Finance and Insurance Sector
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Industry Overview
The US finance and insurance sector consists of more than 250,000 companies with combined annual revenues of more than $3 trillion. Major firms include AIG, Bank of America, Citigroup, Fidelity, Goldman Sachs, HSBC, JPMorgan Chase, MetLife, and Wells Fargo. Other major companies in the sector include credit card processing firm First Data Corporation, brokerage firm Charles Schwab, investment services firm Value Line, and REITs such as Simon Property Group. The sector is concentrated: the largest 50 companies account for about 50 percent of sales.
Competitive Landscape
Demand is driven by business activity, returns on investments, and consumer income. The profitability of individual companies depends on marketing, efficient operations, and investment expertise. Large companies often have advantages in access to cheaper capital, participation in large-scale transactions, and name recognition. Small companies can compete effectively through customer service, knowledge of the local market, and specialization. The industry is capital-intensive and highly automated: annual revenue per employee varies due to the number of industry groups but averages around $550,000.
The finance and insurance sector has undergone significant change in the past decade, and more changes are likely. The traditional lines between business segments within the finance and insurance sector were blurred by the Gramm-Leach-Bliley Act of 1999 (GLB Act), which permitted commercial banks to sell securities and insurance and enabled insurance firms to sell financial products. Deregulation led to the creation of gigantic financial services firms covering multiple industries and wide geographical areas, dramatically changing the landscape of the industry. Driven by unprecedented profits and an expanding global economy, the interlocking companies helped fuel home buying by offering adjustable-rate and subprime mortgages that were financed by complex financial instruments such as mortgage-backed securities.
The risks taken by lenders were offset by rising home values that increased precipitously between 2000 and 2007. But when home prices began to falter, the staggering defaults on subprime mortgages set off a chain of events that resulted in the near collapse of the global financial system and a deep worldwide recession. With losses at some large financial firms in the billions of dollars, the US government intervened aggressively in 2008 to prevent further impact on financial markets. By injecting capital into firms laden with toxic assets, the federal government hopes to stimulate the flow of capital to businesses and households. Banks, insurance companies, securities firms, and investors alike were affected in some form by the events of the global financial crisis of the late 2000s.
Products, Operations & Technology
Major financial and insurance products and services include loans, financial services, investment advice, insurance products, transactions processing, trading financial instruments, and asset management. Financial and insurance firms create, liquidate, or change ownership of financial assets such as stocks, bonds, options, and insurance. Insurance carriers account for about 45 percent of sector revenue, banks and credit unions for about 20 percent, and securities firms for 10 percent.
Banks and credit unions, consumer finance firms, and other lenders primarily make loans or facilitate lending and offer account services, credit cards, and money management. They collect deposits and borrow from credit markets. Loan-related activities include production, underwriting, and servicing for residential, business, and personal loans. Firms facilitate lending by engaging in transactions on behalf of clients or by providing transaction services. Lenders increase their financial assets through returns on the loans they make.
Investment banks, hedge funds, and securities brokers issue and trade securities, facilitate securities activities, orchestrate mergers and acquisitions, and manage portfolios of assets. Securities brokers may conduct transactions on securities exchanges. Securities firms may also dispense investment advice, and perform in-depth risk analysis and economic research.
Insurance carriers and agencies pool risk by underwriting insurance policies or facilitating such underwriting. Insurance agencies create and sell property, casualty, and life insurance products to customers. Firms build reserves with the fees and premiums they collect from policyholders. Insurers increase their financial assets through investments made with reserves. Fees of policyholders are based on their risk levels and expected return on investment.
Mutual fund managers, financial planners, and investment advisors aim to achieve specific investment objectives through recommendations or by pooling assets together into a fund. Depending on the risk level of the fund, a manager may trade financial derivatives to bring about strong returns. The funds earn interest and pay out dividends. Firms may manage funds, create financial plans for investors, and dispense investment advice. Fund managers may have a team of analysts to conduct in-depth research and data analysis.
The US finance and insurance sector has become highly dependent on computer technology. Firms use computer technology to carry out transactions, manage accounts, and market to potential clients. High speed networks are crucial for time-sensitive electronic transactions and trades. The finance and insurance industry spends over $50 billion annually for information and communication technology equipment and computer software, accounting for 20 percent of technology spending across all industries.
