2. Development of Insurance: A Global Perspective Lecture Two Northwest University Huixia Liu

3. Contents Insurance: developing in crisis Insurance: integration and breakthrough in competition Insurance: innovation against challenges The status, potential and trends of China's insurance industry Northwest University Huixia Liu

4. Insurance: Developing in Crisis Northwest University Huixia Liu

5. The 1 st insurance Crisis: 18th-the early 20 th Century The 2 nd insurance Crisis: 1970s-1980s The 3 rd insurance Crisis: the late 1970s-the mid 1990s The 4 th insurance Crisis: the late 1990s- presen Northwest University Huixia Liu

6. The 1 st insurance Crisis: 18th-the early 20 th Century During more than 200 years from 18 th to the early 20 th century, insurance was private oriented ： –The operating agencies were a private –The motivation was for profit. –the insurers’ main customers were production enterprises, the rich people. Northwest University Huixia Liu

7. The 1 st insurance Crisis: 18th-the early 20 th Century Revealed some problems: Limited insured subjects : only static risks were insured, which could make profits. Such fundamental risks as floods, earthquakes, etc were not covered. The impact of the Industrial Revolution: the deterioration of working conditions for workers, work-related injuries increased, casualties increased, unemployment, so on and so that social problems. Northwest University Huixia Liu

8. The 1 st insurance Crisis: 18th-the early 20 th Century These risks could not be insured to protect the ordinary people’s basic living. Workers' strike movements broke one after another. There appeared serious social problems. Northwest University Huixia Liu

9. The 1 st insurance Crisis: 18th-the early 20 th Century Workers' insurance needs could not be met. The insurers put too much emphasis on their own economic, neglecting the social responsibilities. There appeared serious conflicts between insurers’ private economic benefits and social benefits. The first insurance crisis broke in the history the insurance industry. Northwest University Huixia Liu

10. The 1 st insurance Crisis: 18th-the early 20 th Century Enlightens: To survive and develop, the insurance industry had to take their social responsibilities, play social roles, and participate in social management. Northwest University Huixia Liu

11. After the first insurance crisis, there appeared some reforms in insurance: In Germany, the Bismarck's government implemented labor insurance programs in 1880. Workers' insurance coming into being to pay the loss of income and medical costs for workers and their families. The concept of “Workers' insurance” was later replaced by “social insurance” Northwest University Huixia Liu

12. At that time, the United States took such measures as the following :  Established Workers Compensation in 1911  Established Group Life insurance in 1912  Enacted the Social Security Act (the Federal old-age insurance program in 1935)  Created such new insurance products as unemployment insurance, Federal deposit insurance, mutual mortgage insurance. the reforms resulted in the great changes in insurance industry: there exist the private insurance and social insurance. Northwest University Huixia Liu

13. The 2 nd insurance Crisis: 1970s-1980s During 1970s and 1980s, there appeared the technological revolution, resulted in great social and economic changes in the industrialized. Industrial economic form turn to a service. Urbanization, the rural population gradually moved to urban areas, resulting in the large cities and metropolitan, megacities. Increasing catastrophic risks Northwest University Huixia Liu

14. The 2 nd insurance Crisis: 1970s-1980s “Mixed loss” and “catastrophic risks” appeared. The insurance industry once again was facing great challenges. Moreover, the dynamic risks, catastrophe risk caused by technological progressed, especially some risks caused by environmental factors, psychological factors, and ethical problems. These social losses were unable to be solved also, some natural disasters as floods, earthquakes, typhoons, and some social losses caused by international trades were still vexing social problems. Northwest University Huixia Liu

15. The 2 nd insurance Crisis: 1970s-1980s Who could solve these social risks? What is the function of insurance? Spreading risks, compensating economic losses ？ Stabilizing the social order? If so, then how to solve such social risks caused by environmental, psychological, moral, and other factors? The second insurance crisis broke in the history the insurance industry. Northwest University Huixia Liu

16. The 2 nd insurance Crisis: 1970s-1980s To solve the above mixed risks, it needs the joint efforts of all aspects to find some new solutions. At this point, the United States had taken a number of innovative measures. For example, to address flood risk, the government encouraged and support the private insurers to start the business of flood insurance, and the federal government provided financial subsidies, technical, and also provides flood re-insurance. In this way, the U.S. established earthquake insurance, nuclear insurance, export credit insurance. The whole society participated in the insurance. Northwest University Huixia Liu

17. The 2 nd insurance Crisis: 1970s-1980s The so called “policy insurance” could solve the dynamic risks, catastrophic risks. The U.S. government to be inspired, and thus enforced it in practice. The other States followed. Nowadays, in most countries there existing a comprehensive insurance system, namely, private insurance, social insurance and policy insurance Northwest University Huixia Liu

18. The 2 nd insurance Crisis: 1970s-1980s Enlightens: The second insurance crisis and its comprehensive insurance system, once again showed us that the insurance could take social responsibility to solve social problems. That is insurance has the social management function. Northwest University Huixia Liu

19. The 3 rd insurance Crisis: the late 1970s-the mid 1990s In the late 1970s, the internal and external competition in insurance industry was fierce. Insurers began to look for the new ways to meet the customer's demands. the insurance practice had mostly gone through three stages, adopting such three ways: In 1 st stage, increased the insured’s returns. In 2 nd stage, motivated the salesmen by providing rebate In the 3 rd stage, developed new products to meet the needs of the insured. Such as a package of insurance, investment- linked insurance, including variable life insurance, universal life insurance, variable universal life insurance, etc., let the policyowners share in the surplus of the insurer. Northwest University Huixia Liu

20. The 3 rd insurance Crisis: the late 1970s-the mid 1990s Aroused strong reaction from other financial institutions: competition between financial institutions. Other financial institutions to take measures and adjust strategies: Northwest University Huixia Liu

21. The 3 rd insurance Crisis: the late 1970s-the mid 1990s Direct measures: develop new financial products to compete with the insurance products, including: investing in stocks, real estate, high- tech industry, and large-scale infrastructure projects. Indirect measures: provided the customers high returns and attract more. Northwest University Huixia Liu

22. The insurers take actions to respond to competitiveness: The insurers initially increased the premium rate. Later, reduced the premium rate. Two different ways, but the final result was the same, that was a tragic for insurers. The internal and external competition lead to the bankruptcy of insurance companies. The 3 rd insurance Crisis: the late 1970s-the mid 1990s Northwest University Huixia Liu

23. The 3 rd insurance Crisis: the late 1970s-the mid 1990s According to relevant statistics, from 1978 to 1994, more than 600 property and casualty insurance companies in the world became insolvent, among which, the United States accounted for 66%, the UK accounted for 7%, other Europe countries accounted for 4%, and the other regions accounted for 23%. In 1992 alone, there were more than 90 property and casualty insurance company declared bankruptcy. Northwest University Huixia Liu

24. The 3 rd insurance Crisis: the late 1970s-the mid 1990s This is the third insurance crisis in the history the insurance industry. The first two insurance crisis were solved by creating new insurance products. Unlike the two previous crisis solution, the third insurance crisis was solved by some non-traditional insurance measures, including: mergers and acquisitions among financial institutions as well as mixed operators, such as bancassurance, captive insurance, insurance securities, insurance futures, and insurance options. Northwest University Huixia Liu

25. Insurance: Integration and Breakthrough in Competition Northwest University Huixia Liu

26. Mergers and Acquisitions(M&A): Integrating Advantages During the mid-1990s, cross-border mergers and acquisitions of insurance companies was popular. M & A wave in the insurance industry swept around the world. Major insurance companies, banks, securities institutions mergers and acquisitions in the United States, Britain, Germany, France, the Netherlands, and other countries. Northwest University Huixia Liu

27. Mergers and Acquisitions(M&A): Integrating Advantages Some financial institutions took the chance to expand the scale and the operating region, to increase market shares. More examples of financial institution M&A Northwest University Huixia Liu

28. Mergers and Acquisitions(M&A): Integrating Advantages Why M&A? the reasons, the motivations, and the consequences Expanding business in new industries or related new fields. Obtaining a new management capabilities to achieve growth. Restructuring through mergers and acquisitions faster than the speed of the internal investment adjustment, realizing economic synergies. Northwest University Huixia Liu

29. Mixed Operation: Expanding Business What does “Mixed Operation of Insurance Industry” mean? The contents??? In the late 20 th Century, there appeared a trend that banking, securities, insurance, mixed operation. Convergence of banking, securities and insurance capital, so that the three ranges had been expanded. Besides its own business lines, insurance companies managed the business of banking and investment Northwest University Huixia Liu

30. Mixed Operation: Expanding Business Insurance Giant Bancassurance Financial supermarket Northwest University Huixia Liu

31. Mixed Operation: Expanding Business Why mixed operation? The advantages, disadvantages? Northwest University Huixia Liu

32. Mixed Operation: Expanding Business Mixed operation has changed the traditional insurance operation modes. providing customers with comprehensive financial asset investment, risk management services Seeking competitive advantages. Achieving earning multi-diversification Northwest University Huixia Liu

33. Deregulation: Freedom Development In the 1990s, most countries took financial reforms, relaxing insurance regulation. In 1990, the European Union promulgated the fourth Act of liberalization of capital movement, with the liberalization of the insurance market conditions. In 1993, issued the second bank act. In 1994 promulgation of the third instruction of the property insurance and life insurance, established the framework of insurance market liberalization, encouraging the universal mixed operation between banking and insurance systems. Northwest University Huixia Liu

34. Deregulation: Freedom Development In 1986, UK took well-known financial “ The Big Bang. In 1996, Janpan took financial reform plan, well-known "Tokyo Financial Big Bang. In 1999, The U.S. passed the well-known Financial Modernization Act. Northwest University Huixia Liu

35. Insurance: Innovation against Challenges Northwest University Huixia Liu

36. New Challenges Since the end of the 20th century, the world insurance industry faces more challenges. The financial crisis broken in 2008 made the development of the global financial sectors worse. The main challenges are as follows: Northwest University Huixia Liu

37. New Challenges Diversified insurance needs More catastrophic risks Increased Competition (within insurance industry, among financial institutions, between the international and domestic markets) Underwriting profit margins shrinking Mixed operation Northwest University Huixia Liu

38. Evolution of the Financial Functions money service intermediary Risk spreading Resource allocation (core) Regulating economy Risk management : Risk transaction Information transmission Corporate governance Macro –regulation: Guiding consumers Regional coordination Wealth redistribution Basic functions Main functions Derivative functions Northwest University Huixia Liu

39. Insurance Mixed Operation From Insurance Mechanism turning to Financial Mechanism From Insurance Market going to Capital Market From Risk Warehousing changing to Risk Intermediary. Northwest University Huixia Liu

40. Insurance Mixed Operation 投资银行 / 证券公司 保险公司 共同基金和养老基金 商业银行 c h i a b f e d g Increase in capital intensiveness Increase in liability liquidity a. Underwriting b. Risk securitization c. Commercial loan d. Asset management e. Securities underwriting f. Securities distribution g. M&A consulting h. Settlement i. Bancassurance Northwest University Huixia Liu

41. More Catastrophic Risks Earthquakes Hurricanes, typhoons, tornadoes 洪水、雪灾 Terrorism Insurance Fraud Relevant measures Government policies and financial supports Reinsurance Catastrophe risk securitization Northwest University Huixia Liu

42. Highlights: Property/Casualty Full-Year 2003 vs. 2002 20032002Change Net Written Prem.405,855369,673+9.8% Loss289,800283,640+2.2% Net UW Gain (Loss)(4,635)(30,840)-85.0% Net Inv. Income38,68637,225+3.9% Net Income29,8773,046+880.9% Surplus*346,987285,386+21.6% Combined Ratio100.1107.3 -7.2 pts. Northwest University Huixia Liu

43. P/C Net Income After Taxes 1991-2003 ($ Millions) Sources: A.M. Best, ISO, Insurance Information Institute.  2001 was the first year ever with a full year net loss  2002 ROE = 1.0%  2003 ROE = 9.4% Northwest University Huixia Liu

44. ROE: P/C vs. All Industries 1987–2004E Source: Insurance Information Institute; Fortune Northwest University Huixia Liu

45. P/C Industry Combined Ratio 2001 = 115.7 2002 = 107.2 2003 = 100.1 2004E = 100.0* Combined Ratios 1970s: 100.3 1980s: 109.2 1990s: 107.8 2000-04: 106.7 Sources: A.M. Best; ISO, III *2004 figures based on III Groundhog Survey, 2/04. Northwest University Huixia Liu

46. Underwriting Gain (Loss) 1975-2004F* *2004 underwriting loss is forecast at $0 (based on forecast combined ration of 100.0 from III Groundhog forecast, 2/04. Source: A.M. Best, Insurance Information Institute $ Billions 2003 was the best year since 1997, with underwriting losses of just $4.6 billion. The forecast underwriting loss for 2004 is $0, given the expectation of a 100.0 combined ratio. Northwest University Huixia Liu

47. Combined Ratio: Reinsurance vs. P/C Industry Source: A.M. Best, ISO, Reinsurance Association of America, Insurance Information Institute  2001’s combined ratio was the worst- ever for reinsurers; 2002 was bad as well.  2003: Big improvement in primary and reinsurer segments Northwest University Huixia Liu

48. Net Investment Income History 1997 Peak = $41.5B 2000= $40.7B 2001 = $37.7B 2002 = $37.2B 2003 = $38.7B Billions (US$) Investment income fell 1.3%in 2002 but rose 3.9% in 2003 Source: A.M. Best, ISO, Insurance Information Institute Northwest University Huixia Liu

49. US Insurers’ Asset Allocation, 1998- 2002 (%) Source: Insurance Information Institute and A.M. Best Co Northwest University Huixia Liu

50. Swiss Re Asset Allocation Shift: 1999-2003 *As of June 30, 2003 Source: Swiss Re “Strong growth in fixed income portfolio reflects reallocation of funds from equity portfolios, cash inflows, market appreciation and two Admin Re transactions.” - Swiss Re Analysts’ Meeting, 08/29/03 Swiss Re’s fixed income portfolio increased to CHF 81 billion at the end of the first half of 2003, up from CHF 74 billion at year-end 2002. Northwest University Huixia Liu

51. Allianz Group Asset Allocation Shift: 1999-2003* *As of September 30, 2003. Source: Allianz Group Financial Results 9M 2003. Allianz’s equity exposure has reduced significantly since 1999. Northwest University Huixia Liu

52. U.S. Insured Catastrophe Losses ($ Billions) *2004 figure is for 1 st quarter only ($963 million). Note: 2001 figure includes $20.3B for 9/11 losses reported through 12/31/01. Includes only business and personal property claims, business interruption and auto claims. Source: Property Claims Service/ISO; Insurance Information Institute $ Billions 2003 was the 4 th worst year ever for insured catastrophe losses in the US. There were 4 events with losses exceeding $1 billion Northwest University Huixia Liu

53. WORKERS COMPENSATION MEDICAL COSTS: CRITICAL CONDITION Northwest University Huixia Liu

54. WC Medical Claim Costs Accelerating Too Medical Claim Cost (000s) Annual Change 1991-1995: +4.0% Annual Change 1996-2001: +8.1% Based on data through 12/31/2001, developed to ultimate, as of 12/2/2002 Based on the states where NCCI provides ratemaking services Excludes the effects of deductible policies Source: NCCI Northwest University Huixia Liu

55. WC Medical Severity Rising Far Faster than Medical CPI Sources: Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states. 7.3 pts WC medical severity is rising 2.7 times faster than the medical CPI Northwest University Huixia Liu

56. Med Costs Share of Total Costs is Increasing Steadily Source: NCCI (based on states where NCCI provides ratemaking services). 1982 1992 2002p Northwest University Huixia Liu

57. WC Drug Costs as % of Total WC Medical Costs* *Analysis is on an accident year (AY) basis, developed through 8 th report. Source: National Council on Compensation: Prescription Drugs: Comparison of Drug Costs and Patterns of Use in Workers Compensation and Group Health Plans. WC drug costs account for an increasingly large share of WC medical costs. They are a major driver behind the accelerating cost of providing medical care to injured workers. Northwest University Huixia Liu

58. Prevalence of Overweight and Obesity among US Adults (aged 20-74 years) Source: Centers of Disease Control and Prevention (CDC), National Center for Health Statistics (NCHS), National Health and Nutrition Examination Survey (NHANES); Insurance Information Institute Nearly 2/3 of US adults are overweight or obese, up from 47% in the late 1970s 15 23 31 Northwest University Huixia Liu

59. THE CHALLENGE OF TERRORISM Northwest University Huixia Liu

60. EVENT WTC victims (workers & visitors)* WTC hijacked jets (incl. 10 hijackers) Pentagon victims on the ground Pentagon hijacked jet (incl. 5 hijackers) Pennsylvania jet crash (incl. 4 hijackers) DEATHS 2,605 157 125 64 44 TOTAL2,995 Source: *New York City Medical Examiner estimate of 2,752 (as of 29 Oct. 2003), less 147 killed on hijacked jets. Death Toll from September 11, 2001 Terrorist Attack Northwest University Huixia Liu

61. Sept. 11 Industry Loss Estimates ($ Billions) Current Insured Losses Estimate: $32.5B Source: Insurance Information Institute Northwest University Huixia Liu

62. Terrorism Coverage Take-Up Rate Rising Source: Marsh, Inc.; Insurance Information Institute FACTS on Take-Up Rates Highest = Energy Industry = 40.5% Lowest = Construction = 12.2% Northeast = Highest = 30.3% West = Lowest = 18.6% Terrorism take-up rate rose through 2003 as commercial property premiums level-off or fall Northwest University Huixia Liu

63. Total International Terrorist Attacks, 2002 Source: Patterns of Global Terrorism, US Department of State; Insurance Information Institute In 2002, there were 199 terrorist attacks resulting in 725 deaths and 2,013 injuries Northwest University Huixia Liu

64. Global Insurance After 2008 Northwest University Huixia Liu

65. World insurance in 2009 In 2009 life and nonlife insurance premiums (excluding cross-border business) accounted for 17.29 percent of gross domestic product (GDP) in Taiwan, the highest share in the Swiss Re study, followed by 13.57 percent in the Netherlands, 12.92 percent in the United Kingdom and 12.89 percent in South Africa. Premiums represented 8.07 percent of GDP in the United States. Northwest University Huixia Liu

66. World insurance in 2009 Among the 10 largest insurance markets, premiums per capita ranged from a high of $6,555 in the Netherlands to a low of $121 in China. In the United States premiums per capita totaled $3,743, including $1,633 for life insurance and $2,110 for nonlife insurance. Northwest University Huixia Liu

67. World insurance in 2009 Swiss Re’s 2009 world insurance study is based on direct premium data from 159 countries, with detailed information on the largest 88 markets. Northwest University Huixia Liu

68. World insurance in 2009 According to the latest Swiss Re sigma study, world insurance premiums totaled $4.10 trillion in 2009, down from $4.22 trillion in 2008. Nevertheless, in most emerging countries insurance premiums grew faster than GDP in 2009 and that the industry’s profitability and capital strength improved as the credit and stock markets recovered. Northwest University Huixia Liu

69. World insurance in 2009 The drop in world premiums largely reflects declines in the markets of industrialized countries, as contrasted with growth in emerging markets. On an inflation-adjusted basis, total premiums rose 3.9 percent in emerging markets, compared with a 0.9 percent decline in industrialized countries. In the United States, the world’s largest insurance market, inflation-adjusted life premiums fell 13.0 percent and inflation- adjusted nonlife premiums fell 1.7 percent. Northwest University Huixia Liu

70. World insurance in 2009 Life convers 52% of the total premiums, while non-life convers 48% Northwest University Huixia Liu

71. Prospects and Trends Northwest University Huixia Liu

72. Preview Read and prepare the questions from “Risk in Our Society “( P1-14 ） Northwest University Huixia Liu