Insurance - Industry Overview

LIFE INSURANCE

Premium receipts of life insurance companies grew nearly 6 percent in 1993 to $298.9 billion. Strong annuity sales and modest growth in health premiums led this growth. Life insurance sales were flat. Life insurance in force - the total face value of all policies - grew very little in 1993.
Before reading this chapter, see "Getting the Most Out of Outlook '94" on page 1. It will answer any questions you may have concerning data collection procedures, forecasting methodology, and sources and references. For related topics, see Chapter 42 (Health and Medical Services), Chapter 45 (Financial Services) and Chapter 46 (Securities Industry).




The life insurance industry consists of more than 1,700 companies that engage in underwriting life insurance and annuities. Life insurance companies also engage significantly in underwriting accident and health insurance, and in managing pension and trust funds. These companies are classified mostly in SIC 631 "Life Insurance" and SIC 6321 "Accident and Health Insurance." Stock companies, owned by shareholders, and mutual companies, owned by policyholders, are the two main types of insurance providers.
Life insurance companies get their premium income from three major product areas: life insurance, annuities, and health insurance. There was little growth in premium receipts for life insurance products in 1993. Sales of traditional whole life and term insurance for individuals fell considerably. This was offset by growth in investment-type products - variable and universal and their hybrids - in which policyholders assume much or most of the financial risk of the underlying assets. Many consumers who bought investment-type life insurance were looking for long-term yields higher than banks and money market funds offered. Sales of group life insurance fell in 1993. Income from individual and group annuities rose strongly to $132.6 billion in 1992 (Table 1) and this growth continued into 1993. Despite some consumer confidence problems, individual annuities sold extremely well in 1993 as people with maturing bank certificates of deposit or qualified retirement plans often rolled over the funds into higher-yielding annuities, especially variable products. Insurers with strong balance sheets did well with group annuities. In particular, guaranteed investment contracts (GICs) offered by insurers remained popular with 401(k) plans - the fastest growing part of the retirement investment market.


Premium growth from health insurance increased again in 1992 and 1993. Cost pressures were the chief reason for this growth. The trend toward managed health care, however, has tempered the increase of health premiums for life insurers. Life insurance companies are major providers of health insurance. Other providers of health insurance include Blue Cross/Blue Shield plans, property/casualty insurers, self-funded employer plans, and government programs.
Growth in investment income for insurers in 1992 and 1993 fell off as interest rates dropped. Other income fell in 1992 because insurers were taking capital losses on mortgages and other troubled assets.
The assets of life insurers increased an estimated 7.5 percent in 1993 to $1.79 trillion. The proportion of corporate bonds remained level from 1991 to 1992 because of the improvements in the bond market, while equities increased their proportion of life insurers assets. The commercial mortgage portfolio of insurers declined both absolutely and as a proportion of assets from 1991 to 1992 (Table 2). Assets consist mainly of financial instruments such as stocks and bonds. These assets back insurance and annuity reserves required to pay expected claims and provide the necessary surplus and capital to meet solvency standards.


The life insurance industry remained financially sound in 1993. Balance sheets improved in 1992 and 1993 for most companies as they adjusted to the new risk-based capital standards (see Key Developments section). In 1991, a stagnant economy, a depressed real estate market, excessive investments in low-grade corporate bonds, and a sharp drop in consumer confidence were the immediate causes of several large, well-publicized failures. Since then, the bond market has improved, the stock market has grown strongly, and the decline in real estate has leveled off in many regions, although real estate holdings remain the problem for many companies. The overall quality of assets in the portfolios of life insurance companies has improved, demonstrated by a shift from commercial mortgages to more conservative assets such as higher-grade bonds.
Life insurance companies cut operating costs by reducing staff and home office expenses and by focusing on reform of their agency and product distribution systems. As a result, employment in the industry fell again in 1993 to 520,800, down from 537,400. Merger and acquisition activity was strong. Many insurers acquired pieces of troubled companies, while some divested unprofitable product lines and operations. Foreign insurers have been active in acquisitions and investments in the United States, although there was a decrease in this activity in 1992.