Chapter 01 - Structure of The Insurance Industry

Sri Lanka Insurance Institute
SL/DIP/IBF
Insurance Business Management and
Finance Aspects
Chapter 01
Structure of the Insurance Industry
M Tharaka Perera
ACII, FIII, MBA- Finance
No. 93 Hunupitiya Lake Road, Colombo 02, Tel No.: 011 245 1426, 011 243 2050, 011 242 1404 , E-mail: slii@sltnet.lk Web: www.slii.lk
Structure of the Insurance Industry

Different Types of insurance organizations;
Global Perspectives;
Different sellers and distributors of insurance;
Importance of the customer.
Importance of other stakeholders;
Company growth and mergers and acquisitions;
Outsourcing
A Different types of insurance organizations

Three Types of Insurance Companies:
Composite,
Life Insurance
General Insurance.
 Insurance Market
Sellers: Insurance Companies and Lloyd’s
Buyers: General Public, organizations and public Authorities.
Middlemen: Insurance brokers and intermediaries.
Types of insurance organization:
Proprietary companies (Limited liability):
Authorized and issued share capital that shareholders have subscribed.
Shareholders liability is limited to value of their shares.
Company is liable for their debt.
Mutual companies (Cooperatives):
Company is owned by policyholders.
Lloyd’s:
Underwriting members can be both individuals and corporates
Members are in administrative groups call Syndicates
Underwriting business is carried out by managing agents.
Provide Bespoke insurance solutions.
A Different types of insurance organization.

Types of insurance organization:
Captive insurance Companies
A Large Company forms a subsidiary to underwrite its own risks.
Pay premiums based on its own loss experience and purchase
reinsurance accordingly.
Operate from offshore locations.
Takaful insurance companies (Guaranteeing Each Other)
Based on the rulings of Sharia law on financial transactions.
Risks and returns should be shared between participants.
Reinsurers:
Insurers protect themselves via reinsurance.
The State
Self Insurance:
Setting a side its own funds to meet the losses
B The global perspective
With the advancement of the technology, the world has become more
international, expansion and globalization issues have become more
important.
Multinational: Operates in different countries but have a home base.
Eg: Prudential PLC.
Global:- Company sees the whole world as one potential Market. Eg: Lloyd’s
The London Market:
Comprises of reinsurers, Lloyd’s and brokers
Leading global market for Aviation and Marine.
1/3rd of the total insurance written in GB.
C Different sellers and distributors of insurance
C1 Who are Direct Insurers?

They accept proposals from the prospective clients
directly , without intermediary entity (agents, brokers,
banks, etc.), and able to provide insurance solutions
(Underwrite and claims processing) then and their.
All information are exchange with the aid of latest ICT.
C2 The Internet?
Banks, Online Insurance Brokers, Well known
companies

C3 Independent Intermediaries?
Full time experts in insurance and able to offer
various personal and commercial products with a
range of companies, usually paid commission on
the premium by the insurer.
C4 Insurance Agents?
Usually be appointed representatives and will be
limited to offering policies from one particular
insurance company.
C5 Building Societies?

Building Societies provide mortgages therefore
require mortgage protection insurance against the
mortgagee’s life.
C6 Banks?
Due to large customer base and extensive branch
network to develop new customers they have the
ability and the advantage of involving in providing
insurance services.

C7 Retailers and affinity groups?
As an additional service to their normal business,
Retailers have opportunity of marketing insurance
products to very large customer base.
Insurers together with retailers uses the concept of
‘white Labeling’ where retailers offer insurance
products branded with their own name but
underwritten by an insurance company.
C8 Travel agents and tour operators?
They have the opportunity of offering travel
insurance facilities to their customers.
C9 Aggregators? (compare with Direct Insurer)

Internet based distribution channel, which relies
upon the corporation of insurers and
intermediaries to access their pricing for different
risks.
Aggregators provide quotations from many
insurers for the same risk .
Proposer then approach the most appropriate
insurer through a link from the aggregator’s web
site to complete purchase.
D Importance of the customer.
Owing to the advancement of technology:

 Information about customers has become plentiful.
Customers have more information about what they
buying.
Many products and services delivered without the
customer and supplier ever meeting.
So, what are the practices that financial services
organizations use to interact with their customers?
11

D1 Customer expectation.
Company should identify its customer
expectations through research and experience and
measure itself against those expectations.
D1 Customer focus?
How you should approach the customer with
correct attitude. The organization should have the
appropriate culture to understand the customer
behavior continuously.
The shortcomings should be address immediately.

D3 Customer relationship management (CRM).
Interact with customers and moving in to proactive environment.
Companies use all kinds of means to approach, satisfy and
maintain the relationship for life.
D4 ‘Treating Customer fairly’(TCF)
This is the principal theme of FSA regulations and consider it to
be the central part of insurance business philosophy. The FSA
Expect that:
1. Faire treatment of customers are central to the corporate
culture of a business.
2. Products are designed for the needs of identified customer
groups.
3. Consumers are provided with clear and accurate
information/ advice.
4. Standardized products.
5. Consumers do not face unreasonable post-sale barriers.
E Importance of other stakeholders.

In the context of business all stakeholders should be satisfied.
 E1 Stakeholders?
 They are the people or group of people who have an interest in the way a company
act. They are mainly:
 Customers,
 Shareholders,
 The government
 Regulators,
 The public,
 Employees.
D2 Stakeholder Management.
 Stakeholder demands are conflicting but the company has the responsibility for
satisfying all. Company need to identify:
 Composition and significance of each group;
 Power that each group exert;
 Their legitimate claims on the company;
 Extent to which the organization is satisfying claims;
 Overall mission of the organization.
E Importance of other stakeholders.

In the context of business all stakeholders should be
satisfied.
 E3 Ethics and organizational beliefs?
Business Ethics are the standards and moral conduct that a
company sets itself in all its dealings.
Why ethics are important?
Large organizations in small countries.
Responsibility vs. Power of senior management.
Consumer groups vs. Environmental issues.
Business strategy vs. cultural factors.
 E4 Ethical standards in insurance.
CII has developed a ‘principle based’ Code of Ethics for all

its members (insurance and financial services professionals)
effected from June 2009.
F Company growth and mergers and acquisitions

F1 Organic Growth?
Is where a company/ business develops and expands by increasing its
revenue through its own activities and efforts and can only be achieve with
appropriate application of its financial resources.
F1 External Features that are essential for business growth?
Increasing consumer income.
Ready availability of finance.
Low interest rate.
Buoyant markets.
Opportunities for product development.
Export opportunities.
Economies of scale,
Opportunity of increased revenue/ profits.
 F1B Current growth trends.
Mergers and Acquisitions (M&A) vs. Organic Growth
F1C Organic growth drivers , examples?
Sound means to measure success.
more profitable route with a better investment.
Demonstrate long term commitment by executive management.
Clear focus on achieving organizational goals
F1D Benefits of Organic Growth ?

Long term benefits and profitable relationships
with the customers.
Morale of the employees
More economical
Clear check as to growth is real and sustainable.
Less risky and accurate predictions.
F1E Disadvantages of Organic Growth.
Incur more time to grow.
Instant expectations of investors.

F2 Mergers and Acquisitions (M&A)
 This is Non- organic growth.
Merger? If two companies agree to join forces on strategic basis
Acquisition? Company gains control of another company by purchasing a
majority share holding.
M&A can be divided into what is known as horizontal and vertical
integration.
Horizontal: Two companies are in the same market.
Vertical: Attempting to control stage either closer to the
manufacturer of supplier.
F2A Reasons for Insurance M&As.

Gaining access to new business channels for rapid growth.
To acquire advanced IT system/ employee know how, local licensing in an
overseas country.
Operate through global market as a large insurer to take large risks.
Improved performance through synergy.
Overcoming cost of It, etc.by economies of scale/ sharing resources.
Investment opportunities from spare capital.
Risk spreading.
F2B Disadvantages of M&A

Reduced customer choice/ no competition.
Impact on staff moral.
Clash of corporate culture.
M&A consumes management time
therefore ‘eye off the ball’
Reduced customer service due to changers
Expected savings are not realized.
G Outsourcing
Outsourcing?
Is the use of skilled resources outside the company to handle work that was
previously performed by in-house staff. E.g. Loss Adjusting.
 Advantages of outsourcing:
Use of external specialist, which never being there before, at correct
cost
Service level agreement
Easy to budget
Bringing in more qualities/ new business processes.
High level of service with new products
More time to focus on core areas of the business
 Disadvantages of outsourcing:
Certain controls and directions will be lost.
Confidential information/ data.
Uniqueness will be lost.
Internal problems of the outsourced company.
Communication problems.

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Sri Lanka Insurance Institute

Structure of the Insurance Industry

A Different types of insurance organizations

A Different types of insurance organization.

B The global perspective

C Different sellers and distributors of insurance

C1 Who are Direct Insurers?

C Different sellers and distributors of insurance

C Different sellers and distributors of insurance

C5 Building Societies?

C Different sellers and distributors of insurance

C Different sellers and distributors of insurance

C9 Aggregators? (compare with Direct Insurer)

D Importance of the customer.

Owing to the advancement of technology:

D Importance of the customer.

D Importance of the customer.

E Importance of other stakeholders.

E Importance of other stakeholders.

CII has developed a ‘principle based’ Code of Ethics for all

F Company growth and mergers and acquisitions

F Company growth and mergers and acquisitions

F1D Benefits of Organic Growth ?

F Company growth and mergers and acquisitions

F2A Reasons for Insurance M&As.

F Company growth and mergers and acquisitions

F2B Disadvantages of M&A

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