Presentation

On
“Insurer Ownership, Financial, &
Operational Structure”
Presented To : Presented By:
Mr. Abhishek Parikh, Hitendra Patel (71)
Faculty Member, Hiren Mehta (57)
V.M.P.I.M. Kalpesh Joshi (51)
Ganpat University. Pratik Modh (63)
 Insurer Capital
• With a typical insurance policy, the policyholder pays a
fixed premium to the insurer and the insurer promises to pay
losses or benefits as provided under the terms of policy.
• This arrangement raises the question: If the premiums and
investment income are insufficient to pay administrative
costs and claim costs, who is obligated to pay the shortfall?
Conversely, if premium revenue and investment income
exceed the insurer’s costs, who receives the excess?
• The short answer to these questions is that the owners of the
insurer are responsible for any shortfall and the owners have
rights to any excess.
 Ownership Sources of Capital
• Who owns insurance company capital?
• Who commits the capital to provide a cushion from
which unexpectedly high claims costs are paid,
• Who has rights to excess funds when claims costs
are lower than expected? There are two broad
approaches to insurance company ownership.
• One approach is make the policyholders the owners;
the other is to make investors the owners.
 Types of Insurance company
Ownership
• Mutual Insurers:
– The common form of policyholder-owned insurer is called a mutual
insurer.
– They are incorporated insurance companies that usually charge
fixed , advance premiums to policyholders.
– Because policyholder usually can’t be assessed to pay unexpectedly
high claim costs, their liability for the insurer’s claim costs is
limited to what they originally paid in premiums.
• Stock Insurers:
– Stock insurers are incorporated insurance companies that are owned
by investors who have purchased the stock of the company. At its
inception, a stock insurer issues shares of stock.
– There are large numbers of both mutual & stock insurers in the
property-liability and life-health insurance industries.
– In order to achieve greater access to capital, a number of mutual
insurers have converted to stock insurers and hybrid stock-mutual
structures in recent years.
 Cont…
• Lloyd’s of London:
– It provides another example of investor ownership of insurers.
– Lloyd’s of London is not an insurance company, it is organization that
provides a location and more importantly, a set of rules and procedures
under which insurance business is transacted.
– The owners of the insurance organization that conduct business at Lloyd’s of
London are called names.
– At Lloyd’s, insurance policies are sold through syndicates(groups) of names.
• Convergence of financial Service Providers:
– During the latter part of the 1990s, a number of analysts predicted that many
insurance companies would be combined with banking and investment
companies.
– It is combination of banking and investment companies.
 Insurer Operations, Reinsurance, and
Insolvency Risk
• Diversification of Underwriting Risk:
• Reinsurance:
– Primary Function of Reinsurance:
– Types of Reinsurance:
 Diversification of Underwriting Risk
• Underwriting risk- the risk that average claim
costs will not differ from the amount expected
when policies are sold.
• Insurers can reduce underwriting risk.
• Lower underwriting risk reduces the amount of
capital needed for a given level of insolvency risk.
• A potential disadvantage of diversification is less
focus on “core” coverages or geographic regions.
 Reinsurance
• Reinsurance is the purchase of insurance by an
insurer.
• “Reinsurance is a contract of insurance
whereby one insurer (called the reinsurer or
assuming company) agrees, for a portion of the
premium, to indemnify another insurer (called
the reinsured or ceding company) for losses
paid by the reinsured under insurance policies
issued by the reinsured to its policyholders.”
 Elements of Reinsurance
• Reinsurance is a form of insurance.
• There are only two parties to the reinsurance
contract - the Reinsurer and the Reinsured - both
of whom are insurers, i.e. entities empowered to
insure.
• The subject matter of a reinsurance contract is the
insurance liability of the Reinsured undertaken by
it under insurance policies issued to its own
policyholders.
• A reinsurance contract is an indemnity contract.
 What Reinsurance Does

1. It converts the risk of loss of an insurer

incurred by the reinsured under its policies
according to its own needs.
2.It redistributes the premiums received by the
reinsured, which now belong to the reinsured,
according to its own business needs.
 What Reinsurance Does Not Do
• Reinsurance is not coinsurance.
• Reinsurance is not banking – it is not the lending
of money but it can have the same effect.
• Reinsurance is not a security.
• Convert an uninsurable risk into an insurable risk.
• Make loss either more or less likely to happen.
• Make loss either greater or lesser in magnitude.
• Convert bad business into good business.
 Functions of Reinsurance
• Financing
• Stabilization
• Capacity
• Catastrophe Protection
• Services
 Financing
• is growing and needs additional surplus to
maintain acceptable premium to surplus ratios.
• Unearned premium demands reduce surplus.
• In a down cycle, underwriting results are bad and
reduce surplus.
• Investment valuation negatively impacts surplus.
• Marketing considerations dictate that an insurer
enter new lines of business or new territories.
 Stabilization
• Marketing Consideration
• Policyholders and stockholders like to be
identified with a stable and well managed
company.

• Management Consideration
• Planning for long term growth and development
requires a more stable environment than an
insurance company’s book of business is apt to
provide.
 Capacity
• Refers to an insurer’s ability to provide a high
limit of insurance for a single risk, often a
requirement in today’s market.
• Reinsurance can help limit an insurer’s loss
from one risk to a level with which
management and shareholders are comfortable.
• Most states require that the maximum “net
retention” from one risk must be less than 10%
of policyholders’ surplus.
 Catastrophe Protection
• Objective is to limit adverse effects on P&L
and surplus from a catastrophic event to a
predetermined amount.

• Covers multiple smaller losses from numerous

policies issued by one primary insurer arising
from one event.
 Services
• Claims Audit
• Underwriting
• Product Development
• Actuarial Review
• Financial Advice
• Accounting, EDP and other systems
• Engineering - Loss Prevention
 Reinsurance is Provided Through
A. Treaty
a. Covers classes or entire “books” of business
b. Reinsurer accepts as written by insurer as to
form, price and risk
B. Facultative
a. Single Policy/Risk
b. Reinsurer evaluates each risk and
establishes or agrees to acceptance, form and
price
c. Automatic or semi-automatic facilities
 Types of Reinsurers
• Professional Reinsurers
– Specialize in Reinsurance
– Are Licensed in at Least One State
– Derive Majority of Their Premium Income From
Reinsurance
– Forms
• Stock Company
• Mutual Company
• U.S. Branch of Alien Company
 Types of Reinsurers
• Reinsurance Department of Primary Company
• Pools
– Special Purpose
– General Purpose
• Lloyd’s of London
 References
• Book:
– RISK MANAGEMENT AND INSURANCE
CHAPTER:5. INSURER OWNERSHIP,FINANCIAL AND OPERATIONAL
STRUCTURE,Page.75-95.
AUTHOR:HARRINGTON NIEHAUS
SECOND EDITION
TATA MCGRAW HILL EDITION
Thank You..