Insurance and risk management make up an immense global industry. According to a survey conducted by a leading global insurance firm, Swiss Re, worldwide insurance premiums totaled $4.33 trillion in 2010 (the latest data available), up from $4.06 trillion in 2009. This was equal to 6.89% of global GDP. Global life insurance premiums were $2.52 trillion during 2010, while all other types of insurance totaled $1.81 trillion.

In America alone, the insurance business employed about 2.23 million people in 2010. Gross insurance premiums totaled $1.16 trillion (per SwissRe). More than 4,000 companies underwrite insurance in America, but the industry is dominated by a handful of major players.

Total insurance premium volume for 2010 in industrialized nations was $3.6 trillion. In emerging nations, where the fastest growth is to be found, total premiums were $650 billion, up 10.9% over the previous year, including $128 billion in Latin America and the Caribbean; $33 billion in the Middle East and Central Asia; and $67 billion in Africa. Again, these figures are from Swiss Re (www.swissre.com/sigma/).

Premiums on a per capita basis remain very low in much of the world, pointing to excellent long-term opportunity for expansion of sales of insurance products of all types, including annuities. It would be hard to overstate the importance of emerging nations, especially China, India, Brazil and Indonesia, to the future growth of the insurance industry. Total premiums in China were $215 billion in 2010. That may not sound like much compared, for example, to $310 billion in the U.K., but China’s premiums were up 26.2% over the previous year, while the U.K.’s were down by 2.7%. India’s premiums in 2010 totaled $78 billion, up a respectable 4.9%. Much of the world is still clearly a fertile field for expansion of companies that are willing and able to invest time and money in emerging markets. The insurance market in the emerging world will be boosted by a combination of rising household incomes, increasing education and financial sophistication among consumers, extending life spans, and a tradition of families relying on personal savings and initiative rather than government social programs to provide for retirement funds and health care.

Massive amounts of insurance company earnings come from the sale of annuities and other retirement and investment products, along with profits (or losses) that insurance underwriters earn on the investment of their own assets and reserves. 2008’s stock market meltdown had a significant effect on profits and assets at life insurance companies in particular, and property & casualty companies to a lesser degree. Insurance companies also hold immense investments in real estate, hedge funds, private equity, venture capital funds and other types of investments. The global financial crisis hurt nearly all of these asset classes and thus hit the capital base of the insurance industry in a hard way. At the same time, business bankruptcies, unemployment and cost-cutting by both businesses and consumers hurt insurance sales. However, a recovery in stock and bond markets that began in the spring of 2009 and ran through late 2011 provided a boost to the investment earnings of the insurance industry.

In America, insurance is unique in the financial services field because, unlike banking and investments, which are regulated largely (although not entirely) by federal agencies such as the Securities and Exchange Commission, insurance is regulated primarily at the state level. This means that insurance firms must deal with up to 50 different sets of state regulations and 50 different state regulatory agencies. At the same time, they must develop dozens of different premium rate structures that appropriately reflect the costs of meeting local risks and fulfilling state requirements. As a result, few insurance underwriters offer all of their insurance products in all 50 states; many do business only in a limited number of states. It is a regulatory and administrative nightmare that limits consumer choices and drives up overall insurance costs.

Insurance underwriting does not earn consistent levels of profits. Property and casualty insurance companies sometimes face a year of losses, rather than profits, due to natural disasters such as hurricanes, floods or an overly active fire season. The devastating tsunami and related nuclear power plant meltdown in Japan in March 2011 put a severe strain on the insurance industry; however, much of the total loss was either uninsured or was covered by government. 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. For example, Yamato Life Insurance Company, a leading Japanese firm that had been in business for nearly 100 years, took bankruptcy in October 2008.

During 2005, Hurricanes Katrina and Rita in the U.S. cost insurance underwriters vast amounts (damages, both insured and non-insured, totaled about $58 billion) and created significant controversy over flood insurance in general. Many changes resulted, and insurance underwriters felt compelled to boost rates for many types of insurance, especially in Gulf Coast markets. More recently, much of each hurricane season’s risk has been sold by primary underwriters to hedge funds and reinsurers who buy portions of large, high-risk insurance policies. This enables property & casualty underwriters to continue to earn reasonable profits while laying-off a significant part of potential losses if there is a devastating hurricane.
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