BWRR2043 : CHAPTER 1INTRODUCTION TO THE INSURANCE COMPANY OPERATIONS A. Insurance Industry Environment B. Monitoring of Insurance Industry C. Legal Aspect D. Taxation in Insurance
OBJECTIVESx Identify and describe the major players in the insurance market and define their rolex Identify and explain the reasons for monitoringx Outline the regulations practiced within the industryx Explain the special nature of insurance business taxation and its effect.
WHAT IS INSURANCE?x An agreement/contractx Between insurer & insuredx Transfer risk and pool lossesx Insd. = promise to pay premiumx Insr. = promise to indemnify and provide benefits.
A. INSURANCE INDUSTRY ENVIRONMENT1. Types of Insurers2. Objectives of Insurers3. Function of Insurers4. The Insurance Marketplace5. Competition Among Insurers
A1: Types of Insurersx Insurers may be classified according to – type of insurance written (products) – by licensing status – by legal form of ownership – by marketing system
Types of Company by Product and Licensing Statusx 1. Life insurers – write life, annuities, and health insurancex 2. Property and Liability insurers – write property & casualty (including health)
Types of Insurers by Form of Ownershipx 1. Capital stock companies (proprietary insurer)x 2. Mutual companies (cooperative insurer)x 3. Lloyds associations (proprietary insurer) - Lloyd’s of London - American Lloyds
x Proprietary Insurer – Formed to earn profit for owners • Capital stock insurer • Lloyd’s • Insurance exchangex Cooperative Insurer – Formed to provide insurance protection to members at min. cost. • Mutual insurer • Reciprocal exchange • Fraternal organization
Capital Stock Insurersx Owned by stockholders.x Organized as profit-making ventures with stockholders who assume the risk that is transferred by insureds.x Premium charged by insurer is final--there is no form of contingent liability for policyholders.x Earnings are distributed to stockholders as dividends on their stock.
Mutual Insurersx Owned by policyholdersx Profit is not the main objectivex Issue assessment policyx Distinguishing characteristic is distribution of earnings. Money left after paying costs is returned to policyholders as a dividend.
Lloyd’s Associationsx Named after London coffee house where modern marine insurance originated.x An insurance marketplace, similar to stock exchangex Lloyds does not write insurance, but is like the NYSE, where buyers and sellers transact business.x Structure – Brokers authorized to transact, and make contact on behalf of their clients – ‘names’ organized into approximately 180 syndicates – Underwriters represent syndicates
x Broker’s Role – Prepare a ‘slip’, defining the risk – Presents it to an underwriter specializing in the type of risk (lead underwriter) – Pieces of the risk are sold until it is 100% insured – Broker receives commission of approximately 5% of the premiumx Handle excess and surplus lines
Types of Insurers by Marketing Systemx Life insurance distribution systems – General agent system – Branch office systemx Property & Liability Ins marketing systems – Independent agent – Exclusive agency system – Direct writer – Direct response system
General Agent Systemx General agent – Is empowered by insurer to operate in a given territory and to appoint subagents. – receives an overriding commission on business produced by subagents, out of which it pays expenses. – Most receive some additional financial support from the insurer.
Branch Office Systemx Branch office manager – is an employee of the insurance company. – may receive additional compensation based on production of agents supervised.x Expenses of branch office are paid by insurer, since branch office is simply an extension of the home office.
Distinction Between Agent and Brokerx Agent: – an individual authorized by an insurer to create, modify, and terminate contracts of insurance.x Broker: – a representative of the insured who solicits business from insurance buyers but who is compensated by the insurer.x The agent can “bind” an insurer to a risk.x A broker does not have binding authority.
Consultants and Financial Plannersxrisk management consultants who offerservices on a fee basis.xInthe personal lines field, there has been rapidgrowth in the personal financial planning field.xCFP, CHFc
A2: Objectives of Insurersx To earn profits – Insurers must earn a profit in order to compensate the people and institution that provide their capital – Policyholders are the major source of capitalx To meet customer needs – Customers need insurance at an affordable price – Customers need ancillary services – loss adjustment and control, risk mgmt advices
x To comply with legal requirements – Insurers have to comply with all the obligations imposed by the law – Failure to comply – fines, penalties, etcx To fulfill the humanitarian and societal duties – Try to avoid human suffering and promote the well- being of society – Societal concerns – contributions to public, benefits plans for employees, etc
A3 : Function of Insurersx Ratemakingx Underwritingx Productionx Claims Settlementx Investmentx Reinsurancex etc
A4: The Insurance Marketplace Intermediaries Agents/Brokers/etc Buyers Sellers(Insured) Insurers/Re
Buyers Intermediaries Sellers-Commerce -Lloyd’s brokers -Insurance co-Industry -Brokers -Industrial ins.-The public -Agents Co -Consultants -Mutual assoc. -Home -Captives service representatives -Self insurance -The state -Reinsurance co.
A5. Competition in the Insurance Industryx Competition within insurance industry is intense.x 2 major areas of competition: – Price • Insurers attempt to offer a lower priced product • Can be done by reducing costs – Quality • Offer broader forms of coverage and prompt claim services
Costs Common to All Insurersx 1. Losses and loss adjustment expensex 2. Acquisition expensex 3. Administrative expense (company overhead)x 4. Taxesx 5. Profit and contingencies
B. MONITORING OF INSURANCE INDUSTRYRationales for Monitoring1. Vested-in-the-public-interest Rationale - Insurance is an industry vested in the public interest - It is pervasive in influence and failures can affect a large group of people - Subject to monitoring due to its fiduciary nature - To protect public interest - To ensure competency of insurers2. Destructive-competition Rationale
C: LEGAL ASPECTS (MALAYSIAN LAW)x Relevant Acts – Insurance Act 1996 – Takaful Act 1984 – Offshore Insurance Actx Supervisory role – Bank Negara Malaysiax Licensing Authority – Minister of Finance
x LIAMx PIAMx Insurance Mediation Bureau – To resolve dispute regarding life and health insurance claims – Can award a sum up to RM100,000
Insurance Act 1996x Licensing – Insurers, insurance brokers, adjusters, reinsurersx Setting up subsidiary & officesx Establishment of insurance fundx Direction & control of defaulting insurersx Examination & Investigation powers of Central Bank
Takaful Act 1984- Based on Insurance Act 1963 with modification to put emphasis on Syariah rules and regulations.- As a guidelines to all takaful companies.
LIAM www.liam.org.myx Life Insurance Association of Malaysia – Trade Association registered under Societies Act 1966 – Established in 1977x Under Section 22(1) of Insurance Act 1966 – All life insurance & life reinsurance companies must be members of LIAM
x Objectives – To promote public understanding and appreciation for life insurance – To improve the image of the life insurance industry through self regulation – To give support to the regulatory authorities in developing a strong and healthy industry – To enhance the professionalism of staff and agents through continuous training and education – To liaise & work with local and foreign life insurance organizations towards achieving common objectives and benefits
PIAM www.piam.org.myx Persatuan Insurans Am Malaysia (1979)x S.22 Insurance Act 1996 – “all general insurers must be registered under PIAM “
x Objectives – To promote the establishment of sound insurance structure in Malaysia in co-operation and consultation with Bank Negara Malaysia. – To render to members where possible such advice or assistance as may be deemed necessary and expedient. – To work as far as possible in co-operation with other similar associations elsewhere in the world. – To circulate information likely to be of interest to members and to collect, collate and publish statistics and any other relevant information relating to general insurance.
D. TAXATION IN INSURANCEx Insurance companies are subject to federal, state and local taxx Life insurers : corporate taxed on their life ins. company taxable income(LICTI)x LICTI = Life ins gross income – Deductions – Gross income = premiums + decreases in reserves + investment income + etc. – Deductions = expenses + death benefits + increases in reserves + etc
Life Insurers Company Taxable Income (LICTI)Incomes: Premiums Decreases in reserve Investment incomeTotal Gross IncomeDeductions : Expenses Death benefits Increases in reservesTotal DeductionsLICTI = (Total G. Income – Total Deductions)
x Property & Liability insurers : Pay corporate tax on net underwriting profit and investment income.x Taxable profits of an insurers are derived from three sources – underwriting, capital profits on investment and investment income