Business 429 Issues in P

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Business 429 Issues in PC Insurance

• An Introduction

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Bus 429 Course Outline

• Glenn Planert
• 573 5981
• goldrun_at_rogers.com
• Readings Package
• Course Content
• Course Expectations
• Creativity Required!

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Course Outline cont

• Grading
• Group Project (30)
• Written due Nov. 22nd
• Presentations Nov. 29th
• Midterm Exam (25)
• In-class Oct. 25th
• Format
• Marking

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Course Outline - cont

• Final Exam (25)
• Take-home format
• Date to be agreed upon
• Submitted via email
• Company Profile Project (10)
• Preparation
• Presentation
• Hand-outs

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Course Outline cont

• Participation (10)
• Active
• Research
• Canadian Underwriter
• Canadian Insurance
• Thompsons Insurance News
• Etc.
• Discussion points

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Benefits to you

• Property Casualty knowledge
• The industry
• The product
• The issues

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Getting to Know You..

• Year of study
• Where from
• Personal
• What you hope to do
• Batman..
• Career jump-start
• Resumes
• Contacts References

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Origins of Insurance

• Babylon (2000 BC)
• Egypt Rome
• China
• The Bible
• Early Ocean Marine Contracts
• Lloyds of London

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Introduction

• Insurance companies are distinguished by a unique
  set of liabilities
• Actuarial liabilities expected net present
  value of contingent obligations to make payment
  to policy beneficiaries upon the occurrence of a
  defined loss
• Obligations are defined in insurance contracts,
  undertaking to indemnify beneficiaries

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Introduction (cont)

• Important to understand
• Major activities and sources of income
• Balance sheet items and trends
• Regulatory structures

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PC Insurers

• Over 200 federally registered
• 100 write most of the business
• No dominant firm in market
• Many limited to single provinces and/or specific
  lines of insurance
• Overlap between PC and Life is small
• Claims and premiums have tripled over the past 20
  years
• Industry currently employs gt100,000

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Assets of Top 10 PC Companies in Canada - 2003
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PC Lines of Coverage

• Property insurance covers losses of real and
  personal property
• Casualty (or, liability) insurance protects
  against legal liability exposures
• Distinctions between PC are blurring due to
  packaging of complete policies as a single-use
  marketing tool

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Lines of Insurance

• Automobile insurance
• Personal Property insurance
• Commercial Property insurance
• Commercial Casualty/Liability insurance
• Marine insurance
• Travel insurance

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Key PC Definitions

• Adjustment process of arriving at a claim
  settlement amount. Determining the amount of
  loss incurs external consultant expenses
  (adjustment expenses on balance sheet)

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Key PC Definitions cont

• Loss Ratio losses incurred divided by premiums
  earned for a specific period. Losses include
  claims, independent adjusters fees, legal fees
  allocated to particular claims
• Expense Ratio expenses accrued (excluded those
  allocated to particular claims) divided by
  premiums earned

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Key PC Definitions cont

• Combined Ratio (COR) sum of the loss ratio plus
  the expense ratio. It is the measure of
  underwriting profitability
• Investment Yield return on premiums invested
  from a line of insurance between the time the
  premiums are received to the time theyre paid
  out as claims
• Operating Ratio COR minus the investment yield.
  A measure of the overall profitability of a PC
  insurer

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Recent Trends

• 1973 1997 industry as a whole increasingly
  profitable
• Stiff competition kept insurers from increasing
  premiums (therefore, underwriting losses)
• Losses offset by investment income
• 2000 forward.bad news!
• Underwriting cycles
• Other major issues

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Government Regulation

• Federal OSFI Office of the Superintendent of
  Financial Institutions
• Provincial FSCO Financial Services Commission
  of Ontario
• PACICC PC Insurance Compensation Corporation

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Measuring Risk

• Liquidity risk
• Interest rate risk
• Market risk
• Credit risk
• Off-Balance Sheet risk
• Foreign exchange risk
• Insurance risk
• Operating risk

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Liquidity Risk

• The risk that the insurer is not able to honour
  its financial commitments promptly as they fall
  due without incurring substantial loss
• Liquid vs. Illiquid assets
• Asset-Liability Management (ALM)

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Interest Rate Risk

• Potential impact a change in the level of
  interest rates has on the financial condition of
  an F1
• Refinancing risk
• Reinvestment risk
• Market value risk
• ALM

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Market Risk

• Risk arising from the F1 actively trading assets
  and liabilities

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Credit Risk

• Arises because promised cash flows on the
  securities held by an F1 may or may not be paid
  in full
• Importance has recently increased within the PC
  industry
• Firm-specific credit risk
• Systematic credit risk

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Off-Balance Sheet Risk

• Tremendous growth trend in off-balance sheet
  activities
• One that does not appear on the companys balance
  sheet
• Letters of credit, loan commitments,
  underwritings by investment dealers, derivative
  products

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Foreign Exchange Risk

• Risk arising from changes in the foreign exchange
  rate
• Hedged versus unhedged position

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Insurance Risk

• In a contract of insurance, the insurer pays the
  beneficiary if a specified event causing loss to
  the beneficiary takes place
• To price the contract, the insurer makes certain
  assumptions
• Probability that the insured event will occur
• Severity of the event
• Investment returns
• Expense levels and required rates of return

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Insurance Risk cont

• In summary,
• Insurance risk is the risk these assumptions will
  prove to be inaccurate

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Insurance Risk

• Is the chance of loss
• Speculative risk exists where there is a chance
  of loss or chance of profit
• Pure risk entails only a chance of loss but no
  profit

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Insurance Risk

• Insurance is concerned only with Pure Risk
• Acid Test for insurability
• Ask
• Is there a chance of loss?
• Is there a chance for profit?
• Coverage may be available if yes to first point
  and no to the second

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Risk

• Are these activities risky? Positive or
  negative risk?
• Crossing a busy intersection
• Walking on an icy sidewalk
• Investing in the stock market
• Cooking hot grease on the stove
• Not studying for your 4th year exams
• Driving on the Autobahn in Germany
• Climbing Mount Everest

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Categories of Insurable Risk

• Personal Risks
• Pemature death
• Physical disability
• Old age
• Unemployment

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Categories of Insurable Risks

• Property Risks
• Direct losses
• Fire, stolen stereo, collision to vehicle
• Indirect losses
• Loss of rental income, business interruption loss

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Liability Risks

• The chance of loss arising from an individuals
  obligation to pay damages because of injury or
  death of another person, or because of damage
  done to anothers property

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Liability based on

• Individuals negligent acts in relation to
• His or her conduct
• Operation of a vehicle
• Ownership or occupancy of property
• Manufacture of products
• Rendering of professional services

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Classes of Risk

• Three classes of risk
• Personal lines
• Commercial lines
• Special risks

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Personal Lines

• Insurance relating to individuals in their
  private capacity
• Included are home, contents, automobiles, boats,
  cottages, jewellery, furs, vacation travel
  insurance

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Commercial Lines Insurance

• Insurance relating to commercial operations
• Included are manufacturing and distribution,
  retail, service industry, any industry involved
  in profit-seeking enterprise, offices, trucking

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Special Risks

• Insurance relating to large industrial firms,
  such as factories, multi-location stores,
  high-rise properties and many other type of large
  commercial operations

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Operating risk

• Or, business risk!
• Organizational Behaviour
• Information/Technological Systems
• Legal aspects

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For Week 2The Economics of Risk Insurance

• Readings
• Facts 2003 of the General Insurance Industry in
  Canada (Insurance Bureau of Canada
• Insurance news discussion points