\03 Insurance business and finance New edition: Aprit 2010 This isa new edition of coursebook P92, Itreplaces entirely the June 2009 edition of P92. See eee : f mi Provided free with your study teat endolmentis 12 months ackess to Revsiontate, the CIs easy-to-use - ‘ontne study support tool offering a suite of online services to lp improve your chances ofexem success. “These include; @ study planer, knowledge check facility covering each chapter, definitions of key terms, spectrien exam guide and hints nd tips. ‘To pepo the benefits foryousel folow tis four-step process 1. Goto wwwsrevisionmate.cem 2. UseyourCIIPIN® as your login name 3. Useyour suiname as your password {illin ower case and omit any hyphens or apestrephes) 4. cik’Login’ ‘eventing ou cHPHV onthe man sennidpmen traded i is ud, P92 | Study text ‘April 2010/Novemnber 2010 ® 209 CiInsurance business and finance poten eran i é ea Provided fee with your study ter enrolments 12 months acces to RevisionMate, the CIfs easy-to-use * cline study support too, offering a sute of onine services to help improve your chances ofexam success. "Theseinctude: a study plainer, a knowledge check facility covering each chapter, definitonsof ke terms, specimen exam guide and hints and tips ‘To explore the benefits for youself Tolow this four-step process: 1. Goto www.revislonmate.com 2. Ureyour CIIFIN' 2s your legin name 3. Use your surnames your password (ln over case andomit any hyphens or apostrophes) 4. Click‘Logi’ ‘oe contin your CPI ni ny mei achneledgma eter indude ith he ty tet P92 Study text ‘April 2010/November 2010 ® ChThe Chartered insurance hsiute 2010 z ‘eights reserve. Material pubishedin ths study texts copytight and may aot be reproduced ia whole ot : in partinciuding photocopying ocecersing, fr any purpose without the wen pecmision of the copyright : holder. uch written permission must also he obtained betore any part ofthis publieation is stored ina tevieva system of any nature This study texts supplied for study bythe origina purchase of the book only and mus nat be std lent, hited or given o anyone ele Every attempt has been made ro ensure the accuracy ofthis study text,however ne liability can be accepted for any loss incurredin any way whatsoever by any person relying soley on the information contained ‘within, The study texthas been produced solely forthe purpose of exam preperation and should not be loken as definitive ofthe legal postion. Specific advice should always be obtained beforeundertking any 1S8N:978 085713 011 2 ‘This edition printed n 2010 contalns replacement pages prlated In November 2010. Previous edition 2009 SBN: 978 1 85369904 7) Authors Keith Holland FH, is an independent management trainer and coach, Keith spent mostof his career in the financial services industry with the Royal & Sun Alliance. Within RSA he worked ia management services, waz {an operational service centre manager, ind also worked as an internal consutant on quality, change and cal/ contact centre programmes. On leaving RSA Kelth became a management wainer. He maintains a specialism In calicontact centre management. tan Hutchinson MA FCA, bas25.yearsofisurance experience having wotkedin a wide vary of oles Royal Sun Aliance, lately s Director of Corporate Finance and aboard member af Royal Sun Allance Insurance pl. lan has lectured on general insurance financial matttsendhas chalred te Assocation of rsh {nsurer's working party to republish the Insurance Statement of Racommanded Praztice Thé ABI SORP = UK : GAAP accounting guidance forinsutence). More recenty lan was Finance Director fr Bighter Business Ltd 2 star-up insurance business and a member ofthe Catlin Group ands current a non-executive dector of Aegon Direct Marketing Services Europe i : Ian is Fellow ofthe stitute of Chartered Accountants in England and Wales, and has an engineering degree from Cambridge University. ‘The views expressed herein ae the personal views ofthe authors anly and not those of any organisation for whom they work o are associated with, Reviewers “The Cit would ike to thank thé following reviewers for their assistance with study tox Jing the text fortis lan Bates FCA John Breckenridge ACA, Assistant Ditectot, Financial Regulation & Taxation, ABI ‘Margaret Crawford CA, Senior Lecturer Divsion of Accounting, Finance and Risk, Glasgow Caledonian UniversityAcknowledgements “The authors acknowledge that information from various sources and websites has been drawn upon in the ‘process of producing thi study text and where possibie specific acknowledgement has been included within the text. The Citwould also like to make the folowing general acknowledgements: Crown copyright material is produced with the permission of the Controller of HMSO and the Queen’ Printer for Scotland. ‘Thanks are due to: Kevin Griffith, Ernst & Young for peiisson to include extracts from the flouting Ernst & Young publication: IRS insurance Reporting ~ Beyend Transton. [RSATor permission to draw on material contalned in RSA 2007 Report and Accounts. Standard and Poors forts kind permission to draw on material thats available from the Standard and Poor's website: wwstandardandouor.com and to include extracts where appropriate. Where extracts appear, they cdo so without amendrnent and Standatd and Poor's holds the copyright to such material, Use of Standard anc Poor's matetial does not indeate any endorsement by Standard and Poor’ ofthe publication, or the material ‘or views contained withinit “The FRC forits kind permission to-drawr on material that is avaiable rom the FAC website an to include extracts where appropriate. Where extracts appear, they do so without amendment and FRC holds the Ccopysight toa such material Use of FAC material doesnot indicate any endorsement by FRC of the publication, o the material or views contained within it “The {CREW forits kind permission to drawon material that is available (rom the ICAEW website end to Include extracts where appropriate. Where extacts appen, they do so without amendment and ICAEW holds thegopytight toll sich material Use of FRC material doesnot Indicate any endorsement by ICAEW of the publication, or the material or views contained within it “The Financial Services Authority (FSA) fr permission to draw on material thats available from the Financial Services Authority website: wwwfs2.govuk and to include extracts where appropriate. Where extracts appear, they do so without emendment. 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Services include: factice your exam technique: déliveting practicat’About your study text ‘Welcome to the P92 study text, whichis designed to support you in your study ofthe Cl Diploma in insurance P92 unit, copy of the examination sylabus is incluced inthe next section. The syllabus forms the basis of the exam, ot this study text, However, we have designed the study text to cover the sylabus, breakingit down into concise sectionsin an order best suited to help you learn: So that you can see which areas of the syllabus each chapter is covering, we have added the number of the relevant sylabus leasning outcomes next to the section ‘headings on the Frit page of each chapter Making the most of your course Using the learning objectives These statements atthe start of each chapter describe what you should know andi able todo when you have worked through that chapter. Use them toasts your progress and to identity areas where youneed 0 domere work Importance of activities You il notice as you go through the materia thot we have included Questions"Thinks'and‘Aetvities You axe €acouraged totake the time to do these. The ‘Questions test your understanding of what you have just” ead, white the'Thinks'anc’Actvtes' will help you look beyond the study text to appreciate how your stucies apply to your daily work. At the end ofthe chapter theteis alistof kay points asa memory Jogger and a st of self-test questions, Additional learning resources Ina practical subject, such as insurance, you wl ind it helpful to take advantage ofather sources of Information, beyond this study text. Talk to your colleagues, read workplace publications and professional journals and make use of thelist of additional reading given onthe syllabus. Taking the time todo this extra ‘esearch will not only enhance your chances of succes in the exam, but wil increase your eflectveness your chosen caret ‘©The Chartered insurance Institute 2010 Po2rapri2010Po2Apal 2010 Insurance business ane finance (©The Chartered insurance lnsttte 2010Examination syllabus 2) insurance business & finance Al the end ofthis unt candidates shoul beable to demonstrate an understanding ofthe: '+ Structure of the insurance business: + tain aspects of management and corporate governance: + Main accounting principles and practices of nsurence company accounts; + Typical messures ofthe Financial sength of insurance companies, Assumed knowledge Itis assumed thatthe candidate akeady has knowledge of the fundamental principles of Insurance as covered in Fs, Insucance, legal and regulatory or equivalent exams, ‘Surmary oflezming outcomes 1, Undetstand the structure ofthe insurance business 2. Understand the management of insurance businesses. 2. Understand the main aspecs of corporate governance, 4, Understand other common funtios within insurance organisations. 5, Understand the main accounting principles and practices. 6. Understand the main practices ef insurance company accounts. 7. Understand the use of financial alos fo assess businesses. {8 Understand the financial strength of insurance companies. notes: “+ Thesyilabue ie examined on English and practice + TheAprilsescion wil est the legal postion as of 31 Augusto the preceding year. + The October session wil teat the legal postion os of28 Febraary of the sae year. ‘The chartered nsweance insure 2010 PozNoverber 2010Insurance business and finance Examination syllabus 1. Undersind thestrctareae ihe Insurance business rains receen 12) Saegoet samen ewer 2 Understend the managen Ineurance businessce tent a 3. Understand the main aspects of ‘corporate governance Sle suns ee ‘Understane ator common funetons. within insurance organisations man, ‘Diomtoenie eat stars : myer ntcaane ‘sauieienratem re linderstend the min accounting principles snd practices eset enlist EB gag norman ed ‘Understand the main pact Insurance company accounts erage an sof Firion naam mamaeiee aaa Po2iNoverber2010 The Chartered insurance institute 2010Examination syllabus 7. Understand the use of fuancat ing it satlos to assess businesses erent duno, 133 gery TI hae eden boat senate ‘sqeatiantarenacastern ejrence mati Petodiats Wats home teense rmination gis Sees. SSE aiaoae em teciqs ety ie ‘egret ete maton ‘Reparaiesceitnaimaen nat ‘Sncmannseeaaas gas (elgeteltenauc pent Ws Blosmm i ‘oTne Chartered tnsorance insite 2010, s2/November2010It’s important to have the credentials. Join the growing community of insurance professionals by becoming a member of the Cll. Statistics show that a member's pass rate is higher than anon member's. Join up to get help passing exams: * Discounts on learning materials, exams, seminars, study and revision days ~ membership can pay for itself Free access to exam gui Recommended textbooks and online fact files. Technicat reference books and newsletters Support from other local institute members Coaching on exam technique and revision courses. ‘And ongoing support for your career: ‘+ Use our world renowned designations ~ Cert Ci, Dip CHl, ACI! and Chartered Status + News and regulatory updates + Online career support centre * UK tax-payers can claim income tax relief on membership fees. Membership from as little as £5.84* a month by Direct Debit. To sign up please use the form enclosed, contact us on 0208989 8464 oF Visit wwew.cii.co.uk/join “Membership pce are reviewed ont auary each year nd are subject ton overall maxkrum inceas of5% in ine with our Royal Charter.P92 Insurance business and finance [Atthis stage in your studles it likely that you are already working inthe insurance market and the broad scope ofthe P92: Insurance business and finance Diploma in Insurance unit means that you may well already have an understanding of some of the move familar topes covered. The sim ofthis units to provide you with an understanding ofthe core principles relating to insurance business and finance. Corporate governance for example, isone ofthe most alked about topics n business today and the requirement to promote good corporate governance both within and outside of the financial services is receiving increased attention worldwide. Cone area that often causes concern to students isthe financial accounting aspacs and although these topics do form significant part ofthe content, it snot the intention to convert you to accountants by the nl ofthe ‘course! Rather, ou will have gained an understanding ofthe principles and practices of nancial accounting, hhow this function relates te the other activities caried out in business together with an understanding of how specie aspects impact on insurance companies ‘OTe Charteedtsurance insite 2010 Po2rapel 20102 Po2znpnit2010 Insurance business and fnance ‘©The Chartered insurance natute 2010Contents 1: Structure of the insurance business A Different types of insurance company a 8 _Dilferentsellessofinsurance va © importance ofthe customer wna D Importance of other stakeholders 129 £ —_Theglobal perspective 17 F Company growth and mergers and acquisitions 130 G Outsourcing 136 H Delegated authortyin underwriting 19 Appendix 1:C¥ Code of Ethics vas 2: Management of the insurance business: roles, responsibilities and styles A Theboard of diectors 22 B Senior executives 24 Managers end supervisors 26 DNonmanageral staf ana E — Managementstyles ana 3: Management of the insurance business: planning and control A Theplanning process 32 B Budgetary planning and control am © Decision making aro D_— Managementinformation an E Knowledge management ans 4: Main aspects of corporate governance A Regulatory structure “B B_ Incorporation of businesses an Statutory reporting requirements as 1 Theexternal and internal aust functions an E Meetings and their functions any F Agenda, minutes and related documentation any G _Keygovernance reports and requirements ana Ho Confidentiality ano ‘Appendix Main principles ofthe UK Corporate Governance Code ana Marketing ‘A _Themarketing function and business sR 1B Key marketing concepts 5B Market research and product development processes 5/6 D+ Communications and promotion sm ‘oThe Chartered ncurance nets 2070 PoziNevember2010,surance busines and nance mmone> Human resources Human eesource management function Recruitment and selection Appralsaland reward Teining and development Motivation and morale ‘Employment and workplace legislation 7: Main accounting principles and practices -zanmone> Purpose and function of nancial accounting Financial and management accounting Users offnancil information and thei information requirements Basic financial concepts and the accounting equation Receipts and payments ‘The balance sheet ‘The income statement Cash flow statements ‘Statutory notes to the accounts ‘Appendix 1: Examples of insurance accounts 8: Accounting standards and insurance company accounts A 3 c > Role ofthe International Accounting Standards Board ASB) International Fisancal Reporting Standards (IFRS) UK Generally Accepted Accounting Principles (UK GAAP) FSA UKUsting Rules 9: Claims reserving a 8 c A 8 c The importance of accurate reserving Incurred but not reported (BNR) andi rolein insurance company accounts Reserving methods Financial ratios Frequently used ratios Ratiosin the insurance industry Assessing aninsurance company’s results Vi: Financial strength of insurance companies a 8 Rating agencies Solvency mat ‘and regulatory requirements Answers ‘Statutes Index 2 - enn : ons, ons na n 7 7S wT my 716 m7 2 7n3 725 my wt sno ana - on ors 314 won 10 ons m2 15 a val a Pauaenl 2010 (©The Chartered insurance Institte 20101: Structure of the insurance business alongs A Dilton types of insurance ent elles ofinsurce @liiportunce’of thé custome aa vi2 (©The Chartered Insurance Institute 2010 Pstovember2030Insurance busineseand Boance Introduction ‘Insurance companies haven valuable function to perforin within society by insuring the wealth of the country. wil cone as no surprise that no two insurance companies are identical in their structure nd outlook, However within the UK, all insurance companies can be grouped into three broad types: + A composite company: an insurance company that transects both long-term business (life) and general business. + Allife company: a life assurance company that is only able to transact long-term business. +A general insueanee company: an insurance company that is only able to transact general business “These three siyes of companies do not make one single large market, since the Insurance anatketplace refers more to the mechanism by which buyers and sellers come together, rather than 2 physical location. However, every ral as an exception andthe one exception is that the transaction of insurance business within the London Marke, including Loyd’ of London, can be classed asa physical location. We shall look at the London Market in more detail in section EI. Structure and size of the UK insurance industry ‘The UK insurance industry + isthe largest in Europe and second largest inthe world + accounts for 11% of total workdwide premium income; + employs over 309,000 people a third of al financial services Jobs: + had total net investments of £1,599bn at the end of 20075, + accounts for almost 23% ofthe net worth ofthe UK economy; + ita major exporter - 20% ofits net premium income comes from overseas business ‘As at 31 March 2008 there were 510 authorised UK insurance companies, of which 120 were fe ‘companies, 18 composites and 372 general insurance companies. (Sovrce FSA.) ‘Worldwide net premium income of UK insurers in 2006 was £194bn, of which £152.6bn was long-term business and £41.4bn general business. oie z are Find out more about the Insurance industr'srole nthe UK economy and society. See you can find the answers to questions such as: How does the industry help to promote investment in future economic growth? How does it help public services and company expansion? ‘What role does itplay inthe following issues: + fighting crime;improving safety at work; + dealing withthe effects of climate change; and “supporting the nation’s health? Ps2rapei2010 ‘©The chartered Insurance nstte 2010Strut ofthe insane business “The market for insurance Like any other market, the insurance market comprises: + sellers insurance companies and Lloyds; + buyers: general public, industry and commerce, and public authorities: + middlemen insurance brokers and intermediaes, In other markets the buyers, sellers andthe midlemen come together to examine the merchandise thats forsale. With insurance it s not posible to bring a house, factory or ship to 4 matketplce, and in any event what is being insured isthe financial interest in that asset which isat risk “The buyer is any person, company or organisation wanting to purchase insurance. This may bbea homeowner spending few hundred pounds purchasing home insurance or one single ‘company spending many millions of pounds per year on insurance premiums. They may be faced with many different insurance companies to choose from. The buyer will ofien use an insurance broker or intermediary ‘An ‘intermediary’ is an agent who is authorised by a party, often a commercial company to tecommend an insurance company and/or insurance policy. They may even be authorised to purchase i ‘As insurance broker is an individual or frm whose fulltime occupation is the placing of Abighstandord Insarance with insurance companies. A high standard of expertise is expected of insurance otenpertiselt brokers. The broker shal place the intrest oftheir client before all other considerations. The “*P**"*4 insured can obtain independent advice on a wide range of insurance matters from a broker, without direct cost to themselves. From the Insurers’ point of view, negotiations with brokers ard’casier and speedier because only the intricate points or special requirements require detailed ‘discussion, thus saving time and money on routine matters. Lloya’s Lioya's occupies a unique postion in the world of insurance. A society incorporated by statute it provides premises, services and regulation to e marketplace (‘the Lloyds market) which has been trading in insurance for over 300 yeas. Lloyd's does not itself transact insurance, as this is the busines ofthe underwriting members of Lloyds (both individual and corporate) who make up the Lloyds market, They underwrite for their own profit and loss and in administrative groups called syndicates. The underwriting ‘members appoint independent companies known es managing agents to carry out the underwriting business (write the risk, pay the claims et) on their behalf Since Lloyds was fist established in the late seventeenth century the Loydls market has developed a strong worldwide reputation for is ability to provide the finest risk solution for its customers. These customers generally instruct to act for them one of te firms of Lloyds brokers, all of whom have a good understanding ofthe Lloyd's market and many of whom specialise in particular risk categories. Lloyd's has a unique ‘chain of security’ to protect insurance poticyholders, should any member be unable to pay a claim, ‘©The Chartered insurance nse 2010 strap 2010 awThe company Istiabie torte Insurance business and finance Aq ‘A development in the moulernisation and reform of Loyd ws the creation of a hanchise structure, whereby Lloyds acts as the franchisor and the managing agents and the members for ‘whom they acted are the anchisees. The aim ofthis structure isto improve market profitability ‘and 0 allow monitoring nd guidance of franchises, withthe franchisor having ullimate power to eect businesses that are vnable to respond. As franchisor, Lioydt now pursues a much more ‘proactive role than had been undertaken previously. A Franchise Board with members drawn from both inside and outside the Lloyd's market cary out the franchisors le rae Visit the Lioye's website at vnwvdloyds.com for mare information on how the Lloyd's market works Different types of insurance company Proprietary companies ‘The majority of insurance sellers come under this heading, Proprietary companies have an authorised and issied share capital to which the original shareholders subscribed, and iti to the shaccholders that any profits belong after provision for expenses, eserves and, in the cate of ie busines, with-profit policyholders bonuses. The sharcholder’Hability i limited tothe nomingl value oftheir shares (hence the term limited lability), but the company is able forts debe and Ifthe solvency sargin (see chapter 11) cannot be met the company wil go into liquidation. The public can des direct with these companies but often a broker ort intermediary is involved, Tin most classes of business ther is keen competition among proprietary companies and also between proprietary companies and other sectors of the market ‘Most are composite or general companies writing insurance and reinsurance business. Insurance companies operate by charging relatively small premiums in comparison to the exposed risk to large numbers of the same type of customers in other words the losses of the few are paid for by the premiums of the many (risk transfer), Good examples of insurance and reinsurance classe avez + accident and health; motor: svistion; fire and other darnage to property; Tiabry. Reinsarasice companies operate in a similar way to insurance companies, as they transfer risk, They allow insurance companies to pass risk onto them in return fora premium. There are many types of reinsurance contract but this course does not expect you to have a working ‘knowledge ofthe reinsurance markt, other then Having an appreciation of the diversity of the term*insurance market! Po2sapaiz2010 ‘©The Charceredinsrancelnsttute 2010"Structure of the ingurance bnass However, you do need to understand why the reinsurance market exists, Insurers purchase reinsurance for two basic needs: + To limit (as much s possible) annual Nuctations in the lasses that affect their underwriting account, often referved teas smoothing the underwriting result “To be protected in case ofa catastrophe (both man-made and natural. ce eee Before you move on, male sure you knowhow reinsurance companies help general insurance ‘companies. Make some notes below: A2 Mutual companies Mutual companies have been formed by Deed of Settlement or registration under the ‘Companies Acts. They are owned by the policyholders, who share any profits made. Most ‘mutual companies operate inthe long. term sector (life) offering their customers the fall benefits of saving over along period ~ often between 10-25 years. The shareholder in the proprietary company receives thelr share ofthe profit by way of dividends, but in the mutual company the policyholder owner may enjoy lower premiums or higher life assurance bonuses ‘than would otherwise be the ease Many companies, which were orginally formed as mutual organisations, have now registered under the Companies Acts as proprietary companies, although they have retained the word ‘mutual in thei til, Others, registered as companies limited by guarantee and without the word mutual n their tile, are actally owned by the policyholders. Mutual companies may transact life or general insurance business. A feature of mutus! status is ‘adifficultyin raising additional capital since they cennot issue additional shares inthe way that proprietary companies can. The 1990s saw growing pressure on mutuals to convert to the status of proprietary companies (a process known as ‘demutalisation!). Good examples of long-term business areas follows: + fife and annuity; + permanent health; + pension fund management; . + linked long-term. ‘As with reinsurance, this course does not expect you to have a working knowledge ofthe life insurance business, other than having an appreciation of the diversity of the insurance market, ‘The Chartered ieuranc nstte 2010, Po2/apr 010 us,Insurance businssand finance Ee ‘Armateal fm ill concentrate on getting the best returns for its members as there are no shareholders to take a share ofthe profits through payments or dividends, 7 A3 Captive insurance companies Captive insurance i a tax-efficient method of tcansacting risk transfer, which has become ‘mote common in recent years among the large national and multinational companies. The parent company forms a subsidiary company to underwrite certain of its insurable sks. ‘The main incentives are 1o obtain the full benefits ofthe groups risk control techniques by paying premiums based on its own experience, avoidance ofthe direct insurers! overheads and obtaining 2 lower overall risk premium level by purchasing reinsurance at lower cost than that required by the conventional or direct insurer. ‘Many captives are operated from offshore locations such as Bermuda, Guernsey and the Isle of Man, This does give the captive certain fiscal advantages, but it also reduces the Volume of paperwork associated with registering 2s an insurer and, because 60 many captives are off- shore, allows the captive to tap into all the necessary ancillary services such as hwvestment ‘management, banking and accounting. ‘Make some notes on the hey benefits of having a captive insurance company below. 4 Takaful insurance companies ‘Takaful isa basis of insurance that has its roots in the Islamic financial services industry. The ‘model has been developed over a period of time and it is based on the rulings of Sharia law on financial end commercial transactions. It works on the principle that in any transaction, risk and profit (and loss bearing) should be shared between the participants ‘The reason for this business development is to meet a newly identified customer group for both {ngurers and intermediaries with a need for products to meet their particular eligious principles. Under Islamic (Shariah) law, traditional insurance polices are seen by Muslims to be contrary to some of the fundamental principles of Islam, as they involve: + harar—uncertainty. Islamic la forbids sles where there is isk tothe buyer, unles the Fiskis of normal or reasonable proportion, Some believe that traditional insurance policies ‘donot emove uncertainty beceuse how mach and when, ifatalla policy wil py out remains uncertain: vs Po2taped2010 ‘©TRe Chartered surance nse 2010>-Suvetute ofthe surance business + maisir - gambling, Traditional insurance policies are seen tobe a sort of gambling because some policyholders receive payouts whilst others do not. Gambling is foxbidden under Islamic laws + riba ~ interest. Islamic rules also forbid making money from money, such as through invert, Wealth ean only be made through the tade of assets and investments To respond to the specific needs ofthese customers a new type of product ~ takafu insurance ~ thas been developed. Taal isan Arabic word meaning uarantcing each ater hkl insurances embrace the Means ba eee ‘each other’ _ + mutuality and co-operation; shaved responsibility: joint indemnity; + common interest; and + solidarity. “The ac similar to those which underpin mainstream mutual insurance and involve a number of participants sharing risk on co-operative basis. This avoids poicyho fortunes or misfortunes of others, as eustomners pay money into a conumual fund snd ake out what they ned in the event ofa claim. Insurance companie charge a fee for miansging the fund. Any money lef over atthe end ofthe yea, afer payment of claims and business expenses incurred by the insures is istributed to policyholders, who ae trested a shareholders. gambling on the Policies also need to be carefully worded so that no cover is provided for areas prohibited by Islam, For example, there is no cover for items connected to aleohol or pork. Products need to be approved by Islamic scholars to ensure they are compliant, and many providers consult special Shariah advisory committees during the development process. ‘There is significant potential market for products developed to meet the needs of those with specific religious preferences, For example, the total value of takaful premiums is predicted to be anywhere between USS 7.5bn and USS 20bn by 2015. While takaful insurance has been in existence for at least 20 years it was only in 2008 that a major high street bank becamme the first to offer Islamic insurance policies for buildings and contents. Tis isa trend, which has ‘continued since, with an ever-inczeasing number of providers entering the marketplace, ‘Terefore with the investaent funds that the Midele East ha availble, these funds are now being used to buy and take over companies that are established in the Western World, Consequently tekaful as a means of underwriting sk is growing ata very rapid pace in many Midele Eastern insurance sectors and als itis being taken into other parts of the world The current key centres oftkafol activity are Dube, Bahrain and Kuala Lumpur, but London is now also recognised as an emerging centre for islamic finance and there sat least one takafil Insurer that has gained FSA approval. Taere will no doubt be others shortly. In addition, banks axe also developing takaful products (©The Charred nswance Institute 2010 e2/Apa20%0 wIneurance business and nance ‘There isa usefl article on takaful insurance entiled ‘Divine intervent in the OcvNov 2009 edition ofthe CI Journal bby Timothy Bvershed Identify how akaful premiums have grown on a worldwide basis over the last ve years and the expected growth aver the next five years. Make some notes below. Cereees | Takaful companies have a similarity to another type of company. Which is B Different sellers of insurance Thi B as : ‘Before moving on, how mary different sellers of insurance can you think of? Incurance is now ¢old through an extensive list of distribution channels which includes: + the types of insurance companies (proprietary, mutuals, takaful) mentioned above; + Lloyd’ of London, mentioned abave; + direct insurers; + theinternet; + independent intermediaries; + agents; + building societies; + banks; + retailers and affinity groups, + travel agents and tour operators; = aggregators; + theState; + selfnsurance. hue Paxpi 2010 ©The Chartered insurance inate 2010Lu Strotute of he igurance basins B1 Directinsurers Use ofthe latest technology in telecommunications and telesales techniques means that the new rect” writers do not require extensive branch networks to service thei business. Their adininisteative and underwriting centres may be located anywhere in the country and contact by customers only charge! for on the basis ofthe cost ofa local telephone cal. Cos! of office accommodation and proximity ofa suitable workforce may be the most important considerations in the choice of location. Direct insurers stl of course, have to settle claims and arvange vehicle repairs ata local level and their arrangements in this respect are similar to traditional insurer, ‘The traditional composite insurers have established their ovn dicect writing subsidiaries. The direct market continues 1 grow and, as the public become more and more used to dealing by telephone forall soxts of products and services it is difficult to predict when the ditect share of the market will level off, Some fel that this is already beginning to happen. B2 Theinternet “The development of the internet in the insurance industry has been somewhat cautious Customershave compared to online baking, The fet generation of internet users mainly consisted ofyoung _“serutlons people with high incomes who were inspired by the new technology. Nowa second wave of Seay ‘users has emerged: people less interested in the technology, who use the internet mainly because its convenient and saves time. In the financial sector, the marketing of products vi the internet has presented a numberof difficulties, one being the significant differences in some national régulations. Customers also appear to have reservations about data security, particularly since financial transactions {particularly for life rather than general insurance) contain extremely sensitive data ‘Major UK insurers are now selling motor and home insurance on the Internet. However, they * {face growing competitive pressure from new entrants, in particular, banks, online insurance ‘brokers and internet service providers, Thase cormpanies take advantage of ther internet presence and brand name to add insurance products to their existing range. ‘Over the past few decades there has been a rapid and significant increase inthe number of distribution channels available for personal insurance. A number of new inditect distelbution, channels have been developed, Some of the most important are examined below. B3 Independent intermediaries “These include both insurance brokers and consultants, Both operate as fll-time experts in insurance, and can offer various personal insurance products with a range of companies. They provide a personal cervice to their customers enabling eave of access to products and giving advice and choice, ‘©The Chartrednsurance state 2010 Po2apst 2010 wsChange of status gives greater funds lnsurance business an faance B4 BS Be Indepenctent intermediaries work on behalf ofthe cient and recommend an appropriate insurer on the bass of price, product feataes, service and security. negotiating with the insurer on the : client behal, The intermediary normally collects the premivm on behalf ofthe insurec and : will often ive the policy documents. They are abe o give advice and guidance to the customer ‘when making a claim, Some may have delegated authority to handle and pay elaims on the insurers behalf ste section H for more delegated authority in underwriting). The inerrnedinny is usually paid commission on the premium by the insurer: This is knovn as brokerage These intermediaries may also have their own schemes under written by insurance companies (or Lloya’s underwriters, often offering broader cover us standard at competitive rates, They are often targeted at a specific sector of the market, such as members ofa particular profession, club fr society and are known as affinity schemes. In these ceses, they will be responsible for both policy issue and claims handling, and so will receive a higher rate of commission. Agents ‘These are intermediaries whose main business is net the transsetion of insurance and include state agents, and other professions whose clients may have a demand fr insurance of particular type. For example, veterinary surgeons may act as agents for pet insurance. ‘Agents will usually be appointed representatives and may be tied to one particular company. Building soci ‘Traditionally. building societies provided mortgages, and their involvement with insurance came through mortgage-related life assurance products, household buildings insurance and mortgage guarantee business, However, legislation including the Financial Services Act 1986, the Building Societies Act 1986 and more recently the Financial Services and Markets Act 2000 has changed theit position, They now have the freedom to engage in activities other than loans on property, including estate agency services and insurance intermediary activities. ‘he Building Societies Act provided the opportunity for building societies to demuwalise and ‘become proprietary companies whose shares ae publily traded. This change of status gives @ batiding society acess to greater funds to expand its operations into new areas, Many building societies have extended ther activities by entering into competition with direct marketing ‘operations, Tey are able to offer most product lines, underwritten by authorised insurers over the telephone othe internet, targeting sectors of he general public with a view to increasing their customer base. Where new customers ar= obtained this provides a further opportunity to cross-sell their other associated investment and lending product. Banks ‘Banks (some of which ace former building societies) are now avery powerful force in the personal insurence marketplace. They have the advantage ofa large customer base and an ‘extensive distribution network to develop new customers ino s2/apit2010 (©The Chats insurance ntte 2010eStucine ofthe insurance business ‘Banks have moved on considerably from the situation inthe 1970s, where individual managers ‘were local agents of insurance com \hile others have become intermediaries forming partnerships with selected insucers or Lloyd's “gyndicates forthe provision of household, motor and travel insurance. Cover is, however, ‘sully branded in their own name, inthe same way as discussed for retailers and affinity {groups in section B7, “The types af personal insurance offered by banks include the following: es, Sorne have scp their own insurance companies ‘When agreeing «loan fora customer, a bank may provide creditor insurance, + When a bank grants a morigage, it may also offer creditor insurance to protect mortgage payments in the event of sickness, accident or redundancy. + Tanks have their ov schemes for cover, such as household, motor, hospital plans and travel Special covers are algo available such as for articles in sofe custody, and for students and nurses living away from home. B7 _ Retailers and affinity groups ‘This distribution channel is known as ‘brandassurance, where organisations offer products This distribution branded with thee own name, but underwritten by insurers or at Loyd’. These policies are shannetis sometimes referred 10 as ‘whit label prosucts. They have recognised the broader commercial "pandavsurance? ‘opportunities that can be developed through wel regarded brand names with an extensive distribution network. They have used these to enable them to maximise on their large ‘established customer base by cross selling insurance products. Retailers, utilities, mail order companies, membership and consumer groups have all entered the marketplace. Some offer a broad spectrum of the more commonly purchased personal insurance products, such ag household and travel, Others offer products particulary associated with their own product lines, sch as credit insurance in relation to store card and extended warranty insurence in elation to white goods. * All providers of consumer goods and services are potential channels for the sale of insurance products, Recent insurance tie-ins are as diverse, ranging from power utility companies to ‘organisations targeting pariicalar groups of society such as Age Concern and SAGA. B8 Travel agents and tour operators ‘Other then the channels noted above there are three other distribution channels for travel fngurance: 1 Travel operstors as providers of package holidays usually offer travel insurance factlites to their customers. Generally the cover is offered ona package basis and is usually ‘underwritten by an insurance company. Many tour operators make ita condition that holidaymakers arrange adequate insurance cover, bat customers are not legally obliged to ‘buy the operators ovn policy. Tour operators’ contol on travel insurance as been affected by the activities of travel agents + Travel agents have embraced the opportunity to sellto their customers tthe point of sale as they have mare opportunity to influence the choice of scheme and receive further income by ‘way ofthe commission made on the see +A further opportunity fr distribution of travel ingurance is atthe point of departure, partiulaly in airports. Travellers are able to purchase policies in coupon form, obtained through machines staated at airports This method has the advantage of attracting the cients attention ata time when they are psychologically receptive to the need for travel insurance. (0The Chartered Insurance nsttte 2010 Po2snpit2010 wAnoggregator relies upon the co-operation ofincurer and Intermedioriee toaccess thelr pricing for aa) Insurance business and nance Bo B10 Aggregators Most money supermarkets are essentially price comparison websites. They ae a relatively new concept on the internet and ace referred to.as ‘aggregators: Aggregators can and do cut across traditional boundaries. As we have seen direct insurers by definition desl directly with the public. However, the prices of many direct companies as well as intermediaries miay be accessed through aggregators ‘An aggregator is an internet-based distribution channel, which relies upon the co-operation of Insurers and intermediaries to access thei pricing for different sks. Aggregators aim to deliver a service whereby the customer completes one set of questions and is provided with quotations from a number of insurance providers. The proposer can then approach that company direct ~ often through a link from the aggregator’ website, to complete the purchase of heir insurance. Eine ne 3 Can you identity at least two major insurers who 6o not use aggregator sites? ‘These arrangements have attracted some criticlsm in the marketplace. Many insurers and intermediaries are happy to participate in such sites, bt others have chosen not to (Aviva, Direct Line). One concern is that only a limited number of questions is asked at the inital quotation stage, which may afect the sccuracy of the quotation given or the willingness ofthe insurer to offer cover, once the complete feets are known. Often the aggregator will rank quotations solely in terms of price and not necessarily in terms of the covered offered. The results can be confusing as they are not always an accurate reflection of what the insurance product wil actually cost once fuller detaits have been submitted to the chosen insurer. Aggregators have also been criticised for the use of default positions on questions such as voluntary excesses, ‘The Financial Services Authority (FSA) has recently carried out a review of comparison ‘websites. It found that there was mixed evidence in terms of the clarity, fairness and accuracy of [Information given to customers. The FSA-has called on aggtegatort to give more information to ‘consumers so that they understand how their premiums are being calculated, the scope oftheir ‘cover and the level of excess on their policy. ‘There ie a useful articie on ageregator sites entitled ‘Getting the prize right by HaryeyJ6nes in the Oct Nov 2009 edition ofthe CH Journal. Pier eee Stes ‘Access one of more aggregator websites on the internet. Try entering your own de ore about how they operate. The State Following numerous teroris incidents in the UK, Pool Re was established by statute in 1993, a5 a mutual reinsurance company to provide éover above a threshold for property damage and ‘business interruption from fie or explosion caused by terrorist actions. It is owned by all ofthe ‘most significant participant in the UK commercial property ingurance market. The Treasury stands behind Pool Res the reinsurer of last resort, though no call has been made on the Government during the lifetime of Pool Re In July 2002, the UK Government announced an extension of the remit of Pool Re to help ‘address the widespread post-i1 September withdrawal of UK terrorism cover. wa Poathprii2010 (OTneCharterednsurance institute 2010B11 Lu Stetur of the insurance vines ‘As from Inuiry 2003 the UK insurance industry has theirtotl esponibity for eros mir singe cover capped at £30 million per event anc! £60 million per year. Pool Re picks up the bill for eccrine loses above sprit nsreesetetin limit. Poo Re sess own premio rts for spn its share of cover. The limit for any single UK insurer is based upon market share, With this approach, UK insurers know in advance their tecorism exposure in any one year, Pool Re does not tell them what to charge, insurers are fee to set the premiums for their policies according to normal commercial considerations ‘Asan alternative to parchasing insurance in the market, oF as an adjunct to it where the rst. layer or proportion ofa lam isnot insured in the commercial market, come public bodies and large industrial concerns st aside funds to meet insurable losses. As the esk retained within the organisation there is no market transaction of buying or selling, but such arrangements hhavean overall effect on the funds ofthe market in general and on premium levels where the organisation is carrying the fst layer. “These organisations have made decisions to self-insure because they feel they are large enough financially to carry such losses and because the cost to them, by way of transfer to the fund, is lower than commercial premium levels. Tis could happen where an organisation decides that ithas an exposure to loss involving a large number of incidents, sll of which aze of fsrly low severity. This high frequency and low severity profile implies thatthe losses are predictable. ‘Were the organisation to insure such losses, there would be a kind of pound swapping exercise ‘with the organisation paying a pound to an insurer only to get it back when the losses, which both parties knew would occur, actually take place. The problem forthe insuring company is that it would also have to recover its costs, and so the amount paid in premiums would probably exceed the cost ofthe predictable claims, In such cesesa fund could be created, out of which the losses will eventually be met. You should + note the diflerence between ‘telf-insurance where a conscious decision is made to crestea fund and ‘non-Ingurance’ where either no conscious decision is made a all, of where no fund is created Importance of the customer Ean = ee Why do you thik that being customer facused has become so important for insurance businesses today? ‘Owing to advances in technology and the use of the imernet, many products and services are delivered without the customer and supplier ever meeting. Beamples of meant of doing this {include transactions via telephone banking fax and electronic data interchange (ED, Information about cstomers has become more plentiful as a result ofthese technologies, which not only facilitate trade, bu also store it very efficiently. As information about customers {increases and becomes more detailed, the customer's needs and preferences become more cleanly visible to the seller of goods or services. In this section, we look at the practices that financial services oxganisations use to interact with their customers ‘The Charcetedinsucancetnstute 2010 Po2sap 2010Insurance business and nance C1 Customer expectations ‘While the key objective of any busines isto make a profi, in most cases today thisem only be . achieved by winning and keeping customers. Customers ae the lifeblood of an organisation and the reason forits existence. Every organisation needs to provide good service to its custome, ‘because it depends on them for prosperity, salaries and jobs. customerswit tis crucial today for organisations to knov, understand and meet their customers’ expectations. Persea Competition is fierce, and customers will very quickly move on tow competitor if their pee ‘expectations are not met. Contrary to popular belief, price is not always the deciding factor for customers, Research has shown that while 10% of customers discover that they prefer a competitors product or service, 70% leave because of indifference, rudeness or lack of service from staff Itis essential, therefore, that fa company is going to meet its customers’ expectations that it knows those expectations in the first place. These expectations will usually be identified through market research. Heving identified the expectations to be met its necessary for the company to measure itself against those expectations. Tis will mean returning to customers to assess the level of satisfaction achieved through customer susveys, and/or an analysis of the complaints reezived, The customer isthe only judge as to whether a company has met their expectations. Castomer satisfaction and delivering a quality service also makes very good business sense as it costs, on average, five times as much to win a new customer as it does to retain an existing, customer ‘Customersusually have plenty of choice when buying goods and services in the commercial . sector. Their spending power creates competition between suppliers of similar goods and gives ‘customers choice. There are only’ few areas in which customers cannot change a supplier if their standards do not meet thelr expectations. Businesses have no choice but to compete for their customers and to listen carefully to what they are saying. Every time a customer buys something from a supplier, they are sending 2 ‘message fo competitors that ther sales message is wrong. Competitor businesses will have to ry harder next time to win the customer’ business ‘thas never been more important to know your customers’ expectations and to deliver to those. C2 Customer focus ‘We have slreaty seen that customer demands ere ever increasing and if companies do not deliver what customers want, in the way they want it, and with quality, they wil take their business elsewhere, Costomersare ‘As mentioned eaties, customers are the lifeblood of an organisation end the reason for the life bloodof its existence. They have aright to expect friendly attentive service and to expect efficient rebar ‘company procedures and systems that will support, not hinder, good service. Customers sre «also motivated to use organisations, which treat them with respect and provide a high quality product or service at reasonable price. Iti, therefore, vital today that companies recognise this ‘and become traly customer focused. wa | Pups 2010 (©The chartered insurance instvte2010.J:Stacrure of mh insurance busines To ensurea true customer focus, this approach and attitude must exist through the whole ‘organisation and stat from the very top. It must apply not only to front offices who tal, direcily to customers, but also support or back offce operations as it is often they who fuli the promises made to customers by the front offic. It must apply to all managers within the ‘organisation at whatever level they work. All msnagers, supervisors and teatn leaders should becustomer champions and role models. If management is not customer focused one eannot expect staf to be. “There are, therefore, two types of customer, the external customer and the internal customer, External customers are those who are not on the company’s payroll. Internal customers are those people who work for the organisation, and they are as much customers as those outside the organisation whe pay forthe company’s services. If suppliers of internal services do not serve their internal customers well, the chances are the external customers will not be served ‘well either. External customers generate income for the business and therefore must be given ‘op priority: Everyone within an organisation should either be serving an external customer, soineone who is Giving customers what they want and expect i the key to excellent customer service and being customer focused. ‘Another important part of being customer focused isto find out regulerly what customers fel about the company’s product or services. This can be done through customer satisfaction surveys, ‘nalysing the results and putting in place improvements that are found to be necessary, Seeking ‘customer feedback and taking sction on that feedback isa key ingeedient in customet focus. Remind yourself ofthe difference between external and internal customers. customers. Then asses how you can ensure you deliver what your customers expect of you. However, in any business things will go wrong from time to time, Whea this happens it wil often generate a complaint froma customer. Analysing these complaints in a positive way to Identify the root cause of what went wrong and why, isa good way to help improve quality. Often it highlights a fault in the process, ora training need, end if these are addressed it will, help to avoid the same problem happening again. Positively analysing complaints to put the root cause right isa part of continuous improvement and an important part of being customer focused, tis looking at what went wrong for the customer te avoid it happening again. ‘The isne ofthe correct handling of complaint is now becofning even more important following the decision by the Financial Services Ombudsman to publish complaint data so as to make the financial services industry more transparent around customer complaints. There is ‘useful article entitled “Here looking at you! by Edward Murray inthe DeciJan 09/10 edition ofthe Cif fournal. It sets out the impact and felings within the insurance industry to the ‘Ombudsmanis proposal. The article also includes comments mede by Tan Cowie, the personal finance editor ofthe Dlly Telegraph . (The Chateredinsurance astute 2010 Ps2inpt 2010 mstnsuance business ad finance With more businesses now providing more services than ever before, it means increasing, ‘competition for everyone. Quality customer service and being really customer focused gives a competitive advantage to the organisation. 3 Customer relationship management Gustomer relationship management (CRM) is largely about geting closer to the customer and ‘roving into a prosetive environment, Iisabout ying to build relationships with customers by ‘understanding their needs ane offering products and services that meet those needs. ‘Why is this seen as important today? Put simply if customer obtains only one product from a company itis very easy for that customer to move nway toa competitor. I, however, the ‘customer obtains several products frou that company itis not so easy to move to a competitor. By selling further products to @ customer the company will increase its revenue and profit. ‘This approach to business tokes alot of energy in companies today. In means adopting a clear focus in the way business is done with customers as it entails: + offering a relationship focus rather than an enquiry focus; + abetter understanding of buying patterns of customers to expand business + moving to a proactive rather than ceactive environment, for instance starting the process with welcome telephone calls; + adopting a total relationship management approach, including: = direct mail, = telemarketing, ~ direct selling, = cross selling, — customer service, = email, = daternet, = face to face ox personal ttention; + enancing/complimenting additional revenue generation efforts. ‘activity dently how your company thes to generate more busines fom its own customer base. ‘The rewards are Expectation levels of customers are ever increasing. They now expect not only to be able to considerable reach supplies easily by whatever means that suits them, but tobe proactively informed of new products and services that could be of benefit orhelp them to be more productive and profitable Therefore, for those companies who cen deliver increased levels of service, the rewards are considerable. “These expectations can be addressed through “The Lifecycle Model! This isan approach built around the whole lifetime relationship of «customer, and understanding the value of that ‘customer to the organisation, Let us take a simple example, A customer aged 25 spends on average 650 per week atthe local supermarket. Over a year they will be spending around £2,600. {f that supermarket keeps their custom until the age of 65, which is for 40 years, the customer will have spent £104,000 with that supermarket. The lifetime value ofthat customer is, therefore, ata minimum of £100,000. ane psapei'2010 (The Chartered Insurance stitute 20101: Strveture ofthe insoraece buingss ‘So the approach means managing customer on an end-to-end basis, from tistening to customers and identifying new revenue opportunities 10 selling new or enhanced products! services, and to fulilling and servicing the contract to achieve further revenue opportunities. It depends on building a successful relationship with customers ensuring their needs ave Identified and fulfilled. [tsa value proposition tht is driven by eapturing knowledge about the ‘customer and using the information in a prosctive way, which benefits both the customer and the organisation. ‘The following dagram illustrates these points: tea + Why 90 elsewhere? Everytime a company ‘ inteerelates witha customer ia “ Supplier theres the opportunity t> Ge ——— sevicels build the relationship m s the key ‘One of the most cost effective ways of handling this process is through the telephone, so call/ ‘contact centres are ideally placed to help develop and deliver a CRM capability. However, probably the most challenging issue for companies in developing a CRM capability is how the disparate computer databace systems companies have can be brought together to presenta single view of the customer. Having done that, what isthe information they currently have, how up to date isi, what further information needs to be captured, and where and how is the additional information to be stored? So developing effective computer systems to be able to support this is an important challenge. C4 Internet and e-commerce its most basic level, the internet isthe way that computers ace connected by telephone The internet allows computer srs to communicate quickly, cheaply and internationally ‘with one another through their computer terminals by using the world’s existing telephone ‘communication structure, ‘On the internet, communication takes the form of writen electronic mail or paperless faxes, but there are also opportunities to ‘cha’ in writing with other users or to make use of video linking ‘equipment. Many ofthese services are also now being extended to mobile phones through text messaging and the internet capability that many mobile phones have. (OTHE Chorteredtsurencenstiute 2010 Poatnpsit 2010 m7Ingurance business and Rance E-commerce is the name given to electronic business. Business transactions can be carried out ‘willy and efficiently over the internet, with instant payment for goods by exedit cards or debit : cards. For the insurance industry, this means that policies can be bought over the internet. The ability to reach customers and potential customers in this way makes transecting insurance businesses relatively chewp, and allows small insurance organisations with low overheads 10 compete effectively with larger and more well-established insurers. The changes to all industries ‘brought by the internet are strategic and fundamental posese Mowees the internet poses challenge fr essed business Kes oportnies ee a such as direct links to anyone anywhere. It lets companies build interactive relationships with Faron Caters and suppliers. Itals lets them deliver new products and services competively. Managers nee to focus ina systematic wayon wa he interme can allow ther particular cxgenisaton odo in ores to determine what opportunites and heats it poses. ‘Through the growing use of the internet for business a security issue has arisen, There are Row many instances where fraud is being committed through the internet, therefore, both companies and customers neec| secure systems to stop fraudulent access to customer and ‘company information, This is an issue that is constantly taxing organisations as the fraudsters develop new ways of hacking systems. C5 Direct link to customers Financial services organisations can establish a direct lik over the imernet to customers, alfiites and associates to complete transactions or ade information more easily. They can do s0 by thinking in terms of the devices outlined in the fllowing three subsection. ‘The combination of these three levels of service make the internet channel very compelling for customers, and because these services are basically just electronic exchanges, they are delivered at very low cost Investments in the electronic channel displace traditional sales, marketing and service costs; ‘moteaver, the technology allows companies to offer increasingly higher levels of service without ‘incurring incremental costs for each transaction. 5A Sales Insurance compenies can offer the same level of service through the internet as they offer ‘through telephone agents or field salespersons, For example, hey can offer a choice of products, provide an electronic quotation and allow customers to pay for policies electronically, 5B Personalzecords Fineneil services companies can use internet technologies to personalise interactions with their ‘customers and build customer loyalty. This can be done by tailoring the information and options customers see ata website fo just what they want, offen basing this on past vss by the customer For example, when vistors carry out on-line banking, they may beable to personalize the display of inforination inthe way they want tose it. Overtime, insurers and insurance brokers «an collect information about their customers preferences and use that information to offer other customised services, for instance by ‘erossselling’ othe financial products ne Po2rnpii2010 ‘©The Chartered Insurance netiuts 2010"Steetare ofthe insurance buries CSC Internet portals ‘What isan internet portal and how can customers use it? Internet portale are websites which people visi because they provide a range of information and links about particular topic or area. For example, to attract visitors and potential customers to its site, afinanctal services organisation might draw on data from its entire customer base to make available wide-ranging knowledge of some topic. For instance, claims statistics may produce information on loss prevention that is of universal Interest. Equally, a motor insurer might include reviews about new cars, ora matine insurer night include weather information for its shipping clients. Some insurers may encourage customers to post comments for other visitors to see, making it possible for a potential customer to see an existing customer’s review of insurance cover prior to buying that product. Some organisations may alm to specialise in a specific type of product or service, a particular segment of customers, an entire industry or unique business model to become the main portal {or that group, 5D “Treating Customers Fairly’ What dées the tem Treating Customers Fally'mean to you? A central there ofthe FSA regulation is the principle of "Teeating Custorners Pulrly'(TCF). The FSA sees this theme as so important that it considers it needs tobe a central part of insurance business philosophy. Asa result, the FSA aimsto achieve a number of outcomes with regard to the general insurance regime philosophy so that: 1. Consumers can be confident that they are dealing with firms where the fair treatment of ‘customers is central to the corporate culture. 12. Products and services marketed and sold in the retail market are designed to mest the needs of identified consumer groups and are targeted accordingly. 3. Consumers are provided with clear information and are kept appropriately informed before, uring and after the point of sale, 4, Where consumers receive advice, the advice is suitable and takes account oftheir 5, Consumers ae provided with products that perform as firms have led them to expect, and the associated service is of an acceptable standard and as they have been Jed to expect. 6. Consumers do not face unreasonable post-sale barriers imposed by firms to change product, switch provider, submit a claim or make a complaint. “To achieve these outcomes the FSA is applying thematic approach in choosing the important issues and investigating these across a sample of firms. Its ls using risk-based tool for small firm supervision and then communicating the findings back othe industry. Details ofthe approach can be found on the FSA website. (©The Chartered insurance Instute 2010 ozyapait2010 aneInsuronce business and nance Bearing in mind the very active attention the FSA is giving tothe Treating Customers Fal you should access the FSA website wwwfsa.govuk and search forthe latest information supy You can find ths by entering treating customers fain the search box of he FSA site ‘The TCF theme is now seen as so impdrtant to the insurance industey that the Chartered Insurance Institute has also issied guidance to companies, brokers and employees working in ‘general insurance. “This guidance can be found on the Cll website under Treating Customers Fairly. In addition, there is a set of factsheets available that cover the following aspects: Relevance for senior management. ‘Management information, Product design, Relevance for human resources ~ including remuneration. Advertising, Sales proces. Customer service, Complaint handling, ‘Cl members can access the detail ofthese factsheets through the CII website ~ wwweefuco.uk ‘A useful article entitled “Treating customers fairly ~ an update! by Lesley Titcomb can be found in the AprilMay 2010 edition of the CIL Journal. . D__ Importance of other stakeholders ‘Within the context of business management itis important to-onderstand the impact that stakeholders have in a business, Stakeholders are people or groups of people who havean Interest inthe way 2 company acts. Principal examples of stakeholders arc: customers; shareholders, Government; the public; + employess. However, there are others such as creditors/suppliers, consumerist, the law and unions. Cries i ‘What do you think ae the stakeholder types of interest and expectations that Goverhmenthas ina business? a0 PoziNovember 2010 ©The Chartered insurance naire 20101: Stet of heinsurance business Stakehalders may or may nat have any formal authority ins company but each does have some vested interest in the organisation such as finance, work, or other resources. Asa result they will ‘want something from the company and will ften want to apply some influence in one way oF another: ble 1.1 indicates the types of interest and expectations the various stakeholders can have int business The Chortered Insurance stitute 2010 P52Movember2010 oetnsurance business and finance Proper application of health &defety.znd tei 2.4 Nogéiruption Falecompetton + Sanetity pfcontractand contact lave Unions: + Negotiating rights aie a + Fal treatipent oftis members a + Inpit te company policies and strategies D1 Stakeholder theory Stakeholder theory relates to the fact that as stakeholders exist and can apply coinsiderable influences on a company, management will have a key task of having to balance the requirements of the various stakeholder groups. They will need to develop good relations with, the groups, create alliances, and vse persuasive and influencing skills to ensure stakeholder needs are as near as possible met. ‘This means that management will need to gain a very clear appreciation ofthe stakeholders who hhave an interest in the business and what their needs ae, To achieve this the following actions will be needed: ‘identify the business's stakeholders, and who they are find out their expectations, and the minimum retuen each stalteholder will accepts {demtify the strength of each stakeholder’ influence on the way the company acts; establish who the key people are in each stakeholder group and develop good relations with ther the views and attitudes ofthe various stakeholders to the company's mission, strategies, activities, and where necessary invoke any changes ‘+ establish the stakeholders who support the management's business poles and approach, and find out those who do not agree: + find out how antagonistic stakeholders can be won over, use supporters to exert their influence on antagonists. rowerot Within al this, the power ofthe harcolders must be dearly understood. If there are only afew ee tar shareholders their power wil be considerable, However, if there area high number of eee small investors they wil nt exert 2 igh level of ower which mean they ae wlialyto have snuch influence on a business’ stretegy, unless something happens that makes the investors act together. Ce ‘What do you thinkare the speclc stakeholder interests an investment analyst would have ia an ‘ciganisation? ane P92/Noverber 2010, ‘© The Chartered Insurance Institute 20101: Stet of heinsuance business Let us now look at some of the more specific interests that stakeholder groups wil insurance company: + Sharcholders wil be interested in the: = retuen on th investment - profits, dividends, capital growth; = stability ofthe company, its solvency and whether there may be a need for it to raise extva capital = future profitability ofthe compat + Policyholders willbe interested in: ncluding the type and spread ofits business. ~ thestability of the company including its solvency margin aba guarantee ofits ability to meet is obligations to them; ~ whether they are getting value for money or if premiums include an undue profit margin; ~ policyholders have certain rights which arise ovt ofthe purchase of an insurance policy, the most important of which i he right to receive the benefits ofthe insurance contract. + Investment analysts and commentators ae interested i: ~ theperformance ofthe company’ shares, which depends on market perception ofthe future, influenced by, among other factors, ype and spread of business, profitability, Aisributabe reserves, dividend potiey, management policy and ability as well as general economic trends. + Reinsurance security advisers are interested inthe: = soundness of the company’s underwriting: ~ security ofthe company as shown in its soveneys = durability of the company; ~ strength of any group to which the company belongs, Other insurers ae interested in — underwriting and profit comparisons: = marketing policy and developments + Employees (including management) are interested ins ~ the efficiency and profitability ofthe company asa whole; = fature plans; = the security ofthe company, including possibilities of takeover, +The Government and regulators ae interested in: ~ . the profitability ofthe company ~ wil tbe abet: © meet it taxes? ® continue to employ people? * bea strong competitor inthe global market? ~ compliance with legal and regulatory requirements; ~ compliance with ethical ad social esponsibilites. “The information requirements of those stakehelders who havea specific interest in an organisation’ financial affairs are examined in more depth in chapter 7, section C. ‘©The Chartered insurance nsute2010 Pontapet 2010