How Do Insurance companies work?

zimmerseo

I'm wondering how insurance companies work.

I'm guessing they charge a premium, the underwriters take a slice and the insurance company keeps the rest.

Is this right?

thebiglad

http://www.insuranceeurope.eu/uploads/Modules/Publications/how-insurance-works.pdf

That's a wide question!

Basically depends on their structure - an Insurer can be the Underwriter or they be an MGA (Managing General Agent) - in which case they have a limited authority (capacity) from the Underwriter and will receive either commission on all business written or a profit/loss share arrangement.

it is not as simple as premium less claims, insurers have operating costs such as marketing, distributions, staff & office costs, licences, IT, commissions etc etc

Insurers may in the good times also make additional income from premium whilst they await for the claims to be settled (investments) or from selling installment plans to allow customers to purchase.

They will have to maintain certain Solvency Margins (as seen with Quinn and recently RSA, FBD) which means that based on claims projections they must have certain amount of fairly liquid assets.

Underwriters will probably purchase their own insurance (reinsurance) to cover individual claims above a certain level i.e. €1ml (this is obviously also a cost to them).

Underwriters may also enter into sharing arrangements whereby they underwrite 50% of the risks and other insurers share in the remaining 50% - this means of course only 1/2 the profit if the risk was good.

As I said at the start the question is very wide and there are lengthy courses available on this topic but hope this gets to the bones of it.

Not an easy business and do not forget a policy premium collected now can bring claims for many years to come, for every year there are more operating costs.

Insurance business is also subject to Political whim and legal pressure, a random court ruling can have a huge impact when premiums have already been set and collected.

zimmerseo

Thanks for your prompt and detailed answer.


The business model I have in mind would be something similar to insurethebox.com where a telematics device is attached to a car and the insurance rate is applied to the driver based on their driving style.

My concept is very similar, but the software I have developed is much more accurate and as a result, the risk is proportionally lower. For obvious reasons, I can't get into specifics but I would imagine it could cut as much as 60-70% off a 'safe drivers' annual premium.

I guess once testing has been completed, the best thing to do would be approach underwriters and insurance companies alike directly or perhaps use a third party to do negotiations on my behalf, as I know next to nothing about the industry itself.

thebiglad

The issue you will have to get over is the start up cost of the box and whether the discount on premium is front loaded or paid in arrears (this is a current model) - look up Drive Like a Girl. Insure the Box in UK go big on this too but I think, a different model.

Personally I would prefer telematics combined with a dashcam - I think Swiftcover give discounts for the use of a camera. lots going on in the industry...

A few insurers (Aviva) use downloadable Apps - issue with these is the insurer cannot know which car and by whom the car is being driven so not as safe as equipment fixed in the car.

Who will install the boxes for you and what about the costs of staff to analyse the outputs.

With the costs of set up to have your own agency you would be better to partner with a smaller but established player.

Best of luck

zimmerseo

Hmmm, food for thought.

I've seen Drive Like a Girl as well. Exactly the same concept as insurethebox.

The software itself will automatically assess the risk, so maybe a road to go down might be to sell on the risk (the value of which are based on the risk metrics) in much the same way loans are bought and sold in the same way.

Like I said though, this is an area I know nothing about.

thebiglad

you only understand the risk once you have recorded data on the individual or individual profile (dependent on how you do it)

It will be very difficult to offer an up front price which is interesting to the customer when you have nothing other than the typical rating factors which all the insurers are using.

Why would they allow the insurer (or pay themselves) to have a box installed in their car unless the premium advantage is great. If the insurer will be expected to pay or contribute to the box then they will need either commitment to long policy so that have opportunity to spread cost or an enhanced premium to cover their additional costs.

Generally this product will attract customers who have higher premium as they are considered to be high risk (right or wrong) by the insurance market.

You may know this better than me but are EU not requiring the installation of basic telematics into new cars from 2018 (eCall I think it is called)- if so you would be able to piggy back off the manufacturer installed technology. I doubt though that owners of new cars will be the primary target market for this product.

I really do think telematics is the future with pay per kilometer policies etc but the market is still incredibly price sensitive, perhaps the current cycle of premium increase will make the telematics product more interesting.

zimmerseo

Hi,

Good points there. Unfortunately, again I can't get into specifics about the devices programming, sorry about that.

You are right, some insurance companies base their premium on a 'trial period'. For this device, their typical driving metrics are not required. The incentive to use the device is the discounted premium. No trial required.

The 'device' is very cheap to manufacture, less than €20. I think it would be fair to get the consumer to pay for the fitting of the device initially. It would take about 10 minutes and I'm pretty sure a flat rate of something like €50 could be agreed with garages.

The main reason a user would stop using it, is because their driving style raises their premium. In which case, I would imagine the insurer is better off having that risk of their books. In the end, they would be left with mainly low risk drivers.

Sorry I can't be more specific about the device. It's similar to others but radically different in others.

pedroeibar1

There is not much to argue with in the Biglad’s posts on his description of how insurance companies work.. Where we diverge is the business being discussed.

OP, you have skillsets/product that you understand and want to exploit, but you are looking at bundling / distributing them with something quite different about which you have no idea. It is like a retailer saying s/he has a great opportunity to sell wine and then to start going about manufacturing it. It does not work that way, (and anyone that tries produces awful wine and probably loses both businesses!)

In Ireland, insurance is probably more regulated than any other sector and Post #1 shows that you have not the faintest hope of (a) being approved by the CBI (b) attracting the right people and (c) making money. You would need a very large amount of capital for reserves on which there will, under present market conditions, be no return (actually rates are negative currently) so who would bother to invest? Staff costs would be very high to get the right people, and even if you outsource actuarial, an actuary will change you minimum €30 k every year just to give an opinion on your business (that’s probably the cheapest you’ll get for a small co.) You will need a Big Four accountancy firm for your audit to have cred…..the costs list goes on.

Even if you get a large wedge of cash to front-end supplying the GPS widget to users, you still have nothing because you have no information on driver behaviour. As for the model you talk about, you will not drive down premiums by 70%, not a hope. For starters, typically increasing your deductible from say 250 to 500 or even 1000 will not make much of an impression on a premium because a large chunk of the premium is for third party claims and those sums are nothing when compared to a whiplash claim. You need to learn about IBNRs.

The only way your widget would have any tiny hope of getting to market is (if it really is as good as you say) to partner with an insurer and most already have looked closely at this market already. You would have to front-end the investment in fitting the widgets, collect Big Data and then apply a retrospective NCB to the users. I cannot see that model working. “Schemes” like this attractt he worst type of risk in the hope of lowering premium, they have accidents, and the whole goes into a downward spiral. Finally, I would be very surprised (no matter what you think) if what you have is original, this kind of stuff (and idea) has been around for an age, it’s just the widget cost is getting cheaper.

blindside88

The insurance market would be a very difficult market to get into without a background in it, compliance is gone very stringent and the amount of capital needed for claims reserves and professional indemnity cover would require a huge amount of start up capital. Telematics is definitely the way the industry is going, larger direct insurers like aviva and 123.ie have started to move towards it. Your best bet would be to partner with an existing insurer that is looking to get bigger in the high risk market (octane or kennco would be good to approach) or licence it to a large insurer like Zurich or RSA

CatFromHue

Paging Sean Quinn, paging Sean Quinn

:pac: