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 $4.061 trillion in 2007 (the latest data available), up about 9.1% from $3.72 trillion in 2006. This was equal to about 7.48% of global GDP. Global life insurance premiums were $2.39 trillion during 2007, while all other types of insurance totaled $1.66 trillion.
In America alone, the insurance business employed about 2.31 million people, and insurance gross premiums totaled $1.1 trillion during 2007, making the U.S. the world's largest insurance market. Life, health and annuity premiums in the United States totaled about $666.6 billion in 2007, up from about $619.7 billion in 2006. Property and casualty premiums totaled about $447.9 billion for 2007, about the same as in 2006. U.S. life insurance firms held about $4.95 trillion in assets in 2007, according to the Federal Reserve Bank, up from about $4.7 trillion the previous year. 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 2007 was $1.68 trillion in Europe, $640.7 billion in Japan and "newly industrialized" Asian economies, $176.6 billion in South and East Asia and $23.1 billion in the Middle East and Central Asia.
In Oceania (which consists mainly of island nations in the Pacific), 2007 premium volume totaled $68.8 billion, Africa totaled $53.2 billion, and Latin America/Caribbean totaled $87.3 billion. 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.
Massive sources of insurance company earnings come from 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 will have a significant effect on profits and assets at life insurance companies in particular, and property & casualty companies to a lesser degree.
In America, insurance is unique in the financial services field because, unlike banking and investments, which are regulated 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.
Insurance underwriting does not earn consistent levels of profits. Property and casualty insurance companies sometimes face a year of losses, rather than profits, due to natural disasters such as hurricanes, floods or an overly active fire season. Occasionally, insurance underwriters go broke, and firms that rate the financial stability of insurance underwriters always list more than a few that are not financially sound. For example, Yamato Life Insurance Company, a leading Japanese firm that had been in business for nearly 100 years, took bankruptcy in October 2008.
Major American insurance underwriters found their stocks falling sharply in October 2008 when stock investors realized that many of these companies will need to raise new levels of capital due to losses in the firms' reserves and investment assets. At the same time, markets were reacting to the fact that net profits will fall sharply during tough economic times. Hartford Financial raised $2.5 billion in new capital in October 2008 by selling shares to Allianz, a major German insurance firm. MetLife raised $2 billion in new capital during the same month.
Of course, the biggest news was the U.S. government's need to bail out global insurance giant American International Group (AIG) in the fall of 2008. AIG was considered by most analysts to be a reasonably well-managed insurance company with good long-term potential in the global market. Unfortunately, a relatively small division at AIG had taken immense risks by writing credit default swaps (CDS) totaling hundreds of billions of dollars. This is what broke the company's back. CDS are essentially an unregulated form of insurance, used by investors and financial firms of all types to hedge against potential losses in the value of bonds and debt instruments of all types-such as collateralized debt obligations consisting of pools of mortgages. The American government promised AIG up to $85 billion in loans in exchange for effective control of the firm and a change of top management. That need quickly grew to more than $120 billion when AIG found it difficult to find buyers for assets and operating companies that it intends to sell. Over the mid-term, AIG hopes to refocus primarily as a U.S. property and casualty company, with investments in foreign general insurance and life insurance operations.
During 2005, Hurricanes Katrina and Rita in the U.S. cost U.S. insurance underwriters vast amounts (damages, both insured and non-insured totaled about $58 billion) and created significant controversy over flood insurance in general. Many changes resulted, and insurance underwriters felt compelled to boost rates for many types of insurance, especially in Gulf Coast markets. Despite predictions of damaging hurricane seasons for 2006 and 2007, large losses did not occur, and underwriters earned fat profits. During 2008, hurricanes caused significant and costly damage in Louisiana and Texas. Recently, much of each hurricane season's risk was sold by primary underwriters to hedge funds and reinsurers who buy portions of large, high-risk insurance policies. This enables property & casualty underwriters to continue to earn reasonable profits while laying-off a significant part of potential losses if there is a devastating hurricane.
insurance industry includes a wide variety of sectors and services. The most obvious are insurance underwriters that cover the risks and issue the policies, along with the agencies that sell insurance. However, there are also large numbers of consulting firms, claims processing firms, data collection firms and myriad other specialized fields serving the industry.
In addition, there are insurance brokers, which have traditionally posted enviable profits. Normally, insurance brokers-companies that are supposed to represent the interests of major corporate clients while finding these customers the best coverage at the best rates-would be little known to the general public. However, scandal rocked the brokerage sector during 2004, and regulators' efforts to control this sector created significant changes. Meanwhile, some members of the brokerage industry promoted the idea of important changes from within, including the abolition of "incentive payments" from underwriters to brokers, and a focus on acting as advocates for clients.
Recent regulatory changes have heightened competition within the insurance industry-an area in which competition has always been fierce. Massive mergers and acquisitions have resulted, creating financial services mega-firms, many of which offer a complete range of financial services and products to their customers, from checking accounts to investment products to life insurance. For example, banks are slowly gaining market share in the sale of insurance products, particularly annuities and life insurance. Investment companies like Merrill Lynch (now part of Bank of America) have been eager to sell insurance to their customers as well. Bank holding companies have been aggressively acquiring insurance agencies. Competition will only become more intense. While there are tens of thousands of small insurance industry companies in the U.S. alone, the industry tends to be concentrated in a few hundred major companies, many of which enjoy brands that are household names. A handful of these leading firms operate on a truly global scale.
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