Insurance In Connecticut

The battle to keep Connecticut an insurance industry capital continues. Click here to read the article.

What's happening to the insurance industry? Let's look at the major business issues in the industry. Here are a few insights Connecticut officials might consider.

OVERVIEW

In the U.S., 5,000 companies provide insurance coverage of various sorts, with combined annual revenue of about $1 trillion. Large companies include American International Group (AIG); 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 the ability to accurately estimate the future claims or benefits they will have to pay. 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

Major products are accident and health insurance; property and casualty (P/C) 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.

CRITICAL ISSUES

Investment Income Depends on Economic Conditions - The revenue of insurance companies depends highly on economic conditions. During economic slowdowns, fewer business transactions (like home sales) occur that require new insurance, and investment income can be sharply reduced if the stock market or interest rates are lower. Investment income typically accounts for more than a third of total revenue at large insurers.

Real gross domestic product, the output of goods and services produced by labor and property located in the US, increased at an annual rate of 3.8 percent in third quarter 2005, according to the Bureau of Economic Analysis.

Individual Insurers may have Catastrophic Losses - Large-scale claims have become more common and individual insurers may have concentrations of risk. Katrina is a major loss to be considered. Although insurers often spread risks through reinsurance, unknown risks can be large enough to drive insurers out of business. Fortress Re, a large aviation insurer, went out of business following the 2001 terrorist attacks.

US property/casualty (P/C) insurers paid an all-time record $40.8 billion to homeowners and businesses for insured property losses in 14 states in 2005, according to preliminary estimates by ISO, making it the costliest year for catastrophe damage.

Rates Depend on Regulators - Because insurers have difficulty forecasting future claims for a variety of coverages, including auto and health insurance, they've frequently had to appear before state insurance commissions to ask for higher rates. Although insurance commissioners wish to maintain the financial health of insurers, they're also influenced by political considerations, and frequently grant lower rates than insurers ask for.

Specialized Risk Difficult to Assess - The rapid expansion of the US economy during the 1990s created strong demand for insurance products to cover a wide variety of commercial and industrial needs. However, the more specialized or customized the insurance policy, the more difficult determining the actual risk is. Insurance companies may be holding risks that they're not fully aware of.

Exposure to Unknown Risks - In the past decade, insurers have sustained large losses on hitherto unknown risks, such as asbestos' exposure, environmental cleanup costs, and terrorist attacks. Although insurance policies are being written more carefully by insurers in a bid to exclude coverage for certain types of catastrophic events, other unknown future liabilities may arise. The difficulty of collecting reinsurance is increasing for property/casualty (P/C) insurers. Although many P/C insurance companies are building large reserves with higher premiums, most still depend too heavily on reinsurers to pay up in case of catastrophic loss.

Competition from Foreign Insurers - In recent years, large foreign insurers like ING, Axa, and Converium (formerly Zurich Re) have expanded their US operations.

Terrorism Risk - Terrorism remains a major unknown for the insurance industry, since insurance underwriters have no foundation for accurately pricing its risk. As a result of federal legislation signed into law November 2002, all commercial insurers must offer terrorism coverage, which makes the insurance business riskier because of uncertainty about losses from future attacks, how the federal backstop actually works, and if insurers will be able to buy reinsurance protection against future attacks.

Mixed Results for Managed Healthcare - To contain the rapidly rising costs of healthcare, insurers have enrolled policyholders in managed care plans on the premise that healthcare can be delivered more efficiently if it contains systems for review of medical necessity. While managed care had early successes in reducing wasteful medicine, US healthcare costs have recently resumed high rates of growth, while patient and doctor dissatisfaction with the intrusion of insurance companies into medical practice has grown.

Medical Malpractice Insurance - The rising cost and frequency of malpractice claims are leading many medical insurers to stop offering coverage. Insurers say medical malpractice reforms are necessary to stop soaring medical liability insurance rates. Medical malpractice premiums in the US jumped 400 percent in the past 30 years. Insurers are pushing for tort reform legislation that, among other things, would cap non-economic damages in medical malpractice cases.

Contact ED Futures for a price quote on a full profile of this sector. enail: dtia@don-iannone.com, and phone: 440.449.0753.