This document provides an overview of the insurance domain, including key statistics about the size of the global insurance market. It defines insurance as a risk transfer contract between two parties, and outlines several principles that govern insurance, such as utmost good faith, insurable interest, and indemnity. The document also describes the business model of insurance companies and common types of insurance. It concludes by listing several key performance indicators used in the insurance industry to measure profitability, sales growth, claims processing efficiency, and customer satisfaction.

1. Insurance Domain Overview
Understanding How Insurance Works
Author – Varun Arya
Happiest People, Happiest Customers

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Agenda
• Money, Money & Money
• What is Insurance?
• Principles of Insurance
• Business of Insurance
• Types of Insurance
• KPIs of Insurance

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Money, Money & Money

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• How big is this?
$4300000000000

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The Numbers
• $4.3 trillion in premium collections globally
$1.6 trillion – Europe
$1.4 trillion – North America
$1.16 trillion – Asia
Thrice as big as India’s GDP - $1.43 trillion

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Insurance Pie for the IT Industry
• $140.2 billion in 2013
• Continued growth to $154.5 billion in 2015

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Opportunity in India
Abysmally low Insurance Penetration in India
• Life Insurance – 4%
• General Insurance – 1%

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So, What is Insurance?

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Insurance Defined
• Risk transfer. Contract between 2 parties.
Insurers and Insured. Insured pays a
premium, insurer promises to pay for loss.
• Can you transfer any risk ? Betting in a casino in
Vegas? Jumping from a multistory building for
adventure?
• Some characteristics? So what are they?

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Characteristics of Insurable Risk
• Large number of similar exposure units
• Definite loss
• Accidental loss
• Large loss
• Affordable premium
• Calculable loss
• Limited risk of catastrophically large losses

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Principles Governing Insurance

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Principles Governing Insurance
• Principle of Utmost Good Faith
• Principle of Insurable Interest
• Principle of Indemnity
• Principle of Subrogation
• Principle of Contribution
• Principle of Proximate Cause

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Principle of Utmost Good Faith
• A positive duty voluntarily to disclose, accurately
and fully, all facts material to the risk being
proposed, whether requested or not.
• Doctrine of “Uberrimae Fides” and not doctrine
of “Caveat Emptor”

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Principle of Insurable Interest
• There must be some
property, right, interest, liability or potential
liability capable of being insured.
• The insured must stand in a relationship with the
subject matter of insurance whereby he benefits
from its safety, well being or freedom from
liability and would be prejudiced by its
loss, damage or existence of liability

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Principle of Indemnity
• On the happening of the insured event for which
the insurance policy is taken up the insured
should be replenished the amount of loss.

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Principle of Subrogation
• Subrogation means the restitution of the rights
of an assured in favor of the insurer against the
third party for any damages caused by him in
place of the assured after the insurer has
indemnified him for the loss.
• The principle of subrogation is invoked when a
third party is responsible for the loss.

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Principle of Contribution
• As per the doctrine of contribution the indemnity
provided for the loss occurring on the
asset, which is insured with several insurers has
to be proportionately shared among them
according to the rateable proportion of the loss

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Principle of Proximate Cause
• The term “Proximate cause“ literally means the
nearest cause or direct cause. In insurance
parlance it relates to the immediate cause of the
mishap, which resulted in the loss
• Car damaged in house fire. Covered by Property
Insurance and not Auto.

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Business of Insurance

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Value Chain of Insurance
• Marketing
• Risk Modeling
• Sales
• Policy Administration
• Billing
• Claims
• Customer Service

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Business Model
Profit = Underwriting Income + Float

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Types of Insurance

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Insurance
Life General
Auto Property Marine Health

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Insurance KPIs
The Business Metrics

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Net Income Ratio
• This KPI measures the profitability of an
Insurance company
• NIR = Net Income/Earned Premium
• The higher the better

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Policy Sales Growth
• This KPI helps us measure whether an Insurer is
hitting sales targets or not
• PSG = (Current Sales – Prev Sales)/ Prev Sales

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Renewal Ratio
• This KPI measures the policy renewals over a set
period of time
• Hints at the customer satisfaction level
• RR= Renewals/Policies Sold

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Claims Ratio
• This KPI measures claims as a percentage of total
earned premium.
• Direct Impact on profitability
• CR = Claims/Earned Income

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Quotas Vs Production
• This KPI measures the effectiveness of agents
and sellers at meeting desired target sales
• Calculation – Quoted Business/Revenue

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Average Time to Settle a Claim
• This KPI measures back office efficiency in claims
processing
• Differs according to the type of Insurance

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Customer Satisfaction
• No one standard measure across industry
• Generally measured by doing surveys

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Average Cost per Claim
• This KPI is a cost measure. The lower the better
• Calculation – Total Cost of Claims/No. of Claims
• Important to categorize by the type of claim

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Sales Ratio
• This KPI helps an Insurer understand the results
its pricing policy is yielding
• No. of Quotes/ No. of Wins

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Combined Ratio
• Loss Ratio + Expense Ratio
• More than 100% is red zone

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