Transcript Section I Slides - Bryant University

The Private Insurance Industry
Measured by any one of a number of standards,
the insurance industry in the U.S. is significant.
1.
2.
3.
4.
7,900 insurance companies (insurers)
2.1 million persons employed
$3.1 trillion in assets
13.6% of Gross National Product
5-1
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)
5-2
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
5-3
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.
5-4
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
5-5
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 holdingcompany structure
5-6
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.
5-7
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.
5-8
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
5-9
Lloyd’s Associations
1.
Lloyds of London
2.
American Lloyds
5-10
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.
5-11
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
5-12
American Lloyds
American Lloyds are U.S. organizations
whose operations are patterned after
Lloyds of London.
5-13
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.
5-14
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.
5-15
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).
5-16
Government Insurers Defined
1.
Direct provision by the government
2.
Government reinsurance
3.
Does not include self-insurance of
government exposures
5-17
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
5-18
Federal Private (Voluntary) Programs
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
War Risk Insurance (WW I, WW II)
Nuclear Energy Liability (1957-1975)
Federal Riot Reinsurance Program (1968-1983)
Post Office Insurance coverages
Federal Crop Insurance
Mortgage Loan Insurance (FHA, VA)
National Flood Insurance Program
Federal Crime Insurance Program (1971-1996)
SBA surety bonds
Federal Fidelity Bonding Program
Export-Import bank
Overseas Private Investor Corporation
Servicemen's and Veteran’s Life Insurance
5-19
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
5-20
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.
5-21
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.
5-22
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.
5-23
Life Insurance Distribution Systems
1.
General Agents
2.
Branch Office System
3.
Personal Producing General Agent
5-24
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.
5-25
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.
5-26
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.
5-27
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
5-28
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
5-29
Corporate Combinations in Insurance
Underwriting syndicates
1.
Associated Factory Mutual Insurance
Companies
2.
Industrial Risk Insurers
3.
Improved Risk Mutuals
4.
Nuclear Energy Pools
5-30
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
5-31
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
5-32
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
5-33
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
5-34
Competition in the Insurance Industry
Competition within insurance industry is
intense. The competition occurs in two areas:
1. Price
2. Quality
5-35
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.
5-36
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
5-37
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.
5-38
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
5-39
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
5-40
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.
5-41
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
5-42
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
5-43
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.
5-44
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.
5-45
Insurer Insolvencies
Year
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
Life Insurers
11
9
14
20
19
42
41
58
32
22
11
3
6
2
P & L Insurers
27
52
32
25
42
52
43
47
59
24
22
10
9
24
5-46