1. Introduction to the Insurance Industry
Insurance and risk management is an immense global industry.
In America alone, the insurance business employs about 2.5
million people. Life and health insurance in the United States
will be about a $725 billion in gross revenues business in
2006, compared to only about $500 billion in 2002. U.S. life
insurance firms hold about $3.8 trillion in assets.
Personal lines comprise another vast sector of insurance.
For example, private passenger automobile insurance will be
about a $172 billion annual premium market in the U.S. for
2006. Homeowners insurance is about a $50 billion market.
Property and Casualty insurance premiums will total about
$450 billion in the U.S. for 2006.
Additionally, massive sources of insurance company income
include annuities and other retirement and investment products,
along with profits that insurance underwriters earn on their
own assets and reserves. For example, the National Association
of Insurance Commissioners (NAIC) estimates that life and
health insurers earned about $140 billion in net investment
income in each of the first three years of the 2000s.
Insurance is unique in the financial services field because
it is regulated primarily at the state level (while banking
and investments are regulated primarily by powerful federal
agencies such as the Securities and Exchange Commission).
This means that insurance firms must deal with up to 50 different
sets of state regulations and 50 different state regulatory
agencies. At the same time, they must develop dozens of different
premium rate structures that appropriately reflect the costs
of meeting local risks and fulfilling state requirements.
As a result, few insurance underwriters offer all of their
insurance products in all 50 states; many do business only
in a limited number of states.
Insurance underwriting does not earn consistent levels of
profits. Insurance companies sometimes face a year of losses,
rather than profits, due to natural disasters such as hurricanes,
floods or an overly active fire season. Health insurance can
be a particularly difficult sector in which to earn steady
profits, because costs often exceed projections. Occasionally,
insurance underwriters go broke, and firms that rate the financial
stability of insurance underwriters always list more than
a few that are not financially sound.
During 2005, Hurricanes Katrina and Rita cost U.S. insurance
underwriters vast amounts and created significant controversy
over flood insurance in general. Many changes may result,
and insurance underwriters will feel compelled to boost rates
for many types of insurance in Gulf Coast markets
The insurance industry includes a wide variety of sectors
and services. The most obvious are insurance underwriters
that cover the risks and issue the policies, along with the
agencies that sell insurance. However, there are also large
numbers of consulting firms, claims processing firms, data
collection firms and myriad other specialized fields serving
the industry.
In addition, there is the insurance brokers’ niche,
which has traditionally posted enviable profits. Normally,
insurance brokers—companies that are supposed to represent
the interests of major corporate clients while finding these
customers the best coverage at the best rages—would
be little known to the general public. However, scandal rocked
the brokerage sector during 2004, and regulators’ efforts
to control this sector continue to create vast changes. Meanwhile,
some members of the brokerage industry are promoting the idea
of important changes from within, including the abolition
of incentive payments and a focus on acting as advocates for
clients.
Recent regulatory changes have heightened competition within
the insurance industry—an area in which competition
has always been fierce. Financial services mega-firms have
resulted, many of which offer a complete range of financial
services and products to their customers, from checking accounts
to investment products to life insurance. For example, banks
are slowly gaining market share in the sale of insurance products,
particularly annuities and life insurance. Investment companies
like Merrill Lynch are eager to sell insurance to their customers
as well. Bank holding companies have been aggressively acquiring
insurance agencies. Competition will only become more intense.
While there are tens of thousands of small insurance industry
companies in the U.S. alone, the industry tends to be concentrated
in a few hundred major companies, many of which enjoy brands
that are household names. A handful of these leading firms,
such as AIG, operate on a truly global scale.
The biggest challenges facing the insurance industry today
lie in the health coverage sector, where soaring costs, malpractice
liability suits and a rapidly aging U.S. population make it
extremely difficult for insurers to forecast future costs
and appropriately price their products. Meanwhile, health
coverage underwriters face growing demand from patients for
more choices of providers and treatments.
|
