What is insurance?

This is not as easy a question as it might seem. There are dozens of sub-divisions within the insurance industry and they operate in very different ways.

The industry is usually broken down into two key areas:

• Life assurance companies — these firms offer life insurance, pensions and annuity products and are part of the long-term savings and investment market.
• Non-life or general insurance — these companies provide all other forms of insurance: mainly those policies that protect you against an event such as crashing your car or your house burning down.

So, are they really one single industry? The answer is yes — for two reasons:

• Both are based on statistical probabilities. In the case of a long-term investment culminating in a pension, the life assurance company is offering protection against your financial resources being exhausted before you die — a very real concern as life expectancy increases. More obviously, the non-life companies are basing their models and their pricing on the likelihood of a particular kind of event happening.
• Many life and general insurance companies have come together to form what are known as composite insurers, offering both life and general insurance. These companies — such as Aviva/Norwich Union — tend to be very large indeed.

Behind these companies, there are also wholesale insurance markets, and the strength of the UK in these makes the City one of the largest insurance centres in the world.

General insurance companies take on big risks. Sometimes these are a combination of large numbers of small risks, such as insuring a million car drivers. Sometimes, on the other hand, they are large individual risks, such as insuring a cruise liner. Insurers need to manage these risks and share them out across a number of other insurers, so that a single ship sinking doesn’t bring down the company. There are two ways of doing this:

• Lloyds of London — this is the UK’s unique market in insurance risk. Lloyds handles all forms of risk from across the world. The insurance companies that sell policies can go to Lloyds and sell on some of the risk they have taken on to the so-called 'syndicates'. These syndicates agree to take on some of the risk, for a fee, and if a disaster hits they will contribute to settling the claim.
• Re-insurance — the other model is the re-insurance industry, where large companies buy and trade risk. This is a market dominated by large reinsurance companies from Germany, Switzerland, Italy and the US. However, given the concentration of skills in the City and the overlap with Lloyds, many of these firms also have very large operations in the UK.

In addition, there is a wholesale market that sits behind the life industry. People invest their hard-earned cash in financial products, such as pensions, offered by life companies in the hope of having a comfortable life in the future. Life companies invest these funds with the intention that their value will increase and cover any future liabilities — for example, the provision of a decent pension.

As a result, these companies are major players in the investment and wholesale capital markets — indeed, they are the primary source of long-term investment for those markets. They use their massive cash balances to buy shares and bonds in companies in the hope that these investments generate a good return for their customers. This makes life assurance very similar to the asset management business, and many assurance products are direct rivals to other forms of long-term investment such as unit trusts.

In fact, it’s not only the life companies that operate in this way. So too do the general insurers, which also have large amounts of money to invest when they are not faced with large claims. The market for general insurance is so competitive that it is often the returns insurers make on their stock market investments that produce their profit.

So is there a role for you?

This is a massive industry with jobs at all levels.

The most obvious roles are those related to the distribution of the products and the management of any claims that are made.

Distribution

• General insurance — this is now mostly sold through call centres and websites, or as part of another package of financial services products (such as a buildings insurance policy sold with a mortgage). As a result, there are large numbers of jobs in the area of call centre customer sales and service representative. See Customer Service and Sales Representative - Call Centre
• Life sales — since these are mainly long-term investment policies, they are regulated products. This means that you are required to hold a regulatory qualification in order to sell them — entirely understandable, in view of the fact that these products are often very complex, and the choices people make can materially affect the rest of their lives. This is the field of the financial adviser (see Financial Adviser). The rewards can be good, but the responsibility is growing all the time. Large life companies now employ increasing numbers of compliance officers to ensure the processes and procedures required by the regulator are maintained. See Compliance Officer

Claims

Many claims are handled very straightforwardly through call centres and operational hubs. Insurance companies employ large numbers of people in operational and administrative roles. These staff have a number of responsibilities. They must ensure:

• that sales are completed correctly and that procedures such as background checks are carried out;
• that customers are kept informed about the performance of their products (especially important for pensions and other long-term investments;
• that basic claims are managed efficiently and quickly to keep customers happy, while any suspicious claims are highlighted for professional investigation.

For further information on these types of role see Operations and Administration

Claims is an area where there are also highly specialised jobs specific to the insurance industry. If a claim is not entirely straightforward, an insurance company will send a claims inspector to check damage and assess the loss. If the loss is very large or complex, they may send a loss adjuster.

Loss adjusters are either employed by an insurance company or are independent consultants working for insurance groups on a case-by-case basis. They assess claims, which in turn leads to an offer for settlement.

For more information on this area, go to the Chartered Institute of Loss Adjusters.

Investment

For life companies, and for many general insurance groups, investment of policyholders’ funds is a vital part of the business. Together, these firms are known as institutional investors and they dominate investment markets. They employ large numbers of portfolio managers, whose job is to make a return (ie to increase the value) on the funds they manage. However, in a number of cases, life assurance companies have decided to concentrate on the packaging of policies for their customers and have handed responsibility for actually managing their investments to large investment management companies. Many of these companies are owned by investment banks.

Risk

We have mentioned risk a number of times, and the insurance industry has its own world of risk assessment, based around statistical modelling. Actuaries carry out this work. They tend to have very good degrees in maths and other quantitative disciplines. This is a complex but very well-paid area. For more information, see the Institute of Actuaries and the Faculty of Actuaries (which is the Scottish professional body). Both can be found at http://www.actuaries.org.uk.