Handbook of International Insurance

Insurance markets have radically and deeply changed in the last 20 years. Deregulation, globalization of insurance institutions, intensified competition, electronic commerce, bancassurance, and the emergence of new risks are among the challenges faced by insurance markets now. These developing trends pose both global and local challenges for insurance firms.

The United States (U.S.) is home to the largest insurance market in the world. With over a trillion dollars in premiums written in 2003 (approximately 9.6 percent of gross domestic product (GDP)), insurance operations from the U.S. generated over 35 percent of the worldwide total, a market share in excess of the next four largest countries combined (Insurance Information Institute (III) 2005d, p.1).³ More than half of the 100 largest publicly traded insurance firms in the world are traded on U.S. exchanges. In 2003, seven of the top ten global insurance brokerage firms were U.S. companies (III 2005b, p. 4). The insurance sector is also a significant source of employment, comprising, on average, 2.1 percent of the entire U.S. workforce in the years 1994 to 2003 (III 2005b, p. 13). In 2003, insurers alone provided employment for over 1.4 million U.S. workers, while another 840,000 workers were employed at insurance agencies, brokerages, and at other firms with insurance-related activities.

Although the Japanese insurance market in the 1990s was sluggish, it is still the second largest, only behind the U.S. market. According to Swiss Re (2004), U.S. total premium volume (including life and non-life insurance) in 2003 was 1,055 billion U.S. dollars, followed by Japan with $478 billion, the United Kingdom with $247 billion, and Germany with $171 billion.¹⁰⁶

The earliest insurance to be written in the UK was marine insurance, which was introduced into England in the 14^th or 15^th centuries by the Lombards from northern Italy. Alongside this early development of marine insurance came the earliest life insurance policies, the very first of which is thought to have been written in the late 16^th century on the life of a merchant sailing with his goods. Fire insurance in the UK started a little later, with the first policy probably being written by the Phoenix Insurance Company (originally named the Fire Office) in 1680, just fourteen years after the Great Fire of London in September, 1666. The Great Fire destroyed much of medieval London and was an important stepping-stone in the development of fire insurance and organized fire fighting. In June 1861, the great Tooley Street fire occurred in the London docks, destroying warehouses, wharves, shops, offices and even ships. After paying out a total of about £2 million, insurance offices not surprisingly began to impose more restrictive terms on warehouses and wharves and to apply differential rates to encourage owners to think about fire precautions.

The French insurance market is in the top four worldwide in terms of its annual insurance premiums. This is not surprising because the country is also the fifth world economic power in terms of gross domestic product. This economic position and the size of the insurance market are sufficient to stress the importance of covering the French insurance market. In addition, the business of insurance in France has a long history.

The private insurance business in Germany has its origins in three different lines: mutuals, public, and commercial insurance companies (for details on the German insurance market’s history, see Wandel, 1998, pp. 59–65, and Koch, 1988). The first mutuals were organized during the sixteenth century, and they typically provided fire insurance to members of specific groups such as guild members (called Brandgilden). In 1821 the Gothaer Feuerversicherungsbank and in 1827 the Gothaer Lebensversicherungsbank were founded by Ernst Wilhelm Arnoldi, with both companies organized as mutuals. Following these examples, many mutuals were created in all insurance lines during the second half of the nineteenth century. The first public insurer in Germany, the Hamburger General-Feuercasse, was formed as a merger of many Brandgilden in 1676. Following this example, other public insurers providing fire insurance to homeowners, who were often required by the authorities to insure their property, were formed in nearly all other German states during the eighteenth and nineteenth centuries. After this period, public insurers also started to offer coverage in other lines of the private insurance market. The first commercial (i.e., profit-seeking) insurers were sea transport insurers, created in 1765 and headquartered in Hamburg and Berlin. It was only in the mid-eighteenth century that the first commercial life insurer was created in Germany (Brockhaus, 1974). One of the major factors in the development of the life insurance industry was discoveries in mathematics, particularly in probability theory.

The Italian insurance market has undergone a series of profound modifications over the last decade. This is immediately apparent by looking at the performance of the market in terms of premiums collected, volume of investments, and profits earned, and also by looking at the number and variety of insurance instruments that have been launched on the market and at the distribution of such instruments among households. Moreover, transformation is even more evident if we compare the statistics of the Italian market with those of the markets of other European countries that possess a similar structure.

Canada is the largest country in the western hemisphere and the second largest country in the world in terms of land area, but ranks twenty-fifth in terms of population. It is the smallest of the G7 economies with a population of approximately 31.6 million and a gross domestic product (GDP) of approximately US$867 billion in 2003. It ranks twelfth in the world in terms of GDP per capita. However, in terms of total insurance premium volumes (in U.S. dollars) sold worldwide during 2003, Canada ranked eighth with 2.01 percent of the market. More specifically, Canada ranked twelfth in life insurance with 1.37 percent of the world market, and seventh in non-life insurance with a market share of 2.86 percent (Swiss Re, 2004). These overall world rankings have been quite stable since 2000. With respect to insurance density (premiums per capita in U.S. dollars), Canada ranked seventeenth in 2003, while it ranked twenty-third in terms of insurance penetration (premiums as a percent of GDP).

The insurance industry in the Netherlands has a long and rich history. The founding father of modern life insurance mathematics, Johan de Witt, was a famous Dutch statesman. Thanks to the famous Dutch business sense, several insurance groups from a country as small as the Netherlands today are among the top global players in the worldwide insurance market.

The Spanish insurance industry experienced a dramatic restructuring during the 1980s and 1990s. In the 1980s, under a 1984 law and a 1985 royal decree, the government began tightening solvency standards and encouraging mergers and acquisitions in the insurance industry to create insurers that would be financially stronger, more efficient, and more competitive both nationally and internationally. The Spanish insurance market also has been affected by the overall deregulation of European insurance markets, particularly through the European Union’s (EU) Third Generation Directives, implemented in July 1994. The Third Generation Directives effectively deregulated the EU insurance market, with the exception of solvency regulation, which was carried out by the insurer’s home country. As a result of these regulatory changes, the number of insurers operating in the Spanish market declined dramatically during the 1980s and 1990s.²⁰⁹

In 1973, Ireland joined the European Economic Community (later known as the European Community), the European Coal and Steel Community, and European Atomic Energy Community. In 1993, these three communities were incorporated into the European Union (E.U.). When Ireland entered these organizations, it was a comparatively poor state with an economy based on agriculture. A small, but growing state, Ireland is now one of the wealthiest states in the E.U., having benefited greatly from its membership. Over the past ten years, the population of Ireland has increased from 3.5 million to over 4 million. This is due largely to Ireland’s phenomenal economic growth and net emigration to which, in turn, the continuously changing insurance industry has contributed a great deal.

In 1980, the insurance industry in China was revived after twenty years of stagnation when economic system reform and opening up began in China. During the past two decades, the insurance industry has developed from a virtually nonexistent, minimal, and closed industry to a large, open industry with potential promise. The volume of insurance premiums grew rapidly from RMB 0.46 billion in 1980 to RMB 388 billion in 2003,²³⁰ ranking China eleventh in the world with 1.6 percent of the global market share (China Insurance Regulatory Commission (CIRC); Swiss Re 2004, p. 35).²³¹ This fast growing economy coupled with the largest population in the world, rising personal income, and economic system reform could not only explain the rapid growth of China’s insurance industry, but also foretell the increasing importance of China’s insurance market in the future.

India had the nineteenth largest insurance market in the world in 2003. Strong economic growth in the last decade combined with a population of over one billion makes it one of the potentially largest markets in the future. Insurance in India has gone through two radical transformations. Before 1956, insurance was private with minimal government intervention. In 1956, life insurance was nationalized and a monopoly was created. In 1972, general insurance was nationalized as well.²⁵⁵ But, unlike life insurance, a different structure was created for the industry. One holding company was formed with four subsidiaries. As a part of the general opening up of the economy after 1992, a government-appointed committee recommended that private companies should be allowed to operate. It took six years to implement the recommendation. The private sector was allowed into the insurance business in 2000. However, foreign ownership was restricted. No more than 26 percent of any company can be foreign-owned.

This chapter provides an overview of South Africa’s insurance markets and it is important to not only evaluate it within the context of the world, but also the African continent. South Africa’s life insurance market accounts for 95% of premiums on the African continent, while its property and casualty market accounts for 57% of premiums (Engels 1999). In the world market, South African insurance markets are important for at least two related reasons. First, South Africans spend more per GDP purchasing life insurance than any other country in the world (Birkmaier and Codoni 2004). It is important to note however, that this figure is misleading since much of South Africa’s life insurance market involves savings, not risk products. Second, South Africa does not have a substantial state social security pension system. In turn, the South African government is not facing a pension crisis similar to those faced by most other developed countries. In fact, South Africa is in the position many other countries aspire to reach—a fully-funded privatized pension system. Thus, the South African insurance industry should be of considerable interest to other nations. However, South African’s retirement funding system has its flaws and its approach may be more appropriately considered as a warning, rather than as an inspiration.

The Brazilian insurance industry has grown rapidly over the last ten years. From a historical level of around 1 percent of the country’s gross domestic product (GDP), premiums have doubled to around 2 percent in 1994 and, since then, have been increasing annually, reaching 3.4 percent of GDP in 2004.²⁸⁵ The jump observed in 1994 is associated with a new economic regime that created a new currency, called the Real, and the growth that followed was driven mainly by the newly created defined contribution pension plans.

The European insurance market is currently the subject of harmonization of legal, solvency and accounting rules. However, the demand for insurance is still driven by government incentives and by the extent of financial innovation and variations in consumer penetration and wealth across countries. Moreover, the capitalization and taxation incentives are still very focused on a national basis, and thus the existing regulations, industry structure, link between public and private insurance, and consumer demands for particular classes of both life and non-life insurance are idiosyncratic to each country.

Recent economic research, notably by King and Levine (1993a, 1993b), Levine and Zervos (1998), Levine (1999), Levine, et al. (2000), and Beck, et al. (2000), indicates that financial services and its various components, including insurance and banking, have substantial potential for spreading positive externalities throughout the commercial sector of an economy. Such benefits can stem from improved access to capital by firms, better allocation of capital to investment projects, greater risk management, and enhanced portfolio diversification and liquidity for individual investors. While existing economic research shows the development of financial services is generally important for economic growth, a number of previous studies by Outreville (1990) and Ward and Zurbruegg (2000) provide empirical evidence that insurance market development in its own right can promote economic development. The importance of the insurance industry to the wider economy is seen to stem from the relative size of the insurance industry to GDP in many developed economies, the transfer of risks, and the scale of insurance companies’ financial intermediary functions.

Insurers buy reinsurance for risks they cannot or do not wish to retain and to benefit from the capital relief reinsurance provides. Reinsurance and primary insurance represent two separate elements in the insurance value chain. By providing coverage against adverse fluctuations in claims, reinsurance protects the capital base of the primary insurer and creates a more diversified portfolio, thus reducing the volatility of the underwriting result. Another important benefit of reinsurance is that it allows insurers to accept more business with a given amount of capital, e.g., an insurer can afford to accept larger individual risks or risks exposed to larger loss accumulations from a single event.³¹⁹

Nobel Prize winning economist Kenneth Arrow stated that the world would be a better place if we could insure against future possibility. This would enable more risk taking, creating a source of economic progression. As one of the largest insurance markets in the world, the U.K. insurance market has a pivotal role in the growth of this economic progression that Arrow speaks of.

The concept of alternative risk transfer (ART) defies a precise definition. One reason for this is that the range of risk products that can reasonably be defined as ART has expanded over time as product innovation continues. ART is not one product, but rather a way of doing business. It is generally accepted that there are two segments in the ART market—risk transfer through alternative carriers and risk transfer through alternative products (Swiss Re 2003). The market for alternative carriers (i.e., risk-bearers) consists of self-insurance, captives, risk retention groups, and pools. Alternative products include finite risk reinsurance, runoff solutions, committed capital, multiline, multiyear products, multitrigger programs, structured finance and new asset solutions, and capital market solutions for weather risk.