Finance
Angel Wise
A3.pptxModule 12
Insurance Companies
Outline
Foundations of Insurance
Insurance Categories
Organization of Insurance Companies
Insurance Industry Structure
Life Insurance Companies
Property and Casualty Insurance Companies
Insurance Industry Regulation
Insurance Industry Recent Trends
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Foundations of Insurance Major Issues
Adverse selection occurs when the people most likely to benefit from a transaction are the ones who actively seek out the transaction and are thus likely to be selected.
Insured have higher risk than general population.
Loss probability statistics gathered for the entire population may not truly reflect the loss potential for the people who actually want to buy policies.
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Foundations of Insurance Major Issues
Moral hazard refers to the fact that an insurance policy changes the behaviour of the insured person.
A fire insurance policy written for more than the value of the property may induce the owner to arson.
A generous automobile insurance policy may encourage reckless driving.
Concern arises when we cannot observe people’s actions and so cannot judge whether a poor outcome is intentional or just a result of bad luck.
Solutions to the moral hazard problem are hard to find.
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Foundations of Insurance
To alleviate problems, insurance companies try the following:
information collection and screening
risk-based premium
restrictive provisions
prevention of fraud by investigations
cancellations of insurance
deductibles
co-insurance
limits on the insurance coverage
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5
Foundations of Insurance
The insured (party covered by insurance) and the beneficiary (party receiving payout if loss occurs) must be related.
The insurer (party selling the insurance) must be provided with complete and accurate information by the insured.
The insured is not supposed to profit from buying insurance.
The payout needs to be adjusted with any compensation from a third party.
The insurer must have a pool of insured large enough to diversify the risks.
The loss must be quantifiable.
The insurer must be able to estimate the loss occurrence.
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Foundations of Insurance
Risk-averse people with incentives buy insurance.
Insurance is usually sold through agents.
Independent agent: sell insurance for a number of different companies (i.e., insurance broker)
Exclusive agent: sell insurance for only one company (i.e., insurance agent)
Regardless of the sales approach, insurance companies hire an underwriter who decides whether to accept or reject the issuance of a policy.
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Insurance Categories
Insurance: a device whereby an individual or a business transfers the risk of uncertain financial loss by payment of a premium.
Broadly grouped as life insurance and property and casualty insurance with further classifications:
Life insurance
Health insurance
Property insurance
Liability insurance
Credit insurance
Farm insurance
Reinsurance
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Insurance Categories
Ten largest insurance companies (as of December 31, 2019):
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| Company | Total Assets |
| Manulife Financial Group | $809.130 billion |
| Great-West LifeCo | $451.167 billion |
| Sun Life Financial | $297.202 billion |
| Fairfax Financial | $92.203 billion |
| Industrial Alliance Financial Corp. | $73.148 billion |
| Desjardins Insurance | $53.152 billion |
| Intact Financial | $32.292 billion |
| E-L Financial Corp. (Empire Life) | $23.749 billion |
| RBC Insurance | $18.191 billion |
| Co-operators Group | $15.002 billion |
Organization of Insurance Companies
Mutual Insurance company: accumulated profits owned by policyholders.
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Policyholders
Mutual Insurer
Policy and Ownership Rights
Policy Dividends
Organization of Insurance Companies
Stock Insurance company: accumulated profits owned by shareholders.
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Policyholders
Mutual Insurer
Policy Rights
Shareholders
Stock Dividends
Ownership Rights
Insurance Industry Structure
Insurance pools risk exposures, allowing losses to be shared and reducing the uncertainty of loss.
Insurance industry is a clunky legacy system.
Clients have evolving expectations for insurance transactions, insurance products and services.
Online distribution platform for insurers with a direct-to-consumer channel.
Montreal-based InsurTech: Breath Life
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Insurance Industry Structure
A healthy economy supports earnings growth at Canadian life insurers and premium growth for property and casualty firms, despite the ongoing drag of low interest rates on the insurers’ profitability and investment performance.
Solid asset quality remains a driver of the stable outlook.
Insurers have the capacity to invest in technology to guard against competitive disruption.
This investment should enhance client interface and drive opportunities for all insurers to benefit from claims efficiencies and risk segmentation.
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Life Insurance Companies Overview
Protect nearly 29 million Canadians with various life insurance products and pay $98 billion in benefits.
The average life insurance protection per household is $423,000 in 2019, up from $417,000.
The industry is competitive, with 100 Canadian insurers and 38 foreign-owned insurers.
78 private life insurers, 8 not-for-profit health benefit providers and 14 fraternal benefit societies
Many private life insurers are diversified financial institutions offering more than life insurance.
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Life Insurance Companies Overview
Top six life insurers based on annual revenues (2019):
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| Company | Founded | A.M. Rating | Annual Revenues | Net Income |
| Manulife Financial | 1887 | A+ | $77.83 B | $5,276 M |
| Great-West LifeCo (Canada Life) | 1891 | A+ (Superior) | $44.71 B | $2,492 M |
| Sun Life Financial | 1846 | A+ | $39.69 B | $2,713 M |
| IA Financial | 1892 | A | $15.27 B | $708 M |
| RBC Insurance | 1864 | A | $4.27 B | $775 M |
| Empire Life (E-L Financial) | 1923 | A (Excellent) | $2.12 B | $187.44 M |
In 2019, life insurers in Canada hired 156,000 workers locally and 169,000 employees outside Canada
Although there has been an annual growth of 2.5% over the past decade, the momentum may not continue due to different challenges ahead.
Life insurance companies hold over $850 billion of assets in Canada.
Canadian life and health insurers operate in more than 20 countries serving 60 million people with total assets of $898 billion
57.2% Canada, 12.% US, Asia 11.1%, Europe 9.0%, others 10.5%
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Life Insurance Companies Insurance Contract
Pay upon insurance event
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Life Insurance Policy
Insurance Company
Beneficiary
Asset Mgmt.
Policyholder
Life Insurance Companies Lines of Life Insurance: Ordinary Life
Ordinary life insurance is sold to individuals—policyholders make periodic premium payments in exchange for coverage.
Term life policy is pure life insurance with expiry date and no savings element attached.
Permanent life policy offers a package of pure life insurance protection and investing opportunities with no expiry.
Whole life
Universal life
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Life Insurance Companies Lines of Life Insurance: Ordinary Life
Term life insurance
temporary insurance protection
low cost
no cash value
usually renewable
likely convertible to permanent life insurance without further underwriting
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Life Insurance Companies Lines of Life Insurance: Ordinary Life
Permanent Life Insurance
meet life-long protection needs
have an investment component
no expiry date as long as premiums are paid
more expensive to own
build cash value
loans are permitted against the policy
favourable tax treatment of policy earnings
flexible premium allocation
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Life Insurance Companies Lines of Life Insurance: Ordinary Life
Permanent Life insurance can be divided into two categories:
Whole Life: traditional form where insurer takes on all risks related to death and the underlying investment performance.
Premiums partly fund an increase in cash value.
Expensive.
Universal Life: policyholders select investment options and insurer assumes the risk related to death.
Policyholder may vary the timing and amount of premium as circumstances change.
Cash value depends on the pace of the premium.
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Life Insurance Companies Lines of Life Insurance: Group and Credit
Group life insurance covers a large number of people under a single policy.
Contributory: both the employer and the employee cover a share of the premiums.
Noncontributory: the costs are borne entirely by the employer.
Credit life insurance protects lenders in the event a borrower dies prior to the repayment of a debt contract, such as a mortgage or car loan.
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Life Insurance Companies Lines of Life Insurance: Other Activities
Other activities of life insurers include the sale of annuities, private pension plans, and accident and health insurance.
Annuities protect against the risk of outliving your retirement money.
Contract is initiated by investing a lump sum or making periodic payments before the annuity payments begin.
Canadians’ retirement savings in RRSP, TSFA and RRIF are managed by the industry.
Health insurance supplements government benefits.
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Life Insurance Companies Assets and Liabilities
With a steady flow of premiums and predictable benefit payments, life insurers can securely invest in long-term capital markets.
The mix of investments within general and segregated funds reflects the nature of the underlying insurance contracts of two funds.
Liabilities come from the premiums paid by insured clients and from pension funds under management.
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Invest over $780 billion in long-term capital markets
bonds (36%), mutual funds (30%), stocks (18%), mortgages (6%), real estate (3%) and others (7%)
Total premiums have grown to $117 billion in 2019 written on various life insurance lines:
$22.7 billion (19%) from life insurance policies with 80% individuals and 20% group
$48.0 billion (41%) from annuities with 83% from registered plans (e.g. RRSP, TSFA, RRIF)
$46.3 billion (40%) from health plans with 10% individuals, 90% group
Benefit payments increase to $98 billion or nearly $1.9 billion a week, up 50% from 10 years ago.
$13.2 billion on life insurance benefits
$7.7 billion paid as death benefits and $553 billion paid to living policyholders as disability benefits, cash surrenders or dividends
$36.1 billion on health insurance benefits
$11.7 billion for prescription drugs, which accounts for about 35% of Canada’s total spending on prescription drugs
$48.7 billion on retirement benefits with annuity payments on employer-sponsored and individual products
Increase at an average rate of 6% per year since 2008
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Life Insurance Companies Assets and Liabilities
Segregated funds are kept separate from the rest of the insurer’s activities.
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| Assets ($762 B) | Liabilities ($665 B) and Equities ($97 B) |
| General Funds ($470 B) | |
| 5% short-term investment | 72% policyholder liabilities |
| 87% long-term investment | 7% other liabilities |
| 8% other investment | 21% equities and long-term debt |
| Segregated Funds ($292 B) | |
| 16% cash & other investment | 100% policyholder liabilities |
| 34% real estate & mortgages | |
| 50% mutual funds |
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Property-Casualty Insurance Companies
Currently, 198 companies sell property-casualty (P&C) insurance in Canada, and approximately half of them are foreign firms.
Top 10 firms hold 65% market share.
In 2018, Intact Financial was the top firm, writing 14.4% of all P&C insurance premiums.
Most banks have insurance subsidiaries, as they are not allowed to sell insurance through their branch networks.
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Property-Casualty Insurance Companies
Property insurance protects the insured against losses of real and personal property from fire, theft, storm, explosion and even neglect.
The policy can be either a named-peril policy or an open-peril policy.
Named-peril policies cover losses associated with specific named events (e.g., flood insurance).
Open-peril policies insure against all perils except those specifically excluded by the policy (e.g., war)
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Property-Casualty Insurance Companies
Casualty insurance offers protection from legal responsibility for losses stemming from damage to another’s property or an injury to another person.
Distinctions between property and casualty insurance are increasingly become blurred because they are often sold together.
Auto insurance: you wrecking your car is covered under property insurance, while you accidentally hitting another car with yours is covered under casualty insurance.
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Property-Casualty Insurance Companies
Top ten leading private P&C Insurers (2019):
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| Company | Market share |
| Intact Group | 14.44% |
| Aviva Group | 8.91% |
| Desjardins Group | 8.33% |
| Lloyd’s Underwriters | 5.91% |
| Cooperators Group | 5.57% |
| Wawanesa Mutual Insurance Company | 5.47% |
| TD Insurance Group | 5.39% |
| RSA Group | 5.13% |
| Economical Group | 4.10% |
| Northbridge Group | 2.88% |
P&C Insurance Companies Lines of P&C Insurance
Insurance companies earn revenues through premiums and on investments they make.
Report premiums in two ways:
Direct written premiums: total premiums collected
Net written premiums: total amounts adjusted for portions paid to reinsurers
To spread the risk, a reinsurance company agrees to accept risks of another insurance company in exchange for a payment.
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P&C Insurance Companies Lines of P&C Insurance
P&C insurers have $59.6 billion in direct written premiums on six major lines in 2019.
Among the net written premiums of $54.1 billion:
Automobile Insurance: 44.1%
Property Insurance:
Personal: 22.2%
Commercial:14.2%
Liability Insurance: 10.2%
Specialized Insurance: 7.1%
Accident and Sickness Insurance: 2.2%
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P&C Insurance Companies Lines of P&C Insurance
Total direct claim costs by line in 2019:
Net claims incurred are the total claim costs less any share to be paid by reinsurers.
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| Line of Business | $ million | % of the total claims |
| Auto | 18,205 | 44.6 |
| Personal property | 7,810 | 20.0 |
| Commercial property | 6,466 | 16.5 |
| Liabilities | 3,746 | 9.6 |
| Specialized | 1,985 | 5.1 |
| Accident and sickness | 871 | 2.2 |
| $39,084 | 100% |
P&C Insurance Companies Assets and Liabilities
Assets
Out of the total investment of $117 billion, many of those assets have fixed returns that can be liquidated easily.
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| Assets | Amount | Fraction |
| Bonds | $80,586 M | 68.9% |
| Stocks | $10,904 M | 9.3% |
| Mortgages | $1,202 M | 1.0% |
| Real estates | $530 M | 0.5% |
| Term deposits | $4,436 M | 3.8% |
| Others | $19,366 M | 16.5% |
P&C Insurance Companies Assets and Liabilities
Liabilities
About 57% of the total liabilities and equity are unpaid claims and adjustment expenses items.
Risk exposure of property insurance is limited to the property value, but liability risk exposure is much more difficult to determine.
Liability risk exposure can have long lag times (tails).
Liability lines may be subject to social inflation.
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P&C Insurance Companies Assets and Liabilities
To determine insurance premiums, insurers consider the likelihood of a customer making a claim and how much those claims will like cost.
Underwriting risk is the risk that premiums are insufficient to cover losses and operating expenses after taking into account investment income.
Three sources of underwriting risk:
unexpected increases in loss rates
unexpected increases in expenses
unexpected decreases in investment yields
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P&C Insurance Companies Assets and Liabilities
Four key ratios:
Loss ratio: the actual claims incurred on a business line relative to the net premium earned
Expense ratio: the expenses incurred relative to the net premium written, including loss adjustment expenses and mainly employee compensations
Combined ratio: includes both the loss ratio and the expense ratio
Operating ratio: measures overall profitability by subtracting the investment yield from the combined ratio
Investment yield is measured as net interest income divided by premiums earned
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P&C industry ratios in 2019:
earned loss ratio = 67.7%
expense ratio = 30.9%
combined ratio = 98.6%
investment yield = 2% lowest on record
operating ratio = 98.6% − 2% = 96.6%
Overall profitability = 100% − 96.6% = 3.4%
Less profitable firms exit the industry, and there is a rapid increase in premiums among the survivors.
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P&C Insurance Companies Assets and Liabilities
36
Insurance Industry Regulation Life Insurance Companies
Federal and provincial governments share jurisdiction.
OSFI: governs through the Insurance Companies Act
prudential regulation, concerned with safety and soundness of the industry
Provincial regulation
marketing of insurance products and licensing requirements
Canadian Life and Health Insurance Compensation Corporation: industry-funded organization to protect policyholders
$200,000 on claims in case of bankruptcy
$60,000 in cash policy coverage.
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Insurance Industry Regulation P&C Insurance Companies
As P&C insurers may be federally or provincially incorporated, regulation is shared by provincial and federal government.
OSFI is the federal regulator responsible for 75% of companies.
Property and Casualty Insurance Compensation Corporation: pay outstanding claims and refund premiums paid in advance up to the following limits:
auto and commercial insurance policies: up to $250,000
home insurance policies: up to $300,000 per policy
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Insurance Industry Recent Trends Major Issues
Insurance industry becoming more global
cross-country mergers (insurance companies as well as universal banks)
Insurance crime
Severe weather claims
Catastrophic losses
Introduction and acceleration of insurance market reforms
auto insurance
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Insurance Industry Recent Trends InsurTech
Insurers are increasingly focused on consumers’ needs with more tailored product offerings.
Despite lower premium growth and rising claims costs, insurance companies continue to innovate and adapt through the following:
artificial Intelligence (AI)
robotic process automation (RPA)
machine learning
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Insurance Industry Recent Trends InsurTech
Insurance companies must resolve the “synthesis challenge”—integrating innovation into the legacy resistant environment.
Many are beginning to pivot from investments that support business as usual to financing innovations that facilitate more fundamental business model changes.
All need to adapt a more customer-centric approach to run their businesses.
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