Download Overview of Insurance Companies

Overview of Insurance Companies
Size, Structure and Composition of the Industry
 Insurance Industry’s Structure
 Life Insurance
 Property/Casualty Insurance
 Other Types of Nonlife Insurance Firms and Products
 Financial guarantee insurance
 Credit insurance (for short-term trade receivables)
 Private mortgage guaranty insurance (PMI)
 Reinsurance
 Catastrophe bonds
 Weather-related derivatives and insurance
 Life Insurance Companies
 In 1988: 2,300 life insurance companies with aggregate assets of $1.12 trillion. In
early 2000s: 1,500 companies / $3.4 trillion (2003). 5 largest wrote 21% of new
premium business
 Demutualization
 Adverse selection
 Insured have higher risk than general population
 Alleviated by grouping of policyholders into risk pools
 Life Insurance Products:
 Ordinary life
• Term life, Whole life, Endowment life.
• Variable life, Universal life, Variable universal life.
 Group life
 Others
• Annuities
• Private pension funds
• Accident and health insurance
 Property and casualty (liability) insurance companies
 Currently about 3,200 companies.
 Highly concentrated. Top 10 firms have 45% of market in terms of premiums
written. Top 200: 95%
Balance Sheets of Insurance Companies
 Insurance Company Operations
 Source of revenues
 Premiums received on insurance policies
 Investment earnings on reserves
 Major expenses
 Benefit (loss) payments
 Additions to reserves
 Operating expenses
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
Investment expenses
 Balance sheets of Life Insurance companies
 Long-term liabilities: Net policy reserves to meet policyholders’ claims
 Long-term assets
 Need to generate competitive returns on savings components of life insurance
policies
 Bonds, equities, government securities
 Policy loans
 Balance sheets of P/C Insurance companies
 Similar to life insurance cos.
 But,
 P/C hold shorter-term securities since claims are unexpected (greater liquidity
risk)
 Hold less reserves. Have much more equity relative to assets
 Performance evaluation of P/C companies
 Performance ratios
Loss Ratio = Loss Expenses / Total Premiums Earned
Expense Ratio = Operating Expenses / Total Premiums Earned
Combined Ratio = Loss Ratio + Expense Ratio
Operating Ratio = Combined Ration (after dividends) – Investment Yield
Overall Profitability = 100% - Operating ratio
 Loss ratio has changed over time: 60% in 1951; 80% in 1996; 75% in2003
 Expense ratio has fallen over time: 34% in 1951; 26.2% in 1996; 26.3% in
2003
 Combined ratio has increased over time: 94.3% in 1951; Since 1981, over
100%
 Overall Profitability: 1980s – 1990s
• Higher yields on stocks, higher interest rates increased investment yield to
cover costs + losses
• Lower yields recently have led to low profitability and even losses in some
years
Regulation of Insurance Companies
 Insurance Company Regulation
 Regulated at state not federal level
 Licensing & solvency requirements
 Mutual insurance funds by state
 Rate regulation
 Product regulation
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