Introduction to the Insurance Industry

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 $7.3 trillion in 2022 (the latest data available).

In America alone, the insurance business employed about 2.94 million people as of July 2023 according to the U.S. Bureau of Labor Statistics. Gross life and accident & health insurance premiums in the U.S. totaled $1,172.0 billion during 2022 (up from $1113.0 billion in 2021; this is the latest year available), per the National Association of Insurance Commissioners (NAIC). A large number of companies underwrite insurance in America, but the industry is dominated by a handful of major players.

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 developing nations, such as India, Brazil and Indonesia, to the future growth of the insurance industry. Much of the world is still clearly a fertile field for expansion of insurance companies that are willing and able to invest time and money in emerging markets. The insurance markets in these areas will be boosted by a combination of rising household incomes; increasing education and financial sophistication among consumers; extending life spans; and a tradition of families relying on personal savings and initiative rather than government social programs to provide for retirement funds and health care.

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.

In America, insurance is unique in the financial services field because, unlike banking and investments which are regulated to a large extent (although not entirely) by federal agencies, insurance is regulated primarily at the state level. This means that insurance firms must deal with up to 50 different sets of state regulations and 50 different state regulatory agencies, which may vary widely in their requirements related to allowing an insurance firm to offer policies in their states. 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. A property and casualty insurance company may, from time-to-time, face a year of losses, rather than profits, due to natural disasters such as hurricanes, earthquakes or floods. Insurance underwriters also face risks in the investments that they make with the funds they are holding in reserve against future payouts. If they make poor investment choices, it can lead to serious financial problems. 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. Today, however, nearly all U.S. insurance underwriters were in excellent financial condition and had very substantial reserves on hand to cover losses. This was particularly important during the Coronavirus pandemic, when businesses made substantial insurance claims—although the extent to which insurance firms are liable for such claims remains to be seen. In addition, most insurance firms lay-off a substantial portion of potential losses to third-party “reinsurance” companies and hedge funds willing to take such risks. Consequently, even major disasters may not put the insurance industry in financial jeopardy.

The insurance industry includes a wide variety of sectors and services. The most obvious are the 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, consultancies, loss inspectors (“insurance adjusters”) and myriad other specialized fields serving the industry. In addition, there are insurance brokers, which have traditionally posted enviable profits. Insurance brokers represent the interests of corporate clients while finding their customers the best coverage at the best rates. Elsewhere, banks such as Wells Fargo are doing reasonably well in the sale of insurance products, particularly annuities and life insurance. Investment companies like Merrill Lynch (part of Bank of America) have been eager to sell insurance to their customers as well.

While there are tens of thousands of small insurance firms worldwide, the industry tends to be concentrated in a few hundred major companies, many of which enjoy brands that are household names. A handful of these top firms operate on a truly global scale.

Health coverage is a major component of the insurance field. Health spending in the U.S. is projected to grow steadily. Health care spending in America accounts for a larger share of GDP than in any other country by a wide margin. Despite the incredible investment America continues to make in health care, including government-provided programs such as Medicaid, millions of people continue to lack health coverage. For some, insurance was unavailable or unaffordable. In other cases, a lack of insurance was due to a personal decision not to pay for it. (It is worthwhile to note that the official uninsured count includes aliens who are in the U.S. illegally.)

The Patient Protection and Affordable Care Act (ACA) was designed to strengthen insurance company regulation and provide medical coverage to millions of uninsured Americans. Consumers whose annual incomes do not exceed set amounts may purchase health insurance at subsidized rates.

The act called for sweeping changes on most insurance policies, including coverage for adult children up to age 26 on their parents’ policies; other rules that make it unlawful for insurers to place lifetime caps on payouts or deny coverage should a policy holder become ill; and requirements that policies must pay the full cost of selected preventive care and exempt such care from deductibles.

Online health care insurance “exchanges” began enabling consumers to shop for health coverage. Special investment income taxes on above-average earners were instituted to help fund the program.

Internet Research Tip:

Excellent sources of in-depth insurance industry information can be found at the following sites:

= Insurance Information Institute, www.iii.org

= National Association of Insurance Commissioners, www.naic.org

= National Association of Mutual Insurance Companies, www.namic.org

= Swiss Re, www.swissre.com

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