1.CHAPTER I: General Characteristics of Insurance Since early years people have been concerned on protecting their possessions, their health and of course their life. The oldest forms of insurance were funeral insurance and the grants. Both first appeared in the Mediterranean area, in Ancient Rome and Ancient Greece and were related with religious group. In the Middle Ages the need for security was meet by the guilds which provided mutual assistance to their members in case of death, illness, capture by pirates, the burning of one‟s house etc. Although the risk transfer element is present, the help offered by the guild members was only an organized system of charity and not a guarantee of aid or an indemnity. Towards by the end of the 17th century, when London‟s growing importance as a trading center also led to the emergence of a real demand for insurance (i.e. maritime insurance). In late 1680, Edward Lloyd opened a coffee shop that after a little while it became the most popular among local vessel owners, merchants and vessel captains as well as an important source of information in the field. This was the meeting place for parties wishing to insure ships and those willing to underwrite. Today, Lloyd's of London is, structurally, the market leader in maritime insurance and other types specialized, but the activity is quite different from the most common insurance segment. Insurance, as it is perceived today, has appeared as a consequence of the Great Fire of London in 1666, when 13,200 homes were destroyed. Following this disaster, Nicholas Barbon opened an office to insure buildings. In 1680, the Englishman founded the first fire insurance company in England called „The Fire Office‟. In the United States, the first insurance company started its activity also through fire insurance, located in Charles Town (the city Charleston of today, South Carolina), in 1732. Benjamin Franklin helped to popularize and standardize the practice of insurance, especially for fire insurance. In 1752, he founded the Philadelphia Contribution ship for the Insurance of Houses from Loss by Fire, the first company that collected contributions for fire prevention.1 1 Văcărel, I., Bercea, F., Asigurări şi reasigurări, Ed. Expert, Bucureşti, 2004 1 The existence of different risks determined people to discover and apply various means of protection against potential damage generators that were exposed their activities or themselves. These methods are based on prevention, assistance and provision. Prevention represents the best means of protection, but is not always possible, especially if the risks are generated by forces of nature unleashed. Assistance is an action seeking the compensation of damages. It is uncertain and not always sufficient, unable to repair the damage, only partially and temporarily. Provision involves the anticipated accumulation of resources for future needs. The best and most effective form of provision has proved to be the insurance. 1.1. The Need of Insurance in a Society In the context of the market economy, insurance is one branch of activity, a sector of services, with multiple valences. The development of the insurance industry has complex economic connotations, involving not only the insured, but the whole society. The extent of risks of all kinds, affects a growing number of individuals or legal persons, demands as strictly necessary to increase the business of insurance in the insurance industry. The weight of certain phenomena or events may cause material losses, interfering with economic activity, to endanger the life or physical integrity of people. So, human are subject to multiple and varied threats caused by natural forces, the use of technology, economical, or social factors. Hazards and risks to which human beings are subject are generating possible risks and, therefore, they must know to protect against the effects and to act contrary to them. Therefore every economic activity is subject to the occurrence of a possible risk element.1 The most important social and economic benefits that insurance brings are: indemnification of loss, less worry and fear, source of investment fund, loss prevention, enhancement of credit. In the case of the indemnification of loss it contributes significantly to both individuals and 1 Bistriceanu, Gh. D., Asigurări şi Reasigurări, Ed. Universitară, Bucureşti, 2006 2 business stability and therefore is one of the most important social and economic benefit of insurance. Also in the case of worry and fear are considerably reduced after a loss occurs, because the insured persons know they have an insurance that will pay for the loss.1 The most important feature of the insurance as a source of investments funds is that usually the funds are invested in order to increase the society‟s stock of capital goods, and promote economic growth and full employment. The insurance companies are actively involved in different loss-prevention programs, therefore loss-prevention activities reduce both direct and indirect or consequential, losses. The society benefits, since both types of losses are reduced. The final benefit is that the insurance enhances a person‟s credit, by making a borrower a better credit risk because it guarantees the value of the borrower‟s collateral or it gives greater assurance that the loan will be repaid. Therefore prevention appears as the best mean of protection, if it allows the suppression of risks. In reality it appeared that rarely has a radical effect, especially when risks are caused by forces of nature. 1.2. The Importance of Insurance as a Method of Handling Risk Over the time, the economic agents have sought to discover and apply various means of protection against risks generating possible damages that exposed their activities of production and trading, and persons exercising such activities. Nowadays the number of possible risks has considerable increased due to continuous improvement of equipment and technology, creation of urban areas, increasing transportation and other factors related to the evolution of the society. Insurance is based on the principle of reciprocity, according to which each insured contributes with the insurance premiums to the creation of the insurance fund that supports the value of the insured damages. So, in return for relatively little money, the insured will be guaranteed the protection against the potential risks, and the insurer has the role to manage the fund.2 Even though there is no single definition of insurance, it is a topic that can be defined and analyzed from different viewpoints of several disciplines, such as law, economic, actuarial, 1 2 Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003 Badea, Gh. D., Manualul agentului de asigurare. Ed. Economică, Bucureşti, 2008 3 science, risk theory and sociology. The common elements of the insurance plan were defined by the Commission on Insurance Terminology of the American Risk and Insurance Association as it follows: „Insurance is the pooling of fortuitous losses by transfer of such risks to insurers. Who agree to indemnify insureds for such losses, to provide other pecuniary benefits on their occurrence, or to render services connected with the risk‟.1 Therefore, were developed various means of defense against the hazards of any kind. These methods are based on prevention, assistance and provision. The purpose of the insurance is the financial protection of the financial rehabilitation of the insured namely the patrimonial situation existing before the disaster, and not making a profit or enrichment of the insured person. However, the fund may prove to be not enough to cover completely the damages caused. Therefore, insurers need to increase funds by investing such amounts. Until then, the destination of these sums is related only to the interests of the insured until the end of the contract. In particular, in life insurance, but also to other types of insurances, the money is entrusted by the insured, to the insurers that have the obligation to administer the funds so that they can have at any time the necessary liquidity to meet the payment obligations that derive from the insurance contract. The insurer thus appears as an administrator of the insurance fund. In most of the countries there are laws and strict prudential regulation on how to invest the amounts available (types of investments allowed, the proportion of these and others) to avoid insolvency or bankruptcy of the insurers. So, the essence of insurance lies in risk despair. The insured person transfers the risk of financial loss to another person caused by an event. The insurance distributes the damage caused to certain individuals among many policy holders, so that no person (or organization) may not support claim. Insurance reduce fears of the insured person, offering safety. It gives confidence and releases the policy holder of the potential financial loss. 1 Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003 4 1.3. Introduction to Life Insurance. Perspective for Analysis Life insurance, as it is known today, did not exist since ancient or medieval times, although even at that era practices having similar features of insurance existed. From an individual‟s perspective the most important characteristic of insurance is the partial or total release of a financial loss, known as risk transfer. When compared with property and liability insurance1, the structure of most life insurance policies would appear fairly uncomplicated. In general, the event triggering the payment of benefits is well-defined, such as the death of the insured person. Also, the amount of the benefit usually is fixed by contract. The typical life insurance policy does not call for an analysis of possibly complex contract provisions, such as duplicate coverage provisions, deductibles, and coinsurance clauses, often found in property and liability coverage. Instead, the key to understanding life insurance is recognizing the motives leading to the purchase of coverage. This paper emphasizes the main reasons leading to the purchase of life insurance. Because many types of life insurance contracts incorporate investment features, possible investment reasons for the applicants for holding the coverage must be considered. Analysis of investment features represents a significant departure from the patterns of analysis developed in this paper. With few exceptions, explicit consideration of investment reasons is not required for the analysis of property and liability insurance coverage. For many types of life insurance, in contrast, investment motives can be the dominant factor leading to the purchase of coverage.2 The reasons for holding life insurance can be contrasted with the reasons leading to the purchase of property and liability insurance. Property and liability exposures usually are fairly obvious; most individuals are aware of the value of objects they own or their exposure to potential liability. The difficult part of property and liability contract analysis is understanding the structure of the coverage and the effect of provisions that may appear obscure or complex. In 1 Liability insurance is any type of insurance policy that protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. Liability insurance policies cover both legal costs and any legal payouts for which the insured would be responsible if found legally liable. Intentional damage and contractual liabilities are typically not covered in these types of policies. 2 Constantinescu , A. D., Istoria asigurărilor în România, Colecţia Naţională, 1st Volume, Bucureşti, 2002 5 contrast, the analysis of life insurance almost requires the perspective to be reversed. In life insurance, the structure of the coverage itself tends to be relatively simple, the difficult part is identifying and evaluating motives leading to the purchase of coverage.1 Most demands for life insurance spring from individuals or families as isolated units, not collectively as a result of being members of organizations. Individual employees and their families bear most of the direct consequences of the event covered by a typical life insurance contract. The absence of a direct effect on the organization might seem to distance the analysis of life insurance coverage from the concerns of an organization‟s risk manager, especially in large organizations with diverse ownership interests. However valid reasons exist for risk managers to be concerned with human resource loss exposures faced by employees. As a result of this concern, organizations often provide coverage that employees could purchase for themselves. An understanding of motives that could lead employees to purchase life insurance coverage is essential to design an effective program of benefits for employees. In addition, organizations often provide their employees access to individual coverage through group-purchasing arrangements, so the risk manager may be asked to evaluate a proposal to offer coverage in this manner. An understanding of life insurance coverage and the motives it serves is essential to fulfill in this part of a risk manager‟s responsibilities. Further, life insurance may be used to finance a risk facing the organization itself, as an example we could consider life insurance used to fund a business-purchase agreement for a closely held firm. After describing the basic issues related to the structure of life insurance coverage, this paper shows how the typical life insurance policy is a two-part contract comprised of term insurance and an investment. The investment feature of life insurance arises from the way the coverage is financed (i.e. the schedule of premium payments). A two-part contract requires two distinct types of motives to be considered in the analysis of coverage. The investment element requires the analyst to consider motives leading organizations or individuals to hold investments. At the 1 Bistriceanu, Gh. D., Asigurări şi Reasigurări, Ed. Universitară, Bucureşti, 2006 6 same time, the insurance element implies that motives leading to the purchase of insurance (e.g., protection against large unforeseen loss) should be considered.1 1.4. Basic Concepts Related to the Structure of Coverage of Life Insurance Life insurance is included into a more general category of people insurance, which aims to protect the life and the individual‟s health. The criterion underlying the classification consists of the risk covered by the main component of the product: the main risk covered by the life insurance is death, and the insurance of persons other than life, the main risk that is covered is the individual body integrity, human health. Life insurance itself has a long history, with a more consistent presence into the ancient the Mediterranean area. The most utilized form of insurance was then related to funds that had to provide financial support to cover funeral expenses. More precisely, the death of a member, the group, and community raises money to pay the costs to be supported by the family. The analysis of life insurance coverage can begin using the same framework used for property and liability coverage: determining the events covered and the resulting amount of recovery. Under life insurance coverage, the covered events are the contingencies leading to the payment of the benefit. While the contingency leading to benefit payment may be complex, in term insurance contracts it is simple, the payment is done when the death of the person whose life is insured occurs. Term insurance2 contracts require that the death occur during the period of coverage (the „term‟) for the benefit to be payable. Under term insurance, death is the singular covered event. Other types of contracts provide narrower coverage, such as death resulting only from specified causes such as accidents. Certain policies, to be identified shortly as whole life insurance, provide benefits under a broad range of circumstances, including events other than death. 1 2 Bistriceanu, Gh. D., Asigurări şi Reasigurări, Ed. Universitară, Bucureşti, 2006 Most individual life insurance coverage contains a suicide exclusion denying full benefits for death resulting from suicide during a stated period (by law, not to exceed two years) following the issuance of the contract 7 Annuity contracts1, by way of comparison, provide a benefit for survival, a straight life annuity, for example, provides a periodic income benefit as long as the covered individual survives. Annuity contracts commonly provide additional guarantees. A life annuity with period certain guarantees that benefits will continue for the lifetime of the annuitant, but under no circumstances for a shorter time than a „period certain‟, such as 10 or 20 years. A refund annuity guarantees that benefits will continue for the lifetime of the annuitant, but under no circumstances will the benefits total less the purchase price. The refund guarantee can take two forms. The amount of recovery under life insurance is stated as part of the contract making life insurance an example of a valued contract2. For some contracts, the benefit amount depends on covered event, such as an increased benefit if death results from an accident. Even when the benefit amount varies across circumstances, however, life insurance still is a valued contract. The occurrence of the covered event triggers the payment of a benefit whose amount does not depend on the size of the loss. In some contracts, the benefit amount is not stated in a specific amount of money, as in a variable life insurance3 coverage or variable annuity4. In these contracts, the benefit may be stated as a share of an investment fund whose amount of money, that has to be paid to the insured person, value changes daily. Many types of life insurance coverage can be analyzed as consisting of two parts: term insurance and an investment. Normally, this type of contract provides a benefit payable under any set of circumstances, with a larger benefit payable if the covered event has occurred. For example, a whole life insurance policy provides a stated benefit when the insured person dies, with a smaller benefit if the insured person is living when the benefit is paid. This smaller benefit, called the 1 If the annuitant dies prior to receiving the guaranteed amount, an installment refund annuity continues the periodic installments until the purchase price is refunded a cash refund annuity pays the difference as a lump sum death benefit 2 An insurance policy requiring the insurer to pay the insured the full face value of the policy in the event of total loss, regardless of the actual value of the lost occurred 3 This type of insurance is generally the most expensive type of cash-value insurance because it allows you to allocate a portion of your premium dollars to a separate account comprised of various instruments and investment funds within the insurance company's portfolio such stocks, bonds, equity funds, money market funds and bond funds. 4 An insurance contract in which, at the end of the accumulation stage, the insurance company guarantees a minimum payment. The remaining income payments can vary depending on the performance of the managed portfolio. 8 cash surrender value, is the amount the holder of the policy can elect to receive by surrendering the contract to the insurer while the insured person is alive. Policies also offer a set of options for payment of the cash surrender value, called no forfeiture options. These no forfeiture options have a value equivalent to the cash surrender value, but differ in form of payment ( e.g. an annual income may be provided in lieu of a single payment). Hence, the holder of the policy is not necessarily required to take the surrender value as cash. Optional forms benefit payments are also offered through settlement options stating ways in which death benefits may be paid. The structure of these no forfeiture options and of other policy options. In essence, the holder of the contract has a set of options: surrender the contract for its cash surrenders value or a benefit of equivalent value, or continues holding the contract in anticipation of a larger benefit when the insured person dies.1 If a life insurance policy is a participating contract, the holder of the policy is entitled to dividends when they become payable. The dividends arise from favorable experience of the insurer, such as low mortality rates or high earnings from investments. The dividends also may be used to purchase other benefits offered under the policy. When the provision for dividends is absent, the contract is nonparticipating.2 1.5. Persons with an Economic or Legal Interest Identified in the Life Insurance Contract Three persons can affect or be affected by a life insurance contract: the insured, the beneficiary, and the owner. These persons may be living individuals or legal entities, such as a corporation or an individual's estate. The distinctions between these three persons can have important legal and tax implications. The brief discussion below, regarding these persons and their rights with respect to a life insurance policy provides an introduction. 1 When the contract has an endowment feature, the death benefit and surrender value are identified at the end of the period of coverage. Under most whole life insurance policies, for example, the total value of the policy is payable if the insured survives to age 100. 2 Ownership in a share of production, paid to an owner who does not share in the right to explore or develop a lease, or receive bonus or rental payments. It is free of the cost of production, and is deducted from the royalty interest. 9 In a policy providing a death benefit, the insured is the individual upon whose death the benefit is paid. More generally, the insured can be defined as the status upon which the payment of the policy benefit is contingent. For example, the periodic income benefit payable under a straight life annuity contract continues during the lifetime of the insured individual, who usually is referred to as the annuitant. In this straight life annuity, the “status” being “insured” is the continued lifetime of the annuitant. In some contracts, the insured status is defined with respect to more than one life. For example, a joint life policy insuring two individuals' lives provides a stated death benefit when the first of the two individuals dies. A joint and survivor annuity provides a periodic income benefit as long as either one of two individuals (or the „survivor‟) is living, with the benefit amount possibly decreasing at the first death (the ending of their „joint life‟).1 The beneficiary is the person or organization to whom the benefit is paid. In the economic sense of the term, the beneficiary is the one whose interest is insured, similar to the insured in a property insurance contract. A primary beneficiary is the one who, if living at the time of the insured‟s death, receives the death benefit. A contingent beneficiary is the one to whom the death benefit is paid if the primary beneficiary is no longer living at the time of the insured‟s death. A beneficiary designation in a life insurance policy can specify an order of succession: a primary beneficiary, a secondary beneficiary, a tertiary beneficiary, and so on. The owner is the one who controls the policy, the person or organization in which the rights of ownership are vested. Prior to the death of the insured (or termination of the insured status) , the owner has the right to assign or transfer the policy, to change the beneficiary, and to exercise other rights and options provided by the policy. Upon the death of the insured, ownership rights become vested in the beneficiary. With respect to legal and tax issues, ownership is a key concept. The owner can exercise every right provided by the policy unless he or she has agreed to a restriction. For example, the owner can change the beneficiary unless this right has been given up, in which case, the beneficiary designation is said to be irrevocable. Also, any tax liability with respect to the policy generally 1 Solomon, M., Bamossy, G. and Askegaard, S., Consumer Behaviour – A European Perspective , 2nd edition , Financial Times:Prentice Hall, Londra, 2002 10 accrues to the owner; if the owner of the policy is the individual whose life is insured, for example, the policy proceeds are considered part of deceased owner's estate for purposes of estate taxation. 1.6. The Investment Element in Life Insurance For life insurance coverage that is a two-part contract comprised of a term insurance element and an investment (e.g., whole life insurance) the investment element arises from the way the contract is financed. This conclusion becomes apparent, by considering two aspects of a life insurance policy: its benefit provision and its premium payment, or financing provision. The benefit provision of the policy is what the insurer promises to do: the circumstances under which a benefit is paid and the amount payable under these circumstances.1 The analytical framework outlined on the previous pages „events covered‟ and „amount of recovery‟ addresses the benefit provision only. The other aspect of the policy the premium payment provision is the method for funding the benefits promised under the policy. The premium payment provision states the schedule of premium payments required for the insurer to provide the benefits promised under the policy. 2 The distinction between the benefit provision and premium payment provision is important to understand how an investment element arises in a life insurance policy. A given benefit may be financed in several different ways, for example, it is possible to purchase a whole life insurance policy with a single premium payment, although such a financing provision is not chosen commonly.3 This contract, which is said to be „paid-up at issuance‟ is called single premium insurance. More commonly, whole life-insurance is financed using installment premiums payable as long as the 1 2 Constantinescu, A. D., Management în asigurări , Colecţia Naţională, Bucureşti, 2000 http://www.consultantasigurari.ro 3 http://www.consultantasigurari.ro/carteaasigurarilor/istoric.html 11 insured is living. The latter contract often is called straight or ordinary1 life insurance, especially if the required installment premium stays level during the insured's life. Whole life insurance contracts with premium payment provisions falling between these two extremes are called limited-pay contracts, such as 20-pay or 40-pay contracts. Often these limited-pay contracts are identified by stating the age at which the final premium payment is due, such as life paid-up at age 65 or at age 95. All these contracts are whole life insurance, so they provide the same death benefit using different financing provisions. If the insured dies prior to the time the policy becomes paid-up, the death benefit is not affected, the premium is set at a level that contemplates some insured‟s dying prior to the policy becoming paid-up. Annually renewable term insurance may be considered yet another type of financing arrangement. ART2 is term insurance, but if ART were renewable for life the insurance coverage would resemble whole life. Under an ART contract, the insurer promises to pay a stated death benefit if the insured dies during the year, with an additional guarantee of the right to renew the contract at the end of the year. Typically, the right to renew expires at an advanced age such as age 70, although contracts renewable beyond age 90 are offered. Because ART is term insurance, it does not provide a cash surrender value. The financing provision in ART does not allow the development of surrender values, while the financing provision in whole life does. Under level-premium whole life insurance, the amount of the installment payments begins at a higher level than ART providing the same amount of coverage but remains at a lower level during the payment period. Under ART, the annual premium begins at a lower level but increases with each renewal. The increasing premium reflects mortality rates increasing with age and the tendency of healthier-than-average individuals to discontinue (or lapse) the coverage. 1 This use of the term „ordinary‟ is misleading. As a class of life insurance, „ordinary insurance‟ encompasses coverage as diverse as whole life insurance, endowments, and term insurance whose period of coverage exceeds 10 years 2 Annually renewable term insurance (ART) 12 1.7. The Particularities of Life Insurance Industry The insurance activity, held according to the contractual conditions, conducted in a specialized framework, called life insurance market is the place where demand meets supply. Insurance demand comes from the insurable need of individuals and legal entities, willing to enter various types of insurance, while the supply is represented by certain specialized organizations which are authorized and able to conduct such activity. According to the author, the term of market is valid for the countries where are operating more life insurance organizations and those in which the there is a single such organization that operates it is as a monopolistic market.1Another problem relates to the insurance market size. A crucial element that defines the size of such markets is the demand for insurance.2 Insurance demand is influenced by population characteristics, namely age, education, gender, monthly income, marital status, and their conviction of the need to complete a life insurance policy. Life insurance demand comes from individuals who want to conclude contracts of insurance to protect themselves and their families in case of accident, illness, disability or death, the economic units concerned to provide security for their employees. On the life insurance market there are two types of applications: a potential demand and actual demand. Potential demand is much higher, being represented by a country‟s total population, however, actual demand is low, being influenced by its economic potential and make their beliefs about the usefulness of life insurance. Many individuals who have a low level of culture related to the domain of life insurance they consider concluding a life insurance useless, showing a higher interest to other types of insurance such as insurance for the personal vehicle, home insurance, etc.3 The size of the insurance market is expressed by several indicators: 1 2 number of contracts concluded during the reference period; number of active policies; Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003, pp. 143 Văcărel, I., Bercea, F., Asigurări şi reasigurări, Ed. Expert, Bucureşti, 2004,pp. 92 3 Cristea, M., Drăcea, R., Mitu, E. N., Asigurări de viaţă şi fonduri de pensii , Ed. Universitaria, Craiova, 2007, pp. 116 13 the annual insurance premiums1; sums insured amount during the reporting period; the total value of commitments undertaken of insurance companies at a certain time.2 The offer of insurance is represented by the private companies of insurance, public or mixed, mutual organization. Insurance companies undertake the risks of the individuals and businesses, in exchange of a premium, providing certainty regarding a future financial security.3 Mutual type insurance organizations are those that conduct insurance operations for their members on the principle of mutuality and are not intended to gain profit, but helping their members. 4 On the life insurance market, the link between demand and supply carriers can be achieved in two ways, namely: directly through insurance personnel companies or mutual-type organizations; indirectly, by means of intermediate agents, insurance professionals, who are called brokers; The insurance agent is the authorized representative of an insurance company and provides to potential clients, its insurance policies therefore the insurance companies products.5The insurance broker is a legal person (a company that has full legal rights and responsibilities according to the law), Romanian or foreign mutual company or authorized by law, which, for its clients, negotiate or conclude insurance contracts and provides other services related to the protection against risks or damage adjustment. On the life insurance market there are specialized companies that provide related services of insurance / reinsurance: risk inspectors, risk managers, inspectors of damage, damage evaluators, 1 The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. 2 Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003, pp. 144 3 Constantinescu, A. D., Dobrin, M., Galea, M., Bejenaru, M., Năstase, A., Managementul societăţilor de asigurare, Ed. Bren, Bucureşti, 1998, pp. 17 4 http://www.portaldeasigurari.ro/traditie/trad_org.php 5 Petrescu, E. C., Marketing în asigurări, Ed. Uranus, Bucureşti, 2005, pp. 24 14 liquid damage, etc..1 Important players on this market are supervising the work of bodies and professional organizations. In Romania, the body which oversees and regulates the insurance activity is the Insurance Supervisory Commission (CSA2), and one of the most important professional organizations is the National Association of Insurance and Reinsurance (UNSAR)3. Assuming that the life insurance market is a market with perfect competition would result in a number of features: atomicity of the participants, market fluidity, and perfect mobility of the factors of production, market transparency and product homogeneity.4 Atomicity of the participants reflects the market situation activates a large number of bidders and applicants so that none of the participants can influence in a sensible manner the operations.5 CHAPTER II: Characteristics of the Life Insurance Industry in Romania The Romanian life insurance market depends largely on the degree of economic development of the country, of the revenues it produces and that are willing to sacrifice individuals to protect life, physical integrity, and family. Romania‟s population is a population with a relatively poor cultural, in terms of life insurance, people walking on the principle that anything bad will not happen to them, even though they saw the accident happen. It is said that a rule to sell life insurance is to sell the future, but a pessimistic future, this technique can be applied on the Romanian market. 1 2 Petrescu, E. C., Marketing în asigurări , Ed. Uranus, Bucureşti, 2005, pp. 75 CSA- the Romanian Insurance Supervisory Commission is a self-regulating, specialized administrative authority with separate legal personality, having its headquarter in Bucharest. In accordance with the provisions of the Law, CSA is an integral self-financed authority. The source of its revenues consists of the contributions owed by the insurance undertakings and intermediaries. 3 UNSAR- the National Association of Insurance and Reinsurance Companies from Romania is a professional, nongovernmental, non-political, independent, non-lucrative organization established in 1994 to collaborate and cooperate with similar national and international professional unions and associations. 4 Văcărel, I., Bercea, F., Asigurări şi reasigurări, Ed. Expert, Bucureşti, 2004., pp. 96 5 Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003, pp.144 15 2.1. Life Insurance in Romania (as a European Union Member State) - legal framework, evolution, characteristics Life insurance represented a necessity within a society from ancient times. In Romania, the life insurance sector has experienced a favorable development, especially after the First World War. Along with the economic development and the life insurance industry was expressed the idea of free movement of services and capital, the European Single Market 1 in insurance. According to the European Union regulatory authorities, the development of the financial services sector is a source of economic growth and a way of developing new jobs, considers Mirela Cristea.2 By establishing the European Economic Community3 was also established the fundamental freedom that ensures the free movement of services and capital, a field that covers also the insurance activity.4Romania has taken over the provisions of the European regulations, transposing them to the insurance legislation. The merit of its proximity to the European requirements is first and foremost because of the Law 32/2000, governing the establishment, organization and functioning of the insurance supervisory body called the Insurance Supervisory Commission (CSA) and the establishment, organization and operation of insurance companies in Romania. (Law no. 32/2000 published in the Romanian Official Monitor no. 148 on 10th of April 2000) The European Council5 was empowered to issue directives intended to coordinate laws, regulations and administrative provisions of Member States which intended to ensure the 1 In June 1985, the Commission, under its then President, Jacques Delors, was the enabling instrument for the single market was the Single European Act, which came into force in July 1987. 2 Cristea, M., Asigurări internaţionale, Tipografia Universităţii din Craiova, Craiova, 2002, pp. 227 3 On 25 March 1957 with the Treaty of Rome, to build a European Economic Community (EEC) based on a wider common market covering a whole range of goods and services. 4 Lăcătuş, D. V., Asigurări de viaţă – fundamente teoretice şi practice, Ed. AlmaMater, Cluj-Napoca, 2003, pp. 37 5 The European Council was created in 1974 with the intention of establishing an informal forum for discussion between Heads of State or Government. 16 establishment and functioning within the European Union.1 In the life insurance domain were adopted three generations of the Community directives. In the first generation of Community directives were elaborated two specific regulations:2 The directive for life insurance no. 73/267/CEE containing uniform rules with regard to life insurance and providing free establishment of companies or subsidiaries of insurance companies from a country into another member country and providing free life insurance services. The directive on the establishment and operation of companies providing life insurance no. 77/92/EEC. This directive was issued in 1979 and aims to harmonize the prudential supervision by introducing the solvency margin3 and minimum guarantee fund. The directive was intended to resolve also the divergence arising from the conflict existing between Member States regarding insurance companies „composite‟, life and non-life. Argument against „composites‟ was that the beneficiaries of life insurance policies would be part of the same financial group as those who have non-life insurance policies, which are considered to be less consistent.4 The second generation of Community directives represents a sequel of efforts regarding the freedom to provide insurance services. With this directive, consumer protection in insurance was made by performing the subtle distinction between the „free active service‟5 and „free passive service‟6 performance, in which case, „active freedom‟ to be audited for that was released, „passive freedom‟. The third generation of directives is more than a simple establishment and freedom framework providing security services, based on extensive technical provisions, financial, trade, cooperation 1 2 Lăcătuş, D. V., Asigurări de viaţă – fundamente teoretice şi practice, Ed. AlmaMater, Cluj-Napoca, 2003 http://europa.eu/abc/12lessons/lesson_6/index_en.htm 3 a business liquid assets that exceed the amount required to meet its liabilities 4 Cristea, M., Drăcea, R., Mitu, E. N., Asigurări de viaţă şi fonduri de pensii , Ed. Universitaria, Craiova, 2007, pp. 50 5 when the insurance company from the origin office, takes the initiatives in contracting a candidate for insurance from a different Member State; 6 in which an insurance candidate has the initiative of contracting an insurer from a Member State 17 and distribution, while the consumer has become an essential component in the European approach .Therefore the third approach focuses on customers rights.1 The European Single Market has been achieved through the completion of the liberalization established of the directives of the third generation who have imposed a European passport of the insurance market with single license regime. European passport or single insurance passport means that once an insurer has been authorized in a Member State, the state of origin which has its headquarters, it is free to offer for sale the products in any Member State, therefore an accepted State. The authorization of the insurance companies is based on acceptance by the supervisory authority of the country of origin that should evaluate the following:2 The business plan; The components of the minimum guaranteed fund; The excellence of the shareholders; Reputation and professional experience; The financial supervision is the sole responsibility of the supervisory authority in the country which issued the administrative authorization for the operation. It is done by inspecting the annual financial statements and bookkeeping, solvency portfolio transfers and acquisitions of the company. To establish a branch or a subsidiary of an insurance company into another European Union‟s country, it is necessary to inform the supervisory authority on the following aspects: the country where the operations intend to start, the program of the activity and the authorized agent of the delegate. 2.2. The evolution of Life Insurance in Romania Although most sources indicate that insurances in Romania started in the late 19th century, prior to their forms, such as protection performed on a mutual basis, have appeared in the fourth 1 Cristea, M., Drăcea, R., Mitu, E. N., Asigurări de viaţă şi fonduri de pensii , Ed. Universitaria, Craiova, 2007., pp.52 2 Cristea, M., Drăcea, R., Mitu, E. N., Asigurări de viaţă şi fonduri de pensii , Ed. Universitaria, Craiova, 2007, pp.53 18 century in Transylvania, being organized as mutual associations and mutual assistance. The guilds of artisans in Transylvania organized in mutual association for fire and life insurance.1The author Mirela Cristea argues that the earliest forms of life insurance arising from ancient times are the death indemnities for funeral expenses and life annuity insurance.2 On July 24, 1844 was established, the „General Institute of Pension in Brasov‟ the first insurance company itself and covering the life insurance.3 The establishment and evolution of the insurance companies in Romania took place on the background of centralization phenomenon, migration and expansion of capital in insurance. In 1871, when arose the first insurance company in the old Romania, called Dacia, with a capital of 3 million lei, the interest raised among the population was particularly high. Enthusiastically supported by V. Boerescu, Minister of Foreign Affairs, board member of the first management company, Dacia made a great contribution to the modernization process of Romania. In 1930, when they began to practice all types of insurance, through Law no. 216 of insurances was founded the Office for supervision of private companies that were concluding insurance and reinsurance, office that worked with the Ministry of Industry and Commerce.4 ADAS (State Insurance Administration) was founded in 1952, a company with integral Romanian capital, specialized in insurance operations, reinsurance and damage commissariat. This company had a monopoly on the Romanian insurance market until 1990, when the Government 1279/1990 was dissolved, and its assets and liabilities were taken over by Asigurarea Românească SA (ASIROM), of ASTRA SA and SA CAROM.5 A predominant form of institutionalization was the insurance activities of mutual associations of tontines6 or of 1 2 Petrescu, E. C., Marketing în asigurări, Ed. Uranus, Bucureşti, 2005, pp. 23 Cristea, M., Asigurări internaţionale , Ed. Reprograph, Craiova, 2003, pp. 132 3 Lăcătuş, D. V., Asigurări de viaţă – fundamente teoretice şi practice, Ed. AlmaMater, Cluj-Napoca, 2003 4 Bistriceanu, Gh. D., Asigurări şi Reasigurări, Ed. Universitară, Bucureşti, 2006, pp. 201 5 Bistriceanu, Gh. D., Asigurări şi Reasigurări, Ed. Universitară, Bucureşti, 2006 6 Tontines - these associations are constituted for a period of time, during which the association members deposit into the commun fund an annual fee which varies depending on the age. The deadline in respect of which was established the fee amount resulting from capitalization over the years is divided between the surviving members. Similar associations are organized for cases of death. 19 survival, so that modern insurances against risk of death have penetrated relatively hard in all the layers of the Romanian society.1 Currently, there is an increasing need of life insurance, among which more frequent on the national and international level, are: providing financial protection of the family or of those dependent in case of death; the payment of debts of a person in case of death, in this case the insurance is consider a loan guarantee; survivor‟s allowance; old age allowance; saving for possible future expenses; costs of hospitalization, medical care, or a compensation paid in the case of illness or temporary invalidity; investments and more; Therefore, life insurance in Romania was practiced since ancient times, in incipient forms, and is developing along with the Romanian society, with the needs and expectations of the customers.2 2.3. Description of the Offer As any market consists of supply and demand, on the life insurance market there are, of course, customers and suppliers. Regarding life insurance, in recent years, Romania constituted a great opportunity for many companies, entering the latter has positive effects on the market materialized in: diversification of the offer, increase of products quality offered by insurance companies, raising the professional staff the insurance industry, the introduction into practice of new methods and techniques of marketing.3 In Romania, the most used channel for sales of life 1 2 Constantinescu, D. A., Istoria asigurărilor în România , Colecţia Naţională, 1st Volume, Bucureşti,2002, pp. 113 Cristea, M., Drăcea, R., Mitu, E. N., Asigurări de viaţă şi fonduri de pensii , Ed. Universitaria, Craiova, 2007, pp. 24 3 Petrescu, C. E., Ioncică, M. and Petrescu, M., Activitatea de marketing în contextul noilor tendinţe de pe piaţa asigurărilor, Revista de Marketing Online, vol. 1, nr. 4, Bucureşti, 2007, pp. 10 20 insurance is through the sales agents of each company. For example in late 2007, life insurance sold only 10% through brokers.1 The degree of concentration of the life insurance market in 2011 remained at the same high level as in 2010, the rate of 94.53% being the gross premiums underwritten by the top 10 companies. The Romanian life insurance market is a competitive market, because every organization operating in this sector is concerned to gain a larger segment of the market. 2.4. Description of the Demand The need to conclude a life insurance contract comes from an absolute need of each other to provide financial protection for their families, dependents or loved ones in case of death, along with other benefits that insurers can offer: savings, retirement and investment plans. The conclusion of an insurance contract covering the risk of death is a problem that every individual should consider, in order to avoid creating an imbalance in the financial situation of dependent descendants. Therefore, life insurance meets basic human needs: protection, safety, located on the second step needs in Abraham Maslow's hierarchy.2 Life insurance demand on the Romanian market has no uniformity regarding the geographical distribution, being concentrated in geographic areas with a high economic potential and among the population with income over the average. Awareness and expression of the need for protection of everyone, as the decision to buy insurance are determined by two main factors:3 objective factors: economic, financial, social, familial, educational; subjective factors: previous experience, knowledge of benefits and protection offered by insurance; 1 2 Care-i cel mai bun canal de vânzare, Ziarul Financiar, Noiembrie, 2007, p. 30 Petrescu, C. E., Ioncică, M. and Petrescu, M., Activitatea de marketing în contextul noilor tendinţe de pe piaţa asigurărilor, Revista de Marketing Online, vol. 1, nr. 4, Bucureşti, 2007,pp. 71 3 Ciurel, V., Asigurări şi reasigurări: abordări teoretice şi practice internaţionale, Ed. All Beck, Bucureşti, 2007, pp. 17 21 In the conditions where household income and the extent of the population are low, life insurance demand remains also low. The decision to buy an insurance policy is also influenced by the population‟s age. The „third age‟ population is statistically growing, representing a vulnerable social group with specific problems from other social segments. Securing the elderly population for a decent living must cover a wide range of concerns, not only on an economic level but also on a social and psychosocial one. Therefore, this aging process will lead to the point of the impossibility of maintaining the inactive state of the population and thus becomes essential t conclusion of a life insurance to provide financial protection of the descendants in the case of death, and ensuring a peaceful life in retirement. Fig.1.1. The structure of Gross Written Premiums (GWP) on the Romanian Life insurance Market in 2011 Profile companies operating on the Romanian market have established a customer profile. For example, most ING insurance consumers aged 35-39 years (20.6%), followed by the 30-34 years category (17.8%) and 40-44 years (16.6%). Also 45% of customers have university degrees and 28% secondary education and 53.1% are men. The customer profile of Generali Life Insurance is 22 a person with medium to high income, well informed and realizes the importance of the conclusion a insurance policy in time, for both himself and his family.1 Life insurance density is less than 0.5% this is the main reason why Romania has the greatest potential in the region on the life insurance segment. The life insurance market is by nature a homogenous market, consisting of consumers who have specific cultural and economic features. There are many issues that govern the life insurance market: the legislative issues that operate as carriers and demand issues. Many claim that insurers face several difficulties arising from the extremely reduced rate of insurance premiums agreed of policyholders.2 Insurance companies seek to improve the sector, but must assume the role of educator of the conscience of Romanians into the transfer of financial risks associated with accidents, illness or loss of life, from family to specialized management-insurers. It would help increase the enrollment in the Romanian insurance market and increase of insurance penetration of total GDP3. One advantage attributed to the life insurance is the orientation of the population referring to the investment prospects through banking institutions or securities, traditional to the life insurance and mutual funds advantage in itself, being the investment component. The population investment into life insurance and mutual funds are an alternative of long-term savings, providing further financial protection, that other products do not include.4 Therefore, Romania‟s population is attracted of investment products in addition to the component, include also a protective component (such as unit-linked products). It‟s obvious the preference for the financial market investments, bank deposits and government securities, and this is not because of the need for immediate cash, but because the Romanian market does not offer too many investment opportunities.5 1 2 http://www.1asig.ro/Doar-profit-pentru-primele-20-de-grupuri Tudoran, G.,Sistemul asigurărilor din România – Prezent şi perspective, Universitatea Petre Andrei,Iaşi, 2006, pp. 295 3 GDP- Gross Domestic Products is the monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. 4 Tudoran, G., Sistemul asigurărilor din România – Prezent şi perspective, Universitatea Petre Andrei, Iaşi, 2006 5 Constantinescu,D. A., Management în asigurări , Colecţia Naţională, Bucureşti, 2000, pp. 54 23 Life insurance is characterized in the light of Romanians attitude, towards this product as: Difficult to understand, is associated with a complex product; Irrelevant (the beneficiary not being the payer) or useful only to those with risky occupations (only them would have something to gain); Mandatory product required by banks to request a loan; Luxury product that can afford it only „those with financial possibilities‟ and wanted only by those with „Western mentality‟; Disadvantage due to: higher insurance premiums, the insured person does not receive the sum insured itself, lose-lose situation, limited liquidity / cash deposits, fixed sum insured without the possibility of additional benefits; Experts unanimously agree to characterize the mentality of most Romanians as a balcanic type, namely „My destiny is into the hands of Lord‟. Romania‟s population has no confidence in life insurance products, considering them detrimental, irrelevant, not having enough money to complete their life insurance policies or their families. For this sector, Romanians should be aware of the importance of concluding a life insurance policy, which involves both benefits in terms of investment and in terms of protection provided against the inherent risks that threaten life and individual integrity. 24 CHAPTER III: Modern Selling Methods in Insurance Case Study: ING Asigurări de Viaţă S.A. and BCR Asigurări de Viaţă VIG It is important for all the companies that activate in life insurance industry especially in this crisis period, in order to remain competitive to be innovative and to adapt their products and selling methods according to the customers and market demands. The economic crisis translated into the insurance market through repeated annual declines and even deeper with each year, banks have become a major selling channel for life insurance, about one quarter of these policies are currently closed to bank offices. Also, without selling through banks, life insurance market would not have registered a positive trend lately. Thus, for the main players in the market, the bancassurance channel was an engine of business success, this was due to a better understanding of the changes that have occurred in recent years in customer behavior and needs, so the products developed were in accordance with certain real needs. Another important method utilized by the most competitive companies on the life insurance market is represented by Unit-Linked products. Unit-linked plans are also known as universal life insurance and variable life insurance. In Unit-Linked insurance it is encountered a separate identification concerning the costs and the expenditure of mortality and interest value account. Both selling methods will be analyzed in this chapter. 3.1. Description of the Companies: ING Asigurări de Viaţă S.A. and BCR Asigurări de Viaţă VIG The company ING was the first financial institution that entered into the Romanian market in 1994, after the year 1989 and it was the sole supplier of incorporated financial services in Romania, considered to be a pioneering mixture of insurance, banking and assets management services. An important branch of the company, ING Bank is also the leader on the Romanian banking market with the third largest balance sheet, operating wholesale and retail banking activities, including services such as Private Wealth Management. 25 ING Asigurări de Viaţă is the leader of the Romanian insurance market, with 33% market share1. The life insurance company provides retail and group life insurance services in more than 60 cities around the country, with 2000 professional consultants. One of the reasons that the company had become a leader on the Romanian market, both in the insurance and bank industry, were its high qualitative products. ING Asigurări de Viaţă has been since the beginning of its activity, a promoter of education and information for the market, as well as for the market and the customers of life insurance and pensions in Romania, through the majority of its action and the processes that has developed over the time. On a global level, ING started the campaign „Plant a Tree‟ with a dual purpose, both of educating in order to protect the environment and conserving its resources and as well as to support those communities. ING Asigurări de Viaţă, with the support of More Green Association2, started off its first corporate social responsibility project, affiliated with the global program of the Group. ING Foundation „A better world‟ that was created in 2005, had as the main purpose to give hope to those less fortunate during the whole year, and not just for Easter or Christmas holidays. ING Foundation „A better world‟ is built on the faith and belief that everyone should have the opportunity to live to its full potential. ING Romania intends to offer its customers, both individuals and businesses, a wide range of financial services. ING Asigurări de Viaţă commitment to its clients is a long term relationship and focuses its efforts on providing modern products and high quality services, efficient and flexible to meet the various needs of its customers. The organization‟s mission is to allow and to provide easy access to information, and to offer personalized experience. ING Asigurări de Viaţă establishes standards to help customers in managing financial future, to continue to support the development of the Romanian insurance market and provide value to customers, shareholders and employees. 1 2 The market share computed for 2011. More Green Association- „MaiMultVerde‟ is an organization entirely financed from the budgets of social responsibility of the Romanian companies 26 ING is guided by the following four mottos: „ING is a company that collaborates easily‟, „ING treats their customers fairly and honestly, „ING keeps its promises‟ , and „ING activities are focusing on the customers‟. The highest priorities for ING Asigurări de Viaţă are to offer as much as possible more detailed information to millions of potential customers about the services and benefits of the products and services that ING Asigurări de Viaţă offers. The main concern of ING Asigurări de Viaţă consultants is to provide financial solutions tailored exclusively for each client. It is also assumed that financial planning is the key to achieve their long term financial goals. Therefore, the entire business is based on the values of professionalism, integrity, quality and open communication. With a registered capital of 63,042,794 RON, ING Asigurări de Viaţă is the strongest capitalized company on the insurance market and in terms of attracting new customers are occupying the first place. Along with the implementation of the reform of pensions, ING Asigurări de Viaţă has added to its portfolio two pension funds: ING Clasic and ING Optim. As for optional pension segment, ING has a market share of 33% (in terms of assets, on 31st December 2011, according to CSSPP1).The available solvency margin of ING Asigurări de Viaţă was 143% higher than the minimum required by law in late September 2011, liquid assets 500% higher than the minimum required, confirming the company‟s financial soundness. The main channel of sale of ING Asigurări de Viaţă it is represented by its own network of professional consultants. But lately both banks and brokers have also gained an important role in selling life insurance and pension funds. The products offered by ING Asigurări de Viaţă are: Protection plans: Prudent, Marathon and Smart, designed to offer to the clients family a decent financial future, if the client will not be able to do it; Health insurance; Saving plans for children: „GenT‟ for children is a financial plan claiming to cover the needs related to child development: education, health, financial support to start in life and 1 Private Pension System Supervisory Commission(CSSPP) is the specialized, independent, autonomous and self financed public authority dedicated to supervise and regulate the functioning of the private pension system, under control of Romanian Parliament, founded through the Emergency Ordinance no.50, from the 9 th of June 2005, approved by the Law no. 313 from the 10 th of November 2005. 27 „Academica‟ a product that helps to save the amount that will be needed when the child becomes 18 years old, it is also a sum that will cover college costs, to achieve a car or to start a business; Savings plans: Regal, a „2 in 1‟ product recommended for those who want both insurance and long-term savings; Insurance plan with retirement component: the financial plan in addition to the pension consists of extra money plus the amount of the pension that the customer already has(state pension, the compulsory versus voluntary); Investment plan: Capital is a product focused on investment and risk protection and covering the losses resulted from accidental death, anywhere in the world and GenT a product for investment the protection component covers the risk of death from any cause, anywhere in the world. S.C. BCR ASIGURARI S.A. was founded and recorded on the date of 19th December 2001, the length of the company, according to the Articles of Association, being of 89 years. The company is a Romanian legal person, established as a joint stock company integral subscriptions and simultaneously social capital of the shareholders, individuals and legal persons, having as main object of activity - the activity of insurance, in accordance with art. 2 of the Law no. 32/2000, designates primarily offer, negotiation and conclusion of insurance and reinsurance contracts, premium collection, liquidated damages, activity of decline and recovery, and equity investment or fructification of their own funds attracted through the activity performed. BCR Asigurări de Viaţă was founded in October 2005 and intended to introduce in its portfolio products and services of life insurance and financial services integrated into the offer of the group BCR. In September 2008, BCR Asigurări de Viaţă started a partnership with Vienna Insurance Group1, who became the major shareholder of the company. BCR Asigurări de Viaţă products are one of the most competitive on the insurance market of Romania, due to the marketing and sales strategies of the company that are continuously raising the sales charts. BCR 1 Vienna Insurance Group - the roots of the insurance group date back to 1824, when the oldest of the three insurance groups that today form the Wiener Städtische Österreich, and out of which the Vienna Insurance Group emerged, was founded. 28 Asigurări de Viaţă is recognized for its high quality services, characterized by a high degree of professionalism and being able to provide the most valuable bancassurance1 products at the most competitive rates. The company‟s mission related to its customers is to provide the best services and insurance products for family protection, increasing the value of assets, solving the major priorities throughout life insurance and maintain living standards at retirement age. The combination of the insurance products, the distribution channels and selling force together with the basis of reliable services combined with a marketing and sales strategy well founded, makes the company very competitive on the local Romanian market. Choosing the right life insurance is an important decision for anyone. For BCR Asigurări de Viaţă, each client is unique. The attention paid for the analysis of needs, the attitude toward savings, and the unique financial profile of each client represents the company‟s expertise key. The portfolio of products and services, along with the possibility to offer individualized solutions helps its customers to make the fair decision for their financial future. The portfolio of life insurance products of BCR Asigurări de Viaţă is including the necessary expertise for its clients and financial planning objectives of protection benefiting from a comprehensive portfolio of products: Bancassurance products; Savings and protection plans; Saving plans for children; Saving for retirement plans; Unit-linked investment programs; Insurance programs for groups of employees; Health Insurance; 1 A French term referring to the selling of insurance through a bank's established distribution channels, known as a Bancassurer. 29 BCR Asigurări de Viaţă Vienna Insurance Group underwrite in 2011 gross premiums worth 336 million lei, up 13.68% compared to the same period of 2010.1 ING Asigurări de Viaţă and BCR Asigurări de Viaţă are the only companie in Romania that stood in 2011, in the Central and Eastern Europe Region, in the top 50 companies in the field. Thus, the volume of underwritings of about 80 million euro, BCR Asigurări de Viaţă VIG2 was ranked 43, while ING Asigurări de Viaţă was ranked 27.3 3.2. SWOT Analysis of the Companies In order to be competitive, the first step for every company in the life insurance industry must be to conduct a SWOT4 analysis of the Romanian market in order to examine and understand it. The managers involved into the process should be focused on the evidence of the current status of the life insurance industry and to adapt their products and services according to the customer demand and needs. The starting point will be making the SWOT analysis for the company ING Asigurări de Viaţă S.A.: 1. Strong Points: ING Asigurări de Viaţă has managed to tailor its products and services in order to meet the customer demands. Also, the company offers a range of various types of life insurance products, from the pure protection of the term life insurance to the flexibility and growth potential of general and variable life insurance policies. One of the company‟s strong points is the flexibility of their products and services. One good example in this sense is Smart, the first package of protection without medical evaluation. This package is designed to provide protection at both individual and family level, covering the risk of injury or death 1 Table 1.1. VIG - Vienna Insurance Group 3 http://www.1asig.ro/ 4 SWOT -Albert Humphrey developed an analytical tool to evaluate the strategic plans and find out why organizational planning failed, while working on a research project at the Stanford University sometime around 1960s to 1970s. 2 30 from any cause, hospitalization and surgery of the accident. ING Asigurări de Viaţă follows a „customer centric approach‟ while designing its products. The company‟s product portfolio offers products that provide solutions to every financial requirement, at all life stages. Another important strong point of the company is the high standard of professional behavior that are able to provide for the company‟s customers professional advice, by treating customers impartially, a quality that stands for the company‟s culture and act with fulfillment. The life insurance market that the company runs the business in refers to improving the portfolio retention, orientation and sale of traditional products for children, supporting and strengthening distribution channels, communication with the customer and market education. In terms of distribution, the channels of distribution will be the same, the company‟s sales agents remain the main channel, but the company has to focus on the development of other channels, targeting on the partnerships with several banks and new collaboration with brokers. 2. Weaknesses: The improvement of the health system will increase the efficiency through a long term commitment that will take risks and will tie up capital to ensure financial solvency and customer safety. The insurance industry in Romania is still dependent on the automotive population lack of financial education and, in this context, the practice by the insurer to lower rates cannot maintain a high quality for their long-term services. 3. Opportunities: The opportunities are represented by the events with positive impact on the life insurance industry, that UNSAR talks about, but also with the Government representatives over the introduction of tax deductibility of life insurance segment has already resulted in the discharge from the payment of social security contributions for premium insurance paid by the employer for the employees. This provision results in a significant decrease in costs for the employers who decide to offer this type of benefit wages. Certainly this will allow a greater number of Romanians to enjoy the protection provided by life insurances. Extremely small share of life insurance in the GDP (about 0.4%) protection due to the huge deficit of the Romanians, 308 billion lei in 2010, according to calculations ING Asigurări de Viaţă. Then, life insurance leads to a higher level of financial security of 31 the population, and may even reduce welfare costs and increase sustainability of social security system. ING Asigurări de Viaţă closes the year with a market share of 33%. A clear evidence is the market evolution of life insurance, which grew in the first semester of the year with almost 4% over the same period of 2010, while the class of general insurance decreased over 10% in the same period. An important contribution to this trend had, undoubtedly, increased efforts to inform and educate players coming from the life insurance market, efforts that need to continue also in the future. Another important aspect is that the insurance market in Romania is a solid and structurally reinforced with strong and fair players, that will bring benefits for both customers and insurance companies by creating competition and even higher qualitative products. Another important issue for the life insurance market, 2011 was a period of intensification of efforts to increase transparency with customers. Finally, accelerated development of life insurance market, as a consequence of the tax incentives would contribute to economic development through a greater volume of investment through more efficient allocation of capital, boosting long-term savings, and a faster development of financial markets1. 4. Threats: High competitiveness in the industry, new entries in this field of activity of companies with great potential. Four elements of context are the main threats to the field: an unstable political and economic environment, currency depreciation, blocking the crediting and unemployment growth. The SWOT Analysis compiled for BCR Asigurări de Viaţă is the following: 1. Strong Points: One of the most important strong points that the company has is its current strategy to diversify its services, as well as in terms of technology, in order to meet the needs of its customers and to follow the current trends of the market development. In this sense BCR Asigurări de Viaţă is the first Romanian company that facilitates life insurance clients‟ to have quickly access to info about its products and services, directly on their Smartphone or 1 Table 1.1. 32 tablets. The application was designed to provide facilities both for the company‟s customers and anyone interested in life insurance. The company also has a diversified portfolio in order to cover all the possible needs and demands of the customers, therefore BCR Asigurări de Viaţă provides expertise to achieve the objectives of financial planning and protection featuring a portfolio of products: bancassurance, savings and protection plans, savings plans for children, their retirement savings plans, unit-linked investment programs and index linked1, health insurance, life insurance programs for groups of employees. The company performance is based on a proactive attitude, which proves to be efficient, the capacity to deal with the social economic realities in an innovative manner, and also its ability to provide customized solutions tailored for their clients. The life insurance company has an advantage at a strategy level being a member of Erste Bank Group 2. BCR Asigurări de Viaţă, as part of Erste Bank Group, has adopted practically the same strategy in regards with the customer, a very well-defined strategy, using the customer segmentation in order to develop as better as possible the products and services.BCR Asigurări de Viaţă has two main advantages: an excellent partnership with BCR , the number one bank in Romania and a membership of the leading insurance group in Central and Eastern European market, the Vienna Insurance Group. 2. Weaknesses: Also for BCR Asigurări de Viaţă the improvement of the health system efficiency through a long term commitment that will take risks and will tie up capital to ensure financial solvency and customer safety. The practice utilized of lowering rates, during periods of economic crisis when the market requires it, cannot maintain high quality longterm services. 3. Opportunities: The main opportunity for every business that is providing financial services it is represented by the increase of 5% of the life insurance market in Romania, that could be confirmed and even exceeded, and if this year will be an increase in pensions and salaries, 1 Index linked - payment of income on the principal is related to a specific price index, often the Consumer Price Index. This feature provides protection to investors by shielding them from changes in the underlying index. 2 Erste Bank Group was founded in 1819 as the first Austrian savings bank ( Erste oesterreichische Spar-Casse ). 33 the growth estimated this year could reach 6%. Pessimistic estimate indicates an increase of 3-5% in 2012. The estimates for the year 2012 starts with the expectations of economic growth. Expectations for growth are moderate the prediction of the economic growth should be less than 1%. On the other hand, hopes about the life insurance market are optimistic. Trust of the population increased and the financial education so that the estimate is that we will see an increase of about 6-7% of the of life Insurance market this year. If the GDP increases by 1.5%, the life insurance market will grow from about 3% to 3.5%. This event will lead to an increase in the segment of investments and insurance savings that come to support customers‟ need of saving. The tendency to go to universities abroad, a trend that can be very beneficial for insurance companies, and anytime a product of this type may also support the goals of a child in a family of middle-income. 4. Threats: It is very important for the company to be innovative and to think that the future customers are already highly educated, at least in comparison with mature generations that the company has dealt with, during the previous years. The main reason being the rapidity of how the population is evolving and starts to use and understand sophisticated products. The company is forced to burn stages and to evolve quickly, without having the time to go through a step by step accumulation, periods that other countries have passed through. High competitiveness in the industry, new entries in this field of activity of companies with great potential, represents also a threat of BCR Asigurări de Viaţă. 3.3. Selling Techniques in Life Insurance Applied by the Companies Life insurance is something abstract, intangible, and unfamiliar to the client. Therefore, in order to sell such a service the agent first needs to make the customer to understand how life insurance can help him in the future. Secondly, selling a life insurance is based on a relationship of trust between the agent and the client. So before the agent sells a product or a service it is required to win the customer confidence. Thirdly, the sale of life insurance is based on the client‟s financial 34 needs, so the agent needs to make an analysis that highlights the potential customer needs and its financial possibilities.1 Regardless of the field examined, the sale requires the existence of a process of sale and purchase. Depending on the product or service sold, the selling process is different, specific sales techniques used by product, but according to the company that promotes the product. The same thing happens in life insurance. The sale of insurance, although not fundamentally different, has some features from one company to another. All the professionals agree with the idea that selling life insurance is a process where each step is extremely important and generates the next stage. Each day we are involved in the selling process: in the family, at work, with friends, we want to conquer someone, at an interview for a job, etc. The selling of a life insurance begins with the market research and continues with contacting the prospects in order to establish an appointment in which it has to be identified the client needs so that subsequently based on these to be developed the solutions and should be recommended the insurance product that can cover the customer needs. It follows the appointment in which it has to be presented to the client and the recommended insurance benefits, and then, to be completed the sale. Subsequently, clients need these services, so that providing consultancy to the customers will continue even after the sale.2 Therefore, both companies have managed to be competitive and to cement their leader position on the market, through their sales agents. The human resource, in the life insurance industry, and not only, represent the most valuable asset. The companies invest a lot of time and money in the training programs of their, future or present, employees. It is a market that develops very fast and as the demands are continuously change and in order to be successful, the companies have to invest also in their personnel, not only in their products and services. Prospecting is the first selling technique utilized because exploration remains for sales what seeds are for a garden. As we plant more seeds we will have more flowers. Without potential customers we will not have customers to whom to establish long term relationships. This is what 1 2 Badea, Gh. D., Manualul agentului de asigurari, Ed. Economică , Bucureşti, 2008, pp.143 Badea, Gh. D., Manualul agentului de asigurari, Ed. Economică , Bucureşti, 2008 35 is decisive for the success of exploration consultants. Exploration is the conscious activity, direct and continuous of search, observation and classification of people. Exploration is a cornerstone in the sales activity. One method is to select potential customers in the following categories: Business people; Recently divorced; Newly married, engaged; People who change jobs; Home owners; People who have limited assets and liabilities; The results of prospecting are: Obtaining references: names of persons and relevant information about them; Establishing the centers of influence; Determining sources of information for the database, creating and updating the customer database; Classifying the potential clients according to the „temperature‟ of the relationship; If it is conducted properly, the prospecting process lasts between 50 and 80% of the time allocated for the whole sales process. So, it can be assumed that prospecting is determining: For the hole selling process; For the selling results; Finally, for the „survival‟ of the professional selling activity of life insurance; The prospecting process is conducted taking into consideration the following steps: List: a list of names of persons known. Without thinking if they want an insurance or not, if they are or not available. The agent passes these names exactly in the remember order. Qualify: it must be decided if the person is qualified or not, in terms of including in the list of potential clients. 36 A well done prospect means: Character, Health, Income, Need and Approachability. The persons that pass over these stages are, all of them, potential customers. The consultants will have to contact all of them, but previously, there has to be obtained information about the clients.1 The approach is the first contact with the potential clients, this is the starting point of the professional relationship with the client. Approaching the client can be done in several ways: by phone or through correspondence. Regardless of how it is the approach the goal is the same, namely the establishment of meetings with potential customers. The purpose of the approach is not an insurance sale, but an appointment in which to identify the potential client financial needs. There are two factors that can determine a potential client to accept an appointment with a life insurance agent: recommendation, which is that transfer of trust from a person known towards the potential client to the agent, and the importance of this meeting for the client, meaning what benefits the client will have when meeting with the agent. Whether the approach is made by telephone, directly or by correspondence, training is required before the approach is done. The main reason of an unsuccessful approach is poor preparation of the approach Informative meeting: using questions is important because in this way the insurable needs are discovered. By asking questions the agent finds out the current circumstances or features of the client or of its business, the threats that may affect the goods, the clients properties, the implications of these threats especially of the financial ones, but not only, and the current insurable needs. The agent‟s ability of asking questions and of discovering the insurable needs of the potential client represents the key of the selling process success. It is very important how the agent manages to put these questions, so that the final result of such a communication process embodies the clients‟ agreement that there is a real need of insurance and its engagement to do something in this sense.2 1 2 Badea, Gh. D, Manualul agentului de asigurari, Ed. Economică , Bucureşti, 2008 Badea, Gh. D, Manualul agentului de asigurari, Ed. Economică , Bucureşti, 2008,pp.144 37 Evaluating the risk and making the offer and the selling meeting: the reason of evaluating the potential risk is that of finding out if it can be insured, so that the loss can have a financial compensation. At some types of insurances, the information related to the risk is obtained by completing the application-questionnaire and any possible insurable specifications. At the selling meeting it is important that the agent presents the customer several options of the offer in order to give the client the possibility to choose the products that fits the most its needs. At the same time giving the clients more than three options increases the uncertainty creates confusion and at the same time diminishes the chances to take a final decision.1 3.4. Financial Analysis of the Companies The financial analysis of both companies was computed in accordance with the data available of the annual reports, present on the official sites of the companies. Therefore, the total revenues recorded by the company ING Asigurări de Viaţă on 31st December 2011 are worth of 1,057,089,750 lei, representing a 4.1% decrease from the previous year in which the company has obtained the following results: • 554,442,021 lei gross premium income, increasing with to 2% from previous year; • revenues from investments 473,320,842 lei, decreasing with 10% from the previous year; • 22,179,124 lei from other non-technical income, decreasing with 2.6% from the previous year; • 7,166,861 lei revenues from the management of the voluntary pension funds, increasing with 52% from the previous year; 2. Total expenses including income tax amounted to 1,039,294,000 lei, down by 1.5% from the previous year, out of which: • 409,871,264 lei with investments expenses, increasing with 19% over the previous year • 132,834,677 lei expenses with reserves variation, decreasing with 79% from the previous year; • net operating expenses of 167,162,141 lei, increasing with 12.8% compared to last year; 1 Badea, Gh. D, Manualul agentului de asigurari, Ed. Economică , Bucureşti, 2008, pp. 145 38 • 245,317,289 lei gross expenses with equity redemptions, with maturities and annuities, decreasing with 2.6% from the previous year; • gross claims expenses of 19,777,066 lei, increasing with 23% from the previous year; • 13,518,065 lei to cover the voluntary pension fund management, increasing with 6.5% from the previous year; During the year 2011 the company continued to focus the operating expensea on improving customer relationship, increasing the efficiency of the financial and operational process and improving the IT infrastructure and its separation from the bank ING Bank Amsterdam. The investment activity was conducted in order to increase the professionalism of the company‟s consultants and quality improvement of the sales process. A number of projects are still in progress, generating during the year 2011 the record of intangible assets in progress amounting 4.5 million lei and a total of 12.2 million lei at the end of the year. Also, during 2011 the value of the capitalized development costs was reduced by the amount of 6.6 million lei, following the regional decision to stop the development projects. 3. The financial results of the financial year 31st of December 2011 consisted of the gross profit in amount of 17,795,750 lei. The income tax expenses made up during the year, recorded the amount of 3,086,372 lei. In 2011 the company sponsored with 1.2 million lei a number of nongovernmental organizations in the merit of social responsibility programs. Out of the total amount of 771,593 lei was deducted from the liability to pay for the income tax made up in 2011. The company recorded on 31st of December 2011 the net financial result in amount of 14,709,378 lei. The liabilities to the state budget, representing both taxes and taxes on wages (payroll taxes, contribute to social insurance fund, health fund, unemployment fund, fund rise to disease and occupational accident, solidarity fund for the disabled), and specific funds for insurance, 0.3% of earned premiums and guarantee fund for the insured and 0.3% of the first fee collected for operating of the Insurance Supervisory Commission, have been paid on time throughout the year 2011. 39 During the financial year 2011, the company distributed dividends from the net profit of the year 2010 in amount of 36,000,000 lei, excluding the main shareholder ING Continental Europe Holding BV. The payment was executed on 28th of September 2011.The legal reserves established during the year from realized profit is of 889,787 lei, emphasizing at the end of the year an amount of 16,400,637 lei. The net profit recorded in 2011 in the amount of 14,709,378 lei will be submitted for the allocation for the following destinations: • 889,787 lei for unifying the legal reserve; • 13,819,591 lei for dividends payable; Regarding the classification of the company in the parameters of the financial performance for fulfilling the conditions of liquidity and solvency, the dispersion of the assets admitted to cover the technical reserves are made the following specifications: the solvency margin was drawn based on the CSA Order no. 4/2008 to implement rules on the methodology of calculation of the solvency margin for the insurance company that underwrites life insurance policies, of the minimum solvency margin and the security fund and the present value of 1.5 on 31 st of December 2011. The reports of the cover of the technical reserve have been prepared in accordance with CSA orders no. 2/2009, to implement the norms concerning the form and content of the financial and technical reports need to prepare the insurance company and / or reinsurance, in accordance with the stipulations of CSA no. 113131/2006 and no.18/2008 on assets admitted to cover technical reserves and dispersion of those. It is specified that technical reserves can be covered in 90% with deposits and cash liquidities at credit institutions (banks), but no more than 10% of technical reserves in one credit institutes. To observe the degree of dispersion required by regulation, the company proceeded to open bank accounts with new partners. The coefficient of liquidity throughout the year 2011 was more than the minimum rates, recorded averages of 4.7. The following summarized financial statements analyzed bellow of BCR Asigurări de Viaţă include the summarized income statement for the year ended, on that date 31st of December 40 2010 and were prepared by extracting, without modification, the relevant information included in complete financial statements which have been prepared in accordance with the Insurance Supervisory Commission (CSA) no. 3129/2005 with subsequent amendments and completions1. Therefore, the summarized financial statements are consistent with complete financial statements. The management has prepared these financial statements summarized for publication in the annual report. The total asset value is of 595,312,848 lei, out of which the major share is the financial investment in government securities, bank deposits, municipal bonds, investments in mutual funds, listed shares and accrued interest receivable related to these forms of placement for the coming fiscal years. The sum of these forms of investment is of 338,863,789 lei, with a share of 56.92% in total assets, within these are distinguished the placements of life insurances related to risk exposure investments which is transferred to contractors 68.59% (232,417,340 million), government securities, bonds and other fixed income securities 24.65% (83,522,068 lei), bank deposits at a rate of 4.59% (15,551,643 lei), investments in investment funds and shares with 2.04% (6,906,638 lei) equity shares held in affiliated companies 0.13% (466,100 lei). Total fixed assets in the amount of 6,558,190 lei, represent 1.10% of the total assets, although a small percentage, they are important for proper development of the company's activity and represent investments in intangible assets (software licenses) and tangible assets (furniture, computers, automobiles, etc.). The value of receivables related to policies issued is the sum of 142,764,919 lei, which represent a significant share of 23.98% in total assets. The company's liability on 31 December 2011 was represented by: equity in the amount of 64,194,948 lei, ; technical reserves amounted to 478,831,551 lei ; liabilities amounted to 37,039,424 lei ; 1 These are summarized financial statements and are available at the headquarters in Rabat street no. 21, sector 1, Bucharest 41 other liabilities, amounting to 15,246,925 lei, representing provisions constituted and subordinated debt. Technical reserves in amount of 478,831,551 lei, were established in accordance with the regulations of the body for surveillance and control in insurance (Order no. 18/2008 issued by the Insurance Supervisory Commission) are maintained to cover obligations to insured and hold a share of 80.43% of total liabilities. The company‟s liabilities in amount of 37,039,424 lei are the remaining unpaid sold corresponding to reinsurance contracts in the amount of 13,902,866 lei, and other liabilities amounting 23,136,558 lei. It is highlighted the fact that the activity of BCR Asigurări de Viaţă registered a technical result in the form of a profit in amount of 8,267,972 lei. This is due mainly because of the achievement of a balanced portfolio of products and services, leading thus to a very low damage rate on all types of insurance. 3.5. Solutions to Increase Sales During Crisis: Unit-linked and Bancassurance Even though in the past the traditional products dominated the life insurance industry, currently they exist on the market with new life insurance products oriented on investments (Unit-Linked products), these having special characteristics: increase or decrease the amount insured, increases or decreases of the premium installments, forwarding premiums, transfer units, and the possibility to perform partial withdrawals. An example of the strategy adopted by the company during the crisis was to focus on their Unit-Linked products. Unit-Linked life insurances represent a new concept introduced first in Romanian by ING Asigurări de Viaţă. Unit Linked products are both, life insurance and investment products under a single contract. Unit Linked is a new product of the global insurance industry, launched in the second half of last century, benefiting from a success both in the United States and Europe. Its specificity is that the benefits obtained from the investments are set in relation to certain investment deposits 42 associated with these products, in the form of internal funds. The fundamental difference between Unit-Linked products and traditional products is that the investment risk is suffered by the policyholders. The Unit-Linked product emerged as a natural answer to the desire of investment of the clients along with the need for protection. This product has in its structure a protection and investment component. In case of death, at any time during the contract, the designated beneficiary will receive the maximum sum insured of the corresponding life insurance policy and the account value at the time. The insured amount is set by the client between a minimum and a maximum limit, depending on his or her age and the premium paid. The contractor‟s account is the equivalent value of units held in the funds of the insurer. The investment component consists of buying account units (units) in special financial funds constituted. They are internal funds, closed, representing units a portfolio of various types of financial assets managed by the insurer exclusively for the purpose of insurance. Thus, not surprisingly, the best performances were obtained by the funds located in high and medium risk categories, with investments in shares listed on stock exchanges, compared with investment programs with low risk profile which invest mainly in bonds. On the other hand, all the funds with the largest increase recorder in 2012 have at the same time the most to recover from last year‟s negative developments. In general, life insurance with attached investment funds recorded returns between 35% and over 1600% during the period from the beginning until 2012, meaning that policyholders who initially invested 100 lei now have a policy between 65 and 1,600 lei, depending on the investment program and risk profile chosen. In the first quarter of this year, most of the investment programs attached to life insurance policies with an investment component recorded increases in the value of fund units, compared with late last year, helped by the recovery of the financial market. For example, the Bucharest Stock Exchange (BVB) closed the first three months of 2012 with one of the best developments in the world, surpassing all European markets and placing on the third place globally. BVB has climbed by 23%, an evolution reflected by BET, the main local market index. 43 ING Asigurări de Viaţă expectations are that sales of new policies will remain at least at a similar level as the previous year, but will decrease the weight of Unit-Linked products newly sold, expecting a rate of 20%, compared to 35% recorded last year. Insurance with a component of protection will have an upward trend, leading to an increase in overall market share and in addition, will increase the procurement of the products with savings component with guaranteed interest. Regarding the bancassurance activity represented also a major contributor to the results of BCR Asigurări de Viaţă, during the economic crisis. Sustaining highly growth of the life segment of VIG, the group to which it belongs the insurer, in Romania. BCR Asigurări de Viaţă implemented a business model based on the distribution of life insurance contracts through a bancassurance system. The partnership agreement between Erste Bank Group and VIG insurance group, is one of the few notable success of this type in Romania. A successful bancassurance product must be simple in appearance, yet sophisticated in design. The bancassurance channel was a successful engine, whose development has taken account of the results of depth studies on the changes that have occurred in recent years in customer behavior and needs, so that the products developed should respond to real needs, said Florina Vizinteanu, CEO of BCR Asigurări de Viaţă VIG. Among the advantages of the distribution model adopted, customer loyalty of the bank and the opportunity offered, of the insurance company to address to a group of customers with excellent financial education. On the consumers side, interacting with a single financial service provider, capable to set up a package of investment products , savings and protection with a closely tailored customer profile represents a plus. The secret of success in the bancassurance model is „simplicity‟: sophisticated products, but easy to understand, both for customers and bank personnel that have to provide these products. To achieve this simplicity it, however, takes a long technical effort and imagination, constantly learning and improving processes and systems. BCR Asigurări de Viaţă VIG has successfully developed in recent years, the bancassurance distribution, a system that provides 70% of the companies underwritings and was founded in the special engine dynamics recorded of the company.BCR Asigurări de Viaţă VIG ranks second in 44 the Romanian life insurance market in, with EUR 79 million underwritings and a market share of around 19%. In 2010, the company recorded a nominal growth rate in euros, compared to the results of 2009, over 21%. Although bancsassurance was a hope for 2011, according to ING Asigurări de Viaţă representative, was materialized predominantly the classic distribution channel, direct sales force. Distribution by banks of insurance products of unattached credit, may be an opportunity for the current year. 3.6. ING Asigurări de Viaţă S.A. and BCR Asigurări de Viaţă VIG Consumers Preferences The direct consequence of the economic recession is reflected in the decrease of consumption, of the Romanians behavior when they want to conclude an insurance contract. At ING Asigurări de Viaţă, financial plans for children are among the most requested products of the portfolio, representing about one third of the total sales recorded in November of 2010 and one quarter of the entire portfolio of contracts into force. Also, in the first nine months of 2011, the average sum insured for the financial plans for children was 13% higher than the same period the previous year, while annual gross premium is about 10% higher compared to 2010. The strategies of ING Asigurări de Viaţă segment is about improving portfolio retention, orientation and sale of traditional products for children, supporting and strengthening the distribution channels, the communication with the customer and market education. In terms of distribution, channels in this regard will be the same, the company‟s sales agents remain the main binder among clients, but the company seeks to improve however the distribution to other channels, by targeting partnerships with several banks and establish new collaboration with brokers. ING Asigurări de Viaţă has registered in the first quarter of this year a profit of 5.64 million lei, decreasing by 50% over the same period of the previous year. The result is in line with the budgeted and was influenced mainly by the investments in computerization and specialization area, in order to align with new standards for reporting of insurance, was what the company 45 communicated on the official site. On the other hand, the number of new contracts that the life insurance segment increased during the reference period was of 7%. The private pension segment, the annualized performance of the mandatory pension fund investments of ING Asigurări de Viaţă until the launching on March 31, 2012 has been of 13 %.1 In late March of the current year, ING Asigurări de Viaţă private pension fund had net assets of 2.775 billion lei, up to 45.5% from the level recorded at the end of the first quarter of 2011. Thus, the market share of ING Life Insurance Pension at the end of the first quarter of this year was 38.2% of private pension market.2 (source: CSSPP) In addition, the company‟s research indicates a more responsible and interested public in planning the financial future. In these conditions, it is expected that as the economic situation will improve, life insurance to get to a higher profile in planning for financial protection of the family and savings for various goals like retirement income supplement or to ensure the future education of the children. This is however one of the long term processes, and to accelerate it requires joint efforts from all players and educational authorities in this market. Depending on the objective pursued, the way in which clients choose to collect the sums accumulated through life insurance policy contracts, when they reach maturity differ. Thus, at the level of entire portfolio of policies matured of ING Asigurări de Viaţă, 89% of the customers chose to collect the entire amount at once, and the rest choosing to receive the money in installments. In the segment of the financial plans for children, 39% of the contracts matured over the years have been paid in the form of unique payment. The experience on the banking and financial market and the concern for the clients led the Romanian Commercial Bank(BCR) to offer free life insurance contracts from BCR Asigurări de Viaţă VIG. BCR Asigurări de Viaţă is the company that registered the biggest increase last year of the market, 37% after the first nine months of 2011. 1 2 www.http://asigurari-pensii.ing.ro/Asigurari-Pensii.html http://www.csspp.ro/comunicate/comunicat-de-presa/449 46 Half of BCR Asigurări de Viaţă customers have chosen insurance protection and savings, most of them opting for insurance with an investment component, the top preferences for insurance protection and savings being the rents for children. BCR Asigurări de Viaţă promotes the Magister rent for children, a flexible product that combines features of savings and protection, allowing children to receive, at the age chosen by the parent, the amount of guaranteed money plus capitalization achieved during the contract. In terms of insurance with an investment component, the new product BCR Garant enjoyed a success. Also, in the first nine months of this year, BCR Asigurări de Viaţă has paid its customers benefits in value of 21.9 million for insured events. The life insurance company has an advantage at a strategy level being a member of Erste Bank Group. BCR Asigurări de Viaţă, as part of Erste Bank Group, has adopted practically the same strategy in regards of the customer, a very well-defined strategy, using the customer segmentation in order to develop as better as possible their products and services. Currently BCR`s customers are divided into three essential segments: the first segment is the mass-market, the mass of customers, people who have become bank customers to have access to credit, or a simple current account for the salary card. To these customers the life insurance company provides the type of products traditional for a loan. Then comes the second segment: the mass affluent segment, the customers who are already is a client that has more than that, the type of client that uses in addition other banking products. For these customers BCR Asigurări de Viaţă comes with dedicated products, with unit-linked products, the first installment: unit-linked products of saving products for children and, of course, credit type products. Then, the company has the private-banking customers, which are extremely sophisticated customers. The main products offered to them are the index-linked, which is a more expensive product. In fact, it is not necessarily an expensive product, but it is a product that can be structured more efficient than a single-premium product, therefore a single payment of a higher value. But index-linked is a product that the company offers also to the mass-affluent areas with 47 developed economy and higher living standards, as Bucharest is. So the Life Insurance Company is in partnership with a bank that already has access to a customer brought in a community. The company‟s managers consider that it is a time when the need for such a product is obvious in Romania, given the negative aspects facing the educational system and the glaring lack of material resources of the parents for the education of their children. As already seen, there is a tendency to go to universities abroad, a trend that can be very beneficial for insurance companies, and anytime a product of this type may also support the goals of a child in a family of middle-income. 48 Conclusion This graduating paper stands to analyze the modern selling methods in insurance of the Romanian market. More precisely, as described and analyzed in the third chapter of the paper the evolution of the first two leading companies in the life insurance industry. The life insurance market is characterized through demand and supply chain, supervisory and regulatory organizations, specialized companies providing related services of insurance and reinsurance. The link between demand and supply carriers is done by the personnel of the insurance companies or by means of intermediary agents, insurance professionals, who are called financial consultants or brokers. According to the features presented in Chapter 2, the insurance market in Romania is a free and competitive market, „young‟ with an increasing demand for insurance products. This is proved by the evolution over the years, of the gross written premiums, of the insurance penetration, the density of life insurance, the number of insurance and reinsurance companies and the number of employees in the industry. Also, for the development of the life insurance sector, the profile companies should have a contribution by aligning supply of products, targeted so far, mainly for high-income segment of the population, to the middle class which is developing increasingly stronger lately. Most of the Romanian population considers the life insurance a luxury product that can afford it only „those with financial possibilities‟ and wanted only by those with „Western mentality‟ irrelevant and difficult to understand. Thus, insurance companies should contribute to change the mentality of the Romanians, to educate them, to make them aware of the importance of concluding a life insurance contract and the benefits they offer. The Romanian economy is directed by specific reforms, required and monitored by the European Union after the accession. Regarding the evolution of political and business environment, without a degree of political uncertainty, there remains a risk of consistency in economic reforms in Romania on the road to implementation of the European standards. Romania remains vulnerable due to persistent external imbalances and insufficient budgetary adjustments, while financing conditions, according to estimates, is about to tighten again in 2012 due to the increased aversion of investors towards risk. 49 In a general economic context, the year 2011 represented for both companies a year of launching innovative products on the Romanian market, which helped in strengthening their position on the life insurance market. Following the patterns of the previous year, ING and BCR Asigurări de Viaţă should continue also in 2012 their evolution and to focus their attention on customer needs and demands. Education campaigns in the financial field, represent an important tool in increasing sales by informing consumers about the benefits and functioning of life insurances and pension funds should also continue during 2012, as part of a tradition followed by the two companies as leaders and market makers. In order to maintain their market share in 2012, ING Asigurări de Viaţă and BCR Asigurări de Viaţă have to continue to develop sustainable approaches related to customer relationships by increasing the benefits offered by professional development and sales force in terms of operational efficiency and financial soundness. Last but not least, in 2012, should also meet the need for consumer protection in the area of prevention and health by reviewing and completing offer additional health insurance, while employers segment approach in terms of voluntary pensions. 50 Bibliography 1) Badea, Gh. D., Insurance & Reinsurance, Ed. Economică, Bucureşti, 2003 2) Badea, Gh. 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