Insurance Carriers
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Industry Overview
In the US, about 7,500 companies provide insurance coverage of various types and have combined annual revenue of $1 trillion. Large companies include AIG, Aetna's Group Insurance division, MetLife, AllState, State Farm, and GEICO. The industry is highly concentrated: the 50 largest companies hold more than 60 percent of the market. Within product segments, concentration is even higher.
See the Insurance Agencies profile for coverage of insurance agents and brokers and the Managed Healthcare profile for coverage of group health insurance providers.
Competitive Landscape
Demand is driven by demographics and commercial transactions. Demand is also driven by legal or financial requirements. Consumers are usually required by states to buy auto insurance and by lenders to buy homeowners insurance, for example. 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, as well as advertising and marketing. Small companies can compete successfully by specializing in particular products or industries. Average annual revenue per worker is around $400,000, so the industry is not labor-intensive.
In the late 2000s recession, insurers saw revenues decline sharply when their investment portfolios lost value after the market fell. Insurance carriers rely heavily on their investment portfolios, which is where they invest premiums collected until they are needed to pay claims or benefits. In addition, deregulation of the insurance and financial services industries led to increased risk taking that hurt insurers' credit ratings. Insurance giant AIG was forced to accept $150 billion in government loans to stave off bankruptcy that was brought on by its overexposure to credit default swaps. Federal government bailouts have primarily targeted banks. Aside from AIG, insurance companies have not been as hard hit by the subprime mortgage meltdown. But some insurance companies are seeking relief from state regulators to allow them to operate with less capital. Other insurance companies are buying financial institutions to qualify for federal aid.
Products, Operations & Technology
Major insurance products, excluding group health insurance, are primarily of two types -- property and casualty (P/C), and life. About 60 percent of insurance premiums come from the property/casualty side; 40 percent from life insurance.
Property and casualty consumer lines cover homes, cars, and other personal property. Commercial lines provide coverage for company assets and industrial properties. Standard personal lines include auto, home, and property coverage; for businesses standard lines may cover property, medical malpractice, workers compensation, and product liability. Specialty business lines may cover specific industries such as aviation and marine, or special circumstances such as kidnap and ransom, computer theft, or directors and officers.
Most P/C 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.
Life insurance includes single or joint policies, whole life, term life, or variable life policies, among other 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 (fixed, variable, deferred, and payout) are almost entirely an investment product, with a large upfront premium and investment-type returns every year.
More insurance companies offer financial planning services and products to their customers since the adoption of the Gramm-Leach-Bliley Financial Services Modernization Act in 1999, which deregulated the financial services industry and allowed insurance companies to sell financial products.
Individual supplemental health policies also have become more popular in recent years as managed care providers, who primarily sell health insurance to groups, have limited their coverage. Disability insurance covers short- or long-term disability with monthly payments. Long-term care insurance covers nursing home, hospice, and other care. Supplemental health policies cover the policyholder for medical services not covered by standard group insurance plans or programs like Medicare.
Insurance carriers are highly dependent on technology for managing customer accounts, processing claims, and determining risk through computer models, among other needs. They also require document management and imaging systems to convert paper documents to electronic data. The Internet has become increasingly important as a sales entry point, as consumers grow accustomed to buying insurance online.
