1. LECTURE 3
INSURANCE MARKETS

2. INTRODUCTION
Insurance markets are key components of the world financial system
It plays a vital role in the management of risk
As well a helps to facilitate and support business activity.
Large and mature insurance markets generate huge premium flows and massive pools of useful capital.

3. MEASURING AND COMPARING INSURANCE MARKETS
Measuring and comparing insurance markets and firms operating in them can be done by using the following ways:-
PREMIUM INCOME: e.g. premium income of a particular insurer or the premiums derived from a particular territory
- The rate of growth in an insurance market or of an insurer is measured by the (%) increase/decrease in premium volumes year on year

4. MEASURING AND COMPARING INSURANCE MARKETS cont..
However, premiums volumes do not give a full picture of the demand for or significance of insurance in a national market or provide an adequate basis for comparing different markets.

5. MEASURING AND COMPARING INSURANCE MARKETS cont..
Two ways can be used which are:
Insurance density: indicates the significance of the insurance industry to a country
Calculated as total insurance premiums divided by population
- This represents the average insurance spending per capital in that country; and
Insurance penetration: indicates how important insurance is to a country
- Calculated as the ratio of total insurance premiums to Gross Domestic Product (GDP)

6. MEASURING AND COMPARING INSURANCE MARKETS cont..
- Represents the relative importance of insurance activity in the economy of the country or countries concerned.

7. It might happen that insurance markets are similar in terms of:
MARKET CONCETRATION
It might happen that insurance markets are similar in terms of:
Premiums volumes;
Density; and
Penetration.
But different in terms of their supply structure.
One market may be:
highly competitive;
With many insurers competing for business

8. MARKET CONCETRATION cont..
Another market may be dominated by small number of firms, or sometimes by a single (state-controlled) monopoly insurer.
This aspect of market structure (and hence competitiveness) is termed market concentration.
Concentration ratio is measured and compared by reference to the market share (in terms of premium income) of, say, biggest insurers in the market(s) concerned.

9. MARKET CONCETRATION cont..
For instance, if the biggest insurers in market A control 50% of premium income and the biggest insurers in market B have 90% then market B is more concentrated and less competitive.

10. INSURANCE MARKETS: BASIC STRUCTURE
A market-place is where goods and services are bought and sold;
And where buyers and sellers are free to transact business with one another.
The insurance market operates whenever buyers and sellers happen to be.
It is the global market with buyers and sellers in every country.

11. STRUCTURE OF THE INSURANCE MARKET
The insurance market is made up of five main groups of people:
Buyers (policyholders/insured);
Intermediaries (those who bring buyers and sellers together);
Insurers (sellers); and
Reinsurers (backers, providing a further means spreading risks).
Regulators

12. STRUCTURE OF THE INSURANCE MARKET cont..
All these groups communicate with each other and with many other people who work in and around the insurance market.

13. BUYERS
The buyers of insurance may be divided into five main types:
Private individuals;
Partnerships (e.g. in medical, veterinary and legal professions);
Companies;
Public bodies (e.g. local councils, schools); and
Associations and clubs (local football clubs, management team or organizers

14. SELLERS: INSURERS (INSURANCE COMPANIES)
Sellers of insurance can be classified in the following ways:
According to whether they are proprietary companies or mutual insurers;
According to the line(s) of insurance they write;
According to whether they are direct (or primary) insurers or reinsurers; and
According to whether they are independent of any particular buyer of insurance or closely affiliated to a particular buyer or group of buyers (captive insurers or reinsurers).

15. SELLERS: INSURERS (INSURANCE COMPANIES) cont..
Currently there 31 insurers (TIRA REPORT, 2016)
The four categories of insurers are as follows:
Proprietary companies:
Owned by shareholders
Shareholders contribute to the share capital of the firm.
Mutual companies:
- Owned by policyholders

16. SELLERS: INSURERS (INSURANCE COMPANIES) cont..
Mutual Indemnity Associations:
These are self-managed pools
Mostly are found in marine insurance
For instance P&I Clubs (Protection & Indemnity) insure certain aspects of marine hull liability.
Pools:
- Coinsurance or co-reinsurance: are risk-sharing partnerships.

17. SELLERS: INSURERS (INSURANCE COMPANIES) cont..
Captive companies:
- A captive is a properly authorized insurance company that is owned by a non-insurance parent company.
Objectives of establishing a captive are:
Paying premiums based on its own experience
To avoid the direct insurers’ costs
To retain premiums, and the investment income on them, within the group
To obtain tax advantages

18. SELLERS: INSURERS (INSURANCE COMPANIES) cont..
To obtain a lower overall risk premium level by purchasing reinsurance
TYPES OF CAPTIVES
Single parent captive: owned by a single non-insurance company
group captive: jointly owned by a number of companies
Agency captive: owned by an insurance agency or brokerage firm
Rent-a-captive: a company that provides “captive facilities to others for a fee

19. SELLERS: INSURERS (INSURANCE COMPANIES) cont..
Association captive: owned by a trade, industry or service group for the benefits of its members.

20. THE LLOYD’S INSURANCE MARKET
This is not an insurer but a market place where insurance is bought and sold.
It has:
55 corporate members
1497 individual underwriting members (names) with unlimited liability
468 individual underwriting members with limited liability
Other market participants include: 46 managing agents, 6o syndicates, and 164 Lloyd’s brokers.

21. INTERMEDIARIES
An agent is one who is authorized by one party, termed the principal, to bring that principal into a contractual relationship with another, termed the third party.
These intermediaries offer a number of services.

22. Intermediaries carry out the following functions:
INTERMEDIARIES cont..
Intermediaries carry out the following functions:
Deciding the best market in which to place the risk;
Negotiating terms and conditions initially and for mid-term changes;
Providing advice to the client regarding the detail of the policy wording;
Reviewing client needs;

23. Advising the client on the validity of claims; Risk management advice;
INTERMEDIARIES cont..
Negotiating renewal;
Advising the client on the validity of claims;
Risk management advice;
Assisting with the presentation of claims; and
Assisting in recovering any uninsured losses

24. Collecting the premium;
INTERMEDIARIES cont..
The following functions may be carried out by an intermediary on behalf of insurers:
Collecting the premium;
Committing the insurer to cover the risk (if authorised);
Settling claims on behalf of the insurer (if authorised);
Issuing motor, or other cover notes to give evidence of cover.

25. Distribution channels
Marketing involves deciding on:
Product;
Price;
Promotion; and
Place.
Together these are sometimes referred to as the Marketing mix.

26. Distribution channels cont..
The distribution channels used for insurance are divided into two main types:
Direct: employees of the insurer sell the insurance products ; and
Indirect: intermediaries paid by the insurer promote products on the insurer’s behalf.
According to (TIRA REPORT, 2016) there 398 Insurance Agents; 123 Insurance Brokers; and 51 Loss adjusters/assessors.

27. REINSURANCE
Reinsurers accept business originally underwritten by insurers.
Reinsurance may be on:
An individual risk basis;
An event basis; or
A portfolio (wide range) of risks covering losses from the operation of some catastrophe peril.
Reinsurance may be used to share losses on a risk-by-risk basis.

28. Purpose of Reinsurance
The purpose of reinsurance is:
To limit liability on specific risks;
To stabilise loss experience;
To protect against catastrophes;
To increase capacity;
To provide improved customer service; and
To provide support for insurers entering new areas of business.

29. Professionals in Insurance
Within insurance market place there are a number of key roles.
These roles need to be performed by different insurance professionals.
Insurance professionals include:
Underwriters:
One of the functions of insurance is creation of common pool.
The task of the underwriter is to manage the pool as effectively and profitably as possible.

30. Professionals in Insurance cont..
The main functions of the underwriter are:
Assess the risk that people bring to the pool;
Decide whether or not to accept the risk (or how much of it to accept);
Determine the terms, conditions and scope of cover to be offered; and
Calculate a suitable premium to cover expected claims, provide a reserve, meet all expenses and provide a profit.

31. Professionals in Insurance cont..
Claims personnel:
An efficient claims department, staffed by competent and professional claims personnel, is vital to ensure the proper management of an insurance company’s funds.
The role of the claims personnel is to:
Deal quickly and fairly with all claims submitted;
Be able to distinguish between real and fraudulent claims;

32. Professionals in Insurance cont..
Assess the cost of a claim so that a realistic value is placed upon it prior to payment (reserving);
Determine whether others, such as loss adjusters, need to be involved; and
Be able to settle claims with the minimum expenses.

33. Professionals in Insurance cont..
Loss adjusters:
A loss adjuster is an expert in processing claims from start to finish.
Small claims are settled by an insurer’s in-house claims staff.
In the case of large claims or complex policy wordings, the services of a loss adjuster will be used.

34. Professionals in Insurance cont..
Their functions include:
The investigation of the circumstances surrounding a claim;
Determining whether and to what extent the policy covers the loss;
Facilitating any emergency measures e.g. for the protection of property;
Negotiation of amounts claimed;

35. Professionals in Insurance cont..
Negotiation with any specialist suppliers; and
Making a recommendation for settlement to the insurer.

36. Professionals in Insurance cont..
Surveyors:
They carry a variety of functions on behalf of insurers.
Many of which are relevant to risk assessment.
The surveyors perform the following functions:
Giving advice on immediate action necessary following a loss;

37. Professionals in Insurance cont..
Making recommendations as to any underwriting action necessary; and
Establishing whether previously advised requirements made by the insurer have been complied with.

38. REGULATION OF MARKET PARTICIPANTS
Objectives of the Authority:
To transform the Insurance industry into a sound and Competitive agent for national savings mobilization and development investment channelling;
To promote the Insurance sector as an effective catalyst to enhance economic growth;
To strengthen and promote the industry health and orderly growth through establishment of operation performance standards and prescriptions;

39. REGULATION OF MARKET PARTICIPANTS cont..
To exempt the Insurance Industry from undue interference; and
To develop efficient, cost effective, comprehensive and customer driven Insurance services in Tanzania.

40. TANZANIA INSURANCE BROKERS ASSOCIATION
The main objectives of TIBA are:
To promote interaction among the Insurance Broker Members and
To encourage, promote, facilitate and protect the interests of the members of TIBA and
To provide an avenue to the members for further education, training and research in all fields of insurance and represent the interests of Brokers with other organizations.