Its activity is an operation to accumulate wealth, through the contributions of many subjects exposed to unfavorable economic events, to allocate what is thus accumulated, to the few who are in need. It follows the principle of mutuality, seeking solidarity among a group subjected to risks.

This mutual society is organized on a business basis, creating assets that deal with risks. The unfavorable effect of these risks, considered as a whole, is substantially lessened, because, for the insurer, the individual risks are compensated: only a few insured suffer them, compared to the many who contribute to the payment of the coverage. This allows a statistical management of the risk, from the economic point of view, although it is kept individually from the legal point of view.

Financial activity Of Insurance Companies

Financial activity is one of the three pillars of the financial markets, along with the credit or banking market and the securities or financial instrument markets. Their strategic, social and economic importance means that they are subject to strict administrative supervision with their own operating, control and inspection rules.

Captive insurer

There are insurers or reinsurers wholly owned by another organization, generally neither an insurance nor a reinsurer. Its fundamental objective is to fully or partially insure the risks of its parent company or business group.

Characteristics of insurance companies

Insurance entities, in order to face any risk arising from their activity, must have sufficient financial resources and, consequently, the legislation imposes certain restrictions on them.

• Given the desirability of permanence and stability in this sector, legal regulations usually prohibit this activity from being carried out by natural persons.
• To guarantee the solvency of insurance companies, the legislation rejects that these companies can carry out any type of activity other than insurance.
• The exercise of a financial intermediation activity that has to inspire maximum confidence between the insured and investors entails that these entities are subject to the tutelage of the State that submits them to control, both for the start of their activity and for their development.

Technical principles Of insurance companies

Insurance entities must take into account a series of technical principles that allow them to assume risk coverage.

• Individualization. The definition and delimitation of each of the existing risks is necessary to classify them and to be able to evaluate and group them.
• Accumulation. According to the laws of probability, the larger the pool of risks, the smaller the failures between the theoretical probability and the number of claims. (See Bernouilli’s Theorem and the Law of Large Numbers )
• Risk selection. Insurers should only accept risks that by their nature are presumed not to necessarily give rise to unbalanced results.
• Another basic principle of insurance companies is the distribution or division of risks. The existence of the technical-insurer risk leads the insurer to the need to ensure that the risks it assumes by virtue of the insurance contracts are qualitatively and quantitatively homogeneous, so that the mutual or compensation principle is fulfilled. This can be achieved by distributing them over time (creating reserves or technical provisions for deviations in claims in economically favorable or positive years), geographically (only valid when their consequences are not very important), by operating in various branches and types of insurance. (offsetting losses between them), between the insured (through deductibles or underinsurance -part of the compensation is borne by the same-),

With the possibility of distributing the risks assumed among other insurance and reinsurance companiesquantitative homogeneity of the same is achieved, more easily controllable and put into practice than the qualitative one, since it is based on another fundamental principle for the insurance company, the principle of distribution or division of risks, indicated in a general way above but which it specifies that it is preferable for the company (under normal and uniform conditions) to sign a large number of contracts with a high sum insured (because in this case the deviations are greater). However, for the reasons stated above, the sole application of this principle is insufficient, given the degree of heterogeneity of the sums insured and the diversity of the risks assumed, and furthermore it cannot be generalized to all companies, since it will also depend on the volume of the business, of its assets,

Technique and insurance contract

From the economic-financial point of view, insurance companies are financial intermediaries, which issue insurance policies or contracts as a specific financial asset , obtaining financing by charging the price or insurance premium , and constitute the appropriate technical reserves or provisions (transactions liabilities) pending payment of the compensation or guaranteed benefit (sum insured), either because the damage or loss that can be compensated (loss) has occurred according to the signed contract, or because its possible occurrence is estimated by methods and actuarial procedures.

The insurance technique is based on the advance payment of the resources that are invested in the long term, establishing special reserves, the so-called technical provisions , which guarantee, when harmful events occur, the payment of compensation for claims . The aforementioned reserves or technical provisions are usually invested by insurance companies in real assets (real estate ) or in other financial assets ( titles or transferable securities, active operations).

By the insurance contract , the insurer or insurance company upon receiving a premium as payment, is obliged to compensate the insured as agreed, if the expected event occurs. All this must be clearly established between the insured and the insurance company in a policy or contract.

Technical provisions and solvency margin

Technical provisions

Technical provisions are those provisions that derive immediately from the insurance contracts, since they are formed with a part of the contributions of the insured and correspond to the future obligation that the insurer has with them. They constitute the most important item of liabilities of insurance companies.

The basic reason for the technical provisions is based on the need to accrue the typical income and expenses of insurance companies, allocating to each financial year those that really correspond to them. They guarantee compliance with the commitments assumed by the company and although their functions are disparate depending on the type of provision in question, as a whole, they perform the same economic function of reinforcing the company’s solvency margin through its perfect constitution. and assignment to the specific purpose that each one, specifically, corresponds to.

Insurance entities are required to set up and maintain sufficient technical provisions at all times for all their activities.

The technical provisions must reflect in the balance sheet of the insurance companies the amount of the obligations assumed that derive from the insurance and reinsurance contracts. They are constituted for an amount sufficient to guarantee, in accordance with prudent and reasonable criteria, all the obligations derived from the aforementioned contracts, as well as to maintain the necessary stability of the insurance company against random or cyclical oscillations in the claims rate or against possible risks. specials.

Solvency margin

Insurance entities must have at all times a sufficient solvency margin with respect to all their activities. It will be constituted by the assets of the insurance company free of any foreseeable commitment and with deduction of intangible elements. Consolidable groups of insurance companies must have at all times, as a solvency margin, unencumbered consolidated equity, sufficient to cover the sum of the legal solvency requirements applicable to each of the group’s entities.

#1. Social: a new paradigm for purchasing insurance.

Many times the concept of social is related to the simple fact of “being in social networks”, without taking into account the importance and scope of the social phenomenon from the point of view of changing people’s behaviors and habits.

At this point it is key to understand that people increasingly value the opinion of others, what they recommend, the good and the bad, they inform themselves, they want to know details and above all they trust what others say, without knowing who they are. are. This is a relevant behavior change to evaluate and discuss the sale of insurance in the (very) near future.

If companies do not try to understand the challenges of insurance management in the future, they will be condemning themselves to observe how others grow in their market with new clients that operate under new mental schemes. Today the importance of the customer “experience” throughout the insurance value chain is critical.

This is a message not only for companies, but also for traditional insurance agents. An example of another industry that could be assimilated is the evolution of the business of travel agencies versus travel sales portals. Let’s think for a moment about the value added by travel agencies not so many years ago, and compare it with what we think traditional insurance distribution chains add today. We are not saying that agents are going to disappear, but we will surely see fewer agents in the future, more specialized and much more professional, coexisting with the direct sale of insurance based on trust and recommendations from social networks.

The change is taking place with the change in people’s habits, not necessarily because companies want to change the way they operate. The sale and the experience offered in general will have to be adapted to the way customers want to buy and be served.

And this arises from a clear demographic phenomenon (unrelated to insurance): the new young clients entering the labor market are already fully integrated into the digital age. They are people used to researching, finding out about prices, conditions and terms through digital sources, and then deciding whether to buy, and through which channel. The global insurance industry is only just realizing that it is losing customers every day by not offering digital direct sales and service methods. If we look at other industries,  Amazon  is an example and model, all products, different providers where multiple forms of payment and guaranteed delivery coexist. Following it, insurance “ marketplaces ” have already emerged in the world with great success, such as Insurify.com  or the closest  Comparaencasa.com . On these sites, one can do the same as on  Amazon , but to buy insurance.

#two. Mobile: an ideal channel for after-sales service, in addition to generating improvements in the service offer.

Here we can observe another relevant change in the entire process of the insurance value chain. And not necessarily in the obvious that is the possibility of taking out insurance from a mobile device. Especially for the process of information and management of claims of accidents. Having an accident, reporting the location and accident to the company, taking photos and sending them, sharing the contact information of the other injured people, requesting a courtesy car or directly leaving the accident site (prior approval at the time of the company), etc., are already common currency in many countries.

The success of these new services in full expansion is strongly conditioned by the aspect of usability. Providing an excellent experience in all digital media (and in this case with an emphasis on mobile) is a fertile area for a company to compete for customer preference with its competitors.

#3. Pricing: the return of tailored policies

Linked to the previous point, another phenomenon called the “Internet of Things” ( IoT – Internet of Things ) arises. This implies using the digital trail that people leave to obtain a better price for their insurance policies.

One application of this new concept is “pay for use”: if the conditions are accepted, for example, sharing the GPS information of the cell phone with the insurance company, it will be able to evaluate the way in which the car is used every day. , the routes that are chosen, the hours in which it is driven, speed, etc. This, in addition to serving to evaluate the way of driving and even improve it with advice, training, or other services, can generate two additional advantages for the client. On the one hand, having a personalized price for your particular risk and not an “average” price based on age or the type of car you have. And the second, the possibility of “paying for use”, that is, if the car is used a little, it pays less than another person who uses it more time.

In short, it implies going back to the origins of insurance: having personalized policies that adapt to the needs of each client, something that has been a reality in other industries for a long time (as in the online sale of clothing).

#4. Analytics: information as the basis for transformation

What is analytics?: It is the intensive use of large volumes of data to analyze behaviors, realities, facts, etc. and generate predictive knowledge in order to answer the intelligent questions that exist in the company, promoting action and aligned behaviors.

Obviously, everything we talked about above is based on Analytics: big volumes of data, handled quickly in an intelligent way.

But we can extend the concept with the following: how much better can a company’s distribution network and customer base be managed if good quality data were first available? And after having them, use them to generate personalized offers at times when there is a greater probability of accepting the offer and taking out insurance.

For example: a young person who has just had their first child is surely an ideal candidate to buy life insurance, just as a person with several children who are starting school age is a target for enrollment insurance, and a tourist is target for travel insurance. All this is very logical and reasonable, but why are fortunes still being spent on generic campaigns that do not have much effect on insurance production? Basically for two reasons, one because the data is not always available or it is tortuous to dispose of it in a timely manner and with little effort, and the second because if it is available, it is not always known how to manage and analyze it to detect business opportunities.

5. Insurtech: enemies or allies?

There has yet to be an app or a new player outside of the traditional financial industry that will completely change the insurance business as we know it. But we have to know that there are many people, groups and companies in the world that are working to achieve it. Insurance companies should not lose sight of this. As such, we believe that insurers that successfully integrate and embed new digital capabilities into their ongoing operations, whether through insurtech acquisitions or partnerships with innovation ecosystems, will reap the greatest benefits.

Many technologies have the potential to achieve significant impacts. An obvious example is blockchain technology. While the short-term uses for insurers may not be clear, the bottom line is that there are ramifications that need to be considered.

Blockchain in insurance

The blockchain is a fully distributed data structure that contains transactions and their history, and that guarantees that: each participant has the exact same copy and that once a transaction has been incorporated, it cannot be removed from the blockchain.

Although each participant has a copy, the operations performed on it (new transactions) are propagated to the others so that everyone always works on the same version of the structure. The blockchain allows transforming centralized schemes into distributed or decentralized ones, guaranteeing integrity and without requiring large computing capacities from the participants.

Smart contracts have been developed based on blockchain technology.) that allow setting conditions for transactions to be executed. These conditions are verified by all blockchain participants to validate a transaction. Although there are several applications that are seen in the context of the insurance industry, one of the most paradigmatic would be to incorporate policies as an intelligent contract. In this scenario, the conditions of execution of a policy are incorporated into the smart contract in the form of a small program and external actors are defined that will provide the information to determine the fulfillment of the conditions of the smart contract. As an example, let’s imagine that we introduce a smart contract associated with fire insurance for a home.Internet of Things ), that the Fire Department has published a fire report with certain characteristics (eg, address of the insured, that it was accidental, etc.) and that formal conditions are met (eg, current policy). Blockchain participants (eg one or more insurers, brokers, beneficiaries) will be able to verify in real time the fulfillment of the conditions of the smart contract, and once the network agrees that the conditions of the contract are fulfilled, they will automatically execute the transaction. crediting the agreed amount to the beneficiary. A scheme of this type promises to add transparency to the user, make the policy payment process more efficient and reduce operational costs for insurers.

We have proposed a scenario as an example, but it is understood that blockchain technology and smart contracts offer alternatives for fraud prevention and establish fault-tolerant operating schemes at lower costs.

While short-term uses are being investigated, what is clear is that there are ramifications that need to be considered.

Insurance companies cannot remain oblivious to this new reality, they must approach the new innovation ecosystems, to get to know them and understand what they do, what they can do, even manage these ecosystems. All with the goal of quickly adapting to survive and succeed.

These 5 factors are key in defining the insurance industry of the future. Obviously, here we are talking about factors related to digital, but there are many others, such as socio-cultural aspects, the aging of the population, regulatory issues, among others.

What’s Critical: Not Killing Innovation

When we consider the above factors alongside emerging technologies or approaches such as blockchain, robotics, cognitive computing, self-driving cars, the important thing to remember is that companies must take advantage of these opportunities to stay ahead permanently. . In other words, today when opportunities appear, companies have to analyze and implement them quickly (and periods are getting shorter and shorter), only then can they respond adequately and meet customer expectations.

For this, there is a critical factor to take into account: you should not “kill innovation”, and there is a space to reflect on how innovative the company really is.

The financial sector is in recent times under threat from various new competitors that enter thanks to innovation and cultural changes; The same thing is happening in the insurance business. In most of the countries of the region we have seen interesting movements of insurance companies innovating in interactive portals for advisors, apps for their end customers, direct insurance sales, micro-insurance, etc. All very good news but should not stop there.

The world progresses quickly,  Lemonade  and  Progressive  are examples of insurance companies that move forward by taking advantage of new trends. Each company has to find the way and its own way to incorporate innovation in all its critical processes.

The digital transformation of the insurance business

As we have seen, we firmly believe that transformation is possible, and it is necessary above all in a world where new trends and technologies are going to emerge that make changes faster and faster. Business models have to adapt to the new environment, to the new demands of customers and to the possibilities that companies have today and those that they will have in the near future.

The opportunities are many, the decision of each company is simple to make (but not simple to answer): either ride the wave or let it pass and observe what the rest does. We firmly believe that the second answer is not the best one to ensure the sustainability of a company. Be careful, you don’t necessarily have to risk everything, but technological progress unequivocally implies that companies gradually or more quickly adopt changes and take advantage of new technologies if they intend to expand or at least survive.

That is why we believe that today there are countless possibilities for insurance companies to reaffirm their commitment to innovation, to effectively implement it, and to promote an innovative ecosystem with new partners and under new paradigms that must necessarily be adopted and incorporated. to be at the forefront of the business.