china life corporate day presentations-4

8/9/2019 China Life Corporate Day Presentations-4

1/42


2/42

ForewordForeword

•• The characteristicsThe characteristics

•• Why we need to understand themWhy we need to understand them

•• How we analyze themHow we analyze them


3/42

The distinctive characteristicsThe distinctive characteristics

of life insuranceof life insurance operatoinoperatoin

1.1. ProductsProducts

2.2. PremiumsPremiums

3.3. Marketing and salesMarketing and sales

4.4. Business operationsBusiness operations


4/42

Products:Products:

1. Life insurance is an intangible product1. Life insurance is an intangible product

How do we understandHow do we understand ““ risks may or may not materializerisks may or may not materialize”” ??

Insurance policies are the product

A contract in natureRelated to birth, aging, illness, death and injuries.

Conclusion: A life insurance product is an intangible risk protection

obligation. The business of a life insurance company involves

risks related to birth, aging, illness, death and injuries. However,

these risks may or may not materialize.


5/42

The meaning ofThe meaning of ““Intangible productIntangible product””::

Products:Products:

1. Life insurance is an intangible product1. Life insurance is an intangible product

••Insurance companies sell promises. AnInsurance companies sell promises. An

insurance policy is a proof of this promise.insurance policy is a proof of this promise.

Therefore, credibility is the foundation of theTherefore, credibility is the foundation of thebusiness of an insurance company.business of an insurance company.

•• A customer experiences the benefit of insurance A customer experiences the benefit of insuranceproducts through the service of the insuranceproducts through the service of the insurance

company. Customer service is, therefore, thecompany. Customer service is, therefore, the

core business of an insurance company.core business of an insurance company.


6/42

•• The risks borne by an insurance company willThe risks borne by an insurance company willmaterialize.materialize.

•• Therefore, buyers can choose to buy or not toTherefore, buyers can choose to buy or not tobuy such products.buy such products.

•• The insured risks involve events that may orThe insured risks involve events that may ormay not happen.may not happen.

Products:Products:

2. The need for insurance is not obvious to2. The need for insurance is not obvious tobuyers.buyers.


7/42

ImplicationsImplications::

•• Most buyers are reactive.Most buyers are reactive.

•• Since risks may or may not occur, sales isSince risks may or may not occur, sales is

more difficult.more difficult.

•• Adverse selection may occur. Adverse selection may occur.

Products:Products:

2. The need for insurance products is not2. The need for insurance products is notobvious to buyers.obvious to buyers.


8/42


9/42

•• A life insurance company needs sales people. In the A life insurance company needs sales people. In theprimary market, the number of sales people is inprimary market, the number of sales people is in

proportion to sales.proportion to sales.

The meaning ofThe meaning of ““marketed by sales peoplemarketed by sales people””::

•• A unique sales team management model A unique sales team management model

•• Making the primary market a seller Making the primary market a seller ’’s markets market

Products:Products:

3. Sales of insurance products rely on sales3. Sales of insurance products rely on salespeople.people.

•• The targets of promotional activities are salespeople, notThe targets of promotional activities are salespeople, not

the actualthe actual ‘‘consumer consumer ’’..

•• Misrepresentation may occur.Misrepresentation may occur.


10/42

•• Insurance covers life and health, which areInsurance covers life and health, which arenot commodities.not commodities.

•• An insurer buys a policy for financial An insurer buys a policy for financialcompensation, not for consumption.compensation, not for consumption.

Products:Products:

4. Life insurance products are not consumer4. Life insurance products are not consumerproducts.products.


11/42

Implications:Implications:

Products:Products:

4. Life insurance products are not consumer4. Life insurance products are not consumerproducts.products.

•• Life insurance is not considered a basicLife insurance is not considered a basic

necessity by many.necessity by many.

•• Only people who have achieved a certain livingOnly people who have achieved a certain living

standard feel the need.standard feel the need.

•• Development of the industry is closely linked toDevelopment of the industry is closely linked to

market environment.market environment.


12/42

•• FirstFirst--year premiumsyear premiums – – the value of output ofthe value of output of

an insurance companyan insurance company

•• The number of firstThe number of first--year policiesyear policies – – thethe

quantity of output of an insurance companyquantity of output of an insurance company

Premiums:Premiums:

1. The difference between first1. The difference between first--year premiumsyear premiumsand renewal premiumsand renewal premiums


13/42

RenewalRenewal

premiumspremiums

FirstFirst--yearyear

premiumspremiums

TotalTotal

1st year 1st year 100100 100100

2nd year 2nd year 9090 5050 140140

% change% change (50%)(50%) 40%40%

• Measures the sales capability of an insurance company.

•First-year premiums are a key performance indicator for

an insurance company and a comparable among peers.

The significance ofThe significance of ““ firstfirst--year premiumsyear premiums”” ::

Premiums:Premiums:

1. The difference between first1. The difference between first--year premiumsyear premiums

and renewal premiumsand renewal premiums


14/42

•First-year premiums are a growth driver for the following

year’s business.

Year 1 2 3 4 5 6 7

FYP regular-premiums 2 2 2 2 2 2 2

Renewal premiums 0 2 4 6 8 10 12

Gross premiums 2 4 6 8 10 12 14

Driving factor 50% 33% 25% 20%

•There is no increase of FYP, but gross premiumsincrease every year.

The significance of theThe significance of the ““ firstfirst--year premiumsyear premiums”” ::

Premiums:Premiums:




15/42

The significance of theThe significance of the ““ renewal premiumsrenewal premiums”” ::

•• Measures the sustainability of an insuranceMeasures the sustainability of an insurance

company.company.

•• Determines the longDetermines the long--term nature of anterm nature of an

insurance companyinsurance company’’s business.s business.

Premiums:Premiums:



Companies A and B: Assuming a renewal rate of 100% different amounts of


16/42

Year 1 2 3 4 6 7

3

2

1

1

42

2

Renewal Premiums 0 2 4 6 8 10 12

3/4

7

43/57

2

8

2

1

6

142 2 2

2 2 2

GP of A /

GP of B

2/2 4/6 5/8 6/10 7/

12

8/

14

1

5

36/64

12

36/64

5

2

1

3

82

2

38/62

4

2

1

2

62

2

40/60

2

2

1

0

22

2

50%/50%

5

Gross premiums 6

First-year premiums 2

First-year regular-

premiums

1

4

First-year premiums

First-year regular

premium

Renewal premiums

Gross premiums 10

Market share37/63

Company BRegular

premiums

account for 100%

of FYP

Company A

Single premiums

account for 50%

of the FYP

Companies A and B: Assuming a renewal rate of 100%, different amounts of

renewal premiums wil l lead to dif ferent gross premiums.


17/42

Gross premiums 2 4 6 8 10Gross premiums 2 4 6 8 10 ……

New business 2 2 2 2 2New business 2 2 2 2 2 ……

Year 1 2 3 4 5Year 1 2 3 4 5 ……

Gross premium income tends to grow arithmetically.

How do premiums accumulate?How do premiums accumulate?

Premiums:Premiums:

2. Premium income is accumulative.2. Premium income is accumulative.

Why do premiums accumulate?Why do premiums accumulate?


18/42

Gross premiums 2 2 2 2 2Gross premiums 2 2 2 2 2 ……

Single premiums 2 2 2 2 2Single premiums 2 2 2 2 2 ……

Year 1 2 3 4 5Year 1 2 3 4 5 ……

* Regular premiums are accumulative. Singlepremiums are not.

Premiums:Premiums:

2. Premium income is accumulative.2. Premium income is accumulative.


19/42

How do premiums accumulate?How do premiums accumulate?

• Longer payment periods result in higher premiums accumulated

and higher sustainability for an insurance company.

• The higher the proportion of the accumulative part, the better the

premium structure is.

• Short-term regular premiums are not ful ly accumulative.

N/GN/G 100%100% 50%50% 33%33% 25%25% 20%20% 17%17%

Gross premiumsGross premiums (G)(G) 2 4 6 8 10 12

New BusinessNew Business (N)(N) 2 2 2 2 2 2

Year Year 1 2 3 4 5 6

Premiums:Premiums:

2. Premium income are accumulative.2. Premium income are accumulative.


20/42

Annual premium 5 * Pm 12 * Pm

Monthly premium Pm Pm Pm Pm Pm Pm Pm Pm ……

Year 8 10 31/12 2 4

Organic growth of premiums

First-year premium income: 5 * Pm

Second-year Premium Income: 12 * Pm

(+140%)

Premiums:Premiums:

3. Organic growth of premiums3. Organic growth of premiums


21/42

Financial year

31/121/1

Why do premiums grow organically?

Premiums:Premiums:


Since the policy anniversary and financial year are

usually different, most policies would straddle two

financial years. Therefore, there will be a situation where

premiums received in the current financial year will be

less than the amount for the next premium renewal year.

Hence, there is a natural increase in premiums in thesecond year.

Policy anniversary


22/42

Annual premium Annual premium 5 * Pm5 * Pm 12 * Pm (+140%)12 * Pm (+140%)

Monthly premium Pm Pm Pm Pm PmMonthly premium Pm Pm Pm Pm Pm PmPm Pm PmPm Pm …………

MonthMonth 88 1010 31/1231/12 2 42 4

The more premiums paid on a regular basis (except one-off

annual payments) in an insured year, the more natural growth of

the premiums in the next f inancial year.

The more regular premiums paid (except one-off annual

payments) in the second half of an insured year, the more

natural growth of premiums in the next financial year.

Organic growth of premiums:

Premiums:Premiums:



23/42

Guaranteed interest rates and guaranteed policy dividendGuaranteed interest rates and guaranteed policy dividendpayments are the cost of premiums of a life insurancepayments are the cost of premiums of a life insurancecompany.company.

Investmentincome

Customers

Investmentincome

Company

Property insurance

company

Premiums:Premiums:

4. Cost of premiums4. Cost of premiums

Life insurance

company

Company


24/42


•• Since premiums come with a cost, the use ofSince premiums come with a cost, the use ofcapital has a very significant impact on thecapital has a very significant impact on the

business operations of a life insurancebusiness operations of a life insurancecompany.company.

•• TheThe ““ costcost”” is deducted from the tax a lifeis deducted from the tax a lifeinsurance company pays.insurance company pays.

Premiums:Premiums:4. Cost of premiums4. Cost of premiums


25/42

Volume

Sales

Profit

Companies in general

Volume

Profit

Life insurance companies

Sales

Sales:Sales:

1. Sales of new policies need proper control1. Sales of new policies need proper control


26/42

Why do we need proper control?

* Costs in the first year of life insurance

policies are higher than in renewal years

* Insurance companies nowadays use

level premiums schemes

Sales:Sales:



27/42

Natural premium vs level premium

Natural premium

Level premium

Premium

Period

Insurance cost

(Expense loading)

Sales:Sales:



28/42

1) Two-year principle

1st year 120%—130%2nd year 70%—80%

—————————Two-year premium income

How do insurance companies control sales?

Therefore, if reserves are not set aside for two years ,

the policy wil l have no ……

Level premium

Period

Insurance cost

1 2 ……

Premium

Sales:Sales:



29/42

2) Budget management

Example Cost of new policy (assumption) 130%

Annual profit plan 80 million

Realizable profit 110 million

New policy premium plan 100 mil lion

What would happen if the new policy

premium reaches 120 million?

How do insurance companies control sales?

Sales:Sales:



30/42

* First-year premiums do not generate profit

* Premiums from policy renewal generate profit

These features are yet to be reflected in China’s life

insurance industry.

* More “ resources” should be allocated to new

first-year policies

Why do we need proper control?

Sales:Sales:



31/42

Companies in general

All customers are welcome

Life insurance companies

Increase premiums, accept with

conditions or even reject applications

Sales:Sales:

2. Careful selection of customers is essential2. Careful selection of customers is essential


32/42

Why be selective

* Not everyone can be a customer of a

life insurance company

* Key to success: look for those who match

our criteria

* Application underwriting is essentialin the life insurance business

Sales:Sales:

2. Careful selection of customers is essential2. Careful selection of customers is essential


33/42

Insurance companiesInsurance companies

Sale of policy Management (production) Service PSale of policy Management (production) Service Paymentayment

Companies in generalCompanies in general Purchase of raw materials Production Sales SPurchase of raw materials Production Sales Serviceervice

Business operations:Business operations:

1. Production comes after sales1. Production comes after sales


34/42


** Underscore the important role of sales agentsUnderscore the important role of sales agents

** Sales has the leading role in the companySales has the leading role in the company’’ssoperational chainoperational chain

** The companyThe company’’s development is driven by saless development is driven by sales

** Think aboutThink about ““ productionproduction”” before selling; never sellbefore selling; never sellany product that is unable to deliver any product that is unable to deliver

** Rules can be violatedRules can be violated


1. Production comes after sales1. Production comes after sales

B i i


35/42

Net risk ofNet risk ofInsurance?Insurance?

Net risk of insurance = Sum insuredNet risk of insurance = Sum insured – – reservereserve

Net risk of insurance is the actual risk borne by anNet risk of insurance is the actual risk borne by aninsurance companyinsurance company

Year Year

ReserveReserve

Sum insuredSum insured


2. Risk declines over the years2. Risk declines over the years

B i tiB i ti


36/42

Example: A = 1000, N = 10,Example: A = 1000, N = 10, RsRs for eachfor eachyear below:year below:

V1 = 0 R = 1000V1 = 0 R = 1000 -- 0 = 10000 = 1000V2 = 200 R = 1000V2 = 200 R = 1000--200 = 800200 = 800

V3 = 450 R = 1000V3 = 450 R = 1000--450 = 550450 = 550

………… …………

V9 = 890 R = 1000V9 = 890 R = 1000--890 = 110890 = 110

V10 = 1000 R = 1000V10 = 1000 R = 1000--1000 = 01000 = 0



B i tiB i ti


37/42

Implications:

•• The longer an insurance policy has been in force,The longer an insurance policy has been in force,

the less risky it is for an insurance company.the less risky it is for an insurance company.•• Therefore, after Therefore, after --sales service to longsales service to long--termterm

customers is extremely important.customers is extremely important.



B i tiB i ti


38/42

Companies in general:Companies in general:

Actual cost of raw materials Actual cost of raw materials

Actual cost of production Actual cost of production

Actual cost of sales Actual cost of sales

Estimated profitsEstimated profits

Life insurance companiesLife insurance companies

EstimatedEstimated mortality ratemortality rate

Estimated interest rateEstimated interest rate

Estimated additional costsEstimated additional costs

Estimated profitEstimated profit

Product pricesProduct prices

Product sold,Product sold,profits realizedprofits realized

Premium ratesPremium rates

Insurance policiesInsurance policies

terminated,terminated,profits realizedprofits realized


3. Profitability hinges on anticipated costs3. Profitabil ity hinges on anticipated costs


39/42


40/42



41/42

Implications:

A life insurance company operates with liabilities.

A life insurance company’s financial stability is

very important. Prudent business operations are the fundamental

management principle of a life insurance

company.


4. Reserves are an obligation to customers4. Reserves are an obligation to customers

B i t t d fit bilit fB siness str ct re and profitabilit of a


42/42

Business structure and profitability of aBusiness structure and profitability of a

life insurance companylife insurance company

In general:

• Product nature: For protection > Savings> Dividend-paying >

Derivative

• Duration: long term > short term

• Payment method: Regular > Single

• Distribution channel: agents > Bancassurance > group direct

sales

Conclusion: For protection, long-term, regular premium, agent

distributed channel

china life corporate day presentations-4

Documents