1. 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 $4.270 trillion in 2008 (the latest data available), up about 6.3% from $4.061 trillion in 2007. This was equal to about 6.18% of global GDP. Global life insurance premiums were $2.79 trillion during 2007, while all other types of insurance totaled $1.78 trillion. In America alone, the insurance business employed about 2.31 million people in 2008, and insurance gross premiums totaled $1.13 trillion, making the U.S. the world’s largest insurance market. For 2009, life, accident (including supplemental health) and annuity premiums in the United States will total an estimated $679 billion. Property and casualty premiums will total about $450 billion for 2009. U.S. life insurance firms held about $4.51 trillion in assets in 2008, according to the Federal Reserve Bank. Approximately 4,500 companies underwrite insurance in America, but the industry is dominated by a handful of major players. According to Swiss Re, total insurance premium volume for 2008 was $1.75 trillion in Europe; $933.3 billion in Asia; $104.9 billion in Latin America and the Caribbean; $29.2 billion in the Middle East and Central Asia; and $54.7 billion in Africa. Again, these figures are from Swiss Re (www.swissre.com). 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. While it will take many years for underdeveloped nations to begin spending significant amounts on insurance products, 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. Per capita premiums worldwide were $646 in 2008, compared to $2,990 in North America. More than 87% of that year’s premiums were earned in industrialized nations, leaving a bit more than 12% earned in emerging markets. Massive sources 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 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 meltdown hurt 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 in developed countries. The best growth was in emerging markets, including a 16.3% premiums increase in 2008 in South and East Asia. Europe showed a 6.2% decline while North America showed a 3.1% decline. 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. underwriting does not earn...
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