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Overview

Overview. In this segment ... Insurance Companies: Two major groups: Life Property & Casualty Size, structure and composition Balance sheets and recent trends Regulation of insurance companies Global competition and trends. Insurance Companies. Differences in services provided by:

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Overview

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  1. Overview • In this segment ... Insurance Companies: • Two major groups: • Life • Property & Casualty • Size, structure and composition • Balance sheets and recent trends • Regulation of insurance companies • Global competition and trends

  2. Insurance Companies • Differences in services provided by: • Life Insurance Companies • Property and Casualty Insurance

  3. Life Insurance Companies • Size, Structure and Composition of the Industry: • In 1988: 2,300 life insurance companies with aggregate assets of $1.12 trillion • Mid 2000s: 1,300 companies • In early 2006: $4.5 trillion in assets • 3 largest wrote 20% of new premium business in 2005 • Increasing involvement of commercial banks in insurance policy sales • 2005: Nationwide sold $33.1 million via banks. 45% increase over 2004

  4. Life Insurance Companies • Significant consolidation in life insurance industry although not to the same extent witnessed in banking • Competition from within industry and from other FIs • Conversion to stockholder controlled companies

  5. Mutual versus Stock Insurance Companies

  6. Biggest Life Insurers

  7. Life Insurance: Issues • Demutualization • Adverse selection • Insured have higher risk than general population • Alleviated by grouping of policyholders into risk pools

  8. Life Insurance Companies • Life Insurance Products: • Ordinary life • Term life, Whole life, Endowment life. • Variable life, Universal life, Variable universal life. • Group life • Industrial life • Credit life

  9. Distribution of Premiums

  10. Other Life Insurer Activities • Annuities • Reverse of life insurance activities. • Topped $272 billion in 2005 • Ethics: Conseco, 2004 • Private pension funds • Compete with other financial service companies. • Mid 2000s, managing $2.3 trillion (45% of all private pension plans) • Accident and health insurance • Morbidity insurance • Effects of growth in HMO enrollment

  11. Balance Sheet • Long-term assets • Need to generate competitive returns on savings components of life insurance policies • Bonds, equities, government securities • Policy loans • Long-term liabilities • Net policy reserves to meet policyholders’ claims • Separate account business 32.9% of total liabilities and capital in 2006.

  12. Regulation of Life Insurance Companies • McCarran-Ferguson Act of 1945 • Confirms primacy of state over federal regulation. • State insurance commissions • Coordinated examination system developed by the National Association of Insurance Commissioners (NAIC). • States promote life insurance guaranty funds • Not permanent funds (like FDIC) • Required contributions from surviving within-state firms. • Financial Services Modernization Act, 1999

  13. Recent Regulatory Issues • 2004: Proposals to create council of federal and state officials to oversee insurance • Complaints of costly and cumbersome state regulation • Possibility of a dual (State and Federal) system similar to bank regulatory system. • Resistance from states, consumer groups, Congress

  14. Web Resources • For more detailed information on insurance regulation, visit: www.naic.org www.ins.state.ny.us

  15. Property and Casualty Insurance • Size and Structure • Currently about 2,700 companies. • Highly concentrated. Top 10 firms have 48% of market in terms of premiums written. • Top 100 frims: over 87% • M&A increasing concentration

  16. P&C Products • Fire insurance and allied lines • Homeowners multiple peril insurance • Commercial multiple peril insurance • Automobile liability and physical damage insurance • Liability insurance (other than automobile)

  17. Property-Casualty • 2005: Changing composition of net premiums written since 1960: • decline in fire insurance and allied lines: 3.7% in 2005 vs. 16.6% in 1960 • Homeowners MP: 12.2% vs. 5.2% in 1960 • Commercial MP: 6.8% vs. 0.4% in 1960 • Auto L&PD: 42.8% vs. 43% in 1960 • Other liability: 23.7% in 2005 vs. 6.6% in 1960

  18. P&C Balance Sheet • Similar to life insurance cos. (Smaller asset base) • Requirement for liquid assets • Major liabilities: loss reserves, loss adjustment expense and unearned premiums.

  19. Loss Risk • Underwriting risk may result from • Unexpected increases in loss rates • Unexpected increases in expenses • Unexpected decreases in investment yields or returns. • Property versus liability: • Losses from liability insurance less predictable. Example: claims due to asbestos damage to workers’ health.

  20. Loss Rates • Severity versus frequency: • Loss rates more predictable on low-severity, high-frequency lines (such as fire, auto, homeowners peril) than on high-severity, low-frequency lines (such as earthquake, hurricane, financial guaranty). • Claims in high-severity, low-frequency lines may not be independent. • Higher uncertainty forces PC firms to invest in more short-term assets and hold larger capital and reserves than life insurance firms.

  21. Insurance Risks Post 9/11 • Crisis generated by terrorist attacks forced creation of federal terrorism insurance program in 2002 • Federal government provides backstop coverage under Terrorism Risk Insurance Act of 2002 (TRIA) • Caps losses for insurance companies • Key provisions extended in 2004

  22. Long Tail Versus Short Tail • Long-tail risk exposure: • Arises where peril occurs during coverage period but claim is made many years later. • Examples: Asbestos cases and Dalkon shield case. • Efforts to contain long-tail risks within subsidiaries. Example: Halliburton

  23. Insurance Costs: Social Inflation • Product inflation versus social inflation • Unexpected inflation may be systematic or line-specific. • Social inflation: unexpected changes in awards by juries. • Reinsurance • Approximately 75 percent of reinsurance by US firms is written by non-US firms such as Munich Re. • Catastrophe bonds

  24. Underwriting Ratios • Loss ratios have generally increased. • Expense ratios have generally decreased. • Trend toward selling directly through their own brokers rather than independent brokers. • Combined ratio: • Includes both loss and expense experience. • If greater than 100 then premiums are insufficient to cover losses and expenses.

  25. Investment Yield / Return Risk • Operating ratio = Combined ratio after dividends minus investment yield. • Importance of investment income: • Causes PC managers to place importance on measuring and managing credit risk and interest rate risk.

  26. Recent Trends • PC industry was not very profitable during 1987 - 2006. • Succession of catastrophes • Hurricane Hugo 1989, San Francisco Earthquake 1991, Oakland fires 1991, Hurricane Andrew 1991 • 2004, Hurricanes Charley, Frances, Ivan, Jeanne in rapid succession generated claims comparable to Andrew. • Trough of underwriting cycle. • September 11, 2001 terrorist attacks created an insurance crisis (and heightened demand). • Potential for crowding out via government actions

  27. Regulation • PC insurers chartered and regulated by state commissions. • State guaranty funds • National Association of Insurance Commissioners (NAIC) provides various services to state regulatory commissions. • Includes Insurance Regulatory Information System (IRIS). • Some lines face rate regulation. • Criticism regarding Katrina related claims

  28. Global Issues • Insurance industry becoming more global • Regulatory and tax effects in Cayman Islands and Bahamas • Introduction and acceleration of insurance market reforms • cross-country mergers (insurance companies as well as universal banks)

  29. World’s Largest Life Insurers Revenues ($millions)Country ING Group 138,235 Netherlands AXA Group 129,839 France Assicurazioni Generali 101,404 Italy Aviva 92,579 UK Prudential 74,745 UK Nippon Life 61,158 Japan

  30. World’s Largest P & C Insurers Revenues ($millions)Country Allianz 121,406 Germany American Int’l Group 108,905 US Berkshire Hathaway 81,663 US Zurich Financial Svc. 67,186 Switzerland Munich Re Group 60,256 Germany State Farm Insurance 59,224 US

  31. Pertinent Websites A.M. Best: www.ambest.com Federal Reserve: www.federalreserve.gov Insurance Information Institute: www.iii.org Insurance Services Offices: www.iso.com National Association of Insurance Commissioners: www.naic.org State of NY Insurance Guarantee Fund: www.ins.state.ny.us

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