Insurance Structure

Key Takeaways: Insurance business lines, Insurer types, Stakeholders

Understand Important Factors

The insurance industry plays a valuable role in securing wealth and supporting the prosperity of society. This industry is a financial structure where every stakeholder creates value for the benefit of everyone. Therefore, it is important to understand:

The structure	This helps identify key Entities, their roles & functions, and the regulators. It also helps understand the movement of business. The accountability and obligations of entities can be figured through the structure.
The stakeholder	They are benefactors involved in the insurance structure. They can be directly or indirectly related to the process. They all want something in return from the industry. The customers want security and timely compensation, the shareholders want returns on investment. The regulators and the government wants tax payments, VAT, regulatory compliance, and reporting and the society seeks environmental considerations and social responsibility.
Value Creation	Actuarial & Data Analysis, Information Technology, Technical Survey, Repair & Reinstatement Works, Dispute Resolution, Claims Management, Relationship & Customer Management, Marketing, Sales, Recruitment, Education, Research & Development, Audits & Accounting, Every time a service is required to simplify the process.
Risk Transfer	Transfer of the financial interest, from the buyer to the seller through the intermediary, the loss of which arises from an unforeseen event.

Insurance Business

There are three general classifications of insurance lines of business: 

Life Insurance	This is a long-term transaction that takes periodic premiums in return for a huge sum on the maturity of the period, or upon the death of the policyholder to the beneficiary/nominees, such as pensions, term plans, etc. Example: LIC, Royal London, etc.
General or Non-life Insurance	This is a short period transaction (usually annual), to secure the financial losses arising from the pursuits related to assets, property, business, trade, specialty, and investments. Example: Tata AIG, Chubb, etc.
Composite (Both)	This is when a business entity transacts both life and general insurance. Example: Allianz, Zurich, Munich Re, AXA, etc.

Forms of Insurance Entities

There are various entities that perform certain functions and create value in the business chain or process. While some entities are centralized as part of one organization or insurer, others work independently providing service, performing functions independently, and creating value at different phases of the insurance business cycle. The independent ones are an example of a decentralized system where insurers outsource functions to specialists to save on costs and channel specialism. The entities that transact business within the above lines may have the following formations (within the legal boundaries):

Proprietary Companies	They have an authorized & issued share capital to which shareholders subscribe and share the profits after accounting provisions are dealt with. Liability is limited to the shares but the company is liable for the debts and may risk liquidation where the solvency margin is not met. They usually transact in composite (both) lines of business.
Financial Mutual Organisations	They’re owned by members or customers to whom they provide financial services products. The members benefit from lower premiums and higher bonuses.
Captives	They are a subsidiary company (co.) created to underwrite the risk of the parent company, and transact insurance business. They are cost-effective, tax-efficient, and help jump regulatory hurdles and market obstacles.
Government Companies / The State	The companies that are owned by the government and the organizations established by the state provide basic securities to its people and transact insurance business. A scheme such as UK’s NHS, agreements such as Flood Re, and insurance companies such as National Insurance Co., The New India Assurance, and The Oriental Insurance Co are all examples of state-owned and funded entities.
Lloyd’s	A physical marketplace where underwriting members (syndicates) and their Managing General Agents, meet with brokers to transact insurance business. Customers usually instruct Lloyds brokers to represent them. Lloyd’s acts as a franchisor and members are franchisees.

Market Players

The Insurance market is where these entities transact their business of risk transfer. The business can be in layers meaning intermediaries between the buyer and seller who add value by connecting, communicating, and helping decide the correct product and the correct customer. There are parties directly or indirectly related to the transaction such as brokers, reinsurers, governments, public, who I would consider the stakeholders. Simply put, the market has the following players:

Sellers	They’re insurance providers who promise to secure your financial interest. They will assess the risk presented to them in its entirety and decide the acceptance in part or full of the risk. An example would be the practice of taking percentages of risk (lines) in the London market for marine business, reinsurance, etc.
Buyers	Everyone who wishes to secure their financial interest in a legitimate venture such as individuals, corporates, organizations, governments, and societies. Even Insurers buy insurance or invest in the capital market. This spreading of risk or transferring it further is called re-insurance.
Intermediary	They are the fantastic people who help the business transaction by connecting the buyer and the seller. They simplify the process by helping the buyer decide and select the correct product that secures their risk. They also help sellers seek the correct buyer for their products. Some middlemen also have the authority to transact business on behalf of the seller (Called delegated authority) which allows them to provide a variety of products to secure assets, properties, business, and investments. Their help is not only limited to buying and selling but extends throughout the service tenure promised by the product in functions like claims process, recovery, payments, risk assessment, and dispute settlement.

Intermediaries

The intermediaries can be further classified into:

Broker	They are the experts in understanding the risk of the customers and arranging the appropriate coverages within the insurance market. They represent the customer. They are essential in communicating & presenting the risk fairly, along with applying diligence during documentation and at the time of claims. They archive varieties of covers/insurance products from various insurers.
Agent	These are appointed representatives of insurers and offer their products in the market.
Aggregator	Internet-based distribution channel that compares insurance products based on customer needs and budget. They channel insurance products in cooperation with insurers and agents. They provide forms that can be filled by the customer to meet customized risk needs.
Banks	Having a large customer base, and financial data, they are the most suitable partners to channel insurance products as per the customer classification and credit score for various pension and life term plans, as well as assets, property, and liability insurance products.
Retailers	Sell the product along with a protection plan, in cooperation with insurers, to a large customer base. Like utility service providers sell the relevant insurance along with it.
Affinity Groups / Societies	Groups that provide security to its members. Usually, Chartered groups provide professional indemnity, office, and other insurance products to their members.
Disrupters	Substantial Innovators who break market barriers to entry and create value for customers, such as Insurtech companies.

The insurance providers may grow organically by developing and utilizing their resources over time. They may also grow by merging or acquiring other entities that expand their scope of business and functions, allowing them to clear business obstacles and better serve the interest of the stakeholders. While some insurance providers have their own resources to carry out the functions, there are many others who outsource these functions and thus there exists an opportunity to create value in the market. These are entities that perform only the following functions:

Actuarial	They are the mathematical geniuses who price and rate risk by studying and modeling the historic loss data, various factors, and trends relevant to the risk to forecast essential business information.
Claims Handling	They manage the customer claims by liaising with various professional services. Decide the claims settlement in accordance with the policy limits, terms, and conditions. They also provide the loss data to the underwriters.
IT Management	They manage the system upon which the whole process is operated. They are responsible for the interface.
Audit, Accounting, Reporting & Regulatory compliance	They are qualified independent professionals who perform the functions of auditing the claims settlement, accounts, and regulatory compliance. Their reports are important because it helps the management understand the issues, and review and improvise the business decisions. They help keep the entities healthy and stay compliant with solvency regulations.
Risk Assessment & Surveying	They validate the losses and damages as per their expertise. Most also have delegated authority to a certain limit to proceed with settlements.
Dispute Resolution	They help resolve disputes between the insurer, customer, and various stakeholders, as per their expertise in regulation, law, rules, and guidelines of practice.
Marketing & Sales	They are responsible for marketing and channelizing the insurance products. Most importantly making sure that correct information is advertised, and the product sold is relevant to the customers’ needs. They ensure that the customer understands the product by providing detailed information such as covers, premiums, policy excess, limits, terms, and conditions, etc.

The Framework

The statutory regulators play a very important role in regulating the entities and market. They ensure solvency margins are maintained so that insurers are capable to meet their promises. They also ensure the conduct of the entities meets the standard of fairness. The legislation, rules, guidelines, and the common law not only provide a framework but also resolve issues of law from time to time laying down precedents. Some of them are as follows:

Legislations	Insurance Act 1938 (IND), The Marine Insurance Act 1963 (IND), The Insurance Act 2015, Marine Insurance Act 1906, Life Assurance Act 1774, Financial Services and Markets Act 2000, Consumer Insurance (Disclosure and Representations) Act 2012, etc.
Rules, Guidelines	PRA Rulebook – Insurance Rules, FCA Handbook – PERG, Insurance Conduct of Business, IRDA Guidelines, Insurance Distribution Directive, etc.
Courts, Ombudsman, Common Law,	Law Commission Reports 353, July 2014; Carter v Boehm, Pan Atlantic Insurance Co. Ltd V Pine Top Insurance Co Ltd; The DC Merwestone case; Versloot Dredging BV case; Prudential Insurance Co. vs. Commissioner of Inland Revenue [1906]; NIC vs Pranay Sethi case, Cendor Mopu case, Leyland Shipping case, Lucena vs. Craufurd, etc.
Literature	MacGillivray, Arnould, Ozlem Gurses, Colinvaux, Periodic reports of independent and statutory bodies; Articles, Journals, Newsletters, and E-Magazines.

The Future

The developments in the market towards a sustainable overall industry around the world for a better future have created opportunities. Information technology has opened this financial industry to huge possibilities for improving the way business is conducted. Fields such as below have helped unravel data and utilize the technology to better understand the needs of the customer and cater to their interests smoothly:

• Processing applications & platforms
• Big data science
• Data analytics
• Cloud computing
• Artificial intelligence
• Internet of things  

Stay tuned to my upcoming articles and learn more about insurance.