The Insurance Industry Today
Goods and Services. The insurance industry provides protection against financial losses resulting from a variety of hazards. By purchasing insurance policies, individuals and businesses can receive reimbursement for losses due to car accidents, theft of property, and fire and storm damage; medical expenses; and loss of income due to disability or death.
Industry Organization. The insurance industry consists mainly of insurance carriers and insurance agencies and brokerages. In general, insurance carriers are large companies that provide insurance and assume the risks covered by the policy. Insurance agencies and brokerages sell insurance policies for the carriers. While some agencies and brokerages are directly affiliated with a particular carrier and sell only that carrier's policies, many are independent and are thus free to market the policies of a variety of insurance carriers.
In addition to these two primary components, the insurance industry includes establishments that provide other insurance-related services, such as claims adjustment or third-party administration of insurance and pension funds. These other insurance industry establishments also include a number of independent organizations that provide a wide array of insurance-related services to carriers and their clients. One such service is the processing of claims forms for medical practitioners. Other services include loss prevention and risk management. Also, insurance companies sometimes hire independent claims adjusters to investigate accidents and claims for property damage and to assign a dollar estimate to the claim.
Insurance carriers assume the risk associated with annuities and insurance policies and assign premiums to be paid for the policies. In the policy, the carrier states the length and conditions of the agreement, exactly which losses it will provide compensation for, and how much will be awarded. The premium charged for the policy is based primarily on the amount to be awarded in case of loss and the likelihood that the insurance carrier will actually have to pay. In order to be able to compensate policyholders for their losses, insurance companies invest the money they receive in premiums, building up a portfolio of financial assets and income-producing real estate which can then be used to pay off any future claims that may be brought. There are two basic types of insurance carriers: primary and reinsurance. Primary carriers are responsible for the initial underwriting of insurance policies and annuities, while reinsurance carriers assume all or part of the risk associated with the existing insurance policies originally underwritten by other insurance carriers.
Primary insurance carriers offer a variety of insurance policies. Life insurance provides financial protection to beneficiaries—usually spouses and dependent children—upon the death of the insured. Disability insurance supplies a preset income to an insured person who is unable to work due to injury or illness, and health insurance pays the expenses resulting from accidents and illness. An annuity (a contract or a group of contracts that furnishes a periodic income at regular intervals for a specified period) provides a steady income during retirement for the remainder of one's life. Property-casualty insurance protects against loss or damage to property resulting from hazards such as fire, theft, and natural disasters. Liability insurance protects policyholders from financial responsibility for injuries to others or for damage to other people's property. Most policies, such as automobile and homeowner's insurance, combine both property-casualty and liability coverage. Companies that underwrite this kind of insurance are called property-casualty carriers.
Some insurance policies cover groups of people, ranging from a few to thousands of individuals. These policies usually are issued to employers for the benefit of their employees or to unions, professional associations, or other membership organizations for the benefit of their members. Among the most common policies of this nature are group life and health plans. Insurance carriers also underwrite a variety of specialized types of insurance, such as real-estate title insurance, employee surety, and fidelity bonding, and medical malpractice insurance.
Other organizations in the industry are formed by groups of insurance companies, to perform functions that would result in a duplication of effort if each company carried them out individually. For example, service organizations are supported by insurance companies to provide loss statistics, which the companies use to set their rates.
Recent developments. The recent financial crisis has resulted in large losses for the insurance industry. Industry conditions in the near term remain tenuous, particularly as many companies will continue to experience declining revenues, investment losses, and credit rating downgrades, which can affect an insurer’s ability to repay the debt by having to pay a higher interest rate. Additionally, insurance companies who were trading in credit default swaps and other risky instruments without sufficient hedging suffered especially hard, and some companies even became insolvent. Companies with prudent risk management strategies also suffered large losses, because most investment instruments owned by insurance companies experienced falling values as they were being sold or marked down as the stock market deteriorated in late 2008. Nonetheless, as insurers rebuild capital and adhere to stricter Federal regulations, the insurance industry is likely to stabilize.
Insurance carriers now sell products traditionally associated with other financial institutions, such as banks and securities firms. These products include securities, mutual funds, and various retirement plans. The Internet is an important tool for insurance carriers in reaching potential and existing customers. Carriers use the Internet to enable customers to access online account and billing information, submit claims, view insurance quotes, and purchase policies. In addition to individual carrier-sponsored Internet sites, several "lead-generating" sites have emerged. These sites allow potential customers to input information about their insurance policy needs. For a fee, the sites forward customer information to a number of insurance companies, which review the information and, if they decide to take on the policy, contact the customer with an offer. This practice gives consumers the freedom to accept the best rate.