Conclusiones parciales del capítulo.

Non-life insurance, also known as property and liability (casualty) or general insurance, is a method of sharing the risk of property loss among a group of insured. These individuals trade their uncertainty (of high or no loss) for the certainty of paying a small premium for

139 insurance against possible loss. Conceptually, in general, insurance is a “bad bet” for the insured, meaning that the premium paid by the insured is higher than the expected property loss without insurance. The difference between these two is the underwriting (or sales) expense (e.g. commission) and other transaction costs plus the profits of insurance firms (Joskow, 1973: 377). In other words, the insurance premium is equal to the expected loss plus selling expenses plus operating costs plus risk adjusted profits, which is one of insurers’ two main sources of net income.

Apart from pooling the risk among the insured (law of large numbers), the insurance mechanism keeps the premium low through the “levered investment trust” aspect of the insurance company (Joskow, 1973: 412). A time lag for the insurer between receiving a prepaid premium from its clients (often called unearned premium reserves) and paying back to compensate for underwritten loss in a future period specified in the insurance contract allows an insurer to invest such capital27 in securities (both stocks and bonds). This portfolio is used to support its insurance operations. Investment appears to be a non-detachable activity for insurance companies. It represents another main source of insurers’ net income.

Unlike manufacturing firms, an insurer can increase its underwriting capacity faster and can even improve its underwriting performance, particularly in spreading risk (e.g. catastrophe protection), by purchasing reinsurance, which is a contract arrangement under which one insurer, known as the ceding company, buys insurance from another insurer, called the reinsurer (Webb, 1974; Doherty & Korkie, 1980; Fiegenbaum & Thomas, 1990).

Non-life insurance is marketed in two basic ways:

1) Agency system: Independent retailers or agents represent a number of insurers and

sell insurance for these companies to the public. For their efforts, the agents receive a commission, usually a fixed percentage of the premium written (shown as selling expenses in insurance premiums).

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140 2) Direct writing system: Insurance companies sell insurance directly either through their own salesforce or through other media (e.g. mail, telephone, internet). This system arises because of the high sales costs of the agency system (Joskow, 1973).

In line with the value chain of life insurance companies suggested by Marlborough Stirling (2001), Taylor et al. (2002), and Dommisse and Oosthuizen (2004), the non-life insurance value chain can be formed by combining the two main income-generating activities mentioned earlier with other essential activities that support the delivery of the insurance product to the market, as shown in Figure 6-1.

Figure 6-1: Non-life insurance value chain model

Adapted from Marlborough Stirling (2001), Taylor et al. (2002) and Dommisse & Oosthuizen (2004)

Asset management involves the selection and management of investment assets purchased by cash inflows generated from the sale of stock and insurance products. Operations entail the infrastructure, management information system and administration processes needed to deliver and orchestrate the other services in the chain (e.g. customer interaction, processing of policy record). Risk management is closely intertwined with the insurance product as the actuary determines premium rates (e.g. underwriting, statutory actuary role) and suggests the use of reinsurance to diversify the firm’s risk portfolio. Its products and related services (e.g. claims service) are designed by the next unit. Marketing and sales focuses on positioning its product and service to be suitable for its target market using a combination of the marketing mix. Distribution concentrates on distributing a product that meets the target client’s needs, especially in term of convenience (e.g. market reach and location) and associated cost.

The value chain provides a better understanding of the link between FC and configuration which, when combined, lead to business success. This non-life insurance business value chain shows how a non-life insurance business creates value for its customer by identifying

Asset Management (Investment) Operations (MIS & Administration) Risk Management (Underwriting & Reinsurance) Product Design (R&D & Claim Service Design)

Marketing & Sales (Pricing, Promotion, Branding)

Distribution (Channel)

141 a sequential chain of more specialized value-creation activities, which integrate to form a wider FC (firm’s processes and routines), which in turn supports the business unit’s strategic choice of posture (or configuration), as proposed in the research hypotheses. Asset management, operations and risk management activities shown across the value chain can be grouped into operations capability because all take part in the overall operations of the insurance company. Improving the efficiency of these activities will significantly reduce the overall costs of the firm and support a low-cost defender strategic choice.

On the same grounds, product design and R&D contribute to a differentiated defender strategy by permitting the insurer to charge a higher margin for innovative or more tailor- made non-life insurance products. MIS and sales and distribution, which occur across the value chain, play major roles in an analyzer strategy. MIS supports well-informed decision making by providing an on-time and accurate market database. Most importantly, only a strong sales and distribution function will enable the insurer to respond in a timely fashion, leading to market adaptability advantage. Finally, marketing activities help the firm to maintain a prospector strategy by allowing it to capitalize on its strong brand to market new products and gain a prospector’s first mover advantage. Clearly, to be viable and competitive, a non-life insurer may pursue a variety of strategic choices, depending on its key functional area.