the private insurance industry n.
Download
Skip this Video
Loading SlideShow in 5 Seconds..
The Private Insurance Industry PowerPoint Presentation
Download Presentation
The Private Insurance Industry

Loading in 2 Seconds...

play fullscreen
1 / 46
kinsey

The Private Insurance Industry - PowerPoint PPT Presentation

135 Views
Download Presentation
The Private Insurance Industry
An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.

- - - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript

  1. The Private Insurance Industry • Measured by any one of a number of standards, the insurance industry in the U.S. is significant. • 1. 7,900 insurance companies (insurers) • 2. 2.1 million persons employed • 3. $3.1 trillion in assets • 4. 13.6% of Gross National Product

  2. Types of Company by Product • 1. Life insurers • write life, annuities, and health insurance • about 2,000 companies in 1998 • 2. Property and Liability insurers • write property & casualty (including health) • about 3,900 companies in 1998 • 3. Health and Accident insurers • 400 monoline health insurers • 69 Blue Cross & Blue Shield organizations • 1,600 capitating providers (HMOs and PSOs)

  3. Types of Insurers by Form of Ownership • 1. Capital stock companies • 2. Mutual companies • 3. Reciprocals-attorney in fact • 4. Lloyd's associations • 5. Health Expense Associations • 6. Government Insurers

  4. Capital Stock Insurers • 1. Organized as profit-making ventures with stockholders who assume the risk that is transferred by insureds. • 2. Premium charged by insurer is final--there is no form of contingent liability for policyholders. • 3. Board of directors is elected by stockholders. • 4. Earnings are distributed to stockholders as dividends on their stock.

  5. Mutual Insurers • 1. Owned by policyholders • 2. Distinguishing characteristic is distribution of earnings. Money left after paying costs is returned to policyholders as a dividend. • 3. Broadly speaking, mutuals are divided into three classes • pure assessment mutual • advance premium with assessable policies • advance premium nonassessable mutuals

  6. Demutualization • In 1990s--a period of mergers and acquisitions --disadvantages of mutual form of organization became more apparent: • limited mechanisms for accessing capital • structure of mutuals not particularly flexible • mutuals cannot use stock for acquisitions • federal legislation to allow banks and insurers to affiliate requires a holding-company structure

  7. Demutualization • A number of insurers have demutualized -- that is, converted from mutual to stock insurers (or in some cases to a modified proprietary form). • When demutualizing, a mutual insurer issues stock to policyholders, but also sells new stock. • Policyholders have a choice between stock in the new company or cash. • Some take stock and some take cash.

  8. Mutual Holding Company Structure • Besides demutualization, some insurers have opted for a different approach, under state mutual insurance holding company laws. • Mutual converts to a stock insurer owned by a holding company that is organized as a mutual. • Policyholders own mutual holding company and their contractual rights as insureds remain in the stock insurance company. • holding company can own subsidiaries, and raise capital by selling stock in subsidiaries. • State laws generally require that voting control remain with the holding company.

  9. Reciprocal Insurers • 1. Also called “interinsurance exchange” • 2. Unincorporated aggregation of individuals, called subscribers, who exchange risks • 3. Each member is both insured and insurer • 4. In a mutual, policyholders assume liability collectively; in a reciprocal, subscribers assume liability severally • 5. Administrator of the program is known as the attorney-in-fact

  10. Lloyd’s Associations • 1. Lloyds of London • 2. American Lloyds

  11. Lloyd’s Associations • 1. Named after London coffee house where modern marine insurance originated. • 2. Lloyds does not write insurance, but is like the New York Stock Exchange, where buyers and sellers transact business. • 3. Originally, insurance was written by over 30,000 “names,” with unlimited liability, usually as members of syndicates.

  12. Reconstruction and Renewal Plan - 1995 • Lloyds manner of operating changed after losses in 1980s led to suits against Lloyds by members • Reconstruction and Renewal Plan: • 1. Settlement offer to members • 2. Reinsurance of pre-1992 losses (Equitas) • 3. Revision of financial standards at Lloyds • corporate entities • limited liability • increased financial requirements

  13. American Lloyds • American Lloyds are U.S. organizations whose operations are patterned after Lloyds of London.

  14. Insurance Exchanges • States of Florida, Illinois, and New York enacted legislation authorizing “insurance exchanges” patterned after Lloyds in 1979. • Florida and New York exchanges encountered financial difficulty and failed. • Illinois exchange continues to operate successfully.

  15. Health Expense Associations • 1. Originally, Blue Cross and Blue Shield plans were formed to allow prepayment of hospital and physicians services respectively. • 2. Now include Health Maintenance Organizations which provide a wide range of health care services in return for an annual membership fee. • 3. Physician-Hospital Organizations (AKA Provider-Sponsored Organizations) are provider-owned delivery systems being formed in many areas.

  16. Health Expense Associations • 1. Terminology in this area is changing due to the various proposals for reform in health care delivery system. • 2. Physician Hospital Organizations (PHOs) also sometimes called Integrated Delivery Systems (IDS). • 3. Medicare reforms in the Balanced Budget Act of 1997 introduced the term “Provider Sponsored Organization” (PSO).

  17. Government Insurers Defined • 1. Direct provision by the government • 2. Government reinsurance • 3. Does not include self-insurance of government exposures

  18. Reasons for Government Insurance • 1. Fundamental risks that require compulsion and lack equity • 2. Hazard considered too great by private insurance • 3. Adverse selection against private insurers • 4. Tools of social change by government • 5. Mistaken notion that government can repeal the law of averages

  19. Federal Private (Voluntary) Programs • 1. War Risk Insurance (WW I, WW II) • 2. Nuclear Energy Liability (1957-1975) • 3. Federal Riot Reinsurance Program (1968-1983) • 4. Post Office Insurance coverages • 5. Federal Crop Insurance • 6. Mortgage Loan Insurance (FHA, VA) • 7. National Flood Insurance Program • 8. Federal Crime Insurance Program (1971-1996) • 9. SBA surety bonds • 10. Federal Fidelity Bonding Program • 11. Export-Import bank • 12. Overseas Private Investor Corporation • 13. Servicemen's and Veteran’s Life Insurance

  20. State Private (Voluntary) Programs • 1. State workers compensation programs • 2. Wisconsin State Life Insurance Fund • 3. Title insurance funds • 4. Maryland State Automobile Insurance Fund

  21. The Agent • The agent is the central figure in the marketing process. • The relationship between agents and the companies they represent varies. • Through a process of evolution, several marketing forms have evolved. • Each has as its goal efficiency in distribution and service.

  22. Distinction Between Agent and Broker • Agent:an individual authorized by an insurer to create, modify, and terminate contracts of insurance. • Broker:a representative of the insured who solicits business from insurance buyers but who is compensated by the insurer. • The agent can “bind” an insurer to a risk. • A broker does not have binding authority.

  23. Consultants and Financial Planners • In addition to agents and brokers, there is a growing number of risk management consultants who offer services on a fee basis. • In the personal lines field, there has been rapid growth in the personal financial planning field.

  24. Life Insurance Distribution Systems • 1. General Agents • 2. Branch Office System • 3. Personal Producing General Agent

  25. General Agent System • 1. General agent is empowered by insurer to operate in a given territory and to appoint subagents. • 2. G.A. receives an overriding commission on business produced by subagents, out of which it pays expenses. • 3. Most general agents receive some additional financial support from the insurer.

  26. Branch Office System • 1. Branch office manager is an employee of the insurance company. • 2. Expenses of branch office are paid by insurer, since branch office is simply an extension of the home office. • 3. Branch manager may receive additional compensation based on production of agents supervised.

  27. Personal Producing General Agent • 1. PPGAs are usually agents with a record of successful production. • 2. Operate under contracts that give them greater compensation than other agents. • 3. PPGAs pay their own expenses, including office and clerical. • 4. PPGAs have authority to appoint subagents, but usually concentrate on personal production.

  28. Property & Liability Distribution Systems • 1. American Agency System • Agency represents multiple companies • Agent is said to “own the expirations” • 2. Direct Writing System operates through • exclusive agents (State Farm) • captive agents (Allstate) • 3. Direct response distribution • mass media advertising • direct mail

  29. Corporate Combinations in Insurance • Insurance company groups or fleets • Originally formed in monoline era to combine property and casualty coverages • About 290 groups, comprising 1,100 insurers, write about 90% of property and liability coverage

  30. Corporate Combinations in Insurance • Underwriting syndicates • 1. Associated Factory Mutual Insurance Companies • 2. Industrial Risk Insurers • 3. Improved Risk Mutuals • 4. Nuclear Energy Pools

  31. Cooperation in the Insurance Industry • 1. Rating organizations • 2. Distressed and residual risk pools • 3. Educational organizations • 4. Public relations organizations • 5. Insurance trade associations • 6. Reinsurance organizations

  32. Rating Organizations (Advisory Organizations) • 1. Formerly called “rating bureaus” • 2. Operate in property and liability field • 3. Gather loss statistics and publish trended loss costs • 4. Major Advisory Organizations include • ISO Insurance Services Office • AAIS American Association of Insurance Services • NCCI National Council on Compensation Insurance

  33. Distressed and Residual Risk Pools • 1. Automobile assigned risk plans • 2. Workers compensation assigned-risk pools • 3. Medical malpractice pools • 4. FAIR plans • 5. Beach and windstorm pools • 6. State health insurance plans

  34. Other Cooperative Organizations • 1. Educational organizations • American College • American Institute of P & L Underwriters • Insurance Institute of America • Insurance Company Education Directors • 2. Insurance trade associations • American Council of Life Insurance • Health Insurance Association of America • American Insurance Association • Alliance of American Insurers • National Association of Independent Insurers • Agents Associations • 3. Reinsurance organizations

  35. Competition in the Insurance Industry • Competition within insurance industry is intense. The competition occurs in two areas: • 1. Price • 2. Quality

  36. Price Competition • 1. Price competition occurs primarily at the company level, where prices are set. • 2. Agents compete on basis of price in selecting the companies they will represent. • 3. Price of insurance is a function of costs. • 4. To the extent an insurer can reduce its costs below those of competitors, it can offer a lower priced product.

  37. Costs Common to All Insurers • 1. Losses and loss adjustment expense • 2. Acquisition expense • 3. Administrative expense (company overhead) • 4. Taxes • 5. Profit and contingencies

  38. Quality Competition • 1. Insurers compete on basis of quality by offering broader forms of coverage and prompt claim service. • 2. Most quality competition occurs at the agency level where the level of service can differ significantly. • 3. Service provided by the agent consists principally of advice on coverages, companies, costs, and claims.

  39. Is the Industry Really Competitive? • The 1980’s witnessed a fierce debate over the question of whether the industry is competitive. • Protagonists in the debate were • insurance industry and a group of informed economists on one side • insurance industry critics on the other side

  40. Hallmarks of a Competitive Industry • Economists traditionally focus on market structure and market conduct to judge the competitiveness of an industry. • market structure includes the number of competitors and concentration (percent of market controlled by largest firms) • conduct is reflected by ease of entry into the market and changes in market share over time

  41. Insurance Industry Market Structure • 1. Numerous competitors in each of the three major sectors of the insurance industry. • 2. No firm controls as much as 10% of the market. • 3. Number of competitors has grown over time, indicating freedom of entry into the market. • 4. Major shifts in market share have occurred.

  42. Life Insurance Industry Structure • 1. Number of insurers • 1967 1,715 insurers • 1987 2,343 insurers • 1995 1,695 insurers • about 1,600 life insurers discontinued operations between 1967 and 1995 which means roughly 1,500 new companies. • 2. Market share • mutual insurers controlled 70% of market in 1970, only about 40% in 1997

  43. Property & Liability Industry Structure • 1. Number of insurers • 1970 2,720 insurers • 1990 3,900 insurers • 900 operate in all states and write about 90% of total premiums. • 2. Market share • direct writers, which wrote 8% of total premiums in 1945, increased their share to 45% by 1997

  44. Evidence of Intensity of Competition • 1. Industry is highly cyclical, indicating inability to control output, prices, or profits. • 2. Profits in recent years have consistently been below those for most industries. • 3. Growing number of insurer insolvencies attest to the intensity of price competition.

  45. Cash-Flow Underwriting • For past 30 years, property and liability insurers have broken even or lost money on underwriting, but make a profit from investment income. • Dependence on premiums for investable funds led to phenomenon called cash-flow underwriting. • In cash-flow underwriting, insurers price insurance to compete for investable funds. • Cash-flow underwriting is a form of leveraged investment that has benefited insurers.

  46. Insurer Insolvencies • Year Life Insurers P & L Insurers • 1984 11 27 • 1985 9 52 • 1986 14 32 • 1987 20 25 • 1988 19 42 • 1989 42 52 • 1990 41 43 • 1991 58 47 • 1992 32 59 • 1993 22 24 • 1994 11 22 • 1995 3 10 • 1996 6 9 • 1997 2 24