and payouts
The life insurer has a responsibility to
invest the policyholders premiums
responsibly
Every year there is an actuarial valuation
resulting in a surplus or deficit
Surpluses may be distributed either to
shareholders or policyholders
A successful life assurer will have:
High sales
High margin business
Better than expected mortality
experience
Low expenditure from an efficiently
run organisation
High investment returns
126
Life and Pensions - Surpluses, Bonuses and Payouts
Surpluses
How do Surpluses Arise?
When annual actuarial valuation takes place, assess whether the company needs higher/lower
technical provision. This can result in a surplus or deficit
Only participating vehicles can give policyholders share of surplus distributions
Participating Non participating
With-profit Non-profit
Unitised with-profit Unit-linked
There are 4 different investment vehicles:
How are Surpluses Distributed?
Unit Linked
Premiums can vary and are credited to linked funds belonging to policyholders
Benefits are linked to a specific block of assets (e.g. shares)
Surrender and maturity claims are met from linked funds
Death claims are met partly from linked funds and partly by the company
Investment income and gains accrue to the policyholder
127
Advantages of a Unit linked policy
Flexibility
Investment risk borne by policyholder
Transparent (?) charges
Minimal capital requirement
With Profit
Unitised With Profit
Life assurers may also offer unitised with profit funds
Policyholders may benefit from any surplus relating to the unit linked funds
Restrictions apply to surplus distributions to shareholders
The investor buys units in the with profits fund
Conventional with-profits
Payout determined by sum assured plus cumulative bonuses
Return on policy determined by relationship of this to premiums paid
oMedia emphasis on bonus rates
128
New business is mainly in unitised with profits funds (over 95%).
Current trends in the Life Insurance
market
130
fragmented legacy environments
fragmented legacy environments
Growing demands of regulation e.g.
(Solvency II) increasingly
requiring major investment
Growing demands of regulation e.g.
(Solvency II) increasingly
requiring major investment
Changing product mix Changing product mix
Ongoing industry consolidation and
M&A
Ongoing industry consolidation and
M&A
Pensions Reform National
Employee Saving Trust (NEST)
Pensions Reform National
Employee Saving Trust (NEST)
The Life Insurance marketplace is increasingly competitive. Flexibility and responsiveness will be the key
imperatives for life and pension insurers going forward
Requirements for
flexibility
and
responsiveness
Life and Pensions - Trends
Current Hot Topics
Major Finance Transformation
(Prudential - 100m)
Major Finance Transformation
(Prudential - 100m)
Insurance 101 Finance.
Introduction
132
This section of the course aims to provide an overview of insurance finance and some of the key regulations that insurance
companies must adhere to.
How an insurance company makes
money
Reporting Performance & Analysis
IFRS 4 How Finance can be enhanced
How an Insurance Company
Makes Money
Recap: How insurance companies make money
Referring the above diagram there are a main components of financial management for an insurer:
Strategy and Planning
Reporting financial performance
Managing reserves and cash
Managing risk and ensuring regulatory compliance
134
Premium
Underwriting Expenses
(operations, commissions
etc.)
Losses
(paid and reserves, loss
adjustment expenses)
Underwriting
profit/loss
Profit/Loss
+
-
=
+
Investment
Income
=
A Insurance Finance Framework
The pyramid below summarises the key components of what a Finance function can deliver to manage the
finances of an insurer:
135
Planning, budgeting & forecasting
Risk & compliance policy and procedures
Capital & investment planning
Investment transactions
Claims payments and non-claims expenses
Premium processing and collections
Premium income and claims ratio reporting
Sales and expenses reporting
Investment and tax reporting
External and statutory reporting
Strategy
Reporting
Transactional
Processing
Reporting Performance &
Financial Analysis
Managing Assets and Liabilities Balance Sheet
The balance sheet, or statement of financial position, is a summary of an organisation's assets,
liabilities, and ownership equity on a specific date, such as the end of its financial year.
An example insurance balance sheet:
Description Co A
(000)
Co B
(000)
FT Investments 10222 2646
ST Investments 774 321
Premiums receivable 2501 310
RI recoverable 406 -
Cash 6 35
Property and Equipment 133 47
Total Assets 14042 3359
Unearned Premiums 6000 1500
Loss expenses not yet paid and
IBNR
4000 500
Loans 130 10
A/cs payable 150 30
Total Liabilities 10280 2040
Shareholder Equity 3762 1319
Total Liabilities SH Equity 14042 3359
137
There are important considerations to review on this
balance sheet and more information will be needed to
review:
1. What is the nature of ,and what are the market
forecasts for, the lines of business written by these
insurers?
2. Are insurance prices too risky in the longer term?
3. Is IBNR and reserving too optimistic?
4. Overall, what is the performance of this company
over time and is Shareholder value growing and going
to continue to grow?
Managing Profit Income statement
The Profit and Loss Statement (P&L), also known as
the Income Statement, is a financial
statement for companies that indicates how
revenue is transformed into net income. The
purpose of the income statement is to show
managers and investors whether the company
made or lost money during the period being
reported.
Income statements help investors and creditors
determine the past performance of the enterprise,
predict future performance, and assess the
capability of generating future cash flows.
138
2008
Note m
Income 5
Gross written premiums 36,206
Premiums ceded to reinsurers -1,841
Premiums written net of reinsurance 34,365
Net change in provision for unearned premiums 277
Net earned premiums G 34,642
Fee and commission income H & I 1,885
Net investment (expense)/income J -16,043
Share of loss after tax of joint ventures and associates -1,128
Profit on the disposal of subsidiaries and associates 7
19,363
Expenses 6
Claims and benefits paid, net of recoveries from reinsurers -29,353
Change in insurance liabilities, net of reinsurance 3,885
Change in investment contract provisions 10,629
Change in unallocated divisible surplus 4,482
Fee and commission expense -4,411
Other expenses -5,416
Finance costs 7 -1,547
-21,731
(Loss)/profit before tax -2,368
Overall example:
Linking the balance sheet to the income statement: ABC Ltd used its
$1.7 billion in equity as capacity to write approximately $2 billion in
premiums, of which it earned $1.95 billion in the current year.
Of that $1.95 billion in premiums earned, ABC Ltd incurred
approximately $1.96 billion in losses (for claims and claims expenses) and
operational expenses.
For every $1 in premiums, ABC Ltd estimated it will ultimately pay out
about $1.01 in losses and expenses -- resulting in a 1% loss per dollar of
premium written.
ABC Ltd paid interest on its $850 million in debt, but earned investment
income on its $6.2 billion investment portfolio.
Overall ABC Ltd made about $186 million in pre-tax income which could
be transferred back into Shareholder Value impacting the balance sheet).
Example: Aviva Group plc year ending 2008:
Financial Analysis
There are several key metrics and techniques used to analyse an insurers results
Key balances can be broadly split into those that can be found on the Balance Sheet and those in the P&L:
In addition there are less common balances such as unexpired risk reserves and equalisation reserves.
Life insurance companies will also disclose their Present Value of In Force Business (PVIF)
Balance Sheet
Incurred but Not Reported - Claims arising from
events which have occurred by the end of the
accounting period but have not been reported
to the enterprise at that date.
Outstanding Claims Reserve - Reserve held by
an insurer to meet claims notified but not yet
paid.
Deferred Acquisition Costs - the deferred cost
of acquiring policies
Unearned Premium Reserve - the fund set
aside at the end of the financial year out of
premiums in respect of risks to be borne by the
company after the end of that year, under
contracts of insurance entered into before the
end of that year.
Profit & Loss
Gross Written Premium - premium received for
policies commencing in a period.
Claims Paid - The amount paid by the insurer
under a contract of insurance arising from the
occurrence of an insured event, such as loss or
damage to property.
Claims handling expenses Expenses
incurred in the settlement of claims which
cannot be allocated to specific claims.
Key Ratios
There are several key ratios useful for analysing an Insurers business:
Loss Ratio
Expense Ratio
Acquisition Cost
Ratio
Calculation: Total Expenses / Net Earned Premium
Analysis: A measure of efficency within an Insurance company. A key
determinant is how much it costs to handle claims.
Combined Ratio
Calculation: Total Claims Incurred / Net Earned Premium
Analysis: Shows the profitability of the core underwriting business. In
other words whether the company is selling profitable policies.
Calculation: Total Expenses / Net Earned Premium
Analysis: Resprents the efficiency of an Insurance companys sales force
/ distribution network.
Calculation: Loss Ratio + Expense Ratio + Aq Cost Ratio
Analysis: This measures the overall profitability of the insurance company
without investment income. A ratio of over 100% means that the company
is not profitable. However this may be outweighed by investment income
earned on the capital held.
IFRS 4
Phase I & II
International Financial Reporting Standards (IFRS) are developed by the International
Accounting Standards Board (IASB) and are becoming the global standard for the
preparation of public company financial statements;
The objective of this project is to develop an IFRS on accounting for insurance contracts
that addresses accounting for both insurers and policyholders;
Currently different regions report performance under separate frameworks, meaning the
same company could report a loss under IFRS, but a profit under US accounting
standards;
A common standard will remove some of the subjectivity and allow greater
transparency, which will in turn lower the cost of capital for potential investors;
In addition it will aid governments multinational companies receiving income from
overseas.
Objectives of IFRS for Insurance Contracts
Phase I (IFRS 4)
Definition of an insurance contract
Disclosures
Restrictions on changing accounting
policies and use of existing GAAP
Accounting by both
insurers and
policyholders
Recognition and de-
recognition
Measurement
Presentation
Phase II
Phase II timeline
Discussion Paper
Exposure
draft
Final
standard
Implementation
(earliest)
Publication
End of
comment
period
May 2007
November
2007
Sept 2009? Sept 2010
(+12 months)
2012 / 2013
Key Features of Proposed Model
Single measurement
model
Life, non-life insurance,
reinsurance
pre claim and post claim
stages
Prospective valuation
Valuation of insurance
contract
=
Probability Weighted
PV(all expected CFs)
The current exit value =
market-consistent current
value
The amount the insurer
would expect to pay to
another entity if it
transferred all its
remaining obligations
and contractual rights.
Current exit value is not intended to imply that the insurer can, will, or should transfer the
liability to a third party.
Purpose is to provide useful and cost-effective information that will help users to make
economic decisions.
Business Implications for the Insurance Industry
Implementing
IFRS 4,
Phase II
Implementing
IFRS 4,
Phase II
Need to review impacts on:
Product pricing and design Product pricing and design
External reporting, disclosures
and financial communication
External reporting, disclosures
and financial communication
Training Training
Management reporting and
budgetting
Management reporting and
budgetting
Capital
management and
link to Solvency II
Capital
management and
link to Solvency II
Asset and liability matching Asset and liability matching
Tax planning Tax planning
IT-systems, models, processes
and internal controls
IT-systems, models, processes
and internal controls
Debt Covernants Debt Covernants Mergers & Acquisitions Mergers & Acquisitions
Finance Enhanced
How strategy and reporting can be enhanced
Deloitte is the market leader in providing enterprise finance transformation. Reporting is a key aspect of
Finance and typically Consulting can work with the wider Firm to help insurers:
Key areas for improvement Key improvement drivers
Improve the financial planning process
-Early engagement with senior management.
-Full integrated and clear planning timetable with process owners.
Improve the quality and relevance of reporting
-Value add analysis to identify the actual information and data
requirements of reports.
-Moving low skilled tasks away from higher skills staff (e.g.
accountants and actuaries) can provide the high skilled staff with
more time and capacity for the value add activities such as analysis
and commentary review.
Reduce the time to report
- Critical path analysis to reduce waste and parallel process where
possible.
Enhance the control and reduce the associated
risk of reporting
- Definition of key control points.
- Outline a clear risk management strategy and policy for risk
managers and establish a 3 lines of defence model.
Reduce the overall cost of reporting
-Automation and reduction of waste reduces demand of FTE time.
-Moving low skilled tasks away from higher skills staff (e.g. moving
data reconciliation away from senior accountants and actuaries) can
reduce the cost of the same activity (arbitrage savings).
147
Managing Cash Insurance Collections
148
Many of our Financial Services clients are experiencing similar issues within Collections, including General and Life Insurance
companies.
Common themes we are encountering include:
High servicing and processing waste caused by upstream failure demand;
Premium income leaking out of organisations;
And, as the economy tightens, cash flow and aged debt performance is worsening.

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Indicative Insurance Collections Value-chain
Policy and
instalment set-up
Collect
scheduled
payment
Default and
Collections
Strategy
Write-off and Debt
Recovery
Queries, MI and
data management
Policy and
instalment set-up
Issue
statement
Broker query
and resolution
Payment receipt Queries, MI and
data management
Receive
bordereau
Block write-off and
Debt Recovery
How managing cash can be improved
149
The premise of our offering is to improve Collection performance (effectiveness) whilst also reducing the cost of
administering the operation (efficiency) through the optimisation of processes, and the appropriate utilisation of technology,
all within an optimal organisational framework. Across this value chain a number of best practices can be deployed, of which
some of the relevant considerations have been outlined below:

Example Insurance
Collections best
practice
considerations
Operating
Capabilities
An operating model must
deliver the various required
capabilities of: relationship
management, credit control,
servicing and administration
Operating
Capabilities
An operating model must
deliver the various required
capabilities of: relationship
management, credit control,
servicing and administration
Standardisation
Standardisation and
automation of processes
where appropriate not due
to system, product or
distribution
Standardisation
Standardisation and
automation of processes
where appropriate not due
to system, product or
distribution
Self Service &
Technology
Self-service and Point of
Sale payment increase
levels of automation and
SMS and auto-calls can
increase effectiveness
Self Service &
Technology
Self-service and Point of
Sale payment increase
levels of automation and
SMS and auto-calls can
increase effectiveness
Firm but Fair
A clear, fair but firm set of
rules that are consistently
applied to defaulting
customers drives
effectiveness and treats
customers fairly
Firm but Fair
A clear, fair but firm set of
rules that are consistently
applied to defaulting
customers drives
effectiveness and treats
customers fairly
Risk Based
Collections
Prioritising activity based on
differing risk and value
profiles of both direct and
commercial customers is
both efficient and effective
Risk Based
Collections
Prioritising activity based on
differing risk and value
profiles of both direct and
commercial customers is
both efficient and effective
System integration
Effective interfaces between
self-service, accounting
systems and policy systems
is essential to reduce
administration costs (such
as reconciliations) and
operational risk
System integration
Effective interfaces between
self-service, accounting
systems and policy systems
is essential to reduce
administration costs (such
as reconciliations) and
operational risk
Performance
monitoring
Operational performance
measurement of Brokers,
Corporate Partners and Direct
customers should include
payment and reporting as well
as GWP income provision
Performance
monitoring
Operational performance
measurement of Brokers,
Corporate Partners and Direct
customers should include
payment and reporting as well
as GWP income provision
Predictive Analytics
Risk based pricing and risk
based collections all rely on a
analytics engine to help predict
customer behaviour and hence
inform and improve decision
making
Predictive Analytics
Risk based pricing and risk
based collections all rely on a
analytics engine to help predict
customer behaviour and hence
inform and improve decision
making
150
Example of Finance Transformation
The client was planning to fundamentally change the nature, character, and performance of its
Finance function and the way it serves its customers over the next three years..
Objectives:
Radically reduce reporting cycle times
Develop deep capability in business partnering and strategic business insight
Re-engineer processes to create clearer accountability, reduce duplication and drive
efficiency and effectiveness improvements
Significantly simplify very complex data feeds and so reduce complexity in Prophet
modelling and reducing reconciliation effort
Restructure the organisation to facilitate service quality improvement and cost reductions
Create an inspirational finance leadership team that actively engages with its people,
prioritises people development and customer service
What is the Ambition Performance Dimensions
Speed and Flexibility of Reporting
Quality of Controls and Data
Cost Efficiency
Finance Effectiveness
Climate
Deloitte was asked to structure a transformation that would achieve the clients desired outcomes over the next 2 years,
segmented across 5 performance dimensions.
151
Finance Transformation Programme
We have had over 120 Deloitte people running in 4 work streams over 2 years delivering huge benefits to a large Life
Insurers Finance function.
Reduced Op Ex Cost
Improved quality of Finance output
Increased capacity & output of current
resources
Improved timeliness of key processes
Enhanced control across key processes
Clearly defined end-to-end processes
Standardised output & production
Elimination of duplication
Minimised handoffs
Parallel processing
Efficient & optimal levels of control &
authorisation
Resource skill-set aligned to activities
Lean was applied to the end-to-end External reporting
process of a Life Insurer to reduce the time to report by 15
calendar days. Inefficiency and waste was identified across
the critical path. In turn, over-engineered output was
reduced by understanding the detailed requirements across
the critical path, and parallel processing was utilised, where
appropriate. An example Life Insurance reporting critical
path is depicted below:
A Delivery Example Overall Outcomes
Contract Certainty
Market Reform and Contract Certainty:
Certainty over underwriting exposures for Insurers
Certainty of terms of coverage for Insureds
Wording agreed at or prior to inception of cover ("i") and policies issued promptly
thereafter ("i + # days")
Policies which comply with local requirements (fiscal, regulatory)
Recording of what has been disclosed during policy negotiation
The key to ensuring contract certainty lies in:
Standardisation of process delivered by technology
Standardisation of behaviour delivered by management, measurement and
incentives
A record and audit trail of disclosures by insureds
Customers acting as drivers for change
The difficulties with contract certainty are more acute in the subscription market,
but are also present in the non-subscription market as well.
*Underwriters and Brokers are primarily responsible for ensuring contract
certainty
152
What do Actuaries Do?
154
The task of actuaries is actually very simple!
Policyholder
Insurance
company
Policyholder pays premium to
insurance company
premium
claims
Insurance company will hold
on to the premium for a while,
and eventually pay some of it
back in the form of claims
Investments
Insurance company will also
need to pay dividend to the
shareholders
Because there is a timing
difference between receiving
premiums and paying out
claims, the insurance
company can invest capital
and receive an investment
income
Actuaries are
concerned with
managing the
interplay between
these cash flows
155
Actuarial calculations
Pricing
Insurance premium
Reserving
IFRS or FSA reserves
Capital
ICA, RBC and Solvency II
Valuation
Embedded Value
What premium should the insurance company charge for the contract, to
ensure that obligations to the policyholder can be met and that the
insurance company can make a profit?
How much of the received premium does the insurance company need to
set aside to be able to pay future claims on the insurance contracts?
How much capital does the insurance company need to hold to be able to
weather adverse years, e.g. bad claim experience or negative financial
results?
What is the shareholders net present value over the policies full lifetime of
the insurance business that the insurer currently has on the books?
156
Aspects of actuarial calculations
Data
Assumptions
Models
Results
Data for actuarial calculations must be captured from policy administration
systems. Getting sufficiently granular information, incl historical
information, can present a challenge
The actuary needs to set assumptions for future experience, e.g.
expected future claims patterns, future expenses or future investment
returns. Often, it can be difficult to get sufficient data to support the
assumptions
The calculations are performed in actuarial models, which can be very
complex to build and maintain. Often different models are built to cope
with different business lines
Explaining the actuarial results provides key insights to understanding the
written business.
Conclusion
157
Summary
In summary, this part of the course has looked at the following elements of insurance:
Premium Development
Product Development
The Underwriting Process:
- Gather Information
- Evaluate
- Quote Proposal
- Issue Policy
- Collect Premium
Brokers and Agents
Actuaries
Conclusion
158
Summary
In summary, this part of the course has looked at the following elements of life insurance:
Market overview
4 main life insurance products
Term Insurance
Whole of Life
Endowments
Annuity
With profit, non profit, surpluses, profit sharing, unit linked, unitised with profit
Current life insurance trends
Example life insurance projects
Insurance 101 Underwriting
and Actuarial.
Introduction
160
This section of the course aims to provide an overview of underwriting, .
Over the next hour or so we will aim to provide and understanding of:
Underwriting and Product
Development
Premium Calculation
What does an Underwriter Do? What do Actuaries Do?
The Underwriting Process
Underwriting & Product Development
An underwriter works for an insurance company and is charged with analysing a new
piece of business and with making decisions that will, in the long run, provide the
company with a profit.
Underwriting is the process by which an insurer assesses the acceptability and the
transfer value of a risk for a price to be paid by the insured
The aim is to charge a price that is commensurate to the exposure.
The underwriter is an individual, who acts on behalf of the insurer
After consideration of the facts presented, the underwriter offers terms of insurance
if these are accepted, the underwriter accepts the risk in exchange for a premium
161
An underwriters job can be broken into two main areas risk evaluation and risk pricing
162
Risk evaluation
Different classes have different risks that need to
be taken into account, so underwriters must be
experienced in their area
They need to evaluate whether they can write the
risk based on some of the following factors before
assessing the conditions they are prepared to
offer:
Type of Risk
Quality of Risk
Location of Risk
Occupation and operation of the risk
Exposure to Loss
Claims Record
Producer of the business
Risk pricing
The underwriter needs to decide whether the
premium (i.e. net line) being offered for the risk
will be sufficient to make a profit, once the loss
exposure and cost of administration is taken
into account
Factors that are assessed include:
Sum of insurance cover being requested
Premium being charged for similar risks
Loss experience on similar risks, in recent
years
Any unacceptable parts of the risk that
cannot be insured
What price/rate is being suggested by the
rating model
Exposure the underwriter already has on
the class of business or location of the risk
The underwriters job is very different for packaged products and bespoke products
163
Packaged Products
Probably never meet the policy holder
The underwriter set the rules for risk acceptance
If you get the rules wrong you can get it very wrong
indeed
Focused on getting the algorithm and pricing
factors correct
The market will quickly find the imperfections in
your underwriting
A lot of science
A lot of data
Bespoke Products
Often relationship driven
The underwriter will accept the individual risk
Relies on judgement and experience
Focused on assessing the exposure
Sometimes very little data
More art than science
Example
Off the shelf package policy (covering property and
liability) for a small family run sundries store business
Example-
Kidnap and Ransom policy tailored specifically for a high
flying business executive doing business in South
America
Premium Calculation
The premium needs to reflect the underlying risk being brought to the pool, but must also provide for the
insurers operating expenses, the Insurers profit and some provision for larger than anticipated
claims
Premiums are normally arrived at by the application of a premium rate to a premium base
The rate should reflect the hazard associated with the risk and the insured, and can be expressed
per hundred pounds of risk insured (rate per cent)
The base should be a measure of the exposure such as the sum insured
Premium is therefore calculated as follows:
The rate is calculated from historical claims statistics compared with total values insured
The law of large numbers allows the insurer to make accurate assessments of the likely losses
The insurer charges the gross premium to the insured
Includes the amount to be paid to the broker (brokerage), usually a percentage of the gross premium
The premium remaining after the brokerage and other deductions is the net premium
Some premiums may be adjusted, if contributing figures are unknown initially
Premiums may also be subject to tax that applies in the insureds domiciled country
164
Premium = sum insured x rate per cent
Losses (actual claims made)
Values-at-risk
X 100 = Rate per cent
Example of a Rating Worksheet
165
An underwriter may use a pricing tool, such as the example below to analyse the different components
of a risk and come up with a premium.
What is the underwriting
process?
Underwriting Process Steps
The first step in the underwriting selection process is to gather information that is needed in
rating and evaluating the risk. This information can include specifics about both the
prospective insured or customer as well as information about what is being insured.
For a motor insurance policy, the following are examples of information would be
collected:
- Age
- Gender
- Driving history
- Type of vehicle
- Vehicle features
167
Gather Information Gather Information
Issue Policy Issue Policy
Quote
Proposal
Quote
Proposal
Evaluate Evaluate
Collect
Premium
Collect
Premium
168
Underwriting - will the risk be profitable?
Actuarial what is the risk category for this
class of business?
Once this information is gathered, the underwriter evaluates the risk to determine if it will be profitable. The
purpose of evaluating a risk is to ensure the companys financial stability is not put in jeopardy. This is
where the underwriter may need to interface with the actuaries in determining insurance rates.
The goal is to select risks that will both have average or better than average loss experience than is
allowed for in the rating structure this ensures profitability
Quote
Proposal
Quote
Proposal
Evaluate Evaluate
Collect
Premium
Collect
Premium
169
If the risk is acceptable, the underwriter prepares a quote or proposal for the customer. The rates are
developed based on risk information. This can include information such as the following:
For Commercial risks:
Construction type (Wood vs. Concrete)
Location (Wind, Flood, Earthquake zones)
Number of Employees and type of work
For Personal risks:
Driving Record
Location of Home
A formal proposal will contain detailed information on the pricing of the policy, the limits, specific
coverage, and any exclusions provided by the policy.
At this point, the customer decides whether or not to accept the insurance at the quoted price. If the price
is unacceptable, it may be negotiated.
Quote
Proposal
Quote
Proposal
Evaluate Evaluate
Collect
Premium
Collect
Premium
170
Once the customer accepts the quote, the policy is issued. If a broker or other intermediary is involved,
they will normally issue policy documentation or certificates of insurance on behalf of the insurers.
Insurance policies are generally composed of standard forms which detailed the agreed coverage. These
forms are usually issued using the companys policy administration system.
Certificate of Insurance is issued to detail the basic coverage, and also serves as evidence of insurance
(third party liability motor insurance is compulsory in all European countries).
Cover Note is similar to a Certificate of Insurance, the Cover Note provides evidence of insurance and
also the basic details of the risk and terms & conditions.
Ensuring that the exact cover is agreed and documented before the policy inception is a key issue in policy
administration called Contract Certainty. Most of the insurance industry has agreed to abide by the FSA
code from October 2005. The code also has service standards for issuing insurance documents in a
reasonable time.
Quote
Proposal
Quote
Proposal
Evaluate Evaluate
Collect
Premium
Collect
Premium
171
Quote
Proposal
Quote
Proposal
Evaluate Evaluate
Collect
Premium
Collect
Premium
Underwriting Risk Assessment
Policy administration - Billing and chasing of premium
Accounting - Ledger accounting & premium chasing in conjunction with
policy administration
The last step in the process is to issue a collect the premium due. First a bill or a premium invoice has to
be issued.
Two types of billing are direct bill and agency bill:
Direct billing (usually most common in personal lines and life insurance and in the smaller commercial
accounts) - the bill is sent directly from the insurance company to the insured and the payment is sent
directly to the insurance company.
Agency billing (more common in commercial lines) - the agent or broker bills the insured, collects from
the insured and then pays the insurance company.
Underwriting Process
High Level Process Flow
172
Collate Client
Requirements
Quote Firm Order
Placement, inc.
Issuing Invoice
& Cover Summary / Register
Request for
Quote /
to renew
Policy
Documentation
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Responding to Client Needs
Inception Date
Insurance Best Practice:
Confirm Order to Insurer
Confirm Placement to Client
Contract
Certainty
Prior to Inception
Date!
Underwriting Decision Making Factors
173
Property Liability
Age of building
Condition and use of building
Protection Class
Security
Fire protection
Construction Type
Class (Mercantile, Manufacturing, Office, etc.)
What does the Insured do?
Who else is covered by the policy?
Who uses the Insureds product?
Where is the product used?
Financial losses
How long has the Insured been in business?
Underwriters rely on brokers to provide them with underwriting information.
This data comes in the form of a submission
Better data = more accurate pricing!
Predictive modelling Improved Technology for Price Calculations
1.3 0.75 1 1 2009
1.3 0.75 1 1 2009
1.3 0.75 1 1 2009
A B C D Technical Premium =
x x x
1 1 1 1 2008
1.2 0.8 1 1 2009
1.3 0.75 1 1 2010
External
Data
With Predictive Modelling
Internal data is combined with external data, and both are analysed to identify previously unrecognised relationships and
to find new data fields that don't exist in raw form. For example, high concentration of litigation lawyers in some
geographic areas aligns to both increased litigation risk and generally higher claims costs for routine claims because people
are more educated on claims submissions that may not result in just litigation.
This significantly speeds up the process of updating relativities:
Internal
Data
+
A B C D
=
x x x
Without Predictive Modelling
Rate relativities are based mostly on
internal data and are reliant on
currently identified data relationships.
Pricing changes are reliant on claims
and risk data being generated before
actuarially derived relativities can be
applied.
1.4 0.8 1 1 2008
1.4 0.8 1 1 2009
Accuracy is
Improved
Over Time
It takes significantly
less time to derive
accurate relativities
174
Product Development Strategies
Strategy Action Example
Product Market
Specialisation
One type of insurance for one
type of customer
Life insurance for a fraternal
organization: Association of
Lithuanian Workers
Product
Specialisation
One type of insurance for
various types of customers
Homeowners insurance to any
homeowner: Southern Michigan
Mutual Insurance Company
Market
Specialisation
Various types of insurance for
one type of customer
Auto, property and liability insurance
for farmers: Farmers Union Co-Op
Ins Co of Nebraska
Selective
Specialisation
Various types of insurance to
several specific markets
Business owners packages to schools,
churches, small retailers: Hastings
Mutual Ins Co
Multi-Product,
Multi-Market
Most types of insurance to a
large market
All property and casualty lines to a
national market: AIG
175
Day in the Life of
A Property Underwriter
8:30: Check messages and emails
Joe from Average Joe Brokers chasing for two 1/6
quotes
Jane from Big Shot Premium Brokers called about a new
business opportunity and wants to catch up over lunch
Two small new business submissions are in from a
Teeny Tots Brokers (specialising in schools)
9:30: Broker Management
Call Jane from Big Shots to confirm lunch and get the
new accounts details
Call Average Joes, negotiate higher rate for Account 1
renewal due to poor loss ratio, agree to decrease
premium for new business because Insured is not
including earthquake cover
Agree to finalise and send quotes out by COB
10:30: Account Admin
Meet with Underwriting Assistant, request that account
from Big Shots is logged into system
Check on status of other new submissions
Answer queries regarding coverage details for issuance
of bound accounts
12:30: Lunch with Jane from Big Shots
Discuss new deal. Agree with Jane that this is a large
risk that will need referral, however, it is within the
risk appetite of the company
2:00: Risk Analysis
Discuss new risk with manager: Large portfolio of
property (30 locations, Total Values = 30M)
Minimal Flood Exposure, Construction is all Reinforced
Steel
Manager agrees to continue, will need sign off from
home office
Continue with detailed risk analysis, prepare write up
and send to home office with business case
4:30: Team Meeting
Discuss new business for the month, renewal retention,
and monthly targets for the team
5:00:
Send out quotes for Average Joes accounts
Review Teeny Tots accounts, discern that this is too
small for the property department (under 5,000) and
politely decline the risks
176
Who is an agent or a broker?
Agent - individual who sells and services insurance policies in either of
two classifications:
177
1. Independent agent represents at least two insurance companies
and (at least in theory) services clients by searching the market for the
most advantageous price for the most coverage. The agent's
commission is a percentage of each premium paid and includes a
fee for servicing the insured's policy
2. Direct or career agent represents only one company and sells
only its policies. This agent is paid on a commission basis in much the
same manner as the independent agent.
Insurance Scandal Creative Quoting
Brokers would manipulate quotes from insurers in order to steer their
clients towards particular insurers who were paying those brokers
so-called "contingent commissions" behind the scenes
These brokers and insurers acted to give the illusion that the broker
was shopping the clients' business to obtain the best deal for the
client
In fact they were not--they were colluding to produce inflated
proposals to make the clients think that the insurer recommended
by the broker was offering the lowest price
The insurer was paying the broker, behind the scenes, commissions
that provided the incentive for this deceptive practice
178
Insurance 101 Claims.
Introduction
180
This section of the course aims to provide an overview of claims management, looking at the how insurance
companies process claims and what is best practice.
Claim management objectives
and the drivers of a good claims
management service
The common challenges facing
claims management functions
and solution options
What best practice claims
management looks like
How Deloitte approach claims
transformation programmes
How insurance companies
process claims
Sad but True Real Insurance Claim Statements
181
The pedestrian ran for the
pavement, but I got him."
I started to slow down but the
traffic was more stationary than I
thought."
I was going at about 70 or 80
mph when my girlfriend reached
over and grabbed my testicles so
I lost control.
An invisible car came out of
nowhere, struck my car and then
vanished.
I was on my way to the doctor
with rear end trouble when my
universal joint gave way causing
me to have an accident.
In an attempt to kill a fly, I drove into a
telephone pole.
Why is claims management important?
A Claim is The Moment of Truth
Whether we like it or not:
Accidents happen,
Catastrophes & weather related events occur,
resulting in
Damages to persons and property.
Claims occur infrequently, but can be
quite severe.
May be the only contact an insured has
with the agent/company over an
extended timeframe.
Claims service is the moment of truth; key
influencer of retention.
183
Earned Premium
20%
55%
25%
Surplus Premium
Claims Paid
Claims Expense
At least 80% of every earned premium
pound is impacted by the claims organisation,
in the form of:
Payment & settlement of claims
Claims Adjusting Expenses
Service to the insured and claimant
Claims Management Objectives
Optimise Claim Outcomes
Pay the right amount
Pay at the right time
Minimise costs to handle
Efficient processes and operations
Best use of people
Maintain discipline
Reserve accuracy and consistency
Compliance
Maintain value proposition
Meet the needs of customers and Agents
184
Service
Indemnity
Expense
Balanced
Management
Claims Vision & Building Blocks
Our experience indicates that:
An insurers core philosophies and
strategies are the basis for
developing a claims vision
Claim process, technology and
organisation must be evaluated in
the context of the overall claims
vision / strategy
Process is the primary driver of
claims performance
Technology and Organisation are
enablers of the claim process
185
Process, technology & organisational are designed to underpin
an overall claims vision.
Process, technology & organisational are designed to underpin
an overall claims vision.
Claims
Technology
Claims
Technology
Claims
Organisation
Claims
Organisation
Claims Vision Claims Vision
Claims Process Claims Process
Corporate Philosophy & Strategy
Claims Philosophy & Strategies
A clear claims vision is critical to any claims transformation project and
provides the foundation on which process, technology and organisation
are applied.
The following simplified example illustrates four companies with differing
philosophies and suggests a possible claims vision for each.
186
Consider claim service as a differentiator in
retention and focus on insured satisfaction.
Consider claim service as a differentiator in
retention and focus on insured satisfaction.
Direct focused; retention is key to success. Direct focused; retention is key to success.
Company
Provide claims service that meets industry
standard and leverages agents in the claims
process.
Provide claims service that meets industry
standard and leverages agents in the claims
process.
Agency focused; service the agent. Agency focused; service the agent.
Focus on efficiency and accelerating claim
process to closure.
Focus on efficiency and accelerating claim
process to closure.
Speed of resolution is key no claim gets
cheaper with time.
Speed of resolution is key no claim gets
cheaper with time.
Focused on efficiency and effective cost
containment.
Focused on efficiency and effective cost
containment.
Low cost provider. Low cost provider.
Company Philosophy Claims Vision
Claims
Technology
Claims
Organization
Claims Process
A
B
C
D
Value Drivers of the Claims Process
187
Four primary drivers of claims process performance. Insurers must
recognise process changes frequently impact multiple drivers, and all
possible impacts must be taken into account.
Claims
Customer Focus
Goal Increase
retention; enable
add-on sales.
Profitability
Goal improve
underwriting of
risks.
reduction
Effectiveness
Goal Reduce
pure loss cost.
i.e. Leakage
reduction
Efficiency
Goal Reduce
loss adjustment
expenses (LAE).
Claims
Technology
Claims
Technology
Claims
Organization
Claims
Organization
Claims Process Claims Process
It is important to consider the impact of process change from a
number of perspectives reduce claims spend, minimise
handling expenses and maintain customer satisfaction
It is important to consider the impact of process change from a
number of perspectives reduce claims spend, minimise
handling expenses and maintain customer satisfaction
What are the current challenges for claims
management?
189
The last year has been relatively benign period for
catastrophe losses worldwide although the British market
has seen a small spike in claims because of the cold snap
Some low-cost insurers have reduced cover and altered
excesses to restrict the range of insurable events and
compensate for lower premiums.
The recent recession in the UK has seen an increase in the
propensity for policyholders to make claims, over
exaggerate their losses, claims front or make fraudulent
claims i.e. crash for cash
Increasing personal injury costs are the prime driver of
claims quantum. For example, the Personal Injuries (NHS
Charges) Amendment Regulations 2009 has seen costs for
various health service treatments increase at a rate of
between 3.3%-3.6% for accidents occurring on or after 1
April 2009
In motor claims the volume of credit hire/claims farming is
increasing and this represents significant claims leakage -
directly impact loss ratios
Claims handling costs vary by insurer. Some have achieved
cost reductions and improvements in the effectiveness of
claims handling
With indemnity spend accounting for between 75% and
90% of insurance company costs most have initiated
programmes to reengineering their supply chain agreements
to reduce claims leakage
The last year has been relatively benign period for
catastrophe losses worldwide although the British market
has seen a small spike in claims because of the cold snap
Some low-cost insurers have reduced cover and altered
excesses to restrict the range of insurable events and
compensate for lower premiums.
The recent recession in the UK has seen an increase in the
propensity for policyholders to make claims, over
exaggerate their losses, claims front or make fraudulent
claims i.e. crash for cash
Increasing personal injury costs are the prime driver of
claims quantum. For example, the Personal Injuries (NHS
Charges) Amendment Regulations 2009 has seen costs for
various health service treatments increase at a rate of
between 3.3%-3.6% for accidents occurring on or after 1
April 2009
In motor claims the volume of credit hire/claims farming is
increasing and this represents significant claims leakage -
directly impact loss ratios
Claims handling costs vary by insurer. Some have achieved
cost reductions and improvements in the effectiveness of
claims handling
With indemnity spend accounting for between 75% and
90% of insurance company costs most have initiated
programmes to reengineering their supply chain agreements
to reduce claims leakage
Total Claims
Incurred
Total Claims
Incurred
Frequency Frequency
Average
cost
Average
cost
There are a number of factors that drive the number of UK claims including weather
events and the current economic climate. Increasing average claims costs are not being
offset by a reduction in claims frequency. There is a challenge to control spend while
maintaining a differential customer experience.
Claims Environment
Total
events
Total
events
% Valid
incidents
% Valid
incidents
Quantum Quantum
Claims
Farming
Claims
Farming
Claims
handling
costs
Claims
handling
costs
Propensity
to claim and
Fraud
Propensity
to claim and
Fraud
Indemnity
Spend
Indemnity
Spend
Challenges Facing Claims Organisations
190
Claim organisations must navigate a difficult course to meet their strategic, operational
and financial objectives.
Optimised Assignment
The right resources, on the right claims,
taking the right actions
Leakage Management
Minimising incorrect payouts. Many
insurers have leakage of 5 15%
Accurate Exposure Projection
Insurers need to know their exposure to
large catastrophe losses
Controlling Fraud
Est. 30% of insurance payments are soft
fraud
Attracting & Retaining Talent
Deficit of claims expertise - many
inexperienced handlers are in control of
millions of pounds of claim spend
Controlling costs of buildings and
contents suppliers is a challenge
Supplier Management
What is the claims process?
The Claims Challenge
192
Claims Management Process
193
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation
/Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
First Notice of Loss
194
Key Activities
Receive & record notice of loss
Capture full claims facts
Assess coverage
Preliminary assessment
Instruct suppliers
Identify possible referrals fraud,
recovery, salvage
Operational Considerations
Multiple channels internet, agent, call
center, 3
rd
party services
Capacity (out of hours / peak)
Possible Once-n-Done
Quality of data capture
Quality of decision making who should
take FNOL calls?
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Triage & Claim Assignment
195
Key Activities
Assess complexity
Assess severity
Route to appropriate adjuster
Provide clear settlement guidelines
Set customer expectations at the outset
Claim Ownership (individual/team)
Fast track vs. loss adjuster
Cash vs. Supply Chain
Manual vs. automated
Workload vs. skill set/expertise
Escalation & reassignment
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Fast Track Unit
196
Key Activities
Quickly handle low complexity claims
e.g., auto physical damage, contents only
household claims
Simple functions low risk, repetitive
payments
Virtual vs. physical unit
Automatic checks and assessment
Matching complexity to skill
Percentage of Fast Track (balance
efficiency vs. degree of investigation)
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Investigation
197
Key Activities
Determine coverage
Assess damage & liability
Gather documentation (e.g. building
estimates, proof of purchase, etc.)
Business partner integration
Use of suppliers to validate
Reliance on resources and tools
Documentation management
Automated task management
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Evaluation & Referral
198
Key Activities
Determine liability & damages
Develop settlement strategy (cash vs.
replace)
Assign to supplier (builder, contents
supplier, etc.)
Assess for referrals (SIU, med case
management, sal/sub)
Estimating / valuation tools
Balance of settlement approaches
Systems integration with 3
rd
party
partners and supply chain
Fraud and recovery identification
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Manage Claim /Make Payments
199
Key Activities
Review payment requests
Monitor against policy
Seek appropriate approvals
Generate payment / update reserves
Lump vs. periodic payments
Payment controls / authorisation
Large loss reviews
Payment methods (Electronic vs.
cheques)
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
New Information / Claim Event
200
Key Activities
Evaluate new data or event
Assess impact on assignment, settlement
strategy, reserves, payments, and
referrals
Escalate as necessary
Manual vs. automated diaries and notes
Automated re-assessment of claim
characteristics
Active claim management
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
Claims Referral Services
201
Referral Services
Special Investigative Unit (SIU)
Hard Fraud deliberate
Soft Fraud e.g., exaggeration
Recovery
Salvage remaining value
Recovery/Subrogation 3
rd
party
liability
Referral Services
External Loss Adjusters (GAB Robbins,
Cunningham Lindsey, Crawfords)
Special Investigation
Legal Recovery Services
Disability / Medical Management
Close
Triage
Manage
Claim/ Make
Payments
Investigation
(Incl. 3 point
Contact)
Evaluation
Strategy and
Reserves
Referral/
Escalation?
New
Information/
Claim Event
Supervisory
Review
SIU/
Fraud
Investigation
Disability &
Medical
Management
Subrogation/
Salvage
Litigation
Management
Claim
Reassignment
Injury or
Accident
FNOL Fast Track?
Fast Track
Unit
Claim
Assignment
Claim
Adjuster
What is best practice claims management?
203
Customer Management Customer Management Claims Handling Claims Handling
Supply Chain Excellence Supply Chain Excellence Claims Segmentation Claims Segmentation
Information Management Information Management Human Performance Human Performance
Contact Channels
Availability
3rd Party Experience (Loss Adjusters,
Suppliers)
Customer Updates and Handler Knowledge
Contact Channels
Availability
3rd Party Experience (Loss Adjusters,
Suppliers)
Customer Updates and Handler Knowledge
Liability Decisions
Settlement Approach
Investigation & Fraud Detection
Negotiation
Recovery Identification & Pursuit
Liability Decisions
Settlement Approach
Investigation & Fraud Detection
Negotiation
Recovery Identification & Pursuit
Supplier Selection
Contract Management
Supplier Relationship Management
Supply Chain Utilisation
Supplier Selection
Contract Management
Supplier Relationship Management
Supply Chain Utilisation
Claims Profiling & Routing
Handler Skills & Specialisation
Performance Management
Workflow Support
Claims Profiling & Routing
Handler Skills & Specialisation
Performance Management
Workflow Support
Customer Correspondence
Quality Assurance
Management Information & Analysis
Customer Correspondence
Quality Assurance
Management Information & Analysis
Organisational Design
Skills & Behaviours
Training
Rewards & Recognition
Organisational Design
Skills & Behaviours
Training
Rewards & Recognition
Delivering effective management of claims costs and differentiated service requires
claims operations to excel across several key dimensions of performance
Claims Maturity Model
204
Our Approach to Achieving Best Practice
Deloitte has the capabiltiy to support in all aspects of the change journey from initial
diagnostic through to the optimisation phase
Transformation
Technology
Optimisation
Claims Strategy
&
Operating Model
Diagnostic
Diagnostic
Complete
Detailed
understanding of
your current
capabilities (claims
leakage, customer
service, expense
control, employee
engagement).
Identify areas to
focus
improvements.
Ability to create a
target-driven
Strategy & TOM.
Claims Strategy &
TOM Complete
Clear claims vision.
Consistent
communication tool
for all staff and
stakeholders.
Definition of how the
business will deliver
the strategy and
target benefits.
Transformation
Complete
Streamlined claim
process with efficient
and consistent
decision-making
throughout the claims
lifecycle.
Effective, highly
motivated staff within
the claims operation.
Technology Complete
Technology solution
that appropriately
matches the needs of
the claims operation.
Optimisation
Complete
Solution fully
embedded into the
claims operation.
Business benefits are
fully realised and
sustained.
Preparation
Closed file review:
this is a detailed
analysis of a sample
of completed claims.
This is the best way to
calculate an accurate
assessment of
leakage and
understand the key
handling issues
Current State
Analysis: as-is
assessment of current
claims handling
processes
T
r
a
n
s
f
o
r
m
a
t
i
o
n

P
h
a
s
e
s
B
u
s
i
n
e
s
s

B
e
n
e
f
i
t
s
Claims Transformation Outcomes
205
Financial Metrics:
Reduced Claims Spend
Lower loss cost per claim
Reduce Time to Settle
Increased Handler Productivity
Increased Customer Satisfaction
Increased Recoveries
Increased Fraud Detection
3 to 15 %Improvement
in Claim Spend
Successful implementation of a claims improvement programme drives results; economic
and qualitative. The ultimate outcome is a successful claim organisation meeting its key
strategic, financial and operational objectives.
Process Objectives:
Optimally deploy resources best people
making key decisions
Apply the established best practice, every
time consistent handling
Standardise triage through automation
Minimise claim duration balanced with
quality of care
Quickly identify and address soft fraud
propensity
Positively incentivize suppliers to minimise
cost and assure quality of service
Reserving accuracy and timeliness
Real-time claim escalation
Conclusion
206
Summary
In summary, this part of the course has looked at the following elements of insurance:
Why claims is such a key part of an insurance company
Claims philosophies, objectives and strategies
Challenges facing claims operations
The claims process
FNOL
Segment and Triage
Assignment
Investigation
Evaluation
Settlement
Recovery
How to achieve claims best practice
Sad but True Claims Form
207
Insurance 101 Regulation.
Introduction
209
This section of the course aims to provide an overview of the some of the key regulations that insurance companies must
adhere to, and some important changes that are happening.
Solvency II Financial Services Authority
Brief overview of regulations
Regulatory/ industry bodies with an impact on the insurance market include:
Financial Services Authority Insurance is a regulated activity in the UK as is arranging the
purchase of insurance advising on insurance policies and dealing as an agent. The FSA regulates the
sector and acts as the industry watchdog.
European Union legislation from the EU usually takes the form of Directives in the Insurance
industry. Key directives include three life and three non-life insurance directives.
USA an important source of business for the London market, compliance with US Insurance
regulations (often made at State level) is necessary to provide insurance to this market
Financial Services Compensation Scheme (FSCS) an independent body, funded by levies on
FSA-authorised firms. The FSCS can pay compensation if a firm is unable to pay claims against it.
Financial Ombudsman Scheme (FOS) an independent organisation, operating separately from the
FSA, set up to help resolve disputes between consumers and financial firms
Data Protection Act 1998 anyone operating in the London market and processing personal
information, needs to adhere to the Data Protection Act. Organisations must notify the Information
Commissioners Office that they are processing such information, and follow certain principles and
conditions to demonstrate that information is being fairly processed.
Money Laundering legislation regulated firms need to adhere to the Proceeds of Crime Act 2002
and have in place a Money Laundering Reporting Officer (MLRO). Firms in the London market must
report any knowledge or suspicion of money laundering activities. Examples in an insurance context
include large or irregular return premiums and uncharacteristically high levels of brokerage.
Trade Sanctions insurers need to be aware of any trade sanctions the UK government, the EU or
the United Nations currently have in force. Insurers are also not permitted to provide insurance
services to any sanctioned individuals or corporations, such as those with criminal or terrorist
involvement.
210
Financial Services Authority
212
What is the Financial Services Authority (FSA)?
Non-Governmental
FSA Board
Funding
History
The Financial Services Authority (FSA) is an
independent non-governmental body, given statutory
powers by the Financial Services and Markets Act
2000.
The FSA is governed by a Board appointed by the Treasury. The majority
of the Board members are non-executive
The FSA does not receive any funding from the government. To finance
its work, it charges fees to all authorised firms that carry out activities they
regulate, as well as some other bodies.
The Chancellor of the Exchequer announced the reform of financial
services regulation in the UK and the creation of a new regulator on 20
May 1997. The first stage of the reform of financial services regulation
was completed in June 1998, when responsibility for banking supervision
was transferred to the FSA from the Bank of England.
213
What are the FSAs aims?
Maintain Market
Confidence
Maintain Market
Confidence
Increase Public
Awareness
Increase Public
Awareness
Protect the Consumer Protect the Consumer
Reduce in Financial
Crime
Reduce in Financial
Crime
The FSA, through a gradual process, has come to regulate almost all entities within the Financial Sector:
Role Date
Bank Supervision June 1998
UK Listing Authority (from the LSE) May 2000
Building Societies Commission, Friendly Societies Commission , Investment
Management Regulatory Organisation , Personal Investment Authority, Register
of Friendly Societies, Securities and Futures Authority
December 2001
Mortgage regulation October 2004
General Insurance January 2005
In all of these sectors the FSA aims to:
Treating customers fairly - TCF
214
TCF is part of an FSA initiative to make Treating Customers Fairly an integral part of all Finance Services firms business
culture. The requirement on firms to treat their customers fairly is not new: it is part of existing regulatory requirements and is
firmly root in the FSAs Principles for Business (Principle 6)*.
a firm must pay due regard to the interests of its
customers and treat them fairly
a firm must pay due regard to the interests of its
customers and treat them fairly
* Other principles are also relevant when taking a rounded view of what fair treatment means
The Treating Customers Fairly (TCF) initiative aims to deliver six improved outcomes for retail consumers:
The right culture
Consumers can be confident that they are dealing with firms where the fair treatment of customers is
central to the corporate culture.
The right culture
Consumers can be confident that they are dealing with firms where the fair treatment of customers is
central to the corporate culture.
Outcome 1 Outcome 1
The right targeting
Products and services marketed and sold in the retail market are designed to meet the needs of
identified consumer groups and are targeted accordingly.
The right targeting
Products and services marketed and sold in the retail market are designed to meet the needs of
identified consumer groups and are targeted accordingly.
Outcome 2 Outcome 2
The right information
Consumers are provided with clear information and are kept appropriately informed before,
during and after the point of sale.
The right information
Consumers are provided with clear information and are kept appropriately informed before,
during and after the point of sale.
Outcome 3 Outcome 3
The right advice
Where consumers receive advice, the advice is suitable and takes account of their
circumstances.
The right advice
Where consumers receive advice, the advice is suitable and takes account of their
circumstances.
Outcome 4 Outcome 4
The right delivery
Consumers are provided with products that perform as firms have led them to expect, and the
associated service is both of an acceptable standard and as they have been led to expect.
The right delivery
Consumers are provided with products that perform as firms have led them to expect, and the
associated service is both of an acceptable standard and as they have been led to expect.
Outcome 5 Outcome 5
The right post sale treatment
Consumers do not face unreasonable post-sale barriers imposed by firms to change product,
switch provider, submit a claim or make a complaint.
The right post sale treatment
Consumers do not face unreasonable post-sale barriers imposed by firms to change product,
switch provider, submit a claim or make a complaint.
Outcome 6 Outcome 6
215
Over the past few years, the FSA has focused heavily on ensuring Financial Service institutions treat customers fairly. There
have been several high profile cases where the FSA have imposed fines on companies failing to comply*.
Why TCF is important
Date Name Amount fined Reason for fine
2007 -
2008
Alliance and
Leicester Plc, Egg
Banking Plc, HFC
Bank Ltd, etc
Over
10,000,000
in total fines
The FSA has taken action against 19 firms over poor PPI selling practices. The FSA's
thematic work on the sale of PPI published in September 2007 found improvements in
some areas, but also that many firms selling this insurance were still failing to treat their
customers fairly. The FSA introduced additional rules in its Insurance Conduct of Business
Rulebook in January 2008 designed to improve PPI selling practices.
Oct 2008 Orchid Financial
Limited
34,500 The FSA found that the company failed to ensure it provided suitable advice which exposed
over 900 customers to the risk of being sold an unsuitable mortgage.
Jul 2008 Hastings
Insurance
Services Ltd
735,000 Hastings were fined for failing to treat its customers fairly in relation to cancelling around
4,550 incorrectly priced car insurance policies.
May 2008 Thinc Group
Limited
900,000 For not having adequate risk management and compliance systems and for failing to take
reasonable care to ensure that is had records to prove that advice it gave to customers in
relation to the sale of sub prime mortgages was suitable
Jan 2006 Guardian
Assurance plc
750,00 The FSA fined Guardian Assurance plc and Guardian Linked Life Assurance Limited
(Guardian) for serious systemic flaws in its mortgage endowment complaints handling
procedures. They failed to treat customers fairly by rejecting valid complaints and as a
consequence the customer did not receive the compensation they were entitled.
*Information sourced from FSA website: http://www.fsa.gov.uk/Pages/About/Media/Facts/fines/index.shtml
Solvency II
217
What is Solvency II?
Description Imperative
A mandatory insurance EU Directive - Impacts market
structure
Demands compliance by October 2012 - Non-negotiable
Critical to the competitive positioning of the client - A CEO agenda item
Requires changes to systems, process, people and
culture
- Enterprise-wide
impact
FSA Summary: We will shut down organisations that do not comply
218
What is Solvency II?
Definition
Solvency I
Uneven playing field across Europe
One size fits all rather than a risk based
approach to solvency capital requirements
Simplistic premium and claim volume driven
model
Solvency II is a new risk-based regulatory requirement for insurance, reinsurance and
bancassurance (insurance) organisations that operate in the European Union
It deals with the adequacy of capital allocation and risk management to protect policyholders
UK Individual Capital Adequacy (ICA) regime
Principles rather than rules based
Risk based capital assessment, not on straight
percentage. Self assessment of capital
requirements subject to regulatory review
Must meet individual capital guidance given by
FSA
Private, no disclosure required on nature of
model (i.e. set formula) or output
Non-specified definition of assets
Solvency II
Replaces Solvency I across Europe and ICA in the UK,
promising a (more) level playing field
Is risk based, encouraging and rewarding demonstrated (i.e.
evidenced) good integrated risk management
Uses market consistent valuation methods for all insurers, with
set risk parameters calibrated with industry experience
Organisations invited to choose to use standard formula,
internal model or both (subject to approval from regulators)
Greater emphasis on self assessment (ORSA), likely to be
more onerous than ICA submission
Explicit requirement to have an actuarial, risk management
compliance and internal audit function
Requires an annual report on solvency and financial conditions
with predefined content through identifying specific risks
Approach extended to both asset and liabilities, defining quality
and market benchmarks required as part of capital
Current Future
219
The Industry Perspective
Numerous forces are driving adoption of Solvency II
Harmonisation across member
states
Consumer protection
Transparency
Weak capitalisation of many
mature markets
Non- rationale decisions
Market meltdown
Liquidity & solvency crunch
Extreme volatility A consistent approach
around capital:
Levels
Governance
Reporting
Insurers profile
Basel II risk weighted capital
Pro-cyclicality
Banking experience Market environment
EU political agenda
220
Solvency II is a big deal
Consumer
Impact
Insurer
Impact
Social & Economic
Impact
Better protection
Less cross-subsidisation
Lower income in
retirement
Cash like returns
More risk transfer
Raising & releasing
capital
Composition of business
portfolio
Domicility
Core processes
Risk culture & mindset
Administrative burden
Coverage exclusion
Net capital flows into EU
and Switzerland
Corporate bond market
Capital raising in smaller
countries
221
Lots of lobbying expected e.g. liquidity premium, Tier 1 capital and level of
reporting
Regulators likely to take different stances on details compliance
Insurers focusing on the technical issues, but will soon move to business
implications
Incremental capital invested in countries outside Solvency II regime
Selectively need to have large rights issues
Lots of M&A to get out of capital intensive lines or seek to expand in capital light
lines
Consolidation due to capital shortage
Expansion of unit linked or risk transfer products
Growth of re-insurance to enable business mix diversification
Innovation in capital market instruments to take risk off balance sheet
How might the insurance sector change?
222
Liquidity Risk
How is Solvency II structured?
The 3 pillars
Solvency II is based on three guiding principles (pillars) which cut across market, credit, operational,
insurance and liquidity risk
The new system is intended to offer insurance organisations incentives to better measure and manage their risk
situation i.e. lower capital requirements, lower pricing etc.
The new solvency system will include both quantitative and qualitative aspects of risk, each pillar focusing on a
different regulatory component; minimum capital requirements, risk measurement and management and disclosure
Insurance Risk
Market Risk
Credit Risk
Operational Risk
SOLVENCY II
Quantification Governance Disclosure
Strategic Risk
Pillar 1
Quantitative
Requirements
Capital Requirements
Valuation of Assets and
Liabilities
Own Funds
Pillar 2
Qualitative
Requirements & Rules
on Supervision
Regulations on financial
services supervision
Own Risk and Solvency
Assessment (ORSA)
Capabilities and powers
of regulators, areas of
activity
Pillar 3
Supervisory
Reporting and Public
Disclosure
Transparency
Disclosure requirements
223
2
2
How is Solvency II being developed?
Consultation process
Deloitte has had significant input to the EUs 4-level consultative Lamfalussy process used to develop
Solvency II. Deloitte also has two partners as part of the core committees
European Parliament and EU Council adopt primary
legislation defining framework principles
Technical measures for implementation adopted
through 3 steps
EU enforce the consistent implementation of new
framework
National regulators co-ordinate to ensure that the
measures in Level 1 and 2 will be consistently applied
Solvency II is still a work in progress from a legal and practical perspective.
2009
2010
2011
2012
Responded to 12 wave 1 CEIOPS
consultation papers.
Responded to 21 wave 2 CEIOPS
consultation papers
Plans to respond to the remaining papers
1
CEIOPS issues draft technical advice for
Comment. Over 50 papers from March to Dec 2009
1
Impact Assessment of
Solvency II for EU Directorate
2
Comments processed and final advice
submitted to European Commission
2
EC drafts text to discuss at European Union
Council and European Parliament
3
Deloitte input Step
Level 1
Level 2
Level 3
Level 4
Today
N/a
Responded to a number of consultation
papers
223
224
2
2
When does Solvency II need to be implemented?
Timeline
The deadline for Solvency II compliance is 31 October 2012
The FSA (as the UK supervisor) is increasing pressure on firms to prepare for Solvency II
An FSA discussion paper in Q3 2008 set out a number of key milestones insurers should be meeting over the coming
four years
Insurers need to consider integrating their response to Solvency II and other key regulatory issues such as IFRS
(International Financial Reporting Standards)
If insurers are unable to comply by 2012 the regulators will enforce the standard formula and could ultimately lose their
licence to write business
Above timeline assumes first wave participation. A second wave will be available with dry run from Nov 2011
Design
Design Build Implement Validation
Waiver
application
Ongoing
operation
Gap
analysis
Business
case
By March 2009
Organisations report to the
FSA on their Solvency II
governance arrangements
and the senior individual
responsible for Solvency II
implementation
By June 2009
Organisations to indicate
whether they intend to
apply for internal model
approval or use the
standard formula
By April 2009
CEIOPS publish draft
advice on the internal
model approval process
By December 2009
CEIOPS publish technical
advice on associated
implementation measures
(level 2)
By Now
Organisations should be
familiar with Solvency II
Level 1 directive and
guidance issued by FSA
2 3 4 5 1
2009 2010 2011 2012
1 2 3 4
5
9 10 11 7
8 12 6
By Oct 2012
Organisations to be
compliant with Solvency II
By October 2011
Organisations submit first
batch of dry-run results to FSA
By April 2012
FSA give informal view on
submissions
By April-November 2010
Organisations in first wave to
initiate dry-run of their internal
model.
QIS 5 to calibrate calculation
of technical provisions
7 9
10
11
By July 2011
Publication of final IFRS 4
Phase 2.
Solvency II Level 2 technical
policy finalised by the EU
8
By Early 2013
IFRS 4 Phase 2 effective
from 1/1/2013 (Est.)
12
By April 2010
IFRS 4 Phase 2 exposure
draft due out
6
224
225
The impact of Solvency II
2
2
Expected impact of Solvency II
Strategic Operational
Opportunity to minimise costs by considering potential synergies
with other on-going projects such as IFRS2 and MCEV.
Significant effort/investment will be required to meet six tests for
model approval.
Capital models to be enhanced to reflect new requirements.
Data quality and handling processes to be enhanced to meet
new requirements.
More frequent calculation of capital requirements is needed to
provide up-to-date MI. This will require to automate processes
and an enhancement of the control environment.
Implementation work could lead to significant pressure on
existing resources.
Capital optimisation could lead to companies acquiring or
disposing portfolios.
Re-pricing of products (e.g. annuities) could lead to significant
changes in product mix and risk exposure.
Opportunity to decrease cost of capital by enhancing risk
management framework and disclosures to markets
Financial
Annuity providers solvency position will be threaten if current
draft specifications are approved
Capital requirements to increase as a result of the requirement
to stress test free assets
Overall impact on capital requirements will depend on product
mix and the level of current ICA stresses
Risk margin represents an addition to ICA liabilities and will
reduce solvency ratio of companies for which the ICA bites.
Full allowance of the impact of reinsurance will lead to a
decrease of reserves for heavily reinsured portfolios.
226
Eminence
The profile and eminence attained by Deloitte means that we are leading the way in Solvency II thinking
across the industry.
Responded to 12 consultation papers (CPs) for wave 1.
Responded to the 25 CPs in wave 2 on 11 September, 2009.
Responded to the 16 CPs in wave 3 by 11 December, 2009
Responded to CP 80 by March 5, 2010.
Deloitte have also responded to a number of FSA papers.
Final response to EU Commission Level 2 Policy Guidance.
CEIOPS and FSA
Consultation
Papers
EU Directorate announcement that Deloitte are supporting the project to develop level 2 Solvency II guidance.
Lis Gibson and Rick Lester were invited to speak at a Lloyds industry event on the role of Internal Audit in review of
Solvency II initiatives.
Highlights of the 2009 Life Conference: series of presentations from Kathryn Morgan (FSA) and Tamsin Abbey on
the role of Life Actuarial in Solvency II.
Alex Marcuson presenting at FT Global event on EU Commission Solvency II Level 2 policy.
Various Partners involved in industry accredited working groups (Derek Wright, Andrew Smith, Lis Gibson, Alex
Arterton).
Industry group representation includes: Solvency II Industry Working Group, IRM, Group Consultif, FSA.
Partner
Involvement in
key committees
Thought
Leadership
EU Directive
Policy Advice
(Level 2)
Created and established Solvency II Industry Working Group for Tier 1 clients. Includes: LBG, L&G, Prudential,
Aviva, Old Mutual, Standard Life, Friends Provident.
Creating
Industry-Leading
Working Groups
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