1

Long term capital =>

long term investments
(e.g. in government
bonds: in order to
reduce the duration
gap)

e.g. SwissRe which

invests in worldwide
capital markets.
Diversification leads to
better risk distribution
and is cheaper for
insured person.
Insurances must be
able to calculate the
premiums based on the
risks.
This is not always the
case => if health
insurance is per capita,
then you have incentive
to exploit this insurance
service and this leads
to higher prices.

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 insured
losses and benefits, gross value added (Bruttowertschpfung) 24 billion CHF (4.7% of
the Swiss Economy)
Especially important in Switzerland is the pension system (1.5 mio. policyholders in the
occupational pension system)
Important Investors in Switzerland and abroad; Buyer of government bonds; 11% of the
global 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)

promising business
model

each of these 3 forms

of insurance have
historical reasons.

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 (Familienverbnde) torn apart.
In order to bear the risk
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 due
to the law of large numbers, the probability of risks and raise the necessary funds by the distribution of
many 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
e.g. Helvetia as
insurance)
commercial purpose
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 insurance
main aim of such a
company from Hamburg, was founded in 1676 and is considered as the oldest insurance company in
mutual insurer is to
the world. Today: 170 employees, 200.000 customers.
provide security and
Switzerland: Mobiliar in Bern is founded in 1826, Swiss Life (former Schweizerische
coverage.
Lebensversicherungs- und Rentenanstalt) in 1857, Helvetia in St. Gallen in 1858, the Zrich
Versicherungs-Gesellschaft in 1872, Swiss Re was founded in Jahr 1863 by Helvetia, the
Schweizerische Kreditanstalt (today CS) and the Basler Handelsbank.

All larger companies in CH are established in 1860.

Founded as a stock company in order to generate
revenues for shareholders. => Industry used for profits.
Government initiative: Family ties tron apart =>
government needs to bear the risk. => social insurance
(pension, unemployment etc)

increasing trend
towards regulation:
Solvency
Consumer protection
(socio-economic
changes => price
sensitivity, changing
Until 1994: No price competition, no product competition
Since 1994: More Competition, New market entrants, Internationalization costumer behaviour)

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.

Insurance penetration
(insurance volume /
GDP) is one of the
indicator for
comparisons between
countries.
2.) Insurance density:
Premium volume /
Inhabitants
CH: 12 Billion / 8 Mio

link between per capita

income (indicator for
economic development)
and insurance
penetration (indicator to
insurance
development)
=> S-Type relationship
Highly positive
correlation between
10'000 to 60'000 per
capita income. Before
and after this section
less correlation.
e.g. if Brasil's economy
growths, we can also
expect a growth in
insurance market. In
Phillipines we cannot
expect that.

exceptions: Taiwan,
Quatar => GDP is
important driver, but
there are also other
drivers. (culture, trust,
environment, problem
in supply side. in
islamic states => not
allowed to earn
interests, no mendatory
insurance, market
barriers)

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.

http://www.svv.ch/sites/default/files/document/file/groesste-versicherer-ineuropa_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 the
companies

10

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 Gottardo
was 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 (ffentlichrechtliche Anstalt) active in casualty insurance

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 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

Pillar 1 and 2 should

cover at least 60% of
the last income.
(baseline cover)
If you want to be more
covered you have to
use the 3rd pillar.

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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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