The economics of insurance
The greatest shareholder value is generated by those insurers who identify and capitalise on the best business opportunities and have optimum operating efficiency. There are three important prerequisites for accomplishing these goals.
First, a good understanding of the value creation process allows a clear identification of competitive advantages and an unambiguous allocation of responsibilities to specific functions within the organisation. Second, a framework for measuring value creation is indispensable in that it enables quantification and allocation of performance. And third, a consistent incentive system is needed to align the interests of management with the value creation goal.
Implementing a value measurement framework will also foster a better understanding of the value proposition for insurance or reinsurance – that the cost of taking risk is lower for the insuring entity than for the client. Understanding that value proposition allows employees to better identify value-creating solutions for both their clients and their own companies.
This publication provides this type of structure for understanding and measuring value creation based on a careful analysis of the fundamental economic principles underlying insurance business. In particular, this framework emphasises the importance of accounting for the cost of holding risk capital. It also shows that it is not the investment management activities of an insurance company, but their business origination skills and efficient capital cost management that ultimately enable them to create sustainable value for their shareholders.
Although this publication is founded on a detailed economic study, it specifically caters to practitioners. Examples that clearly demonstrate how to apply the structure in practice are provided, making it invaluable for insurance management seeking to improve long-term profitability.
