Insurance Carriers

Industry Overview

In the US, about 5,000 companies provide insurance coverage of various sorts, with combined annual revenue of $1 trillion. Large companies include American International Group, MetLife, Aetna, and Allstate. The industry is highly concentrated: the 50 largest companies hold more than 60 percent of the market. Within product segments, concentration is even higher.

Competitive Landscape

Demand is driven by demographics and commercial transactions. The profitability of individual companies depends on effective marketing and on the ability to accurately estimate future payments. Large companies have big economies of scale in administration and in access to capital. Small companies can compete successfully by specializing in particular products or industries.

Products, Operations & Technology

Major products are accident and health insurance, property and casualty insurance, life insurance, and the sale of annuities. Premiums earned from these products account for about 30 percent, 28 percent, 10 percent, and 12 percent of industry revenue, respectively.

All insurance carriers operate in essentially the same way: they collect premiums today in exchange for paying claims or benefits in the future. Their revenue consists of insurance premiums and income from the large investment portfolios they hold. The number of insurance products is large, and each has different premium plans and claim options.

Accident and health insurance policies are of three major types. Fee-for-service plans make payments for medical services from any provider. Managed care plans (which generally have lower premiums) pay only for services from providers the insurer has contracts with. Supplemental health policies cover the policyholder for medical services not covered by standard insurance plans or programs like Medicare.

Property and casualty (P/C) insurance covers mainly homes, cars, and commercial and industrial properties. Most such policies feature a choice between higher premiums and higher deductibles--the amount of a loss that the policyholder absorbs before insurance coverage begins. Many P/C policies provide different levels of coverage for losses of different sizes, and include "stop-loss" provisions that limit the exposure of the insurer. P/C insurers often limit their risk exposure on commercial policies by selling off "slices" to other insurers.

Life insurance products may be single or joint policies, whole life, term life, or variable life policies, among a long list of products. Term policies are the most straightforward life insurance product because a premium is paid solely in exchange for the possibility that the insurance holder will die during the term of the policy; any investment income is kept by the insurance company. Most other life insurance policies include some type of investment feature and therefore have higher premiums. Annuities are almost entirely an investment product, with a large upfront premium and investment-type returns every year.

Calculating future claims (set aside as loss reserves) is crucial in determining the size of the premiums that an insurance company must charge, and has a large effect on reported financial performance because additions to the loss reserve are income deductions. The annual loss ratio for an insurer (the ratio of losses to premiums) is often close to 80 percent. To calculate loss reserves, insurance companies calculate the incidence of a claim (the odds that a claim will occur) and the size of the claim that might be paid. When the incidence and claim size can be estimated with good accuracy (for example, for a life insurance policy), the insurance company can afford to charge a relatively low fixed premium for a policy that extends many years. When either incidence or claim size can't be forecast with reliability, premiums may be higher, or adjustable, or the policy term may be short. The addition of the loss ratio to the expense ratio (the ratio of expenses to premiums) and the policyholder dividend ratio (if the insurer pays such dividends) gives the combined ratio, a measure frequently used to describe company performance.

The operations of insurance companies are largely clerical and rely heavily on computer technology to store and access files on individual customers and policies. Most insurers have electronic communications links with major commercial customers. The Internet has become a major source of direct business for life and auto insurance.

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