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

Development of Insurance:A Global Perspective

Lecture Two

Northwest University Huixia Liu

Contents

Insurance: developing in crisis

Insurance: integration and breakthrough in competition

Insurance: innovation against challenges

The status, potential and trends of China's insurance industry


Insurance: Developing in Crisis


• The 1st insurance Crisis: 18th-the early 20th Century

• The 2nd insurance Crisis: 1970s-1980s

• The 3rd insurance Crisis: the late 1970s-the mid 1990s

• The 4th insurance Crisis: the late 1990s-presen


The 1st insurance Crisis: 18th-the early 20th Century

• During more than 200 years from 18th to the early 20th century, insurance was private oriented： – The operating agencies were a private– The motivation was for profit.– the insurers’ main customers were production

enterprises, the rich people.



• Revealed some problems:Limited insured subjects : only static risks were

insured, which could make profits. Such fundamental risks as floods, earthquakes, etc were not covered.

The impact of the Industrial Revolution: the deterioration of working conditions for workers, work-related injuries increased, casualties increased, unemployment, so on and so that social problems.



These risks could not be insured to protect the ordinary people’s basic living. Workers' strike movements broke one after another. There appeared serious social problems.



• Workers' insurance needs could not be met. The insurers put too much emphasis on their own economic, neglecting the social responsibilities. There appeared serious conflicts between insurers’ private economic benefits and social benefits.

• The first insurance crisis broke in the history the insurance industry.



• Enlightens: To survive and develop, the insurance industry

had to take their social responsibilities, play social roles, and participate in social management.


After the first insurance crisis, there appeared some reforms in insurance:

In Germany, the Bismarck's government implemented labor insurance programs in 1880.

Workers' insurance coming into being to pay the loss of income and medical costs for workers and their families. The concept of “Workers' insurance” was later replaced by “social insurance”


At that time, the United States took such measures as the following :Established Workers Compensation in 1911Established Group Life insurance in 1912Enacted the Social Security Act (the Federal

old-age insurance program in 1935)Created such new insurance products as

unemployment insurance, Federal deposit insurance, mutual mortgage insurance.

the reforms resulted in the great changes in insurance industry: there exist the private insurance and social insurance.


The 2nd insurance Crisis: 1970s-1980s

• During 1970s and 1980s, there appeared the technological revolution, resulted in great social and economic changes in the industrialized.

• Industrial economic form turn to a service.• Urbanization, the rural population gradually

moved to urban areas, resulting in the large cities and metropolitan, megacities.

• Increasing catastrophic risksNorthwest University Huixia Liu


• “Mixed loss” and “catastrophic risks” appeared. The insurance industry once again was facing great challenges.

• Moreover, the dynamic risks, catastrophe risk caused by technological progressed, especially some risks caused by environmental factors, psychological factors, and ethical problems. These social losses were unable to be solved also, some natural disasters as floods, earthquakes, typhoons, and some social losses caused by international trades were still vexing social problems.



• Who could solve these social risks? What is the function of insurance?Spreading risks, compensating economic losses

？Stabilizing the social order?If so, then how to solve such social risks caused

by environmental, psychological, moral, and other factors?

The second insurance crisis broke in the history the insurance industry.



• To solve the above mixed risks, it needs the joint efforts of all aspects to find some new solutions.

• At this point, the United States had taken a number of innovative measures. For example, to address flood risk, the government encouraged and support the private insurers to start the business of flood insurance, and the federal government provided financial subsidies , technical , and also provides flood re-insurance.

• In this way, the U.S. established earthquake insurance, nuclear insurance, export credit insurance. The whole society participated in the insurance.



• The so called “policy insurance” could solve the dynamic risks, catastrophic risks. The U.S. government to be inspired, and thus enforced it in practice.

• The other States followed. • Nowadays, in most countries there existing a

comprehensive insurance system, namely, private insurance, social insurance and policy insurance



• Enlightens:• The second insurance crisis and its

comprehensive insurance system, once again showed us that the insurance could take social responsibility to solve social problems. That is insurance has the social management function.


The 3rd insurance Crisis: the late 1970s-the mid 1990s

In the late 1970s, the internal and external competition in insurance industry was fierce. Insurers began to look for the new ways to meet the customer's demands.

the insurance practice had mostly gone through three stages, adopting such three ways:

• In 1st stage, increased the insured’s returns.• In 2nd stage, motivated the salesmen by providing rebate• In the 3rd stage, developed new products to meet the needs of

the insured. Such as a package of insurance, investment-linked insurance, including variable life insurance, universal life insurance, variable universal life insurance, etc., let the policyowners share in the surplus of the insurer.

• Northwest University Huixia Liu


• Aroused strong reaction from other financial institutions: competition between financial institutions.

• Other financial institutions to take measures and adjust strategies:



Direct measures: develop new financial products to compete with the insurance products, including: investing in stocks, real estate, high-tech industry, and large-scale infrastructure projects.

Indirect measures: provided the customers high returns and attract more.


The insurers take actions to respond to competitiveness:The insurers initially increased the premium

rate. Later, reduced the premium rate.Two different ways, but the final result was the

same, that was a tragic for insurers. The internal and external competition lead to

the bankruptcy of insurance companies.




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


This is the third insurance crisis in the history the insurance industry.

• The first two insurance crisis were solved by creating new insurance products. Unlike the two previous crisis solution, the third insurance crisis was solved by some non-traditional insurance measures, including: mergers and acquisitions among financial institutions as well as mixed operators, such as bancassurance, captive insurance, insurance securities, insurance futures, and insurance options.


Insurance: Integration and Breakthrough in Competition


Mergers and Acquisitions(M&A):Integrating Advantages

• During the mid-1990s, cross-border mergers and acquisitions of insurance companies was popular. M & A wave in the insurance industry swept around the world.

• Major insurance companies, banks, securities institutions mergers and acquisitions in the United States, Britain, Germany, France, the Netherlands, and other countries.



• Some financial institutions took the chance to expand the scale and the operating region, to increase market shares.

• More examples of financial institution M&A



• Why M&A? the reasons, the motivations, and the consequencesExpanding business in new industries or related new

fields. Obtaining a new management capabilities to achieve

growth. Restructuring through mergers and acquisitions faster

than the speed of the internal investment adjustment, realizing economic synergies.


Mixed Operation:Expanding Business

• What does “Mixed Operation of Insurance Industry” mean? The contents???

• In the late 20th Century, there appeared a trend that banking, securities, insurance, mixed operation. Convergence of banking, securities and insurance capital, so that the three ranges had been expanded. Besides its own business lines, insurance companies managed the business of banking and investment



• Insurance Giant

• Bancassurance

• Financial supermarket



• Why mixed operation?

• The advantages, disadvantages?



• Mixed operation has changed the traditional insurance operation modes.

• providing customers with comprehensive financial asset investment, risk management services

• Seeking competitive advantages.

• Achieving earning multi-diversification


Deregulation: Freedom Development

In the 1990s, most countries took financial reforms, relaxing insurance regulation.

In 1990, the European Union promulgated the fourth Act of liberalization of capital movement, with the liberalization of the insurance market conditions. In 1993, issued the second bank act. In 1994 promulgation of the third instruction of the property insurance and life insurance , established the framework of insurance market liberalization, encouraging the universal mixed operation between banking and insurance systems.


Deregulation: Freedom Development

In 1986, UK took well-known financial “ The Big Bang.

In 1996, Janpan took financial reform plan, well-known "Tokyo Financial Big Bang.

In 1999, The U.S. passed the well-known Financial Modernization Act.


Insurance: Innovation against Challenges


New Challenges

• Since the end of the 20th century, the world insurance industry faces more challenges. The financial crisis broken in 2008 made the development of the global financial sectors worse.

• The main challenges are as follows:


New Challenges

• Diversified insurance needs

• More catastrophic risks

• Increased Competition (within insurance industry, among financial institutions, between the international and domestic markets)

• Underwriting profit margins shrinking

• Mixed operation


Evolution of the Financial Functions

•

moneyservice

intermediary

Risk spreading

Resource allocation(core)

Regulating economy

Risk management :Risk transaction

Information transmissionCorporate governance

Macro –regulation:Guiding consumers

Regional coordination Wealth redistribution

Basic functions

Main functions

Derivative functions


Insurance Mixed Operation

• From Insurance Mechanism turning to Financial Mechanism

• From Insurance Market going to Capital Market

• From Risk Warehousing changing to Risk Intermediary.


Insurance Mixed Operation

投资银行 /证券公司

保险公司

共同基金和养老基金商业银行c

h i

abf e

dg

Increase in capital intensiveness

Increasein

liabilityliquidity

a. Underwriting b. Risk securitization c. Commercial loand. Asset managemente. Securities underwritingf. Securities distributiong. M&A consulting h. Settlement i. Bancassurance


More Catastrophic Risks

• Earthquakes

• Hurricanes, typhoons, tornadoes 洪水、雪灾• Terrorism

• Insurance Fraud

Relevant measures Government policies and financial supportsReinsurance Catastrophe risk securitization


Highlights: Property/Casualty Full-Year 2003 vs. 2002

2003 2002 Change

Net Written Prem. 405,855 369,673 +9.8%

Loss 289,800 283,640 +2.2%

Net UW Gain (Loss) (4,635) (30,840) -85.0%

Net Inv. Income 38,686 37,225 +3.9%

Net Income 29,877 3,046 +880.9%

Surplus* 346,987 285,386 +21.6%

Combined Ratio 100.1 107.3 -7.2 pts.Northwest University Huixia Liu

P/C Net Income After Taxes1991-2003 ($ Millions)

$14,178

$5,840

$19,316

$10,870

$20,598

$24,404

$36,819

$30,773

$21,865$20,559

-$6,970

$3,046

$29,877

-$10,000

$0

$10,000

$20,000

$30,000

$40,000

91 92 93 94 95 96 97 98 99 00 01 02 03*

Sources: A.M. Best, ISO, Insurance Information Institute.

2001 was the first year ever with a full year net loss

2002 ROE = 1.0%

2003 ROE = 9.4%


95

100

105

110

115

120

70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03*

04*

ROE: P/C vs. All Industries 1987–2004E

Source: Insurance Information Institute; FortuneNorthwest University Huixia Liu

95

100

105

110

115

120

70

71

72

73

74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

00

01

02

03

*0

4*

P/C Industry Combined Ratio2001 = 115.7

2002 = 107.2

2003 = 100.1

2004E = 100.0*

Combined Ratios

1970s: 100.3

1980s: 109.2

1990s: 107.8

2000-04: 106.7

Sources: A.M. Best; ISO, III *2004 figures based on III Groundhog Survey, 2/04.Northwest University Huixia Liu

($60)

($50)

($40)

($30)

($20)

($10)

$0

$10

19

75

19

76

19

77

19

78

19

79

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

Underwriting Gain (Loss)1975-2004F*

*2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from IIIGroundhog forecast, 2/04.Source: A.M. Best, Insurance Information Institute

$ B

illi

ons

2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The

forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio.


110

.5

10

5.0 11

3.6 11

9.2

10

4.8

10

0.8

10

0.5

114

.3

10

6.5

12

1.3

10

0.31

08

.8 115

.8

10

6.9

10

8.5

10

6.5

10

5.8

10

1.6

10

5.6

10

7.7

110

.0 115

.7

10

7.2

10

0.1

16

2.5

12

6.5

90

100

110

120

130

140

150

160

170

Reinsurance All Lines Combined Ratio

Combined Ratio: Reinsurance vs. P/C Industry

Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute

2001’s combined ratio was the worst-ever for reinsurers; 2002 was bad as well.

2003: Big improvement in primary and reinsurer segments


$0

$9

$18

$27

$36

$45

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03

Net Investment Income

History

1997 Peak = $41.5B

2000= $40.7B

2001 = $37.7B

2002 = $37.2B

2003 = $38.7B

Bil

lion

s

(US

$)

Investment income fell 1.3%in 2002 but rose 3.9% in 2003

Source: A.M. Best, ISO, Insurance Information InstituteNorthwest University Huixia Liu

US Insurers’ Asset Allocation, 1998-2002 (%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1998 2000 2002

Other

Cash & short-term assets

Bonds

Common andpreferred stock

Real estate andmortgages

Source: Insurance Information Institute and A.M. Best CoNorthwest University Huixia Liu

Swiss Re Asset Allocation Shift: 1999-2003

62%69%

75%81% 86%

34%26%

20%14%

10%

4% 5% 5% 5% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003*

OtherInvestments

Shares

Fixed IncomeInvestments

*As of June 30, 2003

Source: Swiss Re

“Strong growth in fixed income portfolio reflects reallocation of funds from equity portfolios, cash inflows, market appreciation and two Admin Re transactions.”

- Swiss Re Analysts’ Meeting, 08/29/03

Swiss Re’s fixed income portfolio increased to CHF 81 billion at the end of the first half of 2003, up from CHF 74 billion at year-end 2002.


Allianz Group Asset Allocation Shift: 1999-2003*

54% 55%67%

73% 77%

37% 36%26% 19% 16%

6% 6% 4% 5% 4%3%3%3.0%3% 3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999 2000 2001 2002 2003*

Other

Real Estate

Equities

Fixed IncomeInvestments

*As of September 30, 2003.

Source: Allianz Group Financial Results 9M 2003.

Allianz’s equity exposure has reduced significantly since 1999.


U.S. InsuredCatastrophe Losses ($ Billions)

$7.5

$2.7$4.7

$22.9

$5.5

$16.9

$8.3 $7.3

$2.6

$10.1$8.3

$4.3

$28.1

$5.9

$12.9

$1.0$0

$5

$10

$15

$20

$25

$30

89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04*

*2004 figure is for 1st quarter only ($963 million).Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims.Source: Property Claims Service/ISO; Insurance Information Institute

$ Billions2003 was the 4th worst year ever for insured catastrophe losses in the US. There were 4

events with losses exceeding $1 billion


WORKERS COMPENSATION MEDICAL COSTS:

CRITICAL CONDITION


+6.8%+1.3%

+5.1%+6.4%

+7.3%+5.7%

+7.4%

+7.6%

+10.7%

+12.0%

-2.1%+9.0%

6

7

8

9

10

11

12

13

14

15

16

Accident Year

WC Medical Claim Costs Accelerating Too

Medical Claim Cost (000s)

Annual Change 1991-1995: +4.0%

Annual Change 1996-2001: +8.1%

Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002Based on the states where NCCI provides ratemaking servicesExcludes the effects of deductible policies

Source: NCCINorthwest University Huixia Liu

4.5%3.6%

2.8% 3.2% 3.5%4.1%

4.6% 4.7%

5.1%

6.4%7.3%

5.7%

7.4% 7.6%

10.7%

12.0%

0%

2%

4%

6%

8%

10%

12%

14%

1995 1996 1997 1998 1999 2000 2001 2002

Change in Medical CPIChange Med Cost per Lost Time Claim

WC Medical Severity Rising Far Faster than Medical CPI

Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.

7.3

pts

WC medical severity is rising 2.7 times faster than the

medical CPI


Med Costs Share of Total Costs is Increasing Steadily

Indemnity60%

Medical40%

Source: NCCI (based on states where NCCI provides ratemaking services).

Indemnity52%

Medical48%

Indemnity47%

Medical53%

1982

1992

2002p


6.5%

7.7%8.6%

9.5% 9.6%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

1997 1998 1999 2000 2001

WC Drug Costs as % of Total WC Medical Costs*

*Analysis is on an accident year (AY) basis, developed through 8th report.Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans.

WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind

the accelerating cost of providing medical care to injured workers.


Prevalence of Overweight and Obesity among US Adults (aged 20-74 years)

32 33 33

56%

64%

47%

0

10

20

30

40

50

60

70

NHANES II (1976-80) NHANES III (1988-94) NHANES (1999-2000)

%

Obese (BMI>30)

Overweight (BMI 25.0-29.9)

Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition

Examination Survey (NHANES); Insurance Information Institute

Nearly 2/3 of US adults are overweight or obese, up

from 47% in the late 1970s

15

2331


THE CHALLENGE OF TERRORISM


EVENT

WTC victims (workers & visitors)*

WTC hijacked jets (incl. 10 hijackers)

Pentagon victims on the ground

Pentagon hijacked jet (incl. 5 hijackers)

Pennsylvania jet crash (incl. 4 hijackers)

DEATHS

2,605

157

125

64

44

TOTAL 2,995

Source: *New York City Medical Examiner estimate of 2,752 (as of 29 Oct. 2003), less 147 killed on hijacked jets.

Death Toll from September 11, 2001 Terrorist

Attack


Sept. 11 Industry Loss Estimates($ Billions)

Life$1.0 (3.1%)

AviationLiability

$3.5 (10.8%)

OtherLiability

$4.0 (12.3%)

BizInterruption

$11.0 (33.8%)

Property -WTC 1 & 2

$3.6 (11.1%) Property -Other

$6.0 (19.5%)

Aviation Hull$0.5 (1.5%)

EventCancellation$1.0 (3.1%)

WorkersComp

$1.8 (5.8%)

Current Insured Losses Estimate: $32.5BSource: Insurance Information Institute


Terrorism Coverage Take-Up Rate Rising

Source: Marsh, Inc.; Insurance Information Institute

24%26%

33%

27%

2003:II 2003:III 2003:IV Average

FACTS on Take-Up Rates

Highest = Energy Industry = 40.5%

Lowest = Construction = 12.2%

Northeast = Highest = 30.3%

West = Lowest = 18.6%

Terrorism take-up rate rose through 2003 as commercial property

premiums level-off or fall


Total International Terrorist Attacks, 2002

Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute

5

99

7

5029

0 98

327

245

13

132

0 0

Africa Asia Eurasia LatinAmerica

MiddleEast

NorthAmerica

WesternEurope

Number of Attacks Deaths

In 2002, there were 199 terrorist attacks resulting in 725 deaths and 2,013 injuries


Global Insurance After 2008


World insurance in 2009

• In 2009 life and nonlife insurance premiums (excluding cross-border business) accounted for 17.29 percent of gross domestic product (GDP) in Taiwan, the highest share in the Swiss Re study, followed by 13.57 percent in the Netherlands, 12.92 percent in the United Kingdom and 12.89 percent in South Africa. Premiums represented 8.07 percent of GDP in the United States.



• Among the 10 largest insurance markets, premiums per capita ranged from a high of $6,555 in the Netherlands to a low of $121 in China.

• In the United States premiums per capita totaled $3,743, including $1,633 for life insurance and $2,110 for nonlife insurance.



• Swiss Re’s 2009 world insurance study is based on direct premium data from 159 countries, with detailed information on the largest 88 markets.



• According to the latest Swiss Re sigma study, world insurance premiums totaled $4.10 trillion in 2009, down from $4.22 trillion in 2008.

• Nevertheless, in most emerging countries insurance premiums grew faster than GDP in 2009 and that the industry’s profitability and capital strength improved as the credit and stock markets recovered.


World insurance in 2009• The drop in world premiums largely reflects

declines in the markets of industrialized countries, as contrasted with growth in emerging markets.

• On an inflation-adjusted basis, total premiums rose 3.9 percent in emerging markets, compared with a 0.9 percent decline in industrialized countries.

• In the United States, the world’s largest insurance market, inflation-adjusted life premiums fell 13.0 percent and inflation-adjusted nonlife premiums fell 1.7 percent.



• Life convers 52% of the total premiums, while non-life convers 48%


Prospects and Trends


Preview

Read and prepare the questions from “Risk in Our Society “( P1-14 ）


Documents

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