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• Insurance is a catalyst for economic growth• Three main functions of insurance / Three main types of services provided: Risk pooling,

intermediation, financial services (here called information function)

• Some aspects with respect to the economic importance of insurance from a macro perspective(perspective of the general economy): • Functioning of the economic system

• Insurers take risks and allow economic activity (both in private and industrial business), avoid social problems, save from ruin

• Who is insured is creditworthy (e.g. house)• Insurance stabilizes demand and preserves purchasing power (in case of a loss)• Insurance encourages the systematic risk analysis (you have to think about risks and

the price of risks)• Reduce unnecessary liquidity holding (for risk retention) => Allows investment =>

Increases profitability• Switzerland: 7.9 mio. people, 20 mio. insurance contracts, 7.3 mio. life insurance

policies, 1006 billion insured sum in life insurance, 41 billion payments for insuredlosses and benefits, gross value added (Bruttowertschöpfung) 24 billion CHF (4.7% ofthe Swiss Economy)

• Especially important in Switzerland is the pension system (1.5 mio. policyholders in theoccupational pension system)

• Important Investors in Switzerland and abroad; Buyer of government bonds; 11% of theglobal investment volume are from insurance companies; Important participants in the real estate market (give mortgages, buy and built own real estate)

• Important employer (50000 in Sitzerland, further 70000 abroad) and taxpayer• Some aspects with respect to the economic importance of insurance from a micro perspective

(individual perspective): 1. Risk pooling 2. Intermediation 3. Fin. Services (part B and next slide)

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• Hammurabi (1800 BC; caravane insurance): The "Code of Hammurabi" is a legal text, which mentions the loss coverage for robberies in caravans (no formal insurance company, but first time the idea of insurance was mentioned in history). Some informal insurance mechanisms were also observed in the middle ages(guilds).

• Things then changed during the 18th and 19th century. What has changed? Need of social security systems following the industrialization and the accompanying social problems:• The existence for the majority of citizens in industrialized economies depends on their labor force,

either temporary or permanent loss of working ability or possibility leads to the existence threat• In the course of industrialization and urbanization, the family ties (Familienverbünde) torn apart.• Church and other charities are no longer able to provide adequate protection• Provision on the private insurance market is too expensive for many in need assurance• For some risks, the private insurance market does not cover protection (e.g., unemployment)• Idea: By compulsory insurance, it is possible for the government to generate a sufficiently large group

of risks. As part of a social contract with correspondingly large collectives, it is possible to estimate dueto the law of large numbers, the probability of risks and raise the necessary funds by the distribution ofmany members

• We can therefore define the three orgins or insurance:• Mutual Purpose: Mutual assistance in case of a loss (e.g. fire risks in Germany)• Commercial Purpose: Insurance as prominsing business model (e.g. industrial areas such as transport

insurance)• Government Initiative: Complusory insurance (e.g. building insurance) to stabilize the infrastructure

and to keep social peace (e.g. causualty insurance SUVA)• Some examples for very old insurance companies:

• Hamburger Feuerkasse (official: Hamburger Feuerkasse Versicherungs-AG), a fire insurancecompany from Hamburg, was founded in 1676 and is considered as the oldest insurance company in the world. Today: 170 employees, 200.000 customers.

• Switzerland: Mobiliar in Bern is founded in 1826, Swiss Life (former Schweizerische Lebensversicherungs- und Rentenanstalt) in 1857, Helvetia in St. Gallen in 1858, the Zürich Versicherungs-Gesellschaft in 1872, Swiss Re was founded in Jahr 1863 by Helvetia, theSchweizerische Kreditanstalt (today CS) and the Basler Handelsbank.

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• Until 1994: No price competition, no product competition• Since 1994: More Competition, New market entrants, Internationalization

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• Industrialization:

• Standardization: One process for whole value chain

• Consolidation: similar activities are concentrated in the same organizational entity

• Integration: IT -> applications and processes are connected

• Key figures: Same performance measures are used all over the whole company

• Sourcing: focusing on core competencies and outsourcing (see competition)

• New competition examples:

• Substitution in Product development, communication and sales (Die Post, UBS …)

• Process owners in Product development, communication and sales (Oracle, Microsoft, Dell …)

• Client owners in contract administration, asset management and sales (Audi, VW, COOP …)

• Service providers in contract administration, asset management and sales (IBM, accenture, DEKRA..)

• Technology impact examples of social media:

• Social media can be used as early warning system

• Social media can be used as information source for product developing

• Social media can be used to offer services and consulting for customers

• Social media can be used to build up trust….

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• Two important market measures in international insurance markets (definitions):• Insurance penetration: Premiums / GDP• Insurance density: Premiums per person

• S-curve: The figure shows a S-curve shaped relationship between per capita income and insurance penetration. In countries with low per capita income, the correlation between per capita income and insurance penetration is only slightly positive. This holds true for countries with very high per capita income as well. However, within the group of countries with medium per capita income the correlation between per capita income and insurance penetration is high. Therefore it can be expected that emerging markets will soon enter the high correlation stage and there will be a strong growth of insurance premiums. China and Brazil belong to this group, but not the Philippines. According to the figure, the Philippines per capita income is currently too low as it could be expected that the country enters the high growth stage soon.

• Interesting is also to consider some extreme cases: Per capita income is an important factor in determining the demand for insurances. However, it has to be considered, that this is not the only factor. As an example it is interesting to examine the position of Qatar in relation to Switzerland. The per capita income is similar, but the insurance penetration is much lower. This shows that beside the per capita income other factors are important, too, as the distribution of income in the society, the overall political situation, legal matters, as well as cultural and social factors. All these factors determine the demand for insurance cover. Therefore, especially when looking at emerging markets, not only macro economical factors have to be considered, but institutional ones have to be taken into account as well.

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• http://www.svv.ch/sites/default/files/document/file/groesste-versicherer-in-europa_2009_d.png

• Also with premium numbers you have to be careful (which currency, gross or net, whole business (e.g. with asset management divisions) or only insurance business?) -> Take the numbers only as an indication to get some sense of the size of thecompanies

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• Revenues: Premiums + other fees (management fees)

• Zurich: 64.5 also includes farmers management fees and investment income (farmers: 50,000 exclusive and independent agents and nearly 24,000 employees, active in all 50 U.S. states)

• Swiss-Life/Rentenanstalt: Oldest Swiss life insurer with a lot of history; demutualization in 1997, came into the SMI in 1998, extreme expansion strategy (Livit, Banco del Gottardo), became a large financial conglomerate in a few years, then: extraordinary write-downs and many problems in 2003 lead to reorganization and renaming. For example Banco del Gottardowas bought for 2.4 billion CHF in 1999 and sold to Generali for 1.775 billion CHF in 2007.

• Axa Winterthur: Winterthur Versicherungen was founded in 1875 and is the largest player in the Swiss market (both in life and non-life), 2006 it was acquired by Axa. In 2009, a little banking branch was set up (Axa Bank), but it was stopped in 2012.

• Die Mobiliar is a mutual insurer

• SUVA is a public corporation (öffentlichrechtliche Anstalt) active in casualty insurance

• Winterthur was acquired by Axa in 2006.

• Helvetia and Patria were merged in 1996; today only Hevetia is used as name.

• Genfer Versicherung was acquired by ZFS in the 1990ies.

• Berner Versicherung was completely acquired and taken over by Allianz Suisse in 2001

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• Demographic change

• Capital Market Risk

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• Inverted product cycle and different funding structure

• Banking: Liabilites: Short-term deposits or borrowings; mismatch between short-term

borrowing and long-term lending makes banking an inherently unstable business (bank

runs!)

• Insurers, in contrast, hardly run the risk of becoming illiquid

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