10/21/2019 Article: Industry Business Model

Industry Business Model

Abstract

This article describes current insurance industry business models.

The business model

The insurance industry business model contains two types of activities: primary and support. Primary activities make up the company's
value chain and support activities support the value chain. Support activities may include corporate services, finance, human resources,
or information systems and technology.

A value chain provides a functional model for an organization. It models the various functions an organization performs without consideration for how they are
performed. It is through the act of defining these processes that roles and responsibilities are defined, and organizational structure comes into view.

Figure 1: The Insurance Industry Value Chain

A value chain describes the company's product offering from start to finish. An organization that serves more than one type of market may have multiple value
chains. The eight primary activities depict the company's value chain as an end-to-end process:

1. Marketing: The first step in the value chain process is marketing. At this point, a business must determine which policies it will offer.
2. Risk Modeling: As part of marketing, a business must determine the policy mix and pricing strategy. To determine how premiums will be calculated for
each policy, the business must also perform risk modeling. Using the information gathered from risk modeling, the business can then determine the actual
prices for each policy.
3. Sales: The business is now in a position to begin selling its insurance policies to customers. Selling involves quotations, proposals, risk assessments, and
commission calculations. Commissions are paid to all parties involved in the distribution channel.
4. Policy Administration: Having sold a policy, the next step is to write the policy.

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5. Billing: Customers can be billed once their policies have been written.
6. Claims: Customers who have paid their premiums may at some point make a claim. This activity is optional, however, as customers may never make a
claim.
7. Fund Management: The premiums are invested in investment portfolios (primarily stocks and bonds) and are managed by investment professionals with
the intention of growing the funds to ensure that the growth in potential future insurance claims can be met. There is an increasing trend of insurance
companies providing wealth management services and some companies may also invest funds on behalf of private and corporate clients.
8. Customer Service: The customer service activity involves serving the needs of customers until their policies expire.

Each activity contains a number of processes that support the activity, although not all processes within a primary activity necessarily directly contribute to the
value chain. A primary activity must contain at least one process that contributes to the value chain.

Key stakeholders

Many people contribute to the running of an insurance company. Aside from shareholders, the key stakeholders in the insurance value chain are:

Consumers who buy insurance products.

Investors that support insurance companies by purchasing insurance company stock.
Insurance carriers that provide insurance coverage through policies and accept the risks covered by the policies. These are generally large insurance
companies, including direct insurers and reinsurers.
Partners who couple with insurance companies to share profits and losses. Partners include reinsurers, institutional investors, and trade partners. Partners
also include the insurance agencies and brokerages that distribute insurance products.
Outside networks that include those that perform professional services for insurers. They include appraisers, insurance bureaus, reinsurers, claims
adjusters, and firms providing consulting, claims processing, and data collection services.
Regulators and auditors that help secure the financial health of the insurance industry. Regulators implement and enforce regulations, while auditors ensure
adherence to finance and accounting standards.
Vendors that supply the goods insurers require to perform business activities. Examples include software distributors and administrative goods suppliers.
Internal and/or external investment managers that invest the insurance customer premiums into investment portfolios and ensure that the insurance
company can meet its liabilities and generate a profit.
How money is made

A concise and simplified representation of the revenue and cost flow of the insurance business model is: profit = earned premium + investment income - incurred
loss - underwriting expenses.

Figure 2: Profit formula

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This profit formula explains where money comes from and where it goes. In other words, it depicts the revenue and cost flow of the insurance business model.
Money comes from earned premium and investment income and goes to incurred loss and underwriting expenses.

Earned premium, a source of income, is the total of all the premium payments received by an insurer for the current coverage period. Premiums are not
considered "earned" until the policy period they cover is over. Investment income is the residual income generated as a result of investing premiums in the capital
markets. Investment income also includes annuity considerations and asset earnings. Incurred loss is the sum of all claims paid, adjusted by the change in claims
reserve and related claim expenses for the same accounting period. Incurred loss contributes to cost flow. Finally, underwriting expenses include all the costs
associated with a policy, including commissions and the portion of administrative, general, and other expenses attributable to underwriting.

Summary

In this article, you've learned about the insurance industry business model.

© 2015 Skillsoft Ireland Limited

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