Trieschmann, Hoyt & Sommer

Risk Management and the Insurance Industry Chapter 22

2005, Thomson South!"estern

Chapter #$%ecti&es
' Indicate the si(e o) the insurance industry ' *escri$e ho+ the insurance $usiness is di&ided $et+een the pri&ate and pu$,ic sectors ' -.p,ain +hy persona, insurance has a ,arger premium &o,ume than property insurance ' Identi)y and e.p,ain the di))erences $et+een stock companies, mutua, companies, /,oyd0s associations, and reciproca, insurers ' Indicate +hich types o) insurance ha&e the ,argest &o,ume ' -.p,ain ho+ insurance guaranty )unds operate ' *escri$e ho+ insurance is distri$uted )rom insurers to consumers and ,ist the di))erences $et+een types o) agents and $rokers in insurance ' *escri$ed the g,o$a, nature o) risk management and the insurance industry
2

The 2ie,d o) Insurance

' Insurance co&erages can $e di&ided into &arious opposing categories
3 4ersona, 5,i)e and hea,th6 &s property 5$ui,dings, homes, autos6 3 7o&ernment 5),ood insurance6 &s pri&ate 5product ,ia$i,ity6 3 In&o,untary 5Socia, Security6 &s &o,untary 5)ire insurance6

' The categories are not mutua,,y e.c,usi&e and they o&er,ap ' 2igure 22!8 depicts the ma%or c,assi)ications o) insurance and +hat they ha&e in common +ith each other

2igure 22!8: Ma%or C,assi)ications o) Insurance

4ersona, Co&erages
' Those re,ated direct,y to the indi&idua, ' The risk they co&er is the possi$i,ity that some peri, may interrupt the indi&idua,0s income, such as
3 *eath, accidents and sickness, unemp,oyment, and o,d age 3 Insurance is +ritten on each
' 4ri&ate insurers are acti&e in pro&iding insurance )or death, accidents and sickness, and o,d age ' 7o&ernmenta, units are acti&e in a,, categories
5

4roperty Co&erages
' *irected against peri,s that may destroy property ' 4roperty insurance is distinguished )rom persona, insurance
3 4ersona, insurance co&ers peri,s that may pre&ent one )rom earning money +ith +hich to ac<uire property in the )uture 3 "hereas property insurance co&ers property that is a,ready ac<uired
' 4roperty insurance as used here inc,udes )ire, marine, ,ia$i,ity, casua,ty, and surety insurance

' Sometimes re)erred to as genera, insurance, property ,ia$i,ity insurance, or property and casua,ty insurance
;

4ri&ate and 4u$,ic Insurance

' 4ri&ate insurance consists o) a,, types o) co&erage +ritten $y pri&ate,y organi(ed groups
3 Consists o) associations o) indi&idua,s, stockho,ders, po,icyho,ders, or some com$ination o) these

' 4u$,ic insurance inc,udes a,, types o) co&erage +ritten $y go&ernment $odies or operated $y pri&ate agencies under go&ernment super&ision
=

?o,untary and In&o,untary Co&erages

' Most pri&ate insurance comes under the ru$ric o) &o,untary co&erage ' @ ma%or part o) go&ernment insurance is in&o,untary co&erage
3 It is re<uired $y ,a+ that insurance $e purchased $y certain groups and under certain conditions
' -.amp,es o) re<uired insurance inc,ude automo$i,e ,ia$i,ity insurance and +orkers0 compensation insurance
>

?o,untary and In&o,untary co&erages

' Ta$,e 22!8 sho+s the importance o) pri&ate passenger auto insurance ' Ta$,e 22 !2 sho+s that 44@ made up 11B8 percent o) tota, premiums in 8A>0 a,though there has $een a re,ati&e dec,ine since 2000
3 *ue to the dramatic increases in commercia, ,ines insurance premiums during the hard insurance market
A

Ta$,e 22 !8: Cet 4remium "ritten $y /ine o) 4roperty /ia$i,ity Insurance32002

80

Ta$,e 22 !2: 4ri&ate 4assenger @uto as a 4ercentage o) Tota, 4!/ 4remium

88

Stock Companies
' @ corporation organi(ed as a pro)it!making &enture in the )ie,d o) insurance ' 2or companies organi(ed in the Dnited States
3 @ minimum amount o) capita, and surp,us is prescri$ed $y state ,a+ to ser&e as a )und )or the payment o) ,osses and )or the protection o) po,icyho,ders0 )unds paid in ad&ance as premiums

' #rgani(ed +ith authority to conduct certain types o) insurance $usiness ' Some pay di&idends to po,icyho,ders on certain types o) insurance ' Ce&er issue +hat is ca,,ed an assessi$,e po,icy
3 The insured can not assess an additiona, premium i) the company0s ,oss e.perience is e.cessi&e

' The stockho,ders are e.pected to $ear any ,osses

3 @nd they a,so reap any pro)its )rom the enterprise
82

Mutua, Companies
' #rgani(ed under the insurance code o) each state as a nonpro)it corporation o+ned $y the po,icyho,ders ' Has no stockho,ders ' Co pro)its are made
3 Eecause any e.cess income is returned to the po,icyho,der!o+ners as di&idends
' #r is used to reduce premiums, or retained to )inance )uture gro+th

' The company is managed $y a $oard o) directors e,ected $y po,icyho,ders ' Many types o) mutua, organi(ations e.ist and operate under di))erent ,a+s and +ith di))erent types o) $usinesses

81

C,ass Mutua,s
' #perate in on,y a particu,ar c,ass o) insurance
3 Such as )arm and property, ,um$er mi,,s, )actories, or hard+are risks

' 2arm mutua,s

3 Specia,i(e in )arm property insurance 3 Insure a ,arge portion o) )arm property in some states, primari,y $ecause o) the specia,i(ed nature o) the risks

' 2actory mutua,s

3 Specia,i(e in insuring )actories 3 4,ace emphasis on ,oss contro, 3 7enera,,y do not so,icit sma,, risks due to the re,ati&e,y high cost o) inspection, engineering ser&ices, sur&eys, and consu,tations that are pro&ided $y the organi(ation in an attempt to pre&ent ,osses $e)ore they occur
89

7enera, "riting Mutua,s

' #ne that accepts many types o) insureds ' Re<uire an ad&anced premium ca,cu,ated on rough,y the same $asis as that o) a stock insurer ' #perate in se&era, states or e&en internationa,,y ' May or may not pay a re)und o) the portion o) the premium o) the di&idend i) e.perience +arrants it ' Many mutua,s insist on re,ati&e,y high under+riting standards
3 Taking on,y the $est risks so that a di&idend +i,, more ,ike,y $e paid

' Some mutua,s are $oth participating and de&iating

3 They p,an to cut the initia, rate some+hat $e,o+ stock company ,e&e,s and to pay di&idend i) +arranted

85

2raterna, Carriers
' *esigned as a nonpro)it corporation, society, or &o,untary association, +ithout capita, stock, organi(ed and carried on so,e,y )or the $ene)it o) its mem$ers and their $ene)iciaries ' Ha&e a ,odge system +ith a ritua,istic )orm o) operation and a representati&e )orm o) go&ernment that pro&ides )or the payment o) $ene)its in accordance +ith de)inite pro&isions in the ,a+ ' @s charita$,e, $ene&o,ent associations, they usua,,y are e.empt )rom ta.ation ' Some o) the ,argest mutua, insurers ha&e con&erted to stock )irms inc,uding
3 Metropo,itan, 4rudentia,, and Fohn Hancock

8;

Reciproca,s
' Sometimes ca,,ed an interinsurance e.change ' /ike a mutua, in that $oth are )ormed )or the purpose o) making the insurance contract a&ai,a$,e to po,icyho,ders at cost ' Easic di))erences e.ist $et+een the ,ega, contro, and capita, re<uirements o) reciproca,s and mutua,s
3 In a reciproca,, the o+ner!po,icyho,ders appoint an indi&idua, or a corporation kno+n as an attorney!in!)act to operate that company, as opposed to the $oard o) directors 3 @ mutua, is incorporated +ith a stated amount o) capita, and surp,us
' "hereas a reciproca, is unincorporated +ith no capita, as such

' #perate main,y in the )ie,d o) automo$i,e insurance

8=

/,oyd0s @ssociations
' @n organi(ation o) indi&idua,s %oined together to under+rite risks on a cooperati&e $asis ' -ach mem$er assumes risks persona,,y and does not $ind the organi(ation )or these o$,igations ' -ach in&estor is indi&idua,,y ,ia$,e )or ,osses on the risks assumed to the )u,,est e.tent o) persona, assets
3 Dn,ess the ,ia$i,ity is intentiona,,y ,imited

' Simi,ar to reciproca,s in that each under+riter is an insurer

3 Ho+e&er, a reciproca, is composed o) indi&idua,s +ho are $oth insurers and insureds at the same time
' "hereas a /,oyd0s association is a proprietary organi(ation operated )or pro)it 8>

/ondon /,oyd0s
' /,oyd0s started in 8;>> in /ondon as an in)orma, group o) merchants taking marine risks ' Their operations are no+ +or,d+ide
3 #perate e.tensi&e,y in the Dnited States ,arge,y in the surp,us ,ine market
' Consist o) risks that domestic insurers ha&e re%ected )or one reason or another

' In 2009 near,y ;; under+riting syndicates e.isted

3 7roups o) names that com$ine their resources and emp,oyee manager
' "ho determines +hich risks to insure

8A

Re,ati&e Importance o) 4ri&ate Insurers

' Thousands o) insurance companies operate in the Dnited States ' Ho+e&er, most o) that $usiness is done $y re,ati&e,y )e+ insurers ' The ,eading states )or property!,ia$i,ity insurers are ?ermont, Te.as, Ce+ Gork, and 4ennsy,&ania
3 2or ,i)e insurers the ,eading states are @ri(ona, Te.as, and Ce+ Gork
20

Re,ati&e Importance o) 4ri&ate Insurers

' Stock companies tend to dominate as under+riters o) &arious ,ines o) property!,ia$i,ity insurance ' Mutua,s en%oy their greatest markets in the )ie,ds o) persona, automo$i,e and +orkers0 compensation insurance ' /,oyd0s and reciproca,s account )or on,y a sma,, share o) the tota, property!,ia$i,ity insurance market ' In the )ie,d o) ,i)e and hea,th insurance, there are more than t+e,&e times the num$er o) stock companies than mutua,s ' In property!,ia$i,ity insurance, mutua, companies ha&e gro+n more rapid,y than stock insurers
3 Mutua,s ha&e tended to specia,i(e in types o) insurance )or +hich the markets ha&e $een gro+ing most rapid,y 3 Mutua,s ha&e used cost!cutting methods that genera,,y ha&e made the product a&ai,a$,e at ,o+er rates

28

Inso,&ency o) Insurers
' Insurance institutions are not $acked $y a )edera, agency in the same +ay $ank deposits are protected ' The danger o) ,oss )rom inso,&ent property! ,ia$i,ity insurers has $een recogni(ed $y the esta$,ishment in a,, states o) guaranty )unds
3 These )unds must reim$urse the po,icyho,ders )or any ,osses caused $y $ankrupt insurers
' Su$%ect to stated deducti$,es and ma.imum ,oss ,imits that &ary )rom state to state ' The )unds are supported $y assessments against other insurers operating in the same state
22

Inso,&ency o) Insurers
' ?arious reasons e.ist )or property!,ia$i,ity inso,&encies inc,uding
3 Inade<uate pricing
' Dsua,,y disco&ered +hen ,oss reser&es are insu))icient to pay c,aims

3 Rapid gro+th 3 2raud 3 #&erstatement o) the &a,ue o) certain assets

21

-mp,oyment in Insurance
' The insurance industry emp,oyed appro.imate,y 2,222,000 persons in 2002 ' Most o) the %o$s are sa,aried positions ' 2e+er than 8 1 are in marketing or distri$ution
3 This contradicts the )re<uent,y!he,d opinion that most %o$s in insurance are in sa,es

29

#+nership o) Insurance
' *ata )rom the Insurance In)ormation Institute re&ea,s that the property!,ia$i,ity insurance industry has $een a$,e to reach most DBSB citi(ens +ho o+n homes or autos ' Rough,y A5 percent o) homeo+ners indicated that they had purchased property or ,ia$i,ity insurance on their homes and possessions ' Some type o) ,i)e insurance is o+ned $y appro.imate,y =5 percent o) @mericans
25

*irect *istri$ution in /i)e Insurance

' /i)e insurance is distri$uted in t+o main +ays
3 Sa,aried group insurance representati&es 3 Indi&idua, insurance agents +ho usua,,y +ork on commission

' /i)e insurance is a,so so,d $y direct contact +ith the consumers in ad&ertising, mai, order, or the internet
3 The insurer maintains a one!on!one re,ationship +ith the insured
' Independent intermediaries usua,,y are not in&o,&ed
2;

7roup Insurance
' /i)e insurers o))er many o) their products on a group $asis
3 Dnder contracts co&ering groups o) persons rather than indi&idua,s

' Customers )rom group co&erage are genera,,y $usiness )irms ' 4ersons emp,oyed to se,, and ser&ice $usinesses usua,,y recei&e a sa,ary and $onus
2=

Indi&idua, @gents
' 4o,icies so,d to indi&idua,s are usua,,y hand,ed $y persons kno+n as agents, under+riters, or )inancia, p,anners ' The agent or under+riter contacts the u,timate consumer and reports direct,y to the insurer or intermediary +ho in turn reports to the insurer ' The authority o) the under+riter or agent is ,imited
2>

Indi&idua, @gents
' @ genera, agent in ,i)e insurance is an indi&idua, emp,oyed to hire, train, and super&ise agents at ,o+er ,e&e,s
3 Sometimes co,,ects premiums and remits them to the insurer0s home o))ice 3 Cot an independent intermediary in the sense that a typica, +ho,esa,er is
' 7enera, agent does not e.ercise )ina, contro, o&er the issuance terms o) the contract
3 The company norma,,y is not $ound $y the genera, agent in putting a contract in )orce

' The genera, agent e.ercises no contro, o&er the amount o) premium, has no in&estment in in&entory, does not o+n any $usiness +ritten, and has no ,ega, right to e.ercise any contro, o&er po,icyho,ders once he or she ,ea&es the emp,oyment o) the company
2A

Reasons )or *irect *istri$ution in /i)e Insurance

' The system o) direct distri$ution has gro+n up in ,i)e insurance $ecause o) se&era, $asic )actors
3 The insurer0s need to maintain c,ose contro, o&er the po,icy product 3 The insurer0s need to e.ercise contro, o&er sa,es promotion and competition 3 The in)re<uent purchase o) ,i)e insurance 3 The agent0s a$i,ity to make a $etter ,i&ing through specia,i(ation
10

The Changing -n&ironment in the /i)e Insurance Company

' 2rom the 8A50s to 8A>= indi&idua, ,i)e insurance ne+ premiums maintained respecta$,e gro+th greater than, or e<ua, to, the rate o) in),ation
3 Rea, gro+th in ne+ premiums +as occurring

' Eeginning in 8A>= that pattern ceased

3 In 8A>> ne+ premiums actua,,y dec,ined

' Changes in DBSB demographics ha&e contri$uted to the shi)ting o) $usiness &o,ume a+ay )rom indi&idua, ,i)e insurance
3 @s the o&era,, popu,ation aged, peop,e $ecame more interested in )inancia, products that +ere accumu,ation centered
' Rather than protection and accumu,ation ' These changes ha&e meant that ,i)e insurers increasing,y )ind themse,&es competing +ith $anks and mutua, )und companies )or consumers0 in&estment do,,ars 18

*irect "riting in 4roperty!/ia$i,ity Insurance

' In some ,ines, independent intermediaries ha&e $een e,iminated
3 Contract is marketed direct,y )rom the insurer to the insured through either e.c,usi&e agents or emp,oyees +ho +ork on sa,ary and commission
' They so,icit prospects, take care o) paper+ork, and ser&e as the insurer0s direct contact +ith the insured

12

*irect "riting in 4roperty!/ia$i,ity Insurance

' @n e.c,usi&e agent o) a direct +riter represents on,y one insurer
3 *oes not o+n $usiness +ritten and genera,,y does not hand,e ,oss c,aims or co,,ect premiums 3 Recei&es a commission $ut it is a ,o+er percentage than the commissions a,,o+ed independent agents 3 The main tasks o) the e.c,usi&e agent are to
' Se,, ne+ $usiness ' Heep in contact +ith customers ' Ser&ed as a communications ,ink $et+een the insurer and the insured
11

*irect "riting in 4roperty!/ia$i,ity Insurance

' *irect +riters ha&e their greatest &o,ume in the )ie,d o) automo$i,e insurance ' They ha&e $een a$,e to se,, insurance at ,o+er cost to the )ina, consumer ' Inno&ations ha&e occurred in automo$i,e insurance inc,uding
3 Continuous po,icies, ,o+er agents0 commissions, direct $i,,ing )rom the insurer to the customer and specia,i(ed ad%usting o))ices to hand,e c,aims

19

Indirect *istri$ution 5@merican @gency System6

' The insurance is not so,d direct,y $y the insured to the po,icyho,der $ut rather is so,d through a system o) intermediaries
3 Compara$,e to the +ho,esa,er!retai,er system in tangi$,e goods marketing

' The independent agent is an autonomous, ,oca, intermediary in the property insurance $usiness
3 @s the Iretai,er,J the independent agent dea,s +ith the )ina, consumer o) insurance 3 The independent agent usua,,y represents 80 to 10 or more separate insurers and has authority to $ind these insurers on most o) the contracts +ritten
15

Erokers &s @gents

' Erokers operate in a manner simi,ar to ,oca, agents
3 /ega,,y $rokers represent the consumer, not the insurer

' I) the customer asks a $roker to o$tain insurance, the $roker must contact +ith the insurer $e)ore co&erage is $inding ' @gents may $ind co&erage immediate,y
3 Eecause they are the ,ega, representati&es o) the insurer 3 Many $rokers a,so ho,d agency contracts
1;

Is the @merican @gency System *oomedK

' Those insurers and their agents committed to the traditiona, ,ong channe, o) distri$ution ha&e $ecome concerned o&er the )uture o) their $usiness
3 Since direct +riters ha&e $een gro+ing in market share unti, recent,y

' Ta$,e 22!1 sho+s that +hi,e direct +riters ha&e taken a signi)icant portion o) the persona, ,ines market
3 Insurers using independent agents ha&e maintained their dominance in commercia, insurance ,ines

' @,though the &o,ume o) $usiness undertaken $y ,oca, independent agents is usua,,y re,ati&e,y sma,, this is not the case )or nationa, $rokers
3 Ta$,e 22!9 sho+s the name and si(e o) the )i&e ,argest $rokers
1=

Ta$,e 22!1: Market Share 5L6 $y *istri$ution System

1>

Ta$,e 22!9: 2i&e /argest Erokers in the "or,d, 2002

1A

#ut,ook )or the @gency System and *irect "riting

' *irect +riting has gro+n )astest in ,ines )or +hich there is a mass market )or a standardi(ed product that re<uires ,itt,e continuous ser&ice
3 These conditions do not e.ist in a,, areas o) insurance, particu,ar,y in the commercia, market
' Thus, it is e.treme,y dou$t)u, that direct +riters +i,, capture that market

' It seems un,ike,y that the independent agency system +i,, $e rep,aced $y direct +riting un,ess the property insurance $usiness $ecomes much more concentrated than it is no+ ' "hi,e direct +riters continue to gain market share in the property!,ia$i,ity )ie,d, the ,i)e insurance industry is going in the opposite direction
90

*irect Response
' Some insurance is so,d +ithout agents or other intermediaries through the direct response techni<ue
3 Customers are )ound through ad&ertising on te,e&ision, radio, ne+spapers, maga(ines, direct mai,, etcB 3 This is the area +here the internet appears to ha&e the greatest potentia, 3 Co sa,es agents are emp,oyed 3 The po,icies tend to $e )air,y standardi(ed and more specia,i(ed and ,ess cost,y
' -.amp,es inc,ude accident insurance, hospita, indemnity, term ,i)e, automo$i,e, homeo+ners, and short!term disa$i,ity income contracts 98

Mass Merchandising
' @ method o) distri$uting property!,ia$i,ity insurance direct,y to consumers through emp,oyer payro,, deduction ' 4remiums are usua,,y cheaper $ecause o) &arious economies in mass merchandising ' -mp,oyers do not norma,,y contri$ute to the premium on $eha,) o) emp,oyees ' They ha&e not $ecome e.treme,y popu,ar
3 Independent agents ha&e genera,,y opposed the adoption o) such p,ans
' Eecause many agents depend on indi&idua,,y issued persona,!,ines $usiness )or their ,i&e,ihood

3 The e,ement o) ad&erse se,ection e.ists

' "hich has o)ten produced poor under+riting e.periences

92

7,o$a,i(ation o) Risk Management and the Insurance Industry

' @ g,o$a,i(ation o) $usiness has occurred due to
3 @d&ances in techno,ogy and impro&ement in transportation 3 Reduced trade $arriers in many countries

' 2irms and organi(ations that do $usiness internationa,,y )ace di))erences in their ,oss e.posure and in the risk!hand,ing methods they use ' 7,o$a,i(ation and di))erences in )uture gro+th potentia, ha&e ,ed many insurers to ree&a,uate the )ocus o) their $usiness and to consider e.pansion o&erseas
91

7,o$a, Risk Management

' @,most a,, organi(ations ha&e some emp,oyees +ho tra&e, o&erseas ' These acti&ities can gi&e rise to uni<ue e.posures that are not )aced i) the )irm operates e.c,usi&e,y +ithin its o+n home country
3 -.porting goods and ser&ices o&erseas 3 Manu)acturing or importing products )rom o&erseas 3 Hiring part!time or permanent emp,oyees o&erseas

99

7,o$a, Risk -.posure

' Some kinds o) risk e.posure )aced $y internationa, )irms are the same as those )aced $y )irms that do $usiness on,y in their home country
3 2or e.amp,e, )ire, natura, disasters, or damage to goods in transit

' Many o) these e.posures can $e a,tered in $oth )re<uency and se&erity $y di))erences in &arious parts o) the +or,d
3 Most o) the deaths )rom natura, disasters are in de&e,oping countries
' "hi,e most o) the property damage resu,ting )rom natura, disasters occurs in industria, nations

3 2ire ,oss potentia, is much greater in countries +ith poor in)rastructure and ,o+er!<ua,ity $ui,ding standards
95

7,o$a, Risk -.posure

' 7,o$a, )irms a,so )ace uni<ue kinds o) ,oss e.posure that arise as a resu,t o) conducting $usiness in mu,tip,e countries, inc,uding
3 Terrorism, kidnapping, po,itica, insta$i,ity, uncertain ,ega, en&ironment, currency risk, import e.port restrictions, techno,ogy and communications, )inancia, markets0 +eaknesses, and su$standard in)rastructure

' The ina$i,ity to assess risk accurate,y due to an a$sence o) in)ormation in some underde&e,oped countries can $e one o) the $iggest cha,,enges that a risk manager o) a g,o$a, )irm )aces
3 @dditiona,,y, the ,ack o) a +e,,!de&e,oped insurance industry can ,ead to an a$sence o) high <ua,ity risk management ser&ices such as
' C,aims hand,ing, ,oss assessment, ,oss contro, 9;

7,o$a, Risk -.posure

' The rate o) insurance in $usiness and the use o) insurance $y indi&idua,s can di))er dramatica,,y around the g,o$e ' Ta. treatment o) insurance di))ers )rom country to country ' /oca, ,a+s in some countries re<uire the purchase o) certain types o) insurance
3 @nd it either re<uires that insurance $e purchased )rom a ,oca,,y admitted insurer or disa,,o+s ta.!)a&ored treatment i) the insurance is purchased )rom a nonadmitted insurer

' The attitude to+ard risk management can a,so di))er ' Customary ,imits o) co&erage can &ary signi)icant,y ' Some re,igious $e,ie)s discourage arrangements in&o,&ing the payment o) interest and o)ten ,imit the purchase o) insurance ' Signi)icant re,iance upon go&ernment socia, insurance programs reduces the demand )or pri&ate ,i)e and hea,th insurance and annuity products in a num$er o) countries 9=

7,o$a, Insurance 4rograms

' @ g,o$a, )irm can re,y primari,y on nonadmitted insurance on a +or,d+ide $asis
3 Euy insurance in their home country and arrange )or co&erage +here&er they do $usiness
' -asy to administer and ,ea&es the decision!making in the home country ' *isad&antages inc,ude
3 It may $e i,,ega, in some countries 3 2a&ored ta. treatment o) insurance premiums and ,oss payments may $e ,ost 3 The insured does not ha&e a ,oca, insurer to pro&ide c,aims and other ser&ices o&erseas 9>

7,o$a, Insurance 4rograms

' @ g,o$a, )irm can ,ea&e the insurance program design and the purchase o) insurance to the )irm0s management in each o) the countries in +hich it does $usiness
3 Has the ad&antage o) meeting any ,oca, ,a+s regarding admitted insurance and compu,sory co&erage re<uirements
' Can preser&e )a&ora$,e ta. treatment )or premium and ,oss payments

3 Has the disad&antage in that the approach tends to ,ead to a &ery ine))icient program structure i) the )irm does $usiness in a num$er o) countries
' @,so, co&erage ,imits and terms o)ten di))er signi)icant,y across countries and can ,ead to to important gaps in protection
9A

7,o$a, Insurance 4rograms

' @ g,o$a, )irm can use a g,o$a, contro,,ed master program
3 @ g,o$a, insurer +orks through its o+n su$sidiaries or partner insurers in each o) the countries in +hich the insured corporation does $usiness to pro&ide uni)ied co&erage 3 "i,, in&o,&e ,oca,,y admitted su$sidiaries or partners +hich assures that the program meets the ,a+s and re<uirements re,ated to compu,sory and admitted insurance
' These su$sidiaries or partners pro&ide ,oca, e.pertise in managing c,aims and assessing risk

50

7,o$a,i(ation o) the Insurance Eusiness

' Ta$,e 22!5 pro&ides market share data )or the si. ,argest insurance markets in the +or,d ' 4erhaps the $iggest dri&er o) the increasing internationa, )ocus o) the insurance $usiness is
3 The g,o$a,i(ation o) the )irms that $uy insurance and purchase risk management ser&ices )rom insurers

' Mu,tinationa, )irms are $ecoming increasing,y sophisticated regarding risk management practices
3 They demand the a$i,ity to com$ine and integrate their risk management programs on a g,o$a, $asis 3 They increasing,y demand high <ua,ity risk management ser&ices +here&er they do $usiness
' Such as c,aims management and ,oss contro, 58

Ta$,e 22!5: 4ercentage Share o) "or,d Insurance Market, 2002

52

7,o$a,i(ation o) the Insurance Eusiness

' @n additiona, important )actor in the e.pansion o) DBSB and -uropean insurers o&erseas
3 The recognition that insurance markets in industria, countries do not o))er the same opportunities )or gro+th in the ne.t ten years 3 The emerging economies in eastern -urope and the 4aci)ic Rim o))er dou$,e!digit gro+th potentia, in insurance demand
51