Like any other market, the insurance market comprises of sellers, buyers and middlemen.
The Buyers of Insurance
Most people tend to think of insurance in terms of personal insurances e.g. private car insurance, household insurance, life assurance etc. However, for most insurance companies, it is commercial and group insurances that form a big volume of their business. One single company could be spending millions per year on insurance premium. Thus buyers of insurance are individuals and enterprises.
It is possible to buy insurance direct from the insurance company. It is also possible for an individual to use services of an intermediary. The commercial buyer however may be faced with complex risks. He needs expert advice to enable him assess the risks he has and match them to the best seller of the insurance in the market. In legal terms an intermediary is an agent who is authorized by the principal to bring the principal into a contractual relationship with another third party. There are different forms of intermediaries in the market place:-
- Insurance Broker – A broker is an individual or firm whose full time occupation is the placing of insurance with insurance companies e.g. AON Minet Insurance Brokers Ltd. The broker offers independent advice on a wide range of insurance matters e.g. insurance needs, best type of cover, best market, claims procedure etc. Most commercial insurance will be transacted through a registered broker
- Lloyds Brokers – carries out the functions mentioned above but only for placing business at Lloyd’s. The council of Lloyd’s registers broking firms to act as Lloyds
- Insurance Consultants – Regulations exist for those who wish to call themselves brokers. Many of the persons acting as intermediaries without registering under the relevant legislation (The insurance Act) may refer to themselves as consultants.
- Tied Agents – tied agents can only advise on products offered by their host company.
- Home service representatives – industrial life offices employ representatives to call at the homes of policy holders to collect premium and pay claims.
The Sellers or Suppliers of Insurance
- Lloyds – The Corporation does not transact insurance but provides premises, services and assistance for the individual or corporate underwriting members. The capital behind underwriting at Lloyds is supplied by investors called “Names”. Until 1994 Names had to be individuals investing in personal capacity but from January 1994, corporate members have been admitted.
- Insurance Companies – majority sellers are insurance companies which can either be:
- a) Proprietary companies – created by royal charter, or Act of parliament –normally formed by registration under the companies Act. These companies have an authorized and issued share capital. The shareholders liability is limited to the normal value of their shares.
- b) Mutual Companies – They are owned by the policy holders, who share any profits made. The shareholder in the proprietary company receives his shares of profit by way of dividends but in the mutual company the policy holder owner may enjoy lower premiums or higher life assurance bonuses than would otherwise be the case.
- Captive Insurance companies – its an arrangement where the parent company forms a subsidiary company to underwrite certain of its insurable risks. It benefits by the groups risk control techniques thus paying premiums based on its own experience, avoidance of direct insurers’ overheads and purchasing reinsurance at lower costs.
- Reinsurance Companies – Reinsurance furthers the principle of spreading risk and offers the insurer stability and protection against catastrophe and offers technical devises.
Problems of Marketing Insurance
- Lack of proper training of salesmen
- Ignorance on the part of the insured
- Economic level of individuals.
Competition in the Insurance Industry
This may take the following form:
(a) Price – By offering lower prices to products than rival companies, an insurer can reduce premiums by cutting down on the following operation cost:
(i) Payment of losses
(ii) Loss adjustment expenses
(iii) Cost of marketing
(iv) Administrative expenses
(b) Quality – By offering all forms of policies, or offering policies with benefit to the insured i.e. broadening of coverage. This offers more flexible underwriting conditions.
(c) Services – By offering superior claim segment procedures, better agency represents and loss prevention services.
- Location and hours of business and commission
Alternative to Commercial Insurance
With the growth of risk management and the increased emphasis on finding the most appropriate techniques for dealing with risks other methods have been developed. These include:
(b) Captive insurance company
(c) Retention groups
(d) Risk sharing pool
(e) Purchasing group
(a) Self Insurance
These occur when the firm or individuals set side some reserves to meet the future contingencies that may or may not occur. Self-insurance programs are distinguished from other retention programs primarily in the formality of the arrangement retention programs primarily in the formality of the arrangement.
- It is cheaper than insurance in the long run because in insurance, some charges should be paid to cover the cost of operating the insurance company that is then avoided.
- In insurance there are long delays, between the time that a loss occurred and the time it is paid than can be avoided.
- Self-insurers avoid the social load in insurance rates that results from statutory requirement that insurer cover certain risk in which the premiums are less than the losses for those insured.
- Insurers hold reserves (which represent liability for unpaid losses) but the investment income generated from this is not reflected in the rate. The self-insurance can reduce cost of insurance to themselves by capturing investable funds.
- It can expose the firm to catastrophic loss that will result in closure of the firm.
- It may lead to bad employee and public relations.
- It will lead to loss of certain services provided by the insurance such as loss prevention and claim handling.
- The greater variation from one period to another of a given risk will make self-insurance more costly than insurance.
(b) Captive Insurance Company
This is an insurance company created and controlled by a parent whose main purpose is to provide insurance to that parent i.e. it provides insurance to its corporate owners. They can be classified into:
- Pure captive – This is an insurance company established by a non-insurance organization solely for the purpose of underwriting risk of the parent and its affiliates.
- Association of group captive – This is an insurance company established by a group of companies to underwrite their own collective risk. They are also called trade association insurance companies.
(c) Retention Groups
They are formed for the major purpose of retaining or pooling. They are insurance companies controlled and owned by a given group of shareholders who have similar interest or risk (this group needs to be licensed in only one state).
(d) Risk Sharing Pools
It is similar to group/association captives, but this is no formal, corporate insurance structure. It is the transfer of risk in that risk is transferred from the individuals to the group. It can also be considered to be retention in that the firms risk are retained together with those of others pooling members.
(e) Purchasing groups
They are not insurers and do not retain any risk, but they purchase insurance on a group basis for their m