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Insurance Companies
McGraw-Hill/Irwin
Overview
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Size, structure and composition Balance sheets and recent trends Regulation of insurance companies Global competition and trends
Insurance Companies
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Significant consolidation in life insurance industry although not to the same extent witnessed in banking Competition from within industry and from other FIs Conversion to stockholder controlled companies
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Insurance Company
1. Metropolitan Life 2. American International Group 3. Prudential of America 4. Hartford Life 5. Teachers Insurance & Annuity 6. Aegon USA Inc. 7. ING Group 8. New York Life 9. Axa Financial Group 10. Northwestern Mutual
Ownership Form
Stock Stock Stock Stock Stock Mutual Stock Mutual Stock Mutual
Assets (billions)
$407.8 341.1 331.1 204.5 177.9 172.5 169.9 166.2 133.2 133.1
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Insured have higher risk than general population Alleviated by grouping of policyholders into risk pools
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Ordinary life
Term life, Whole life, Endowment life. Variable life, Universal life, Variable universal life.
Distribution of Premiums
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Annuities
Reverse of life insurance activities. Topped $272 billion in 2005 Ethics: Conseco, 2004 Compete with other financial service companies. Mid 2000s, managing $2.3 trillion (45% of all private pension plans)
Balance Sheet
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Long-term assets
Need to generate competitive returns on savings components of life insurance policies Bonds, equities, government securities Policy loans
Long-term liabilities
Net policy reserves to meet policyholders claims Separate account business 32.9% of total liabilities and capital in 2006.
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2004: Proposals to create council of federal and state officials to oversee insurance Complaints of costly and cumbersome state regulation Possibility of a dual (State and Federal) system similar to bank regulatory system. Resistance from states, consumer groups, Congress
Web Resources
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Currently about 2,700 companies. Highly concentrated. Top 10 firms have 48% of market in terms of premiums written.
P&C Products
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Fire insurance and allied lines Homeowners multiple peril insurance Commercial multiple peril insurance Automobile liability and physical damage insurance Liability insurance (other than automobile)
Property-Casualty
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decline in fire insurance and allied lines: 3.7% in 2005 vs. 16.6% in 1960 Homeowners MP: 12.2% vs. 5.2% in 1960 Commercial MP: 6.8% vs. 0.4% in 1960 Auto L&PD: 42.8% vs. 43% in 1960 Other liability: 23.7% in 2005 vs. 6.6% in 1960
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Major liabilities: loss reserves, loss adjustment expense and unearned premiums.
Loss Risk
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Unexpected increases in loss rates Unexpected increases in expenses Unexpected decreases in investment yields or returns. Losses from liability insurance less predictable. Example: claims due to asbestos damage to workers health.
Loss Rates
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Loss rates more predictable on low-severity, high-frequency lines (such as fire, auto, homeowners peril) than on high-severity, lowfrequency lines (such as earthquake, hurricane, financial guaranty). Claims in high-severity, low-frequency lines may not be independent. Higher uncertainty forces PC firms to invest in more short-term assets and hold larger capital and reserves than life insurance firms.
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Crisis generated by terrorist attacks forced creation of federal terrorism insurance program in 2002 Federal government provides backstop coverage under Terrorism Risk Insurance Act of 2002 (TRIA)
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Arises where peril occurs during coverage period but claim is made many years later. Examples: Asbestos cases and Dalkon shield case. Efforts to contain long-tail risks within subsidiaries. Example: Halliburton
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Unexpected inflation may be systematic or linespecific. Social inflation: unexpected changes in awards by juries. Approximately 75 percent of reinsurance by US firms is written by non-US firms such as Munich Re. Catastrophe bonds
Reinsurance
Underwriting Ratios
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Loss ratios have generally increased. Expense ratios have generally decreased. Trend toward selling directly through their own brokers rather than independent brokers.
Combined ratio:
Includes both loss and expense experience. If greater than 100 then premiums are insufficient to cover losses and expenses.
Investment Yield / Return Risk Operating ratio = Combined ratio after dividends minus investment yield. Importance of investment income:
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Causes PC managers to place importance on measuring and managing credit risk and interest rate risk.
Recent Trends
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PC industry was not very profitable during 1987 2006. Succession of catastrophes
Hurricane Hugo 1989, San Francisco Earthquake 1991, Oakland fires 1991, Hurricane Andrew 1991 2004, Hurricanes Charley, Frances, Ivan, Jeanne in rapid succession generated claims comparable to Andrew. September 11, 2001 terrorist attacks created an insurance crisis (and heightened demand).
Regulation PC insurers chartered and regulated by state commissions. State guaranty funds National Association of Insurance Commissioners (NAIC) provides various services to state regulatory commissions.
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Some lines face rate regulation. Criticism regarding Katrina related claims
Global Issues Insurance industry becoming more global Regulatory and tax effects in Cayman Islands and Bahamas Introduction and acceleration of insurance market reforms
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Country
Allianz 121,406 Germany American Intl Group 108,905 US Berkshire Hathaway 81,663 US Zurich Financial Svc. 67,186 Switzerland Munich Re Group 60,256 Germany State Farm Insurance 59,224 US
Pertinent Websites
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A.M. Best: www.ambest.com Federal Reserve: www.federalreserve.gov Insurance Information Institute: www.iii.org Insurance Services Offices: www.iso.com National Association of Insurance Commissioners: www.naic.org State of NY Insurance Guarantee Fund: www.ins.state.ny.us