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The objective of this part of the induction programme is to introduce and give a brief overview of the insurance business which we operate, with an explanation of the type of activities that take place within the insurance market place and the description of the market's structure. Following this, the insurance market participants shall be identified and their functions discussed. Then, finally explain how these market participants/players contribute to the insurance value chain.
This programme is written with the assumption that the intended reader or audience have a basic knowledge/understanding of the Insurance business such as the characteristics of Insurable risk, Legal principles of Insurance, the common pool principle and the Law of large numbers. Although some of these terms will be defined and discussed as necessary during the course of the induction it is should be understood that this write up is intended as an introductory guide to the insurance market place.
Insurance plays a very vital socio-economic role/function in the society, which offers the insured a form of protection (indemnity) against risk or uncertainties that may have potentially adverse financial effect. The main purpose is to give the insured or policy holder, peace of mind knowing that they can be indemnified against financial loss should the worse happens.
The Insurance Market
It can be argued that the most important element in the insurance market is the customer/client i.e. the potential policy holder or the already insured on the other end of the spectrum, without whom there would be no market for Insurance products. It is the client/customer who is aware of a potential risk, its possible implications and understands the need to sort protection against adverse eventuality, and then subsequently decides to spread the risk through an insurance pool or transfer that risk to the insurer.
There are a number of participants in the insurance market who play different complementary roles to ensure that the market functions effectively and efficiently. These functions are so diverse and equally vital to the success of the overall system. Each of these functions/elements has its core success drivers which enables them to contribute to the insurance value chain. The insurance functions vary from the initial process of product manufacturing, through the process of Intellectual capital i.e. products innovation and development, and the actual distribution/delivery of these products to the policy holders.
In the meantime, for the purpose of this exercise, the insurance market's participant will be categorised as follows:
Most of the Design and development functions of the value chain are retained with the risk carriers. Within this function is the Intellectual Capital (IC) of function, which involves all of the following the technical underwriting, claims management, risk management and product design and pricing. The principal driver of this function is the ability to create innovative and better products in the market that can be to proposers/clients at a profit. The speed of innovative over the years has been enhanced by technology.
The Primary/Direct Insurer
The Insurance market is solely built around the primary/ direct insurer (underwriters).These organisations accept proposal from clients who want to transfer or spread their potential risk to the insurer at a price (premium) to meet any valid claims within the agreed terms and period of the policy.
There three types of insurance organisations which are:
Proprietary: these are shareholder-based limited company, which can either be private or public entity.
Mutual: these are owned by customers (who are also members) for mutual benefits
Unlimited Liability vehicles: These type of organisation are not very uncommon and are in decline, with a special arrangement amongst its associations and partners who sometime have unlimited liability.
Insurance is generally categorised into two groups namely: General (short-term) Insurance and Life Insurance (Long-term), with a majority of the world's insurers, estimated to be around 70% focusing on general insurance otherwise referred to as property and casualty, while an estimated 25% concentrate on issuing life policies, and the remainder deal on both which is termed composite. Most insurance businesses will usually operate within a certain geographical location or country focusing mainly on the local market while a relative few operate across international borders.
For convenience, where it is cost efficient and tax reasons large corporations set up their in house though separate insurance entities referred to as 'captive insurer' for the purpose of risk transfer. This is done within industry where the type of risk posed to the corporation is understood. In some cases, they then reinsure the majority of these risks to another insurer retaining a fraction of it.
Ideally most risks are taken on directly by a primary insurer, accepting the entire risk. However, on the contrary, some specialist or particularly complex risk will require more than one primary insurer to take on a portion of the total risk where such risk is too much for a single primary insurer.
There are two major ways in which primary insurer deal with these specialist or complex risk procedures.
1.1.1 Coinsurance (London Market 'slip')
This is most popularly practiced in specialist markets like the Lloyd's market in London. Where a 'lead insurer' who determines the rate of premium and also performs administrative processes solicit other primary insurers to take a portion of the total risk in return for appropriate portion of the premium, adjust for the administrative cost if the risk acceptable and sufficiently priced.
1.1.2 Insurance Pools
Slightly different from the coinsurance, in which primary insurers are members of an organisation (a separate entity) that has its underwriting and administration functions monitored by its members. Members share the outcome of the pool in agreed proportion without getting involved with individual risk level
1.2 The Reinsurers
Reinsurance is the process whereby a primary insurer transfers some of its risk to another insurance company (insurer). This enables the primary free up enough of its capital in order to issue more policies and also spread its risk-base. The insurer and the reinsurers (also an insurer) enter into an agreement where the reinsurer pays the excesses or proportion of the losses by accepting a premium from the primary insurer to the meet the claims. However, the contractual agreement between the primary insurer and the policy holder is not binding on the reinsurer.
There are two ways which this can be done:
1.2.1 Facultative Reinsurance
This method of reinsurance is used to cover a single risk i.e. each facultative risk is reinsured specifically and individually by the reinsurer to cover a single policy.
1.2.2 Treaty Reinsurance
This is a contract agreement between the primary insurer and reinsurer to cover certain policies that fall within the agreed terms of the contract. This is either done through:
Proportional (quota) representation or
Excess of loss
There are a number of service providers that support the activities of the Insurance industry in their auxiliary capacity through either professional services or through special arrangements.
The majority of Insurance products are sold or distributed through intermediaries (mainly independent broker) who act as agents for a commission or fee on behalf of the proposer to get the best policy from the insurer. Although, some very few primary insurer offer their products directly in the market, where they effectively incorporate the manufacturing and distribution element of the value chain. Hence, there should be no confusion between an agent and a broker. The latter is independent, without any contractual obligation to any insurer simply relying on direct business transaction and negotiation method to secure the right policies for clients while the former is a representative of the insurer under a contractual alliance to the insurer and not the buyer. This stance can be debatable as the agent might not necessarily serve the best interest of the client/proposer.
Insurance brokerage/intermediation is mostly common with general insurance (property and casualty) rather than life insurance. Today, the distribution of insurance products is carried out many types of organizations including traditional brokerages, Independent Financial Advisers (IFAs) and telephone or web-based firms.
The drivers of the function are primarily to meet the needs of the customers, the scope of the offering and customer relationship management.
2.2 Market Organisations
There are different types of market organisation and they are all equally important because of the vital roles they play. Market organisations are important in every market or industry, to present the market to the public, promote and maintain stability, to act as lobbying platform for the industry, source of information for the public, they may also set and implement the industry standards and codes of conducts, etc. Some examples of such organisations are BIBA, CII, ABI, IFSL, IUA, IIL, etc.
2.3 Insurance Services Providers
This element of the market basically fulfils most of the manufacturing function, is driven by efficiency of the economies of scale, volume of policies and the cost effectiveness claims processing.
There are a lot of auxiliary insurance service providers operating within the insurance market, depending on the services performed are either serving the interest the insurer or the insured.
These services are non-risk bearing but an integral part of the system which supports the market and equally contributes to the value chain.
These services are not limited to but include the following:
Risk assessors/surveyors/inspectors: An individual who reports a risk on behalf of the underwriter and make recommendations on loss control.
Loss adjusters: Are individual acting for an insurer in assessing and settling claims.
Loss assessor: Are usually appointed by the insured to negotiate a claim on the behalf.
Damage/loss control services/salvors/etc: All these services play similar roles, which is to reduce the severity or frequency of losses. Although salvors are mainly used in marine insurance. A salvor (salvager) is one who is paid a salvage to save or recover a ship or its cargo where possible.
Assistance services: These are additional, non-insurance services included in insurance products to support their clients. These services ranges from medical advice helpline, legal support, etc