CHAPTER 10:

CHALLENGES OF THE INSURANCE INDUSTRY

According to the sources, insurance CEOs are more concerned than their peers in other
industries about certain threats. These are:
● Threats to their growth prospects from over-regulation
● The speed of technological change
● Changing customer behavior
● Competition from new market entrants
● Workforce
● Climate Change
● Economic Instability

10.1 Threats to their growth prospects from over-regulation

The greatest risk currently Insurance Industry is facing comes from the wave of new
regulations which are being introduced at International and local levels. Operating
under multiple regulatory jurisdictions and complying with changing rules in regard
to such things as capital requirements, transparency and reporting, and customer
interaction become really hard for insurance companies in a competitive
environment.

10.2 The speed of technological change

1.Turning the promise of new technology and big data into commercial successes.
2.This includes capitalizing on the opportunities in mobile and web-based services,
using big data and predictive analytics effectively, and overcoming the problems
associated with technologies.
3.AI, IoT, Block chain, API, and wearables are emerging technology trends of the near
future that should be taken into account to stay ahead of the competition.

10.3 Changing customer behavior

The need to create better, more comprehensive customer relationships and make it
easier for the customer to do business with insurance companies. When it comes to
user driven products, insurance companies are not only learning from user interaction
but also their products have seen least amount of evolution compared to all other
industries as shown in the graph below -

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 10.4 Competition from new market entrants
According to a survey conducted,
● About 43% of the new market entrants has the opportunity to become
potential business partners of the existing ones. InsureTech companies, are
potential business partners and insurance companies have been keen adopters
of new core systems, AI and automated processes
● About 17% of the new entrants have the capability to pose threat to the
business of the existing ones
● About 13% are niche players can be serious competitors in future

10.4 Workforce:

There is a gap at the mid management level. People who in the other industries come
up with new idea or drive new ideas to execution are missing all together in many
insurance companies. Younger people are entering the industry and leaving after a
couple of years without gaining industry expertise and then there are senior people

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 who are in the industry for a long time and are struggling with single digit growth.
Non-professionals run many of the insurance companies today. There is a lot of myth
that requirements in the insurance sector is only some knowledge about monetary
policies and no specialized training. This had a major adverse effect on the operations
of the insurance industry.

10.5 Climate Change

Climate change has become one of the most important aspects of our daily lives as it has a deep
impact on our systems and the general wellbeing of humanity. Such unprecedented change in the
climate has resulted in extreme catastrophes such as floods, earthquakes, wild fires etc. The loss
caused by such calamities has a deep impact on the insurance industry. Insurance companies has a
tendency to rely heavily on previous data to formulate policies. But such a practice has only caused
high losses as the climate is changing in a rapid way. Insurance companies can’t simply extrapolate
past experience.

10.6 Economic Instability

When the country’s economy is down, all insurance companies will be affected. At such situations,
the rates can be affected such that the insurance companies might be forced to increase their rates,
just like the interest rates on credits facilities provided by the financial institutions. This leads to no
client being appreciative, even if it is stated clearly in the contract that the insurance rates might
change from time to time. Therefore, such situations might create a bad image for a company since
customers will spread bad image about the company’s product and services in the market.

Moreover, from changing time perspective, we can see following changes in challenges in insurance
industry

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 Chapter 11
Re-Insurance

11.1 Overview

Reinsurance is insurance that is purchased by an insurance company (Called the

ceding company) from one or more other insurance companies (the reinsurer)
directly or through a broker as a means of risk management. The ceding company
and the reinsurer enter into a reinsurance agreement which spell out the Terms
& Conditions upon which the reinsurer would pay a share of the claims incurred
by the ceding company. The reinsurer is paid a reinsurance premium by the
ceding company for this purpose. To put it in simple terms, Reinsurance is
insurance that an insurance company purchases from another insurance company
to insulate itself from the risk of a major claims event. With reinsurance, the
company passes on some part of its own insurance liabilities to the other
insurance company.

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 11.2 Main functions of Re-Insurance companies

● Provides large limit capacities

● Catastrophe protection
● Supports high growth in premium value
● Provides help in underlying process
● Facilitates withdrawal from a particular risk
● Stabilization of Profit

11.3 There are two basic methods of reinsurance:

Facultative Reinsurance
This type of policy basically protects the insurance provider from a
specified risk or contract. Facultative reinsurance is normally purchased
by ceding companies for individual risks not covered, or insufficiently
covered, by their reinsurance treaties, for amounts in excess of the
monetary limits of their reinsurance treaties and for unusual risks.
Underwriting expenses and particularly, personnel costs are higher for
such business because each risk is individually underwritten and
administered.

Reinsurance Treaty
Unlike a facultative policy, a treaty type of coverage is in effect for a
specified period of time, rather than on a per risk, or contract basis. For
the duration of the contract, the reinsurer agrees to cover all or a portion
of the risks that may be incurred by the insurance company being covered.

11.4 Some of the Reinsurance Companies in India:

● General Insurance Corporation of India (Reinsurance Partner of
Oriental Insurance Ltd.)
● General Reinsurance AG - India Branch
● Munich Re - India Branch

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 Chapter 12
Conclusion

The Indian general insurance sector is growing at a healthy 17% a year. Motor insurance
is the biggest chunk, accounting for 38.08% of the gross direct premiums earned
(FY2018-19). Oriental insurance has a vast product portfolio specially designed to cater
to the needs of the consumers in India. It continues to provide customized insurance
products for all sections of the society at affordable prices.
The Company registered a positive growth rate of 8.91% on gross basis in the FY
2018-19.

12.1 Findings of the Study

The most important factor to look at when considering an insurance company are the
quality and strength of the balance sheet.

Companies should strike a balance between high returns while keeping leverage
intact. A company that is highly leveraged might not be able to meet financial
obligations when a large catastrophic event occurs as high leverage means that
company is funded by debt more than equity which poses repayment risk.

We can also see that Oriental Insurance as a company of Motor Insurance is facing loss
because of a simple reason of paying more amount of claim then premium received. This
tells us that most crucial part of any motor Insurance company is risk analysis and
Oriental filed in same during FY 2018-19.

Also, we learned that as per new government regulations now Insurance premium will
not be calculated on basis of vehicle health but on the basis of driving habit of the driver.
This (as per government official) will help companies to overcome loss of risk analysis
and earn profit.

Another thing that we learned was that Insurance market is so huge but less risky. It is
based on pure risk but companies normally do not face loss because of various segment
through where they earn like investment of premium amount received.

12.2 Limitations of the Study

The study was conducted to analyses the Motor Insurance Industry and understand the
business model of an insurance company and the unit of analysis was limited to one
platform i.e. Oriental Insurance Company. We have relied on telephonic conversations
with the concerned people to understand their business model.

12.3 Future Scope of the Study

● A developing market on Internet
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 ● Mergers, joint ventures or strategic alliances in the insurance industry
● A thriving global insurance market
● New and improved products for diversifying product portfolio and moving
into new market segments

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