1

CONTENT

INTRODUCTION.........................................................................................................................3

Chapter I. HISTORICAL DEVELOPMENT OF INSURANCE AND SOCIETAL

EFFECTS.......................................................................................................................................5

1.1. Conceptual and methodological aspects of insurance and the commerce...................5

1.2. Necessity and importance of insurance on the economy.................................................9

1.3. Internet and its impact on the commerce and economic development of the country.

....................................................................................................................................................15

Chapter II: ANALITICAL EVOLUTION OF THE INSURANCE MARKET IN

REPUBLIC OF MOLDOVA......................................................................................................22

2.1. Analysis in dynamics of the national insurance sector in RM......................................22

2.2. Evolution and distribution of insurance products through intermediaries................36

2.3. Electronic commerce in international practices.............................................................37

Chapter III: INTERNET AND ELECTRONIC COMMERCE IN INSURANCE...............43

3.1 New practices and methods in insurance business..........................................................43

3.2 Marketing in insurance trough internet..........................................................................47

3.3 Online systems of insurance - a new trend in business...................................................60

CONCLUSION............................................................................................................................65

BIBLIOGRAPHY........................................................................................................................67

2

INTRODUCTION

This paper proposes some ways forward in stimulating and structuring interdisciplinary

research on business-to-business electronic commerce. A commerce-centred perspective is

proposed that is grounded in concepts of commerce as a complex socio-economic institution. On

this basis, a conceptual framework is developed for assessing the dynamics and impacts of

electronic commerce in the value chains of products (goods and services).

The approach focuses on examining technical change in transaction structures, and how

this relates to the evolution of electronically-mediated business relationships in the rapidly

developing Internet environment.

The approach is oriented towards critical research questions concerning the effects of

electronic commerce on the ways various market participants exercise and/or respond to control

over the organisation and operation of value chains, and the implications for business and policy.

A separate study plan describes implementation of the methodology.

Efficient insurance markets are an essential basis for the transition countries in the world

and Moldova to achieve integration into the global economy and sustainable strong economic

growth. With their capacity, capital and know-how, global insurers play a major role in the

establishment of an efficient insurance sector. In conjunction with the forces of global

consolidation, current advances in information technology and the potential of e-business mark

the beginning of a veritable efficiency revolution in the insurance industry.

The following study initially examines the role insurance plays in economic growth and

the current developmental stage of the insurance industry in the word. It then provides an

overview of the heated debate on the potential and challenges of market access liberalisation and

examines the importance of foreign insurance companies in the various countries. The study also

analyses the impact of e-business on the insurance business.

The present thesis is the result of an intense activity of documentation and scientific

research during several years on main aspects regarding Internet and electronic commerce - the

new trend in insurance. The analyze of this theme supposes, in my opinion, knowing a great

number of electronic commerce, methods, ways, regulations and commercial, international or

civil usances which will allow to logistic to contribute to the intensification of international

business of the companies in conditions of increased efficiency.

In this thesis, a brief introduction of external and internal analysis is given and it would be

the main theory that can support carrying out the purpose of this work. According to Alim and

3

Gerhardt, external analysis can influence on business strategy if a company adapted it in current

dynamic competition. when customer and competitor are researching and classifying by external

and internal analysis, stronger strategies can be developed to sustain a company’s growth. Thus,

external and internal analysis is crucial process for business.

4

Chapter I. HISTORICAL DEVELOPMENT OF INSURANCE AND SOCIETAL

EFFECTS

1.1. Conceptual and methodological aspects of insurance and the commerce

Insurance plays a crucial role in economic development: a well-functioning insurance

sector is a vital piece of national infrastructure. Insurance liberalization, successfully managed,

will help to attract foreign direct investment and drive development in financial services, in turn

spurring overall economic development, financial security and levels of prosperity.

Protection against risk, loss, or ruin, by a contract in which an insurer (the company)

guarantees to pay a sum of money to the insured (the client), the claimant (the other party

claiming injury against the insured), or the beneficiary (person receiving a benefit as designated

by the insured, usually for life insurance), in the event of death, accident, fire, etc.1

The act of insuring, or assuring, against loss or damage by a contingent event; a contract

whereby, for a stipulated consideration, called premium, one party undertakes to indemnify or

guarantee another against loss by certain specified risks. The premium paid for insuring property

or life. The sum for which life or property is insured. A guaranty, security, or pledge; assurance.

Insurance can be defined as the act of providing indemnity or coverage against harm, as the

contract which spells out the terms of coverage, or as the actual coverage itself. In all instances,

matters concerning insurance coverage refer to the legal and financial protection against

potential future harm.

The act, system, or business of insuring property, life, one's person, etc., against loss or

harm arising in specified contingencies, as fire, accident, death, disablement, or the like, in

consideration of a payment proportionate to the risk involved. Coverage by contract in which one

party agrees to indemnify or reimburse another for loss that occurs under the terms of the

contract. The contract itself, set forth in a written or printed agreement or policy. The amount for

which anything is insured. An insurance premium. Any means of guaranteeing against loss or

harm.

Insurance or Assurance, device for indemnifying or guaranteeing an individual against

loss.

Reimbursement is made from a fund to which many individuals exposed to the same risk

have contributed certain specified amounts, called premiums.

Payment for an individual loss, divided among many, does not fall heavily upon the actual

loser. The essence of the contract of insurance, called a policy, is mutuality.

1 Tanaka, Jennifer (1998), From Soups to Lunch: Shop for Groceries without Leaving the Den¡, Newsweek, 16 March, p.34

5

The major operations of an insurance company are underwriting, the determination of

which risks the insurer can take on; and rate making, the decisions regarding necessary prices for

such risks.

The underwriter is responsible for guarding against adverse selection, wherein there is

excessive coverage of high risk candidates in proportion to the coverage of low risk candidates.

In preventing adverse selection, the underwriter must consider physical, psychological, and

moral hazards in relation to applicants.

Physical hazards include those dangers which surround the individual or property,

jeopardizing the well-being of the insured.

The amount of the premium is determined by the operation of the law of averages as

calculated by actuaries. By investing premium payments in a wide range of revenue-producing

projects, insurance companies have become major suppliers of capital, and they rank among the

nation's largest institutional investors.2

Commercial insurance protects small business owners from the damaging effects of

financial liability arising from specific circumstances. It is important to carry at least four general

types of insurance when engaging in trade and commerce: liability, property, employment and

auto. Insurance is crucial to financial and organizational stability because liability can quickly

lead a business and its owners into bankruptcy. Aspiring entrepreneurs should be aware of the

importance of insurance in trade and commerce before starting their own business.

Liability Insurance

The importance of liability insurance stems from the range of financial risks that can arise

from litigation, including legal action from customers, suppliers or other business partners.

General liability insurance covers obligations resulting from negligence, personal injury, damage

to property and a host of other risks. Product liability insurance covers claims of injury or

personal harm caused by defective or unsafe products. Errors and omissions insurance protects

against claims of malpractice for consultants, medical practitioners and other specialists. All of

these policies are extremely important to small business owners with personal liability for

business debts, as these types of risks can destroy personal credit if not properly covered.3

Property Insurance

Commercial property insurance is a must for any business that owns buildings. Renters

insurance is just as important for companies renting their space. Both types of policies cover the

costs of fire, water and hail damage, as well as vandalism and other criminal acts. Peril-specific

2 Universal Postal Union (UPU) (1997), Post 2005: Core Business Scenarios¡, Bern, p.873 Ibidem p.89

6

policies cover heightened risks faced by individual businesses, allowing them to exclude high-

risk items from their all-risk policies. A company located in an area known for frequent

tornadoes may exclude tornado damage from their all-risk policy and carry an additional peril-

specific policy for tornado damage, for example, potentially resulting in a lower total cost.

Employment-Related Insurance

Any business with employees should carry workers' compensation and unemployment

insurance. Workers' compensation policies cover the cost of paying out workers' compensation

claims in the event an employee is hurt on the job. This liability can be significant if employees

are exposed to hazardous materials, operate dangerous machinery or perform other dangerous

activities. Unemployment insurance covers the costs incurred as a result of a previous employee

filing for unemployment benefits, in which case employers are liable to pay a portion of the

filers' payouts. Unexpected employment-related liability can eat away at company profits. It is

important to carry insurance for these risks to ensure a steady and predictable expenditure.4

Commercial Auto Insurance

If you use vehicles in your operations, it is important to carry commercial auto insurance

policies. Commercial vehicles can include company cars, delivery trucks, construction vehicles

or other productive automobiles. Auto insurance will cover the costs of repair or replacement in

the case of accident, as well as your liability if one of your vehicles causes damage to property. It

is important for productive vehicles to remain in operating condition at all times, so having a

ready source of repair money is crucial to any business that relies on vehicles. Automobile

insurance is also legally mandatory in almost every state.

In general, insurance for insurable risks falls into two broad groups: liability and casualty.

Companies buy insurance to prevent financial impairment due to an action that would make the

company liable to a third party. Companies also buy insurance to offset possible losses stemming

from interference with operations. This latter is a wide-ranging classification, embracing work

stoppages resulting from fire, flood, machinery breakdowns, labor difficulties, theft and bad

credit risks.5

The interrelationship between insurance needs and the financial health of a corporation is

such that insurance is properly the responsibility of financial managers. It is a complex subject,

involving financial and legal considerations. Large companies may have an insurance officer or a

risk manager, as he sometimes is called. Smaller firms usually assign the task to a ranking

member of the financial department.4 Wigand, Rolf T. (1997),“Electronic Commerce: Definition, Theory, and Context”, The Information Society,

Vol. 13, p.2875 Ibidem

7

Defining the Risks

Analyzing a company’s pssible exposure to risks which can be insured is not as easy as it

may appear. The obvious perils are one thing. These include fire, burglary, accident, water

damage, and the like.

Other risks are not so easily identified. Take the case of a display manufacturer who

unknowingly uses inflammable materials for his designs. What is his liability if the materials

cause cause a customer’s facility to catch fire? Or consider a firm that charters a vessel for an

employee fishing party. If the boat sholud sinks, or if individuals are hurt or lost, is the company

financially responsible?

The answer are not important here. But the examples serve to underline the fact that risk

exposure covers a multitude of possibbilities. Right from the start, therefore, a business should

analyze its possible liabilities and arrange for adequate coverage.

Insurance against operating losses should also be thoroughly investigated. A machine may

break down, or a raw material may not be delivered on time. Production is set back, deliveries

are delayed, and receipts are postponed. Revenue may be lost entirely if the customers seek

another source of supply.

Naturally, not all possible perils can be foresee. Nor for that matter would a company deem

it necessary to provide insurance for all the risks it could envision. In so far as it is practicable,

the extent of possible loss or liability should be defined. Also, the chances for it occurring have

to be considered. A company may be willing to take a calculated risk, weighing the cost of the

insurance againts the eventuality of anything adverse happening. In short, probability plays a

large role in determining what risks the company insures againts.6

A program of risk analysis is not just confined to buying or not buying insurance.

Whatever possible, the risk must be eliminated. Some exposures, of course, can’t possibly be

controlled. For example, driver education and proper maintenance of vehicles can help

measurably to reduce accidents. But they won’t eliminate them entirely, and so the potential

liability ca be great.

Management has a responsibility to correct all conditions which are potentially hazardous.

Providing adequate coverage for perils should be viewed as a necessary but alternative function.

The first step should always be to attempt to do away with the risk: failing that, the company

should seek to controlit.

6 Rawsthorn, Alice (1997b), Internet Music Retailers: Rapid Growth Expected¡, Financial Times, http://www.ft.com, 5 December

8

Insurance seldom covers the full extent of a loss. A company may recover substantially all

the cost for brick and mortar and equipment for a facility gutted by fire. However, there are also

the indirect costs involved. These may, in the long run, be far more expensive to the company.

For example, the loss in profits due to the company’s inability to continue to operate won’t be

recovered by the fire insurance policy. The company’s possible loss of position in the market is

another factor. Also, necessary development work may have to be curtailed, leading to a future

competitive disadvantage.

Types of Risk

The following are risks which a company generally faces:

Damage or destruction of physical assets. Included in this classification are losses or

damage suffrered to real or personal properties. Real property consists of land, buildings, and

appendages such as elevators, furnaces and plumbing fixtures. Personal properties range from

inventory to furniutre to vehicles. Standard coverages for such losses include fire, ocean marine,

machinery breakdown and crime insurance.

Losses affecting income. There are perils which, while causing physical damage, also

adversely affect earning power, Businesses can obtain insurance which will cushion the effect of

loss profits and help defray extra expenses if the business is such that oprations have to be

carried on regardless. On a personal basis, insurance can also be used to provide income for the

families of individuals who lose their live, or as compensation in the event of accidental injury,

physical disability or sickness.7

Third party legal liability. A company may be responsible for personal injures and property

damage to those outside its employ as well as those within it. This responsibilty can prove to be

especially serious because a liability award can be so large that it becomes a financial burden.

Furthermore, the liabilityma y be incurred whether or not there was any negligence. And it may

result from the action of a company’s agent.

1.2. Necessity and importance of insurance on the economy

Insurance serves a number of valuable economic functions that are largely distinct from

other types of financial intermediaries.

In order to highlight specifically the unique attributes of insurance, it is worth focusing on

those services that are not provided by other financial services providers, excluding for instance

the contractual savings features of whole or universal life products.

7 Price Waterhouse (1998),“Price Waterhouse Predicts Explosive E-commerce Growth,” http://www.internetnews.com, 8 Aprilie, p.76

9

The indemnification and risk pooling properties of insurance facilitate commercial

transactions and the provision of credit by mitigating losses as well as the measurement and

management of non diversifiable risk more generally. Typically insurance contracts involve

small periodic payments in return for protection against uncertain, but potentially severe losses.

Among other things, this income smoothing effect helps to avoid excessive and costly

bankruptcies and facilitates lending to businesses. Most fundamentally, the availability of

insurance enables risk averse individuals and entrepreneurs to undertake higher risk, higher

return activities than they would do in the absence of insurance, promoting higher productivity

and growth.

The role of insurance in economic development such trends are important. They underline

the message that a vibrant insurance industry is one of the keys to wider economic advance. This

is scarcely surprising. Insurance aids economic development through its financial intermediation

function in at least five ways:

Insurance facilitates business. Modern economies rely on specialization and

improvements in productivity, including productivity in financial services. Trade and

commercial specialization demand, in turn, financial specialization and flexibility. Unless there

is a wide choice of financial products – and this includes insurance products – with

corresponding levels of innovation, developments in trade and commerce can be held back.

Insurers provide risk management services. In their widest sense, these services cover risk

pricing, risk transformation, and risk reduction. They are all essential services for a competitive

market. Businesses and individuals need to transform their risk exposures in property, liability,

loss of income and many other fields to achieve an optimum “fit” to their own needs. Again, life

insurers enable individuals to manage their savings to match the liquidity, security and other risk

profiles desired.

Insurers offer risk management through risk pooling. This is the essence of insurance,

taking underwriting and investment together. Pooling reduces volatility. If volatility is reduced,

there is a smaller “risk premium” to be faced by insureds and borrowers. And, through risk

management, insurers can bring to bear economic incentives for reducing business risk

exposures.

Insurance mobilizes personal savings: In general, countries with high savings rates are

those showing fastest growth. An IMF study in 1995 indicated that of the world’s 20 fastest-

growing economies over the previous 10 years, 14 had savings rates greater than 25 per cent of

GDP, and none had a saving rate of less than 18 per cent. But 14 of the 20 slowest growing

countries had savings rates below 15 per cent. Insurers have a key role in enhancing savings rates

10

and in channelling domestic savings into domestic investment; and, through long-run

investments, matched to risks and generally located in the host economy in which they operate,

insurers are key holders of equity and bond portfolios.

Insurers play a key role in fostering efficient allocation of capital and economic

resources: In assessing risks, they engage in an information function which requires them to

evaluate firms, projects and managers. And they do so both in deciding whether to offer

insurance and in their role as lenders and investors. In these ways, a vibrant insurance sector can

act as a catalyst to economic growth.

Human beings, his family and properties are always exposed to different kinds of risks.

Risk involve the losses. Insurance is a tool which reduces the cost of loss or effect of loss caused

by variety of risk. It accumulates funds to meet individual losses. It is not device to prevent

unwanted event of happening or cause of loss but protects them against that loss by

compensating which as lost. The role and importance of insurance are discussed as follows:

1. Insurance provides security

Insurance provides safety and security against the loss on a particular event. Life insurance

provides security against death and old age sufferings. Fire insurance protects against loss due to

fire while Marine insurance provides protection and safety against loss of ship and cargo. For

personal accident and sickness insurance financial protection is given when the individual is

unable to earn. In other insurance too, this security is provided against the loss at a given

contingency.

2. Insurance reduces business risk or losses

In Business, commerce and industry, huge properties are employed. Because of slight

negligence, the property may be turned in to ashes. A person may not be sure of his life, health

and cannot continue the business up to the longer period to support his dependents. By the help

of insurance, he can be sure of his earning, because the insurance company will pay a fixed

amount at the time of death, damage by fire, theft, accident and other perils.8

3. Insurance provides peace of mind

Insurance removes the tensions, fears, anxiety, frustrate or weaken of the human mind

associated with the future uncertainty. By providing financial position and promise to

compensate losses arise out from various risk, it provides peace of mind and stimulates more and

better work performance of an individual.

4. Life insurance encourages saving

8 Wigand, Rolf T. (1997),“Electronic Commerce: Definition, Theory, and Context”, The Information Society, Vol. 13, p.287

11

The insured has an obligation to pay premium regularly and cannot be withdrawn easily

before the expiry of the term of policy. Life insurance encourages the habit of regular and

systematic saving through premium and after a certain period, it would be a part of necessary

saving of the insured person.

5. Insurance accelerates the economic growth of the country

To develop the economic growth of the country, insurance provides strong hand and mind,

with protection against loss of property and capital to produce more wealth. It provides

protection against different kinds of loss caused by risk. It accumulates the capital from the

insured and utilizes for the development of country. Thus, the insurance meets all the

requirements for the economic growth of a country.

6. Insurance provides credit facilities

The insured person can get loan by pledging insurance policy and the interest will not

exceed the cash value of policy charged by insurer. In case of death of insured person, the policy

can be utilized for setting of the loan with interest. Business person can take loan on the basis of

insurance documents from the bank also.

7. Insurance helps to reduce inflation

Inflation created from over supply of money and on less production entities. Insurance can

help to reduce the inflationary pressure in two ways. Firstly, it collects money as an amount of

premium which controls over supply of money and secondly, it provides sufficient funds for

increase production entities. Thus, it reduces the impact of inflation.

8. Insurance makes security and welfare of employees

The security and welfare of employees is the responsibility of employer. These security

and welfare are easily met by life insurance, accident and sickness benefit and pension which are

generally provided by group insurance. The premium for group insurance is normally paid by the

employer. Insurance is the simple method for employer to fulfill their responsibility. Due to

these benefits, employee will devote their maximum capacities to complete their job.

9. Other Importances of Insurance

a) Insurance helps to promote foreign trade providing protection again trade risk.

b) Insurance increases business efficiency eliminating the loss of damage, destruction, or

disappearance of property of goods.

c) Insurance protects the social wealth providing protection against social evil.

d) Development of insurance business helps to solve the evil of unemployment, generating

employment opportunity in the country.

e) The insured gets tax benefit in life insurance.

12

The management of risk is a fundamental aspect of entrepreneurial activity. Entrepreneurs

manage the risk of accidental loss by weighing the costs and benefits of

each alternative. In a structured risk management process, this involves:

1) identifying the exposures to accidental loss;

2) evaluating alternative techniques for treating each loss exposure;

3) choosing the best alternative; and

4) monitoring the results to refine the choices.

Those who do not apply a structured process still make decisions about risk, although

sometimes by default rather than design. The scope of an economy’s insurance market affects

both the range of available alternatives and the quality of information to support decisions.

For example, a manufacturer might produce only for the local market, forgoing more

lucrative opportunities in distant markets in order to avoid the risk of losing goods in shipment.

Transport insurance can mitigate this loss exposure and enable the manufacturer to expand.

Similarly, to avoid the risk of total loss from drought, a commercial farmer may keep half of his

seed in reserve. Crop insurance can protect against drought and permit all of the seed to be

planted for a smaller premium than the cost of holding half in reserve. Thus public policies that

encourage insurance operations improve the economy’s productivity by broadening the range of

investments. Insurers also contribute specialized expertise in the identification and measurement

of risk. This expertise enables them to accept carefully specified risks at lower prices than non-

specialists. They also have an incentive to collect and analyze information about loss exposures,

since the more precisely they measure the cost of risk, the more they can expand. As a result, the

insurance market generates price signals to the entire economy, helping to allocate resources to

more productive uses. Insurers also have an incentive to control losses, which is a significant

social benefit.9

By offering discounts for seat belts, smoke detectors, or other measures that reduce the

frequency or severity of losses, they lower their eventual claims costs, in the process saving lives

and reducing injuries.

On the investment side, due to the long term nature of their liabilities, sizeable reserves,

and predictable premiums, life insurance providers can serve an important function as

institutional investors providing capital to infrastructure and other long term investments as well

as professional oversight to these investments.

9 Yardeni, Edward (1996),“Economic Consequences of the Internet”, http://www.yardeni.com/yardeni, 22 October, p.45

13

Of course, these benefits are fully realized only in markets where insurance providers

invest a substantial portion of their portfolios domestically.

The net result of well functioning insurance markets should be better pricing of risk,

greater efficiency in the overall allocation of capital and mix of economic activities, and higher

productivity. Importantly, these unique functions of insurance should be complementary to

banking and financial sector deepening more broadly. For instance, insurance facilitates credit

transactions such as the purchase of homes and cars and business operations, while depending in

turn on well functioning payment systems and robust investment opportunities.

Insurance to Growth Given the multiple potential benefits of a vibrant insurance sector,

how much of a contribution does insurance make in practice? While still sparse, the research

points to several relatively robust inferences:

1: Insurance Contributes Positively to Economic Growth. The deepening of insurance

markets makes a positive contribution to economic growth. While life insurance is causally

linked to growth only in higher income economies, nonlife insurance makes a positive

contribution in both developing and higher income economies. Some research suggests that the

positive contribution of life insurance to growth is primarily through the channel of financial

intermediation and long term investments. However, it is important to note that these studies do

not address the important contributions to individual and social welfare from risk management.

2: Strong Complementarity between Insurance and Banking. Insurance and banking

system deepening appear to play complementary roles in the growth process. Although insurance

and banking separately each make positive contributions to growth, their individual contributions

are greater when both are present. There is also some evidence that the development of insurance

markets contributes to the health of securities markets. As suggested above, there are many

reasons why this complementary relationship might hold, including the likelihood that the

presence of property casualty insurance avoids inefficiently high levels of bankruptcy and helps

to facilitate credit transactions for houses, consumer durables, and small- and medium-sized

businesses that banks typically finance. Separate evidence that a growing presence of life

insurance providers and pension funds is associated with more efficient banks suggests that they

promote some capital market discipline on the investment side that is also complementary.

Drivers of Insurance Coverage if growing insurance markets make a positive contribution

to growth, then it is important to understand in turn the enabling factors that contribute to the

development of robust insurance markets. Here, the evidence points to rising incomes,

macroeconomic stability, and financial deepening as the key drivers of insurance market growth,

against the backdrop of a conducive regulatory and supervisory environment.

14

1: Rising Incomes, Moderate Inflation, and Financial Deepening are Key Drivers.

Growth in insurance coverage is strongly associated with rising incomes, the development

of an increasingly sophisticated banking sector, and low or moderate levels of inflation. The

strong contribution of rising incomes to greater insurance coverage might be attributable to

demand factors (rising demand for coverage as individuals become wealthier), supply factors (it

becomes more cost-effective to provide insurance as the economy expands, providing both a

stronger institutional environment and greater returns relative to transactions cost), or a

combination. The overall institutional environment plays an important role, in terms of political

stability and openness as well as government effectiveness, rule of law, and control of

corruption. Religious factors also play a role, with insurance consumption inversely correlated to

the share of the population that is Islamic. A number of factors that might be assumed to be

strong drivers of insurance market growth appear much less significant in practice, including

demographic factors, such as the share of the population that is approaching or at retirement

relative to the share that is young, and the educational level of the population. Notably, social

provision of insurance, such as social security and government health insurance, appears to grow

in tandem with the provision of private insurance perhaps because both are associated with

increasing incomes – rather than acting as substitutes as some have conjectured. In addition,

even though urbanization might be expected to lead to growth in insurance coverage due to the

associated separation from traditional informal insurance practices prevalent in rural settings,

urbanization does not appear to be a significant driver.10

Although the key drivers noted above are relatively robust in explaining insurance market

coverage, nonetheless there is substantial variation in insurance coverage among economies that

cannot be fully explained by these factors. This suggests some idiosyncratic factors may be at

work.(annex 1)

1.3. Internet and its impact on the commerce and economic development of the

country.

These days, it is becoming increasingly difficult to browse a newspaper, magazine, or

business technology news segment on television without seeing some reference to the Internet,

and the new information services available on it that offer some sort of access to "cyberspace" or

"the information superhighway." Furthermore, it seems that in some cases, these terms are used

interchangably describing one in terms of the other. So, what is what, and what if anything does

it have to do with business, either now or in the future?

10 US Department of Commerce (1998), Input-Output Commodity Composition of Personal Consumer Expenditure (PCE), Prices, 1992, Washington DC, p.98

15

First, the Internet is real. As its now shortened name suggests, an internetwork is an open-

end network of computer and communication networks that now encircle the globe, with its

greatest concentration of networks, computers, and users located in the U.S. It continues to grow

through the addition of new networks, computers, and user connections at a rate that far outstrips

any previous growth trend associated with modern information technology. Its place is both

nowhere and everywhere: there is no single adminstrative authority that owns, controls or

manages it, yet its users clearly benefit from access to information resources and services from

around the world that can be brought to their desktop computer and fingertips. Commercial

information service providers such as America OnLine, CompuServe, and Prodigy are all

looking at ways for how to offer their subscribers access to the Internet without losing them to its

many direct access portals. Further, its financial and economic underpinnings are not well-

understood, although ongoing government subsidies, corporate telecommunication budgets,

educational overhead line items, user access fees, and telephone usage charges are all somehow

involved. Thus, the pending privitization of the Internet may take some time.

Second, the Internet is not the information superhighway or "infobahn." However, it is

certainly the closest thing to it that is now widely available for investigation and evaluation. It is

perhaps better to think of the Internet as a prototype for the networks of information commerce

and exploration that these over-popularized and meaningless terms connote. Thus, the Internet

should not be ignored. But rather than sitting on the sidelines and wait for the next technological

wave or telecommunications-entertainment industry mega-merger, it might be more profitable

and interesting to examine how the Internet might help your business or strategy formulation.

The last category to address is grouped under the term, electronic commerce. Although

this is another catch-all term, there are large-scale experiments and systems that are now using

the Internet for this particular purpose. Two efforts are noteworthy, the Enterprise Integration

Network (EINet) started in Austin, Texas, and the CommerceNet based in the Silicon Valley

area of Northern California. Large and small businesses are participating in each, although most

are using these efforts for exploratory purposes, rather than aggressively investing to generate

and capture nascent electronic market share. Both efforts seek to create and demonstrate a

national information infrastructure necessary to support the range of electronic business activities

outlined above. Both are supported through government subsidies and private investments,

though funding levels and durations differ for each. Next, both are spearheaded by private

ventures that intend to broker and profit from their technical management and accumulated

expertise. In addition, both efforts are focussed on initially establishing a regional base of

vendors as their customers, so as to thereby facilitate or stimulate electronic commerce between

16

local participating businesses. This may suggest that other domestic or international regions

populated with technology-driven businesses may be targeted by those businesses that want to

venture into the development of Internet-based information infrastructures.11

Ecommerce has allowed firms to establish a market presence, or to enhance an existing

market position, by providing a cheaper and more efficient distribution chain for their products

or services. One example of a firm that has successfully used ecommerce is Target. This mass

retailer not only has physical stores, but also has an online store where the customer can buy

everything from clothes to coffee makers to action figures.

When you purchase a good or service online, you are participating in ecommerce.

Some advantages of ecommerce for consumers are:

- Convenience. Ecommerce can take place 24 hours a day, seven days a week.

- Selection. Many stores offer a wider array of products online than they do in their brick-

and-mortar counterparts. And stores that exist only online may offer consumers a selection of

goods that they otherwise could not access.

But ecommerce also has its disadvantages for consumers:

- Limited customer service. If you want to buy a computer and you’re shopping online,

there is no employee you can talk to about which computer would best meet your needs.

- No instant gratification. When you buy something online, you have to wait for it to be

shipped to your home or office.

- No ability to touch and see a product. Online images don’t always tell the whole story

about an item. Ecommerce transactions can be dissatisfying when the product the consumer

receives is different than expected.12

Electronic commerce and its related activities over the internet can be the engines that

improve domestic economic well-being through liberalization of domestic services, more rapid

integration into globalization of production, and leap-frogging of available technology. Since

electronic commerce integrates the domestic and global markets from its very inception,

negotiating on trade issues related to electronic commerce will, even more than trade

negotiations have in the past, demand self-inspection of key domestic policies, particularly in

telecommunications, financial services, and distribution and delivery. Because these sectors are

fundamental to the workings of a modern economy, liberalization here will rebound to greater

economic well-being than comparable liberalization in more narrowly focussed sectors. Thus,

11 US Department of Commerce (1998), Input-Output Commodity Composition of Personal Consumer Expenditure (PCE), , 1992, Washington DC, p.87

12 Ibidem

17

the desire to be part of the e-commerce wave can be a powerful force to erode domestic vested

interests that have slowed the liberalization of these sectors.

Technical aspects of electronic commerce, its complexity and the characteristic of

network externalities should change the way that developing countries approach the external

negotiating process. Specifically, the complexity of negotiations will require more cooperative

effort among countries through their regional forums (APEC, FTAA) which heretofore have

operated at the periphery of the WTO process. Second, since electronic commerce is

characterized by network externalities, developing countries should take advantage of the

technical leadership coming out of the private sector in the most advanced countries (and their

own private sector, even if nascent) and “draft” in behind. Standing on the shoulders of giants

makes sense when network externalities and interoperable standards are key to maximizing the

benefits of e-commerce. Trying to develop domestic standards or following the old technique of

import substitution to develop a domestic industry is even more economically wasteful in the

context of the internet and electronic commerce than it was in more traditional sectors.

Trade negotiations are often the tool used to liberalize domestic sectors. But the

complementarity between domestic policy and trade strategy is tighter in the case of e-commerce

and the internet. Moreover, this complementarity emphasizes that e-commerce is not a service,

nor a good, but something that is comprised of both. In the context of the WTO commitments,

embracing this idea could lead to a liberalizing bias in favor of electronic delivery of goods and

services as compared to delivery by another scheduled mode. For example, insurance products

could be sold over the Internet even if the physical presence of a foreign insurance firm was not

scheduled for liberalization under GATS. Rather than view this outcome with alarm, developing

countries should embrace it as a positive force that furthers the development both of electronic

commerce, as well as encourages deeper liberalization and deregulation throughout the economy.

“Electronic commerce” is a shorthand term that embraces a complex amalgam of

technologies, infrastructures, processes, and products. It brings together whole industries and

narrow applications, producers and users, information exchange and economic activity into a

global marketplace called “the Internet.” There is no universal definition of electronic commerce

because the Internet marketplace and its participants are so numerous and their intricate

relationships are evolving so rapidly. Nonetheless, one of the best ways of understanding

electronic commerce is to consider the elements of its infrastructure, its impact on the traditional

marketplace, and the continuum of ways in which electronic commerce is manifested. This

approach shows clearly how electronic commerce is intricately woven into the fabric of domestic

economic activity and international trade.

18

Electronic commerce as it has evolved today requires three types of infrastructure:

• Technological infrastructure to create an Internet marketplace. Electronic commerce

relies on a variety of technologies, the development of which are proceeding at breakneck speeds

(e.g., interconnectivity among telecommunications, cable, satellite, or other Internet ‘backbone;’

Internet service providers (ISPs) to connect market participants to that backbone; and end-user

devices such as PCs, TVs, or mobile telephones).

• Process infrastructure to connect the Internet marketplace to the traditional

marketplace. This infrastructure makes payment over the Internet possible (through credit, debit,

or Smart cards, or through online currencies). It also makes possible the distribution and delivery

(whether online or physical) of those products purchased over the Internet to the consumer.

• “Infrastructure” of protocols, laws, and regulations. This infrastructure affects the

conduct of those businesses engaging in and impacted by electronic commerce, as well as the

relationships between businesses, consumers, and government. Examples include technical

communications and interconnectivity standards; the legality and modality of digital signatures,

certification, and encryption; and disclosure, privacy, and content regulations.

Together, these infrastructures enable electronic commerce to innovate the traditional

marketplace in three ways:

• Process innovations: Electronic commerce simplifies, makes more efficient, reduces

costs, or otherwise alters the process by which an existing transaction takes place. For example,

Cisco Systems replaced its phone and fax ordering process with an online ordering process and

saved more than one-half billion dollars and reduced error rates from 25 percent to 2 percent.

Boeing used computer-aided design and electronic communication to coordinate 238

design teams in the globalized production of the 777 aircraft, a process never before attempted in

this way, and which cut error rates by 50 percent, and reduced both costs and time to market.

• Product innovations: Electronic commerce creates or facilitates new industries and

products not previously available. For example, MP3 both enables consumers to play music

downloaded from a computer and enables musicians to upload music directly to the internet,

thereby creating a new medium to produce and consume music; WebMD repackages existing

health information in an easy-to-use online format, offers opportunities to “chat” with people

with similar health concerns, and provides “real-time” responses to health questions.

• Market innovations: Electronic commerce also creates new markets in time, space, and

in information that heretofore did not exist because transaction and coordination costs were

prohibitively high. For example, the online bank Wingspan offers 24-hour bill payment features;

PeopleLink is a global advertising location for artisans in remote parts of Latin America and

19

Africa; reverse auctions through Priceline inform businesses of the exact price a consumer is

willing to pay for the products, as well as reduce the consumer’s purchase cost.

In reviewing the infrastructures that make electronic commerce possible, as well as the

impact electronic commerce has on the traditional marketplace, we can see how electronic

commerce is intricately woven into the fabric of domestic economic activity and international

trade.

Estimates of the growth of internet usage and electronic commerce both within domestic

markets and worldwide are notorious for their hyperbole. Even so, each year the actual growth

has surpassed the estimate rather than falling short of it. Respected sources such as Forrester

Research expect worldwide electronic commerce revenues to surpass $300 billion by 2002 and

accelerate to $1.3 trillion in 2003. Currently an overwhelming (close to 85%) share of electronic

commerce is concentrated in the United States, but diffusion into Europe and Asia, followed by

Latin America and Africa will be rapid.13

In developing countries internet use and its economic potential are growing exponentially.

The share of active internet users in Asia/Pacific Rim, Latin America, and “rest of World” could

increase from 23 percent in 1999 to 35 percent in 2002. In India, for example, the number of

internet users nearly doubled in the last year to 270,000, and could rise to over 2 million by the

end of 2000. E-commerce revenues could jump from $2.8 million in 1998 to $575 million in

2002. In China, a reported 60 percent of businesses are using the internet, and ecommerce

revenues could rise from $11.7 million in 1998 to $1.9 billion in 2002.7 In Latin America,

internet usage rose nearly eight-fold between 1995 and 1997 with revenues estimated to be $167

million in 1998 and projected to be $8 billion by 2003.8 Africa is fully wired now that Somalia

recently added its first ISP; in South Africa, electronic commerce is expected to generate US

$1.1 billion in 1999.

Two important facts about e-commerce are often overlooked. First, the vast bulk of the

actual and to an even greater extent the expected growth in revenues from e-commerce comes

from business-to-business transactions. In 1998, the ratio of B-to-B over B-to-C was 5.5 to 1; but

by 2003 the ratio is expected to be 12 to 1. Second, in virtually all countries other than the

United States, electronic commerce is export oriented. In the US, the share of export sales in

total ecommerce revenues is only 10 percent, but in Canada it is 83 percent, in Latin America it

averages 79 percent, and in Asia/Pacific it is 38 percent.

Developing countries need to address a number of socioeconomic and regulatory barriers

before their electronic commerce and internet use matches that of the United States or Europe.

13 Travel & Tourism Intelligence (1998),“The Impact of Electronic Distribution on Travel Agents”, No. 2, p.34

20

While the socioeconomic challenges are difficult to surmount and will be slower to achieve, the

path to reducing regulatory barriers is clearer and the benefits quicker to observe. High Internet

access rates, low penetration of electronic means of payment (such as credit, debit, or Smart

cards), and cumbersome delivery systems are primary obstacles to the growth of electronic

commerce in developing countries.

One area that is most easily quantified and compared is internet monthly access fees. ITU

data show that these fees vary substantially across countries and that the share of the fees

accounted for by ISP charges versus accounted for by local telephone charges also varies

substantially. For example, in the US, the approximately $20 per month internet access charge is

all an ISP charge. In Korea, the $25 charge is about 1/3 ISP charge and 2/3 local call charges. In

Brazil, the $37 charge is nearly all a local ISP charge. In China, the $65 charge is about half ISP

charge and about half a local phone charge. More importantly, when adjusted by the level of per

capital GDP, the differences in charges is tremendous. For example, in the US and Australia fees

are about $25 per month, accounting for less than 2 percent of monthly GDP per capita. In

contrast, in Mexico, the fee at about $27 per month accounts for about 5 percent of monthly

income and in Mozambique, that $27 per month accounts for about 70 percent of monthly GDP

per capita.

Because the internet creates a new electronic businesses environment, “surfing” is a key

way for users to see what businesses are now doing, and what market niches remain to be

exploited. Consequently, large “entry” and on-going costs are a great disincentive to internet

usage and therefore to the development of e-commerce business both within a country and for

international trade. Competition, both for telephone access as well as among ISPs is a key area

where government policy can make a difference in access and uptake of the internet.

Electronic commerce and the internet integrate both services and goods sectors, across

domestic and international boundaries. Key synergies exist between telecommunications,

financial infrastructure, distribution and delivery, and governance. The internet and electronic

commerce both depend on and facilitate liberalization in these areas. The WTO process can help

prod domestic liberalization and open markets abroad. In addition, it can be a forum where

developing countries use their existing regional relationships to convey information to the

individual countries to raise knowledge levels and work with private sector partners. Electronic

commerce and the internet represent the opportunity to leap forward to the next stage of

economic development, where value is created not just by resource endowments or

manufacturing might, but also by knowledge, information, and the use of technology.

21

Chapter II: ANALITICAL EVOLUTION OF THE INSURANCE

MARKET IN REPUBLIC OF MOLDOVA

2.1. Analysis in dynamics of the national insurance sector in RM

In the economic system of the Republic of Moldova the most powerful is banking

segment. Although it cannot be compared with the performance of banking systems of European

countries and the U.S., however, for our country is the most advanced sector of the financial

market. Certain characteristics of the banking sector in Moldova, the crisis has not led to a taint

system and resisted those negative effects marked by the developed banking systems. However,

the particularity of the Moldovan banking system is that it is the main and almost the only source

of funding. Unlike developed countries where the main source of funding is the stock market.14

National Commission of Financial Market (NCFM) was established in accordance with

the Law nr.129-XVI of June 7, 2007 "On Amending and Completion of Law nr.192-XIV of

November 12, 1998 on the National Securities Commission, by merger of the National Securities

Commission with the State Inspection for Insurance and Non-state Pension Funds Supervision

and the State Supervisory Service of Savings and Loan Associations under the Ministry of

Finance of the Republic of Moldova. Powers of regulation and supervision of NCFM were

extended to non-banking financial market segments, including: securities market, insurance

market, microfinance sector, which till the time of merger were carried out by the state

authorities above, each having its activity history. 15

1. The first official documents on the capital market and on the state authority of

securities market regulation were dated on February 4, 1992 - Decree No13 of the President of

the Republic of Moldova “On Provisional Regulation on the Securities Market and Stock

Exchange in the Republic of Moldova” and on October 13, 1992 - Decree of the Government of

the Republic of Moldova nr.668 "On the Establishment of the Republican Commission for

Securities Market. In 1993, the Republican Commission was reorganized as the State

Commission for Securities Market under the Ministry of Finance of the Republic, by the Decree

of the Government of the Republic of Moldova and a year later, in accordance with the Decree

of the Government of the Republic of Moldova nr.529 of July 20, 1994 was restructured as state

organization with permanent status - the State Commission for Securities Market under the

Government of the Republic Moldova (SCSM).

14 Adriana Rodica NASTASE „Asigurãrile si criza financiarã”, Buletin AGIR nr.3/2011, July-September, pages 134-140

15 Official Monitor (2007), Law of Insurance, Official Monitor No. 407- XVI from 21.12.2006. No.47-49/213 from 06.04.2007

22

Since March 1995 the activity of the State Commission for Securities Market was carried

out as a separate structure with Executive Apparatus. Its competence was established by the Law

on Securities Market and Stock Exchanges and the Regulation of the Commission, approved by

the Government of the Republic of Moldova. The State Commission consisted of 11

Commissioners including the Chairman and his deputies, working as permanent servants and the

other members of the Commission represented the concerned economic bodies - State

Chancellery of the Government of the Republic Moldova, Ministry of Finance, Ministry of

Economy, Ministry of Privatization and State Property Administration and National Bank of

Moldova.

The year 1998 was a remarkable one in the history of the institution by the approval of the

Law nr.192-XIV of 12.11.1998 (in force from 04.03.1999) "On the National Securities

Commission", according to which was established the autonomous authority of the Public

Administration for regulation, supervision and control of the observance of legislation on

securities market and participants activity to it. The National Securities Commission becomes the

successor of the State Commission for Securities Market, is a legal person, and has a stamp with

the State Emblem and its name. Authority of the National Securities Commission is in force

throughout the Republic of Moldova. The National Securities Commission is a collegial body

composed from five members, including Chairman, Vice-chairman and three members. The

Board is composed from Chairman and Vice-chairman and three members. Appointed as

members of the Administrative Council could be persons having experience record in finance,

economy or banking of at least 10 (ten) years.

National Securities Commission stated as a State authority, empowered to regulate,

supervise and control the securities market and its participants, continuing to achieve its goals

and strategies through the development and improvement the legal, administrative and financial

framework. It has consolidated the efforts of the professional participants in the field and of the

state structures representatives for the development of a modern capital market, ensuring strict

control of observance of legislation.16

On June 7, 2007 the Parliament of the Republic of Moldova approved the Law nr.129-

XVI amending Law no. 192 - XIV of November 12, 1998 on the National Securities

Commission, according to which was established the National Commission of Financial Market.

Together with the National Securities Commission, in the composition of the National

Commission of Financial Market entered the staff of the Inspection for Insurance and Non-state

Pension Funds Supervision and the State Supervisory Service of Savings and Loan Associations

16 Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)

23

under the Ministry of Finance of the Republic of Moldova, which were reorganized by

absorption to the National Commission of Financial Market in July-August 2007.

2. Insurance Supervision Authority of the Republic of Moldova was established by

Government Decision no. 296 of 12.06.1991, being created the State Service for Insurance

Supervision under the Ministry of Finance. Subsequently, the Law no. 1508-XII of 15.06.1993

on Insurance and The Regulation, structure and staff number approved by the Government

Decision of the Republic of Moldova no.77 of 08.02.1996 has established the basic principles

and competences of the State Service for Insurance Supervision. As a result of approval by the

Parliament of the Republic of Moldova the Law no. 329 - XIV of 25.03.1999 on the non-state

pension funds, the State Service for Insurance Supervision became the State Inspection for

Insurance and Non-state Pension Funds Supervision which had the basic task the supervision of

insurance activity in the Republic of Moldova, ensuring protection of the lawful interests of

insurants and legislation observance in the insurance field by the market participants of insurance

services. The staff of the Inspectorate included 10 public servants, divided into 2 sections:

Control Section and Analysis and Evidence Section.

3. The State Supervisory Service of Savings and Loan Associations of the Citizens

worked under the Government Decision Nr.719 of 28.06.2004 "On Improving the Framework of

Supervision the Activities of Savings and Loan Associations of the Citizens", approved in order

to increase financial stability and strengthening microfinance system through savings and loan

associations of the citizens, not to allow excessive risks in the system, including to minimize the

risk of losses of savings of the citizens which are members of associations, correlate normative

acts in force with the current requirements on regulation and supervision of associations

activities to achieve the mentioned objectives and to comply with the provisions of Article 6 of

Law nr.1505-XIII of 18 February 1998 on savings and loan associations of the citizens. The staff

of State Supervisory Service of Savings and Loan Associations of the Citizens included 10

persons, divided into 2 sections: Control Section and Analysis and Evidence Section. (annex 2)

Accessible risk transfer mechanisms facilitate sustained growth by helping poor rural

households to escape the classic poverty trap that is caused by shock losses resulting in

difficulties with carrying on with production in the subsequent season.17

The interplay between the public sector and the private insurance industry, which forms

an important aspect of a functioning risk transfer scheme for natural hazards, does not work well

in Moldova. As a result, insurance depth is low and most damages resulting from natural hazards

17 UNDP (2009), p.5

24

have to be borne by individuals, especially the rural poor. There seem to be three remaining

plausible reasons for low insurance depth in Moldova:18

Low income;

Lack of public risk information;

Existence of public funds that also compensate victims.

Agriculture remains one of the most underinsured sectors in Moldova. The share of

agricultural insurance in the insurance market is extremely low, representing only 5.4% of the

total gross written premiums in 2008. Insurance clients are mainly formed of large-scale

Farmers. The current design of the Moldovan agricultural risk transfer scheme has the following

drawbacks:

The scheme is (or has the potential to become) expensive for the state due to

governmental premium subsidies and ex-post disaster relief;

The governmental ex-post disaster assistance is likely to provide poor incentives;

Agricultural insurance seems not to be affordable for poor farmers.

Business opportunities Moldova

The number of new opportunities to offer new products and services increases. For

example, there are new technologies for recycling, biogas production, and new techniques for

fertiliser production. Authorities should support and facilitate this new direction on the market

and create appropriate incentives for businesses to become sustainable and be promoters of

sustainability, in other words to become partners. The private sector, on the other hand, should

understand and accept regulations and practices that, while more costly for the private sector in

the short run, will ensure better adaptation in the long run.

Insured losses - Globally

Globally, insured and total property losses are rising faster than premiums, population, or

economic growth; inflation adjusted economic losses from catastrophic events rose by 8-fold

between the 1960s and 1990s and insured losses by 17-fold. Large catastrophic events cause less

damage in an average year than the aggregated impacts of relatively small events (a 40/60 ratio

globally).19

In the United States, averaged over the past 55 years, weather-related events have been

responsible for 93% of all catastrophe events, 83% of the economic damages of natural disasters,

and 87% of the insured losses. ... The observed upward trend in losses is consistent with what

would be expected under climate change and with demographic factors.

18 UNDP (2009), p.819 Worldbank (2007), in: UNDP (2009)

25

Vulnerabilities - Overview

The insurability of natural disasters and extreme weather events may be affected by

increases in the frequency, severity, or unpredictability of these events. Climate change presents

various challenges to insurability. These include technical and market-based risks:

Technical Risks

Shortening times between loss events, such as more hurricanes per season,

Changing absolute and relative variability of losses,

Changing structure of types of events,

Shifting spatial distribution of events,

Damages that increase exponentially or nonlinearly with weather intensity,

Widespread geographical simultaneity of losses (e.g. from tidal surges arising

from a broad die-off of protective coral reefs or disease outbreaks on multiple

continents),

Increased difficulty in anticipating "hot spots" (geographic and demographic) for

particular hazards,

More single events with multiple, correlated consequences. This was well

evidenced in the pan-European heat catastrophe of 2003. Immediate or delayed

impacts included extensive human morbidity and mortality, wildfire, massive crop

losses, and the curtailment of electric power plants due to the temperature or lack

of cooling water, and

More hybrid events with multiple consequences (e.g. El Nino-related rain, ice

storms, floods, mudslides, droughts, and wildfires).

Market-based Risks

Historically-based premiums that lag behind actual losses,

Failing to foresee and keep up with changing customer needs arising from the

consequences of climate change,

Unanticipated changes in patterns of claims, and associated difficulty in adjusting

pricing and reserve practices to maintain profitability,

Responses of insurance regulators,

Reputation risks falling on insurers who do not, in the eyes of consumers, do

enough to prevent losses arising from climate change, and

Stresses unrelated to weather but conspiring with climate change impacts to

amplify the net adverse impact. These include draw-downs of capital and surplus

26

due to earthquakes or terrorist attacks and increased competition from self-

insurance or other competing methods of risk-spreading.

Pressure on insurance affordability & availability under climate change

Extreme weather events have already precipitated contraction of insurance coverage in

some markets, and the process can be expected to continue if the losses from such events

increase in the future. Impacts vary, of course, depending on the specific circumstances, and can

be relatively minor (gradual price increases) to more significant. For the United States, the

following outlook has been presented for different types of issues:20

Flood - currently a mix of public/private insurance and risk sharing. Under climate

change, insurability problems may extend from the present personal and small

commercial lines into larger commercial lines.

Windstorm—a largely insured risk at present. There are already considerable

insurability problems and associated changes in terms and pricing, non-renewals,

market withdrawl, etc. This could increase dramatically under climate change,

resulting in shifting of losses to governments and consumers.

Agriculture and livestock—currently a public/private insurance partnership.

Climate change will stress this sector considerably, with potential for impacts due

to drought, flood, pests, or other events on a scale with the Great Dust Bowl of the

1930s.

Wildfire—currently largely privately insured. More retention of risk by purchasers

of insurance and more involvement by state governments is anticipated, while

insurers raise deductibles and reduce limits of liability and scope of coverage.

Moldova and moisture damage—largely commercially insured until the crisis

emerged a few years ago. Now, many states have exclusions.

Earth movement and coastal erosion—primarily insured by government, if at all.

With permafrost melt, subsidence of dry soils, sinkholes will become more

prevalent, as will mudslides and property losses from coastal erosion. Government

programs covering storm-surge-driven losses on eroded property could be

overwhelmed with losses under climate change, with the result of more retention

by property owners.

Health impacts—currently largely privately insured. An insurability crisis under

climate change is not anticipated. Impacts will manifest in the form of elevated

health insurance prices.

20 Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)

27

Vulnerabilities - Europe

It is estimated that losses from weather events are doubling globally every 12 years. Even

though the observed increase in losses is dominated by socio-economic factors (such as

population growth, increased number of habitations in vulnerable areas, increased wealth,

increased amount and value of vulnerable infrastructure), there is evidence that changing patterns

of natural disasters are also drivers. It is however not known how much of this increase in losses

can be attributed to anthropogenic climate change. After accounting for changes in population

and wealth, it has been shown that changes in extreme weather events may be responsible for a

growth in losses by about 2% a year since the 1970s.

In Europe, 64% of all loss events since 1980 are directly attributable to weather and

climate events (storms, floods and heat-waves) and 25% to wild fires, cold spells, landslides and

avalanches, which are also linked to weather and climate. 95% of the overall losses and 78% of

all deaths caused by disastrous events result from such weather and climate-related events. The

annual average number of these weather- and climate-related events in Europe increased during

the period 1998–2007 by about 65% compared with the 1980s.21

Swiss Re has estimated that in Europe the costs of a 100-year storm event could double

by the 2080s with climate change (to EUR 40 billion compared with EUR 20 billion today),

while average storm losses are estimated to increase by 16–68% over the same period (3).

Analyses of long-term records of flood losses indicate that societal and economic factors have

played an important role in the observed upward trends.

According to an estimate by the Reinsurance Association of America (RAA), 50% of

insured losses in the world within the last 40 years have been the consequence of natural

catastrophes in the 1990s. Insurance experts have warned that large regions of the world may be

recategorised as ineligible for insurance, because changes in weather caused by climate change

(such as heat waves and hurricanes) continue at an accelerating pace (4).

Climate change is expected to lead to an increase in compensable damage, which will

contribute to increased insurance premiums. This means that extreme events will result in an

increased level of risk in the insurance sector. Climate change may lead to increased costs and

maybe even the bankruptcy of insurance companies (5).

Adaptation strategies Moldova

The following suggestions have been made concerning the risk transfer mechanism (8):

Regarding property insurance

21 International Association of Insurance Supervisors (IAIS), October 2012, Global Insurance Market Report (GIMAR), 2012 Edition

28

any reform has to start with better risk zoning, risk mapping and making this

information as easily available to the public as possible;

the conditions of public ex-post compensation of damages need to be redesigned

so that they also encourage ex-ante insurance;

given the size of Moldova and the transaction cost of the implementation of a new

system, joining SECE CRIF might be worth considering.

Regarding the agricultural risk transfer mechanism

the accessibility of the system to small farmers needs to be improved;

given the considerable budgetary strain caused by the increasing sums being spent

on subsidising insurance premiums, premium-reducing instruments should be

considered;

e.g. Index-based insurance should be promoted.

The insurance sector in Moldova outlines an investment potential that can be exploited so

that the effect would be felt by the population, the public budget and the economy in general.

In countries with a tradition in the insurance field, there are used quantitative and

qualitative indicators for the development level assessment of the insurance industry analysis.

Some of these have been applied in this study to reflect the "potential" accumulated in the

insurance sector in Moldova.

The Moldavian insurance market remained on a positive trend last year, with a GWP

increase of 9.89% to MDL 1.2 billion (EUR 71.6 million), compared with MDL 1.09 billion

(EUR 70 million) in 2012, according to the official figures published by the National

Commission for Financial Markets of the Republic of Moldova (NCFM).

In the same period, the value of gross claims paid totaled MDL 432.45 million (EUR 25.86

million), up 0.45% over 2012 (430.51 million lei - 27.66 million euros).

According to the reported results, the MTPL and Green Card insurance segments generated

gross premiums worth MDL 485.24 million (EUR 29 million). These motor insurance types of

policies have generated about 47% of the market turnover.

The amount of the claims paid on MTPL insurance line amounted to MDL 85.6 million

(EUR 5.11 million), recording a decrease of 1% in comparison with January - December 2012 -

MDL 166.52 million (EUR 9.96 million). On the Green Card insurance class were paid claims of

MDL 71.17 million (EUR 4.25 million) compared to MDL 79.90 million (5.13 million euros) a

year earlier.

29

The largest insurer remains MOLDASIG (28.7 % market share), followed by ASITO

(15.9%), GRAWE CARAT Asigurari (10.9%), MOLDCARGO (10.2%) and DONARIS

GROUP (8.4%). The insurance concentration by total gross written premiums of the top 5

insurance companies decreased to 74.2%, compared with 76.7% at the end of December 2012.

On 30 December 2013 were 16 active insurance companies on the market.

“Penetration” in the economy is a synthetic indicator which shows the contribution of the

insurance sector in GDP creation and is calculated as the ratio between the amount of direct

gross premiums and GDP.

“Density” is expressed as the ratio of total direct gross premiums receivable by them and

the total population of that country, thus expressing the average premium per capita.

Table 2.1 The size of the insurance market of Moldova in quantitative parameters

2008 2009 2010 2011 2012 2013Gross written

premiums, mil. lei

724.2 837.2 816.5 914.7 1006.3 1088.1

GDP, mil lei 53429.5 62921.5 60429.8 71885.4 82847 87847Rate / growth

rate ofGDP,%

- 117.7 96.0 118.9 114.3 99.2

Population, mil.

resident

3581 3573 3267 3563 3559 3560

Penetration,%

1.36 1.33 1.35 1.27 1.22 1.24

Density, lei 202.2 234.3 249.9 256.7 282.7 305.7Source: developed by the authors based on data NCFM for 2008 - 2013

From the table we see that in Moldova the insurance share in GDP is quite insignificant.

This indicator shows a slight decrease in the last years but more importantly, the overall

insurance contribution to GDP is insignificant in Moldova.22 (annex 3)

This is worrying given the major role of the insurance industry in the sustainable

development of a modern economy. For comparison we mention that, according to OECD

statistics for 2011, the penetration of insurance in GDP in other countries is much higher. The

first place in this top is held by Luxembourg, a very small state which is not precluded from

having the highest insurance penetration in GDP, namely 31.57%, followed by Ireland with

20.16% and the UK with more than 12%. In the U.S., where the insurance industry is one of the

strongest in the world, the indicator is 11.42%.

22 Năstase, A. R. (2011), Asigurările şi criza financiară, Buletin AGIR nr.3/2011, (July-September 2011), pp.134-140

30

Figure 2.1 Insurance penetration degree in GDP

Source: Authors' calculations based on OECD data, 2011

Obviously Moldova remains far behind with a penetration of only 1.24%. Insurance

density is an indicator that reflects the costs incurred for insurance products per capita and shows

how the risks of citizens are managed effectively. In a common interpretation we can say that

every citizen in the Republic of Moldova is entitled to about 250 lei, or 20 USD in gross

premiums paid for the insurance, while in Luxembourg this figure reaches the value of 33

thousand USD, in the U.S. - 5000 USD, 3000 USD in Germany, and in Romania - 60 USD /

capita. The overall average for Europe in premiums per capita, according to the CEA (see figure

below) is 1879 euro in 2010 (or 2615 USD).23

The positive development of the insurance market in Moldova over the last years becomes

even more apparent through the constantly increasing volume of premiums collected. In 2013

was also reached the historical record in this regard by exceeding a billion lei since raising

premiums. Thus, the national insurance market was not significantly affected by the crises that

have occurred worldwide and has brought major discrepancies for the main indicators of activity.

Table 2.2 Insurance sector developments

2008 2009 2010 2011 2012 2013Gross written

premiums, mil. lei

742.2 837.2 816.5 914.7 1006.3 1088.1

Benefits & claims

235.3 273.8 361.2 322.7 348.4 430.5

23 Organization for Economic Co-operation and Development (2011), Insurance Statistics Yearbook 2011, Available: http://www.oecdilibrary. org/finance-and-investment/data/oecd-insurancestatistics-ins-data-en

31

paid, mil. lei

Net assets, mil. lei

364.9 656.4 812.7 1081.7 1192.4 1241.7

Capital, mil. lei

207.7 323.1 388.5 420.1 515.2 556.7

Source: developed by authors based on data NCFM

The evolution of the insurance sector in Moldova has major fluctuations during the

difficult years from a financial standpoint. A slight decrease in gross written premiums acquired

during 2009. However, the insurance sector in Moldova recorded dynamic growth rates over the

last years. In the context of implementation of reforms in the insurance sector the income from

received premiums insurance / reinsurance increased. However, there are opinions that the

difficult economic situation influenced the Moldovan insurance market, given that it is actively

connected to other areas such as construction, leasing or transporting. However, at the end of

2010 we had an optimistic result, concluding the insurance market with an increase of 12

percent, and over the past two years growth was evident.

MDL 320.76 million (EUR 19.2 million) was the volume of gross written premiums of

insurance brokers in Moldova last year, show the financial indicators published by the

Supervisory Authority. Compared to 2012, the mediation market increased over 10%.

At the same time, the brokerage market share in the insurance market reached 26.8% at the

end of December, the same as for 2012.

As for insurance companies, insurance brokers' portfolios are still dominated by motor

insurance 77.8%.

Steady growth of net assets shows that the insurance sector in Moldova is quite profitable,

because according to the balance sheets of insurance companies it was recorded an increase in

net assets due to higher net income of the reporting period and to the increased long-term assets.

This shows the profitability and safety of long-term insurance business based in the country.

Another indicator that can quantitatively assess the state of the insurance market is the

number of participants of the insurance market. In Moldova this indicator shows significant

fluctuations due to changes in the regulatory framework, in particular the requirements on

minimum capital and reserve requirements. Thus, if market-wide aggregates were not affected

by the recession, at the level of insurance companies, were large fluctuations.

Table 2.3 Insurance portfolio of insurance companies from the Republic of Moldova

during 2010-2012

Class ofInsurance

Indemnification and insurance claims on insurance classes2010 2011 2012

32

Mln lei Quota, % Mln lei Quota, % Mln lei Quota, %

I. GeneralInsurance,inclusively

860.90 94.12 940.80 93.49 1020.70 93.70

Casco 176.48 19.29 192.62 19.14 192.63 17.68MTPL 452.00 49.41 512.51 50.93 555.37 50.99Goods andhealth insurance

232.42 25.41 235.67 23.42 272.70 25.04

II. Life Insurance

53.82 5.88 65.52 6.51 68.57 6.30

Total 914.72 100 1006.32 100 1089.27 100Source: developed by the authors and based on the NCFM Report 2012

It is obvious that the most popular insurance is mandatory insurance especially MTPL

(Motor Third Party Liability) with a share of about 51% of total premiums. However, this type of

insurance has the largest share in most Moldovan companies. The smallest share is held by

security people that are voluntary and include life insurance, health or accident insurance.

From the aggregated structure of insurance portfolio for 2012 it is clear that 93.7% of

insurance policies are included under general insurance. This enormous rate is due to MTPL

insurance that is mandatory under the law and fall under the category of general insurance.

Figure 2.2 Aggregated structure for insurance portfolio in 2012

Source: developed by the authors based on data and NCFM

European statistics and insurance services divide the world into two categories: life

insurance and non-life insurance. Thus the CEA statistics indicates that in the developed

European states the insurance business is based mostly on life insurance. As mentioned above,

the average gross written premiums per capita in Europe is 1879 euro, of which 1147 euro (or

61%) is life insurance. In Moldova, only 6.3% of the total portfolio insurance lies with life

insurance.

33

The same limited request is also characteristic to health insurance in our country. This type

of policy has a share not exceeding 5% of the market of insurance services and therefore there is

a need to develop this segment. The need comes from discontent against mandatory health

insurance that does not provide opportunities for financial coverage for all types of medical

services.24

The life insurance field for Moldova is at an early stage not only because of the lack of a

culture of providing the population that does not know how to manage their risks. Another

reason would be that trust in the state as insurer of last resort still remained in the public

consciousness. Also nor the retirement system is reformed so that the state diversifies the risks in

providing pension or social security for some population groups. It monopolized the right to

manage completely the collected money without giving away some of its bonds, though often

there were failures. Another reason is that life insurance requires large investments and entails

major risks, thus companies do not engage easily in this sector, which is a strategic one.

Following the model of developed countries we can realize that life insurance will become

increasingly popular in our country, so this will be a very attractive sector for investment.

A few years ago, on the Moldavian banking market there were given highly favorable

terms for deposits. Banks needed liquidity that increased their loan portfolios, therefore raising

capital by paying interest rates on deposits in nearly 20% for MDL and 6-8% for foreign

currency. Back then bank deposits were the most advantageous way to invest money and to

secure an income in the future. In recent years the situation has changed on the banking market.

The interest rates have dropped significantly, being only of 9-10% for MDL and of 4-6% for

foreign currency. This shows that the interest of people to invest in bank deposits and thus

decreases the investment alternative becomes insurance, especially voluntary ones. Thus lately

insurance premiums of life insurance increase which is in itself an indicator of the stability of

long-term insurance companies, given that the minimum term for life insurance is for 10 years.

Therefore investors who will invest in insurance, especially life, will be provided through annual

premiums paid by policyholders during long periods of time. Obviously there are risks of

occurrence of the insured, there is a need to create reserves, to increase statutory capital, but it is

much smaller than the benefits.25

So, on the insurance market in Moldova there are major investment opportunities due to

the following factors: favorable conditions for a new or insurance intermediary insurance

24 National Commission for Financial Markets of the Republic of Moldova (2012), Annual Reports (2007-2012), Available: http://cnpf.md/md/rapa/

25 Official Monitor (2007), Law of Insurance, Official Monitor No. 407- XVI from 21.12.2006. No.47-49/213 from 06.04.2007

34

company; acceptable competitive environment, the positive dynamics of foreign investment on

national insurance market, legislative framework adjusted to European standards; development

of infrastructure, the use of an automated information system in the MTPL and the Green Card;

the improvement of strategies in terms of transparency, management of risk and structure of

provided facilities; restoring the trust of civil society in the insurance system.

The development of the insurance industry has a great future in the Republic of Moldova

and the interest of society towards this segment is becoming increasingly evident. But to reach

the maturity of the insurance market, we need many reforms, significant investments and

persistent competition in this area.

Profound and accelerated changes in the insurance market, due to the promoted reforms,

lead to the financial strengthening of the insurance institutions and to providing services in

accordance with the highest standards of quality and accessibility for the population.

Recently it was managed to adjust the legislative framework to the Community acquis and

international practices, was developed infrastructure operation and were offered insurance

products as the needs of society. The changes in the economic and financial environment have

led to a new approach aimed at transparency, consumer protection, financial education, and also

to the high professional standards in the insurance business. New regulations in the insurance

field confirm the qualitative evolution and growth in the insurance market positions and, of

course, encourage innovation and technology development in this field.

The factors that conditions the current situation of the population are low income, low

insurance culture in society, people learning to rely on state support in difficult situations, and

insufficient legal framework that would foster the development of quality insurance.

The experience of economic and financial crisis has shown that the economic models used

for risk reduction have not worked effectively.

Insurers need to manage risks and maintain an adequate level of resources to cope with

various risks and to quantify future financial position in a broad sense. For these reasons, our

main task is to create an area resistant to any future crisis.

2.2. Evolution and distribution of insurance products through

intermediaries

The insurance industry is a complex area but extremely necessary for a modern economy

and this sector is well prepared for the financial challenges because they do not contain systemic

risk. At the same time they offer different coverage possibilities for several financial risks,

commercial and social, but also accumulate a significant investment potential.

35

Over the years the number of insurance companies operating in the insurance market

decreased significantly (Figure 4). According to data provided by the NCFM, in Moldova there

are 20 currently working insurance companies and 66 insurance and reinsurance brokers.

Figure 2.3 Evolution of professional participants on the insurance market

Source: NCFM, annual reports for 2009 -2012

From Figure 4 it appears that by adopting new business conditions established by the Law

on Insurance, the number of insurance companies is held constant. Following the imposition of

new game rules the number of companies began to decrease, largely due to non-provision of a

capital increase.26

However, the new law allowed the establishment of new insurance and therefore the

insurance portfolio diversification. This has led to the necessity of intermediaries in the

insurance market. Thus, in 2009 the first insurance/reinsurance brokers appeared whose number

has increased dramatically over the last years, reaching 76, the number of insurance agents has

also increased from 722 recorded in 2009 to 1773 in 2012.

The aggregated structure of the insurance portfolio of companies in Moldova shows

predominance of mandatory insurance. Population appeal to insurance companies only where it

is required by law, and this would mean that there is potential for major development in the field

of voluntary insurance, especially life ones.

Analyzing the key indicators of the insurance market in Moldova, we find that it indicates

steady growth rates for the past 10 years. The legislative changes have helped to strengthen the

sector and to establish tough work criteria for participants which filtered unreliable companies.

There have also been established clear rules, thus increasing the confidence of foreign investors.

Another extremely important change to promote our image is political stability. After the tedious

parliamentary elections from 2009 and the political crisis due to the failure to elect the President, 26 European insurance and reisurance federation (CEA), (2011) ‘European Insurance in Figures’, Statistics No.

44, December 2011, pp. 20-21.

36

which resulted in a successful finale, the country has come to establish a certain European

vector. Thus, the investors across Europe have obtained the confidence that they can invest in

Moldova. All these factors contribute to the development of the insurance market's investment

potential.

On the other hand, there are sectors underdeveloped in the portfolio of local insurance

companies which means that there is an untapped potential in this segment. Considering that

only two of the 20 companies in the country provide services for life insurance, it would be a

very interesting area for investment because it provides long-term stability and therefore is a safe

investment.

2.3. Electronic commerce in international practices

The global economy of this decade has witnessed far-reaching impact of e-commerce

growth with intense and deep-seated effects on enterprises across the world. People today are

now able to do their shopping from the comfort of their homes, again with the advantage of

comparing various brands, products and services available throughout the world. The global e-

commerce sales have affected the traditional business styles, forcing most of the traditional brick

and mortar businesses to enter the global online marketplace.

The current market studies reveal that global e-commerce sales are growing by 20 percent

every year. Around one-third of the world population is turning towards the internet and around

a billion people every year are expected to shop online through e-commerce websites for

products such as clothing, electronics, books, fashion accessories and travel packages. The

global e-commerce forecast authorities show that the highest Internet users and e-commerce

growth in the world is recorded to be from North America, especially from the United States and

Canada. The other rapidly growing countries in terms of the global e-commerce market size

include Latin America, United Kingdom, France, Germany, Spain, Sweden, Russia, Poland,

Turkey, Japan, Saudi Arabia, India, Morocco and China.27

Local retailers and small businesses need not depend on a brick-based infrastructure for

sales and profits; developing a website can now help them reach global consumers, their

potential target market. The local retailers and small business enterprises no longer need to wait

for their potential consumers to visit their stores. If the current forecast of the global e-commerce

market size and growth is anything to go by, these businesses already have the opportunity to

draw consumers upfront anywhere across the world. They can now achieve their desired growth

by taking advantage of the impact of e-commerce in a highly effective manner.

27 Cutler, D., Zeckhauser, R. (2000), The Anatomy of Health Insurance., Handbook of Health Economics, edited by Joseph P. Newhouse and Anthony Culyer, New York: Elsevier.

37

Market size and trends

Internet sites are the most important digital channel for consumers to learn about

products.

Figure 2.4 Digital Channels of choice to learn about % of consumers saying

“important/extremely important”

Source: Capgemini, July 2012

38

Figure 2.5 Top eight criteria for global digital shoppers.

Source Finence News

Shopping comparison sites and coupons

72% of marketers have no plans to use daily deals sites.

Figure 2.6 Source: Social Media Examiner, April 2012

41% of US mobile users shop at retail stores that offer digital coupons for apparel.

39

Figure 2.7 Source EMarketer, Jan 2014

The effects of e-commerce and globalization are not short-termed; the changes are not

going to fade away in a few years, instead they are going to prevail and grow in the coming

decades. The infrastructure for e-commerce is going to reach even the smallest neighborhoods

and nations in the forthcoming years. In the near future, only those businesses will survive that

adapt to changes in the market and understand the need to embrace newer marketing methods to

reach their target audience.

According to eMarketer’s latest forecasts, worldwide business-to-consumer (B2C)

ecommerce sales will increase by 20.1% this year to reach $1.500 trillion. Growth will come

primarily from the rapidly expanding online and mobile user bases in emerging markets,

increases in mcommerce sales, advancing shipping and payment options, and the push into new

international markets by major brands.

40

Figure 2.8, B2C Ecommerce sales worldwide, 2013-2017

Source: eMarketer, Jan 2014

In 2014, for the first time, consumers in Asia-Pacific will spend more on ecommerce

purchases than those in North America, making it the largest regional ecommerce market in the

world. This year alone, B2C ecommerce sales are expected to reach $525.2 billion in the region,

compared with $482.6 billion in North America.

Figure 2.9, B2C Ecommerce Sales worldwide,by region 2012-2017

Source: eMarketer, Jan 2014

41

China will take in more than six of every 10 dollars spent on ecommerce in Asia-Pacific

this year and nearly three-quarters of regional spending by 2017. The country’s ecommerce

market is second only to the US, but this is not expected to last much longer. Beginning in 2016,

China will overtake the US in spending. Massive gains in China, as well as in India and

Indonesia, will push Asia-Pacific’s growth ahead. These countries, along with Argentina,

Mexico, Brazil, Russia, Italy and Canada, will drive ecommerce sales growth worldwide.

Ecommerce markets in other countries included in eMarketer’s forecast are nearing maturity. 28

The strength of sales in emerging markets is largely due to their large populations coming

online and buying there for the first time. Asia-Pacific will claim more than 46% of digital

buyers worldwide in 2014, though these users will only account for 16.9% of the region’s

population. Penetration will also be low in Central and Eastern Europe, Latin America, and the

Middle East and Africa. For now, North America and Western Europe are the only regions

where a majority of residents will make purchases via digital channels. eMarketer bases all of

our forecasts on a multipronged approach that focuses on both worldwide and local trends in the

economy, technology and population, along with company-, product-, country- and

demographic-specific trends, and trends in specific consumer behaviors. We analyze quantitative

and qualitative data from a variety of research firms, government agencies, media outlets and

company reports, weighting each piece of information based on methodology and soundness. In

addition, every element of each eMarketer forecast fits within the larger matrix of all our

forecasts, with the same assumptions and general framework used to project figures in a wide

variety of areas. Regular re-evaluation of each forecast means those assumptions and framework

are constantly updated to reflect new market developments and other trends.

28 http://www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575

42

Chapter III: INTERNET AND ELECTRONIC COMMERCE IN INSURANCE

3.1 New practices and methods in insurance business

The distribution of insurance products via the Internet made its appearance in the 1990s.

Today, most industry players use the Internet in one way or another as part of their distribution

process. These players, be they certified insurance intermediaries, firms or insurance companies

registered with regulators, are referred to globally as “providers” in this paper.

As part of its works, the ECC compiled an inventory of websites operated by providers.

This exercise revealed four main activities practiced on those websites relating to the distribution

of insurance:

providing information to consumers;

obtaining a quote;

concluding the insurance contract;

obtaining advice.

Most of the websites visited have an information section, which enables the provider to

give various information to consumers.

There one can find, among other things, a description of the products and services

offered: the main characteristics, advantages, drawbacks, risks, and the coverage and associated

exclusions. Information of an educational nature on the subject of insurance may also be

presented there. It is also in this section that we usually find the conditions governing the use of

the website and legal opinions concerning the relationship between the provider and the website

user.

Statements are made regarding security measures and the protection of personal

information. Finally, this section generally provides information about claim and complaint

procedures, as well as contact information for reaching one of the provider’s representatives.29

Some providers offer the possibility of obtaining a quote via their website. These include

those sites that merely allow consumers to initiate a request, and where a representative will

contact consumers to offer them a quote, as well as those where the process can be completed,

and the quote obtained, online. To that end, consumers generally have to complete several secure

forms, answering various questions regarding their identity, eligibility and rates. This service is

mainly offered in property and casualty insurance (“P&C”). For automobile insurance, for

example, consumers will be asked to indicate the model of their vehicles, how much they intend

to use it and whether they have been involved in a loss. The forms are said to be “interactive” as

29 Hammond, J.D. (1968), Essays in the theory of risk and onsurance, Scott, Foresman

43

the questions asked depend upon the answers given: the forms have an underlying “yes or no”

tree structure, the path of which is dictated by the answers given by the consumer.

Once all the questions have been answered, if the consumers prove to be eligible for the

desired product, a premium that reflects the risk that they represent is usually displayed on the

screen. At this point, various coverages are often proposed to consumers. This has the benefit,

not only of offering choices, but of visually informing consumers about the factors that cause the

premium to vary.

In the case of firms that present quotes via the Internet, it is at this step of the process that

they show the premiums of the various insurers with which they deal. Consumers thus have an

opportunity to compare the premiums, along with the insurers that offer them, and make their

choice.

For most providers, the Internet‐based distribution process ends with the quote.

Consumers are usually then invited to contact a representative by telephone to conclude the

contract. The provider’s representative will access the database containing the information

disclosed by the consumers, and will verbally conclude the contract with them.30

A small proportion of providers offer the possibility of concluding the insurance contract

online. In some of these cases, consumers validate a form that recapitulates the information they

have entered, and then electronically accept the quote that is presented to them. In so doing, they

indicate the date on which the new policy will come into force and provide information about

their old policy, if applicable. The new policy is then sent to the consumers, either electronically

or by mail, as they prefer. Once again, this practice is more widespread among providers offering

P&C insurance.31

Online insurance quotes and buying insurance online is no longer a novelty. Many

business insurers are online and, while buying insurance for a business on the internet is not as

prevalent as buying personal auto insurance online, growing numbers of small business owners

are going to online sources for their insurance. If one follows some guidelines when using online

quote sites to purchase insurance, business internet insurance sites can offer premium savings.

What is missing is the insurance agent or broker. Insurance professionals will tell you that

they offer significant value to the insured. They will contend that the absence of an insurance

professional will cost a business in the long run. Contrary to that argument is the claim that

online sites offer insurance for less and can offer more quotes from more sources. Let's look at

the website versus the insurance professional.30 Dănuleţiu, D., Dănuleţiu, A. (2006), Elemente de analiză a pieţei asigurărilor din România, Annales

Universitatis Apulensis, series Oeconomica, Alba Iulia, nr. 8/2006, vol. Management Marketing, pp. 90-95.31 Ibidem

44

If you choose the right insurance agent or broker, having a real human being with an

office and staff in your community is undoubtedly the best choice in the category of service.

Insurance professionals can:

Visit your place of business.

Review leases, sub-leases, mortgages, and other business documents do determine what

insurance is required for your business.

Understand state and local laws.

Fight for you if there are claims.

Suggest safe practices and claim avoidance.

Here the edge goes to the website. As auto insurers found out in the late 90's and early

00's, insurance clients are driven by lower premiums. Offerings of business insurance online

have not reached the same availability as car insurance. But, specialty business and professional

insurers that focus primarily on online sales without a local presence are growing. The reason:

price. Online purchases can be cheaper because:

There is no agent/broker commission.

Overhead for the insurer is lower.

Automatic payment or withdrawal is very efficient.

The insurer can sell direct or through alliances with professional organizations.

Agent and broker commissions can be sizable. Our Guide to personal insurance has a

good example of the cost of a commission on a life insurance policy. And, just as another

example, a directors and officers policy, depending on the company can have a 6-15%

commission for the selling agent or broker. In many cases, and for certain types of insurance and

depending on the size of the business, the owner will want a well-paid, commissioned

professional working for the business. However, the U.S. is driven by small businesses and a 10-

15% savings is significant.

Here the decision is split. Independent insurance agents and insurance brokers have

access to many companies and work on the business's behalf to find insurance policies tailored to

the business. Insurance agents are often captive agents of one company and their selection of

policies will be limited to what is offered by that company.

Insurance quote sites offer the ability to get many different quotes from the same entered

information without the expertise of the insurance professional. Websites offer more selection

than an agent. Insurance brokers and independent agents can offer the same selection with

greater service.

45

Try an experiment. Open a new tab and Google "business insurance online." I come up

with over 62 million hits. Names like "insure2you" or "bestquote" are mixed in with the online

presence of insurance giants like Allstate or Hartford. The point is, there are many quality online

sites for insurance, including the insurers' websites, but it is becoming increasingly harder to

figure out what sites are legitimate.

Insurance professionals offer greater safety, security and quality because:

Insurance agents and brokers are licensed by the states and regulated.

Insurance professionals must meet the guidelines of the insurer and are

accountable to the insurer.

Insurance professionals are insured.

Insurance brokers will review financial stability and the rating of the

insurer before offering a policy.

Insurance professionals have educational and accreditation standards.

Online quotes and agent finders on the large insurers' websites are safer than any fly-by-

night quote site. Of course, the insurer's site is only going to offer that insurer's product so the

benefit of online selection convenience is lost.

Online quotes and online comparisons make sense for our firm in terms of cost savings.

The website is an excellent tool and an excellent way to secure insurance direct from insurers for

small or clearly defined businesses.

The insurance professional is the better choice for larger businesses, businesses with

employees, vehicles, or specialized needs such as higher than average liability. The insurance

professional is the better choice for businesses that do not want to spend time comparing

premiums, deductibles, ratings, and a number of other comparison factors.32

Ultimately, neither is a clear winner. Used correctly, both the website and insurance

professional can be used by the business owner to secure the best trade off between cost and risk

management. Use the website as a shopping or educational tool to determine what is available

and to learn more about what your business needs. Then, consider seeing a local agent or broker

to intelligently discuss your insurance needs. Make an assessment of whether the online savings

is worth the loss of the agent or broker's value to your business.

3.2 Marketing in insurance trough internet

There is no one-size-fits-all solution in digital marketing. Every industry requires

customized tactics that will best aid in overcoming the challenges unique to their products and

32 Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)

46

services. In the insurance industry, issues such as rising rates and customer unrest can stand in

the way of company growth.

Internet marketing, like insurance sales, is based on relationships and trust. It works best

when tied to a lifecycle marketing program. Used correctly, online marketing channels,

especially social media, provide a tailor-made lead generation engine for the insurance industry.

Through selecting the right online avenues you can initiate new relationships, nurture those

relationships, build trust and grow relationships into pre-qualified leads for your sales team.33

Online insurance sales will double by 2011, and that the Web will play a major role in

most personal insurance purchases across auto, life, and health.

If last 10 years of online insurance sector has been analyzed, key findings include:

The web has become an increasingly important communication channel between sellers

and buyers of personal insurance.

Most consumers’ purchasing process is “Web Influenced”

Search engines like Google and Yahoo! are critical channels for insurers that cannot

afford massive consumer marketing campaigns to drive shoppers directly to their sites, and more

insurers are embracing search engine optimization to help capture these shoppers

Pure online sales are growing, but will still account for less than 15% of sales, even in

personal auto.

The fact can be described that the online ecosystem within which buyers and sellers have

a number of ways to reach one another: the interactions can be direct between the consumer and

the carrier; through online marketing driven by search engines; and through online agencies or

agents’ websites. Insurers need to manage and direct those interactions or risk losing shoppers’

attention to intermediaries that may direct prospects elsewhere.

33 Olivieri, A. and Pitacco, E. (2011) Introduction to insurance mathematics. Technical and Financial Features of Risk Transfer. Springer.

47

Figure 3.1, The online insurance ecosystem

Source Business News 13.40.2014

To demonstrate the varied landscape of online marketing and sales, this report provides

snapshots of web activities for top carriers, aggregators, and online agencies in three areas:

personal automobile, life, and individual health. Personal automobile includes: State Farm,

Allstate, Progressive, Geico, Nationwide. Life includes: AIG, MetLife, Northwestern Mutual,

Prudential, and New York Life. Individual health includes: UnitedHealth, WellPoint, Kaiser

Permanente, Aetna, and the Health Care Service Group. Other significant online players profiled

in the report include eHealthinsurance, Insweb, and Esurance.34

Run a Google search on “insurance sales leads,” and you will find endless lists to buy or

rent. However, list acquisition is never the best way to procure viable and pre-qualified leads for

sales. Those lists are often saturated, always pricey and usually contain dead, abandoned or non-

existent addresses as well as unsuspecting recipients. All these factors along with the CAN-

SPAM requirements and spamtraps can result in poor deliverability and possible legal issues for

your company.

1. Lead Strategy Program

Just follow five easy steps to a lead strategy program that produces pre-qualified leads for

your agency sales force and builds long lasting marketing relationships for you along the way.

Step 1: Demographics. Select online avenues that contain demographics matching

insurance product targets. Here’s a recommended list.

Facebook, Twitter, LinkedIn, YouTube, Foursquare:

34 Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)

48

Step 2: Incentive. Create an online/offline incentive that matches your target

demographic. Here are incentives that work well in the insurance industry for download or

subscriptions:

Life Event Email Subscriptions

White Papers

Webinars/Podcasts

Conferences

Planning Kits (such as Estate or Financial planning)

Online Calculators

Step 3: Opt-In Forms: Design the opt-in form so it only captures the main information

necessary to pre-qualify the lead and segment it for future marketing efforts. Keep the questions

to a minimum, more than five questions can result in uncompleted forms and page drop offs. It’s

best if the form is connected to your email campaign sending account so that the data captured

automatically downloads into specific channel lists in your email campaign management tool.

You’ll want to collect information that includes at the very least; email, first name, last

name and zip code. Your marketing objectives, product portfolio, sales life cycle and other

factors will determine additional questions you may want to add for best segmentation and

marketing customization.

Step 4: Online Implementation. Start with a just a couple of online channels first to test

your method. As you gain traction with one channel start testing a new channel. When

communicating your offer include:

Call to action

Offer benefit

Expiration date (if you are on a lead timeline)

Copy that matches target demographics

Offer style that matches channel style

Social Channel Sharing Options

Step 5: Welcome Email: Create a branded “Welcome Email” for your social media email

campaigns. This is the starting point of your relationships and the first step in nurturing your

leads. Creating the right relationship will payoff in a happy sales department, possible referrals

and most importantly new sales. Based on the information you collected on your opt-in form you

can now precisely target your audience, customize the email per recipient and segment your

messages. Welcome Email customization results in higher open and click-through rates. To

encourage trust and engage your audience with your Welcome Email:

49

Personalize: Customize email, include first name.

Gratitude: Thank opt-in for their interest.

Social channel: Reference social channel and offer/incentive and adding other company

social channel links.

Benefit: Include the benefit of the action and ongoing benefits.

Cross-reference: Offer other company resources of interest based on what incentive was

selected and/or demographics.

Privacy: State your privacy policy.

Subscription: Advise opt-in how to unsubscribe.

Referral: Add Social Sharing options to what was downloaded so that the recipient share

with their network. This will extend your reach.

2. Properties of Internet Marketing

The Internet can deliver sales-ready leads. Generally, online marketing “pulls” prospects

to you, rather than “pushing” your services out to them. If they are looking for your solution,

your sales cycle will naturally be shorter.

It allows you to spend time, not money. Almost all Internet marketing strategies are less

expensive than tradition marketing and advertising solutions. But they do often require more

time to implement.

Everything is measurable. You can track how many visitors come to your web site. You

can see how many people read your e-mail. You can keep data on how many people who came

to your landing page actually signed up. Internet marketing allows you to track everything,

which allows you to test different variables and settle on the approach that works best.

3. Internet Marketing Tactics

Search Engine Marketing (SEM)

Search Engine Marketing includes a host activities aimed at improving your web site’s

ranking on search engines like Google or Yahoo! At its most basic, SEM consists of two things:

Paying for search engine placement through pay-per-click ads and producing content that will

boost your placement in the natural search results. Getting on the first page for Google’s natural

search results can be very valuable and very difficult, depending on the keyword phrases you’re

targeting. To rise in the search results, you need to Search Engine Optimize (SEO) your web site

and produce content, such as press releases and articles, written with specific keywords in mind.

Your first step is developing a content marketing strategy.

E-mail Marketing

E-mail is considered by many to be the most effective online marketing tool because it is:

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Versatile – E-mail can be great touch point for both your existing customers and any

prospects you might have in your database. And it works for almost any message. Some

examples include e-Newsletters, birthday cards, product marketing pieces, sales letters, etc. ·

Immediate – No waiting for days for your mailers to hit peoples’ mailboxes. Responses

start coming as soon as you hit the ‘send’ button.

Inexpensive – No paying for printing and postage.

Measurable – You know if the intended recipient actually received your e-mail, whether

they opened it and whether they clicked any links in the e-mail.

Blogging

A blog is a type of web site, usually maintained by an individual, that provides news or

commentary on a particular subject in the form of brief entries that are displayed in reverse

chronological order. Anybody can have their own blog. All you need is expertise in a given area,

some time and some writing skill. As an insurance agent, you have the expertise, but if you don’t

have to time or skill, this may not be for you. Your blog needs to be updated regularly and must

be interesting and relevant to keep people coming back. You can promote your blog on the social

networking sites below.35

Social Media and Social Networking

You can’t really talk about Internet Marketing anymore without at least mentioning social

media and social networking. Basically, Social Networking communities are sites where you can

create your own profile and connect with other people. These can be great for connecting with

peers for advice, information sharing and business opportunities.

Two common representations of social networking are LinkedIn and Facebook, but there

are niche communities online for everyone and everything you can possibly imagine—including

insurance. Two of the more popular social networking sites for insurance agents are

InsuranceCampus.org and Advisor Nation.

Social Media sites vary greatly in their makeup, but basically they allow like-minded

people to share content on a particular subject in a forum where everyone can play the role of

both audience and author, meaning anyone can post content and comment on the content of

others. If you have a blog or a web site, social media sites offer another venue for people to

connect with your content.

If you’re interested in marketing your practice online, but most of this is unfamiliar to

you, it’s important to start slow. With the vast amount of information that is out there, it’s easy to

35 Cutler, D., Zeckhauser, R. (2000), The Anatomy of Health Insurance., Handbook of Health Economics, edited by Joseph P. Newhouse and Anthony Culyer, New York: Elsevier.

51

get overwhelmed. Pick one topic to start with and do some research (Search some of the

keywords in bold on Google to start the learning process). Just don’t try to learn it all at once.

The latest data available for the industry at this time shows that worldwide insurance

premiums totaled $4.33 trillion, global life insurance premiums were $2.52 trillion and all other

types of insurance totaled $1.81 trillion.

The revenue possibilities within the insurance industry are enormous, and as technology

continues to advance, digital doors are opening in terms of increasing company traffic and

visibility, along with improving education and awareness in the industry overall. Through online

marketing, you can optimize your Internet presence to ultimately increase ROI.

Below are the three main digital marketing techniques that will make the largest possible

impact for your brand when utilized together:

SEO: Search engine optimization allows you to get ahead of your competitor. When users

enter terms surrounding your insurance business, you want to be the first to show up in search

results. Keywords are crucial here, and you need to determine which are most important to you

and then optimize your site in accordance.

SMO: Social media optimization is your opportunity to liven up the insurance industry

and build your brand. Through sites such as Facebook and Twitter, you can participate in

conversations, share knowledge and target specific demographics. Other sites like LinkedIn

allow you to network and build credibility. On all social sites, you can connect by promoting

content, such as sharing tips to lower risk.

Paid Media: Advertising is likely one of the more common digital marketing techniques

in the insurance industry. These tactics includes display banners, PPC, paid social and

retargeting.

Few industries embraced the advent of the internet with the level of commitment as the

Insurance Industry. Online insurance exploded and is now a mainstay of any conversation that

involves insurance carriers. Whether you’re speaking of more net-centric brands like GEICO,

Esurance, Progressive, or more traditional companies that have embraced the online format such

as All State, State Farm and Nationwide, or even smaller regional companies, you would be hard

pressed to find a successful insurance company that does not have an online presence with an

easily accessible web site at this point. 36

36 Olivieri, A. and Pitacco, E. (2011) Introduction to insurance mathematics. Technical and Financial Features of Risk Transfer. Springer.

52

While most will focus on the large amount of auto insurance options offered through

online insurance carriers, these companies offer a wide range of products, each with its own

unique features, risks and rewards for both the company and the customer.

With policies covering home owners’, insurance, renters’ insurance, RV insurance,

motorcycle insurance, watercraft insurance, fire insurance, flood insurance, earthquake insurance

and tornado insurance all being offered online, the number of options available is truly

staggering.

Online insurance can vary from a fully integrated online experience, with all the required

documentation created through a web portal to simply providing quotes, which will generate a

lead to a local agency affiliated with that insurance company. Differing regulations covering

insurance can lead to these issues, as different jurisdictions require significantly different

documentation when obtaining insurance.

The Online Insurance reports offered in this category will assist you as you research

competitors, find new products or new suppliers, and discover new prospects. This unique

collection of market research will offer information on market share, demographics, market

trends, projections, sales and marketing strategies.

The global online insurance industry witnessed 5% expansion between 2007 and 2012,

according to research from IBISWorld. The industry is forecast to grow 9% in 2012 to generate

$17 billion, fuelled partly by the growing number of services online.

Though most consumers still like to deal with an insurance agent to complete their

insurance policies, most begin the process online. Actors in the online insurance industry include

independent agents and companies serving as an intermediary to liaise between insurers and

consumers by way of websites and online web portals. Intermediary bodies can charge insurance

carriers a commission, and may also charge fees for value-added services.37

Many consumers feeling the pinch of the economic recession looked for new ways to cut

down on spending. As the level of disposable income fell, individuals sought to spend less on

insurance. Similarly, declining profits led companies to do likewise. As home and car ownership

rates fell, consumers required less related insurance products. IBISWorld underlines the reaction

among industry players consisting of a reduction in premiums to attract customers. This lowering

of premiums limited commission, which constitutes online insurance brokers’ main source of

income.

37 Pielke Jr and Downton (2000); Mills (2005); Barredo (2007), in: EEA, JRC and WHO (2008)

53

The Insurance Regulatory and Development Authority (IRDA) in India issued guidelines

on the distance marketing of insurance products in April 2011, which governed all forms of non-

face-to-face distribution of insurance products, including telemarketing and Internet.38

The guidelines now permit insurance companies to issue policies sold through distance

marketing without having a physical application in their possession. For these policies, insurers

are required to append with the policy document a transcript of verbal communication or the

electronic record of the customer questions and the answers provided. However, most life

insurers still ask their online customers to print out the completed online application, sign it and

send it to them for processing.

IRDA has released guidelines for insurers for issuing electronic policies and for setting up

e-repositories for holding such policies in electronic form, steps that will facilitate the further

growth of the online distribution of insurance policies.

IRDA has recognized the important role that web aggregators can play in the proliferation

of Internet-based insurance sales and has recently released guidelines governing web

aggregation. To ensure that online customers get unbiased and factual information about

comparable insurance policies, IRDA has clarified that no existing insurance intermediary and/or

those parties that are in any way related to any of the insurers or the intermediaries may act as a

web aggregator. Moreover, web aggregators are not permitted to carry advertisements,

endorsements, rankings, ratings or sponsored content on their websites, or comment on any

insurers or their products. IRDA has also capped the remuneration for services provided to web

aggregators by insurers, removing the opportunity for bias in information contained on their

websites.

This has significantly affected web aggregators’ remuneration, and it remains to be seen

how this business adjusts to these regulations.

A trend has also emerged among larger insurance carriers of selling directly to

consumers. This has allowed them to circumvent online insurance industry operators, creating a

more competitive market place. Due to the more intense level of competition, the industry has

seen a decline in profitability. Profit margin does, nonetheless, remain higher among online

brokers than brick-and-mortar brokers. This is mainly due to the advantage of lower overhead

costs. Insurance carriers are expected to witness an increasing degree of competition over the

next five-year period, intensified by new entrants to the market.39

38 Ibidem39 European insurance and reisurance federation (CEA), (2011) ‘European Insurance in Figures’, Statistics No.

44, December 2011, pp. 20-21.

54

Insurance and risk management make up an immense global industry. According to a

survey conducted by a leading global insurance firm, Swiss Re, worldwide insurance premiums

totaled $4.61 trillion in 2012 (the latest data available), up from $4.59 trillion in 2011. This was

equal to about 6.5% of global GDP. Global life insurance premiums were $2.62 trillion during

2012, while all other types of insurance totaled $1.99 trillion.

In America alone, the insurance business employed about 2.4 million people in 2013.

Gross life insurance premiums in the U.S. totaled $755.5 billion during 2012, per the National

Association of Insurance Commissioners (NAIC), while property and casualty premiums totaled

$515.1 billion (up substantially from $445.0 billion the previous year.) A large number of

companies underwrite insurance in America, but the industry is dominated by a handful of major

players.

Health insurance premiums paid in the U.S. during 2012 totaled $546.7 billion (up from

$516.5 billion the previous year and only $411.1 billion in 2007), according to the NAIC.

In emerging nations, where the fastest growth is to be found, total insurance premiums in

2012 were about $723 billion, up 6.8% over the previous year.

Premiums on a per capita basis remain very low in much of the world, pointing to

excellent long-term opportunity for expansion of sales of insurance products of all types,

including annuities. It would be hard to overstate the importance of emerging nations, especially

China, India, Brazil and Indonesia, to the future growth of the insurance industry. Total

premiums in South and East Asia (including China) were only $369 billion in 2012. Much of the

world is still clearly a fertile field for expansion of companies that are willing and able to invest

time and money in emerging markets. The insurance markets in these areas will be boosted by a

combination of rising household incomes; increasing education and financial sophistication

among consumers; extending life spans; and a tradition of families relying on personal savings

and initiative rather than government social programs to provide for retirement funds and health

care.

55

Figure 3.2

Source Business News 2014

Massive amounts of insurance company earnings come from the sale of annuities and

other retirement and investment products, along with profits (or losses) that insurance

underwriters earn on the investment of their own assets and reserves. A recovery in stock and

bond markets that began in the spring of 2009 and ran through late 2013 provided a boost to the

investment earnings of the insurance industry. Insurance firms have been raising rates over the

mid-term, and they will point to major losses from events such as recent earthquakes, hurricane

Sandy in the U.S. and the nuclear disaster in Japan as justification.

In America, insurance is unique in the financial services field because, unlike banking and

investments which are regulated largely (although not entirely) by federal agencies, insurance is

regulated primarily at the state level. This means that insurance firms must deal with up to 50

different sets of state regulations and 50 different state regulatory agencies. At the same time,

they must develop dozens of different premium rate structures that appropriately reflect the costs

of meeting local risks and fulfilling state requirements. As a result, few insurance underwriters

offer all of their insurance products in all 50 states; many do business only in a limited number

of states. 40It is a regulatory and administrative nightmare that limits consumer choices and

drives up overall insurance costs.

Insurance underwriting does not earn consistent levels of profits. Property and casualty

insurance companies sometimes face a year of losses, rather than profits, due to natural disasters

such as hurricanes, floods or an overly active fire season. Occasionally, insurance underwriters

go broke, and firms that rate the financial stability of insurance underwriters always list more

40 Elinga, M., Schmeiserb, H. (2010), Insurance and the Credit Crisis: Impact and Ten Consequences for Risk Management and Supervision. The Geneva Papers 35, pp. 9–34.

56

than a few that are not financially sound. For example, Yamato Life Insurance Company, a

leading Japanese firm that had been in business for nearly 100 years, took bankruptcy in October

2008.

During 2005, Hurricanes Katrina and Rita in the U.S. cost insurance underwriters vast

amounts (insured and non-insured damages totaled about $58 billion) and created significant

controversy over flood insurance in general. Many changes resulted, and insurance underwriters

felt compelled to boost rates for many types of insurance, especially in Gulf Coast markets. More

recently, some of each hurricane season’s risk has been sold by primary underwriters to hedge

funds and reinsurers who buy portions of large, high-risk insurance policies. This enables

property & casualty underwriters to continue to earn reasonable profits while laying-off a

significant part of potential losses if there is a devastating hurricane. The 2012 hurricane Sandy

in the New York area may have economic impacts that total more than $50 billion, but a vast

portion of that cost was uninsured.41

The insurance industry includes a wide variety of sectors and services. The most obvious

are insurance underwriters that cover the risks and issue the policies, along with the agencies that

sell insurance. However, there are also large numbers of consulting firms, claims processing

firms, data collection firms and myriad other specialized fields serving the industry.

In addition, there are insurance brokers, which have traditionally posted enviable profits.

Insurance brokers represent the interests of corporate clients while finding their customers the

best coverage at the best rates.

Recent regulatory changes have heightened competition within the insurance industry—

an area in which competition has always been fierce. Massive mergers and acquisitions have

resulted, creating financial services mega-firms, some of which offer a broad range of services

and products to their customers, from checking accounts to investment products to life insurance.

In some cases, this strategy was a failure, most notably in Citigroup’s attempt to put together a

financial empire by adding a major investment firm (Smith Barney) and a leading insurance

company (Travelers) to its existing banking organization.

Elsewhere, banks such as Wells Fargo are doing reasonably well in the sale of insurance

products, particularly annuities and life insurance. Investment companies like Merrill Lynch

(now part of Bank of America) have been eager to sell insurance to their customers as well. At

one time, bank holding companies were aggressively acquiring insurance agencies.

41http://www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575

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Competition will only become more intense. While there are tens of thousands of small

insurance firms worldwide, the industry tends to be concentrated in a few hundred major

companies, many of which enjoy brands that are household names. A handful of these top firms

operate on a truly global scale.

In the world’s leading economies, regulators are in the process of forcing vast changes in

the regulation and oversight of financial services firms of all types. The focus is on making risks

held by such firms more transparent, and maintaining sufficient levels of capital to cover

potential losses. The insurance industry is going through significant scrutiny and oversight as a

result.

In the U.S. a sweeping reform bill, the Dodd-Frank Wall Street Reform and Consumer

Protection Act, was signed by President Obama in July 2010 after European finance ministers

approved similar regulations a few months earlier. Most of the 2,300-page reform act does not

apply to the insurance industry. For better or worse, regulation of insurance remains largely with

the 50 states. However, one section of the act created a new Federal Insurance Office (FIO),

described as a non-regulatory, informational office. The FIO’s role includes monitoring the

American insurance industry, along with gathering data from the various state-level insurance

regulators. It will advise Congress and various federal agencies on insurance matters. Also, the

act streamlines the reinsurance and surplus lines sector. A key provision makes the home state of

an insured party the sole regulatory authority in a surplus lines transaction. The FIO will also

represent America, when needed, in dealings with the International Association of Insurance

Supervisors.

In March 2010, President Obama signed the Patient Protection and Affordable Care Act.

Designed to strengthen insurance company regulation and provide access to medical coverage

for uninsured Americans, the act was hotly contested in both houses of Congress.42

The act calls for significant changes in the near term to be followed by even more

comprehensive changes by 2014 or beyond. Provisions that took effect within the first six

months of signing included coverage for adult children up to age 26 on their parents’ policies;

making it unlawful for insurers to place lifetime caps on payouts or deny coverage should a

policy holder become ill; and new policies being required to pay the full cost of selected

preventive care and exempt that care from deductibles. Effective in 2010, small businesses with

42 European insurance and reisurance federation (CEA), (2011) ‘European Insurance in Figures’, Statistics No. 44, December 2011, pp. 20-21.

58

fewer than 25 employees and average annual wages of less than $50,000 became eligible for tax

credits to cover a portion of staff insurance premiums.43

Online health care insurance “exchanges” began enabling consumers to shop for health

coverage on a state-by-state basis as of October 1, 2013, with the insurance sold to take effect

beginning January 1, 2014. However, many aspects of regulations covering the exchanges have

been pushed back to 2014 or beyond, as the plan was largely running behind schedule.

Beginning with income earned in 2013, a 3.8% unearned income tax will be levied on

individuals earning more than $200,000 per year and families earning more than $250,000 per

year to fund the programs in the act. Employers with more than 50 employees that do not offer

health benefits will begin paying a $2,000 fine per full time staff member if any of the workers

receives a tax credit to buy coverage. This fine was originally scheduled to cover 2014, but in

mid-2013 the Obama Administration delayed it until 2015. Businesses with more than 200

employees will be required to enroll all staff automatically in health insurance plans. Also in

2014, the government will begin fining citizens who choose not to carry health insurance. The

fine will start at $95 per year or 1% of annual income (whichever is greater), and rise to $695 per

year or 2.5% of income by 2016.

Initially, health care reform may provide positive growth to the earnings of health

insurance providers. The problem for the industry is that Congress will undoubtedly attempt to

reduce costs and profits throughout the health industry. Insurance providers may eventually

suffer, or be forced into consolidation in order to streamline operations and deal with lower

profit margins. On the other hand, insurance providers may find that they have to innovate and

evolve by offering supplemental policies—that is, policies that provide enhanced coverage above

and beyond basic coverage mandated by Congress. Supplemental insurance is typically a much

higher profit margin business.

The result could easily turn into a profit squeeze for both insurers and providers. Costs for

the government could rise so quickly and so high that it could even impose profit limits. For

example, both Massachusetts and Tennessee have been forced to backtrack substantially on their

relatively recent statewide health plans because costs ramped up much higher and much faster

than they ever thought possible. It is reasonable to assume that pain from a scenario like this

would be passed along to insurers.

43 http://www.emarketer.com/Article/Global-B2C-Ecommerce-Sales-Hit-15-Trillion-This-Year-Driven-by-Growth-Emerging-Markets/1010575

59

For agents with a small marketing budget, the Internet is a virtual playground of relatively

inexpensive (or downright free) opportunities to raise awareness about your services and build

your brand.

Now, before you say this doesn’t apply to you because you work with seniors and they

don’t go online, check out the results of a Pew Research study that show seniors may not be as

apprehensive toward the Internet as you might think.

According to this study, nearly 50% of those between the ages of 65 and 75 use the

Internet. Nearly 95 percent have sent or received e-mail. So even if you work primarily in the

senior market, ignoring the Internet could be a mistake

In a 2008 MarketingProfs survey measuring marketers’ reactions to the economic

downturn, 62 percent of respondents said they plan to increase their online marketing budget in

2009. That is in conjunction with 83 percent saying they plan to cut spending for traditional

vehicles (print/television ads, direct mail, etc.).

Four Reasons Professional Marketers Increasingly Turn to the Internet:

1. The Internet can deliver sales-ready leads. Generally, online marketing “pulls”

prospects to you, rather than “pushing” your services out to them. If they are looking for your

solution, your sales cycle will naturally be shorter.

2. It allows you to spend time, not money. Almost all Internet marketing strategies are

less expensive than tradition marketing and advertising solutions. But they do often require more

time to implement.

3. Everything is measurable. You can track how many visitors come to your web site.

You can see how many people read your e-mail. You can keep data on how many people who

came to your landing page actually signed up. Internet marketing allows you to track everything,

which allows you to test different variables and settle on the approach that works best.

4. Everybody has a voice. A single blogger working out of his basement can have a larger

audience than a major newspaper with hundreds of employees.

3.3 Online systems of insurance - a new trend in business

For many years brokers have dominated the SME commercial insurance market,

traditionally conducting business face-to-face or over the phone.

According to the latest research from DVL Smith and Datamonitor though, this single

channel approach no longer resonates with the the way customers want to buy. The results from

both surveys were very similar.

Insurance software for brokers must support multi-channel distribution

60

In the DVL Smith survey, SME’s were asked to identify the channels they had used to

purchase or renew their commercial insurance over the last 12 months. The results demonstrate

that SME’s are using a variety of channels (see chart below).

It also shows clearly the emergence of the online channel, with 25% of SMEs claiming to

use it when buying or renewing their business insurance. Furthermore, 45% of SMEs claim they

will be purchasing some or all of their commercial insurance online in the next 12 months – an

80% increase from the 25% who do so currently.

At the same time, according to Datamonitor, 49% of SME’s are more comfortable

arranging their insurance on the phone.

Figure 3.3, Top 7 purchasing channels

Source: BBC Finance News

When looking more closely at the 75% of SME’s not buying online, another picture

emerges.

There is in fact a group within this, constituting 23% of the SME market, who are

researching online prior to making a purchase offline (by phone or face-to-face). The

Datamonitor study claims that 29% of all SME’s start their business insurance purchase journey

online. Whilst the final transaction may be taking place offline, the online channel is going to be

influencing the decision.

When you combine the two groups of ‘online customers’, we see that almost 50% of

SME’s are shifting away from using the more traditional channels. In a market that is becoming

increasingly competitive, can brokers really afford to ignore this sizable segment of ‘online

customers’?

61

Today’s reality is that brokers must have an appropriate online presence to attract and

satisfy the needs of almost half of the SME market. In addition, the facility to quote, buy and

self-serve business insurance will address the specific requirements of almost a quarter of the

market today.

The role of a broker remains important, and the emergence of the online channel does not

signify the demise of the broker at all. SME’s are less educated about the more complex

commercial insurance market, and thus less able to choose and buy their own insurance.

This will not change overnight, and for many customers it will never change. Indeed,

almost 30 years after the launch of Direct Line, 30% of the Personal Lines market is still

commanded by brokers.

The confusion that most SME’s feel about their business insurance will persist, and many

businesses are a long way from being willing, or able, to choose their own insurance. It is

therefore no surprise that the Datamonitor research states that 67.5% of SMEs consider brokers

to be valued advisors.

Critically, SME’s are no longer using one channel and one channel only, so brokers need

to realise that a single channel solution is no longer appropriate for today’s, or indeed

tomorrow’s customer. Brokers that want to succeed in this market will need to embrace

insurance systems that support multi-channel distribution, and use it to improve how they help

SME’s in their decisions and purchases.44

Today’s insurance systems need to support brokers online and offline

There is, and will continue to be, clear demand for more and better online services, but

certain customers are still looking for more traditional forms of interaction via the phone or face-

to-face.

It is quite likely that the proportion of SME’s looking to buy their business insurance this

way will reduce as online propositions improve. However, most research concludes that there is

a limit to how far the market will shift, as many businesses will still demand personal contact

during the insurance buying process.

Brokers need to consider how they can seamlessly integrate their online and offline

channels for customers seeking the benefits of both, ensuring they deliver a consistent message

and experience across all channels.

44 Fitzpatrick, S. M. (2004), Fear is the Key: A Behavioral Guide to Underwriting Cycles. Connecticut Insurance Law Journal, Vol. 10, No. 2, pp. 255-275.

62

E-Insurance System is an integrated insurance system which links up all the channels

within the insurance industry. It is a revolutionized insurance solution that can facilitate online

processing and services to the insurance partners, agents and customers through the Internet.45

It will become a major breakthrough in having mutual communications between the

insurance company and all parties involved in the field. The successful implementation of this

system can significantly improve the efficiency of the business operational processes. This will

eventually help the company to gain and maintain leadership as well as business revenue in the

insurance industry.

Figure 3.4

Source Insurance.Link Conceptual Diagram

The above diagram shows the conceptual workflow between an insurance company head

office, branches, business partners, government agencies and customers. Insurance.Link acts as

the gateway for all the operational processes between insurance organization head office,

branches, agents and the customers.46

E-Insurance System Version 1.0 is released with the concentration on the marketing

chain that provides online system for the company and its agents to market, service and process

the customer requirements effectively with cost-efficiency. It covers 2 major application

systems:

E-Insurance application

The E-Insurance application system can currently support the motor cover notes

processing system. The latest feature facilitates the issuance of motor cover notes and policies

45 International Association of Insurance Supervisors (IAIS), October 2012, Global Insurance Market Report (GIMAR), 2012 Edition

46 Hammond, J.D. (1968), Essays in the theory of risk and onsurance, Scott, Foresman

63

control via online Intranet/Internet. Among the operations integrated within the latest release are

agents management system, premium computation, issuance of cover notes by the agents,

displaying of cover notes for printing and making enquiries and management reports. The idea of

having e-CoverNotes will be achieved using this system.

Portal System application

The idea of Portal System is to allow the insurance company to market the

insurance products directly via the Internet. The Portal System is supported by a dynamic back-

end administrative system called the WEBOFFICE. The WEBOFFICE system allows the web

administrator and marketing executive to administer and manage the Internet portal site. Besides

the capability of providing online features like Online Quote, Online Payment, e-Calculator, e-

News, e-Survey and e-Alert, the Portal System can also generate micro-websites for all its agents

to further market the company products. This micro-website is powered by the WEBOFFICE

engine to auto create and maintain the agents' websites. The agents are also given login to

administer their own websites.

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CONCLUSION

The general insurance actuary needs to know the essentials of decision and game theory

to compete in the market of general insurance. An understanding of probability and statistical

distributions is necessary to absorb and evaluate risk and ruin when balancing claims, reserves

and premiums. In introducing and developing new products, credibility theory and Bayesian

statistics play a role in evaluating sample and collateral information. Markov chains are

important in predicting the success of rating methods, including NCD systems. Generalized

Linear models are essential tools in finding risk factors for premiums calculations. Time series

methods are used in various ways to predict trends, and simulation methods are crucial to

understanding the many models considered for anything from new products to revisions in rating

schemes. Is it no wonder that the general insurance actuary must be a practicing statistician!

The financial market of the Republic of Moldova has been characterized by a high degree

of uncertainty during the last years. The political instability had its consequences causing

disturbances, especially on the bank market. At the same time, the global financial crisis has had

a direct impact on the national financial market as well, reducing thus the investment potential in

the bank and non-bank financial sector, especially of the foreign investors. Notwithstanding the

insurance market of the Republic of Moldova has registered a growth during this period. The

paper presents an analysis of the insurance market in terms of its investment potential and tries to

explain the behavior of the insurance products consumers in the conditions of the actual financial

and economic crisis.

Efficient insurance markets are an essential basis for the transition countries in Central

and Eastern Europe to achieve integration into the global economy and sustainable, strong

economic growth. Compared to its importance in world countries, the insurance industry is under

developed in central and eastern Europe. The proportion of income spent on non-life insurance in

these countries is 1.7% or 55% of Western levels, whereas life business expenditure is only

equivalent to 15% western levels at less than 1% of income on average. In the CIS states and

most of the southeastern European countries, in particular, development of the insurance industry

is still at a very primitive stage.

Hand-in-hand with the implementation of e-commerce shall inevitably come tougher

legislation in relation to regulation. One possible scenario to this might be that companies in low

regulated environments would have a competitive advantage over those more strongly regulated

competitors. However marketing considerations would then require that each company display

the badge of the regulator governing its activities. At that point, regulators would effectively be

in competition with each other, which could effectively lead to the privatisation of regulation.

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Security and privacy are not as weak as some believe but is a problem due to the accessibility of

the Internet from virtually anywhere. Having said that there are solutions to such hindrances,

such as data encryption, firewalls and virus protection tools. Combined with a consistent and

regular review of security policies these can be extremely effective in dealing with the problem.

1. As the information highway becomes more extensive and efficient more links between

the supply chains will be seen. The business-to-business sector in particular shall reap

the benefits of the Internet, as it continues to expand.

2. Also, as the Internet continues to become incorporated into insurance companies

activities five possible models may become apparent which are the intermediary

marketplace model, the work site marketing model, the eyeball attractor model and the

transaction processor model. As the market incorporates e-commerce more effectively,

these models should evolve in line with it by being enhanced and refined.

3. Generally within the insurance industry, there shall be less of a distinction between

short and long term insurance products and product design and the pricing of such

products will dramatically adapt to come in line with Internet selling methods. This

however may affect the long term financial stability of the insurance company with

insurance companies having to lower their profit margins to compete on-line and the

dynamic nature of e-commerce having valuation, solvency and appraisal implications,

as well as affecting the actuarial control cycle.

A key source of competitive advantage has to emerge from regarding e-security as a

serious issue. Historically networks have often been the targets of attack, but with the advent of

e-commerce, this risk has been more threatening, as there is that much more to gain from

penetrating a network and obtaining sensitive information. What is paramount is to remain

updated with new security measures constantly as it is unlikely that the risks will be able to be

completely eradicated.

As e-commerce revolutionises business of insurance a number of new research topics in

extension of this thesis emerge. Such topics may include exploration of the strategic drivers for

insurance-based e-commerce,“online modelling of consumer behaviour in interactive

environments and design of interactive customer decision making tools”.

Indeed eventually, some form of “life-table” could be researched into and constructed for

those using on-line facilities. Inevitably, with the introduction of new technology, such as “m-

commerce” the nature of e-commerce will continue to change and open up new avenues for

generating business. Only the technologically most up-to date shall maximise their business in

this dynamic market.

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