Commercial Insurance

The information that I considered important for this work for academic purposes, start with a general idea about what is and how does an insurance work, it is very important to understand the concept about insurance before people know all the history and where does it come from. Then, we will see all the highlights that has been this market since it was created and how has it impacted in the society. This research is going to show information about how the market in this moment is, and by the porter’s 5 forces, this project is going to analyze the industry finding opportunities and threats.

What is an insurance

The insurance history shows that the funds of companies are in the risk that people face in events that could happen. Risk is the origin of this industry, life is full of risk, and some people found that a service could protect people if they buy it for most of those risk in life. Think about all the possible events when people could be hurt or loss or even could be treat unfair by the exchange rates or costs of legal actions against them. In most of the scenarios the “service” that could cover the risk of the people and the companies is the insurance.

Insurance is a service that companies sell as a contract, where companies spread the risks within similar profiles of people who share similar risk, and where people can protect themselves and their property such as their houses, cars, farms, etc. In other words, Insurance is the way how the society collaborate each other sharing risks though a company that collects the money in case that some of the people need it if they face troubles about the risk shared. If things go wrong, people’s property or health has to be repair or replace it depending on the details of the contract that both sides agreed at the beginning.

Some many people think that the risk is not worthy to pay to cover it, and they even think that it is a waste of money to pay for a policy if they never going to use it. However, people never know what could happen in the future, and the money for the policy that is usual to pay it monthly, it is much better and affordable than if people face troubles and must pay in once a lot of money that could impact their finances, lifestyle and potential future. It is good if people are optimistic about none troubles in the future, but that does not make them exempt of the risk. That is why insurance help society to share risks and maintain the peoples’ certainty.

The structure of the business of the insurance

The business of insurance is different from current businesses because insurance is an intangible product that companies sell as a “contract” or as a “promise to pay in the event of contingent losses”. Insurance is in the industry of services, and because of the nature of the service that they sell, it is strong regulated to protect people and the economy. In the United States the laws that regulate the insurance companies varied from state to state, and because of that the companies offer different policies and services depending on the laws regulated.

In the Insurance market there are two groups that differs from each other for the different group of services and market that they have, there are life/health (L/H) and property/casualty (P/C). Life/health (L/H), Are the companies who sell services to cover people for health risks, such as disability, life insurance, dental, vision etc. And Property/casualty (P/C), Comprise all the material goods that the people or companies want to cover from risks. It contains two primary coverage types: liability coverage and property protection coverage.

The role of insurance in the economy

The insurance in the economy is vital for the society in terms of health transactions, “without insurance, local, state, national, and international business would quickly grind to a halt”. Insurance for some people represent waste of money, and if people objectively see how the insurance helps the economy to grow, they could understand that insurance is indispensable for the economy. Without Insurance in our economy, companies and people would act carefully without of big changes and decisions because is the insurance who support and give confident for the big steps forward.

Types of insurance

In the insurance Industry there are three types of insurance structures that are regulated by the insurance departments of each state. The three types of insurance are: Corporation, Mutual and Reciprocal and they differ by the different politics and structure of the organizations about the policyholders, stakeholders and directors determined by different voting rights.

Below is a brief description of each type of insurance subtracted from the book “The Complete Book of Insurance: Understand the Coverage You Really Need”.

Corporation

“The most common form of organization for domestic insurers is the capital stock company (corporation) organized and existing pursuant to the laws of whichever of the fifty states is its corporate domicile. The stock of individual capital stock insurance companies is not always publicly traded. Often, insure

10ers are wholly-owned subsidiaries of one or more other insurance companies comprising a given insurance organization. For example, the group of companies known as American International Group, Inc. (AIG) owns, directly or through subsidiary companies, such well-known commercial insurers as National Union Fire Insurance Company, American Home Assurance Company, Lexington Insurance Company, Insurance Company of the State of Pennsylvania, and Birmingham Fire Insurance Company. The parent company of this group is the corporation known as American International Group, Inc. This corporation is not an insurer itself. Rather, it is what is commonly referred to as a holding company. If a person wished to invest in the insurance business of the AIG companies, one would buy stock in American International Group, Inc. One could not purchase stock directly in any of the member companies that comprise AIG. The corporate domicile of a particular insurer may or may not be the same state where that particular insurer has its principal place of business. Just because an insurer is organized and exists as a legal entity under the laws of a particular state and may even have its principal place of business in that state, does not mean that the insurer operates as an admitted insurer in that state. Insurers can be organized and exist pursuant to the laws of a particular state, and yet operate within that state on a no admitted (excess or surplus lines) basis.”

Mutual

“The next most common form of insurance company organization is the mutual insurance company. Stated generally, a mutual insurer is an insurer corporation without capital stock that is owned by its policyholders collectively, who have the right to vote in the election of its board of directors. The principles governing the duties, powers, and obligations of the board of directors of a mutual insurer are generally the same as those applicable to other private corporations. Many insurers that retain the word mutual in their names have long-since converted to the capital stock form of doing business. They retain the term mutual in their corporate names not only because of the company’s history, but also because the use of the term mutual has a feel-good quality that helps support the image of security that insurers like to promote.”

Reciprocal

“The third most common form of insurance company organization is what is called a reciprocal insurer, also called inter insurance exchange. In effect, all policyholders of a reciprocal insurer, who are also called subscribers, insure each other. In order to become an insured of a reciprocal insurer, each person or company executes a subscription agreement as part of the application for the policy. In the subscription agreement, that person or entity appoints an attorney-in-fact, who, pursuant to the terms of the subscription agreement, manages the affairs of the reciprocal insurer. The attorney-in-fact is often a separately constituted corporation. Through the corporation’s employees or through contractual relationships with other entities, the attorney-in-fact arranges for underwriting, actuarial, claims, and other services, and enters into reinsurance contracts. For example, the insurance offered by the American Automobile Association or its affiliated organizations in different states, such as the Automobile Club of Southern California, is offered through entities that are organized as reciprocal insurers. United Services Automobile Association is another well-known example. Reciprocal insurers are often organized and will insure only those persons who share some qualifying membership criteria, such as a club membership or service in the armed forces.”

The marketing and selling insurance

It is important to understand the insurance to purchase the right one that protect people from the risk that are involve. Risk are all around the world, but the risk is not the same within countries or even cities, it differs by the age, kind of job, and more variables that experts analyze to establish the risk of a groups of people.

In the market there are three channels of property and casualty insurance in the United States. They are: 1. independent agents; 2. captive agents; and, 3. various forms of direct marketing.

INDEPENDENT AGENTS Are the people licensed by the department of insurance to sell policies for an insurer company, receiving a commission for each policy sold that they determined before. “Independent agents are often members of professional/trade organizations, such as the Professional Insurance Agents (PIA) organization or Independent Insurance Agents (IIA) organization. The independent agents are not limited to offer policies just from one company. Although, the commission could be different from the companies, they could offer policies from all the insurance companies.

CAPTIVE AGENTS In most of the cases represent only a single insurer and they must limit themselves to sell policies from that only company, usually the captive agents are employees from the company that they represent, and they limit their services and rates from that company. “State Farm, Allstate, Nationwide, Liberty Mutual, and Farmers control a substantial portion of the United States personal lines insurance market.”

DIRECT WRITERS Are those which use direct mail, or sometimes TV ads emphasizing in incredible savings, but the policies could not have the same covers and details and that is why are cheaper and look like better options for the customers.

In the insurance industry there are also the market of life and health that their marketing and selling structure it’s made of:

  1. Bancassurance;
  2. Brokers;
  3. Agency; and,
  4. Internet marketing.

BANCASSURANCE is the channel that use a bank to sell life insurance. It is a good channel to sell this kind of services because banks know financial services and attend an important number of people every day throughout a country or even around the world. Furthermore, the bank has a lower distribution cost than other channels. Customers considered bancassurance one of the best channels because they find in there better prices, quality and is already involved with their banks, they don’t have to go to a different place.

BROKERS are a group of professionals than as a group analyze the risk of the companies or/and people to identify he best options to sell them the best possible deals for them. Brokers show to their clients all the insurance companies in the market to compared the rates and risks, and find them the best option. They don’t represent insurance companies, they connect the customers with the right company for them. This channel is the one who provides the highest satisfaction in their clients.

AGENCY was the first channel for all the insurance industry. Every insurance company have an agency-building where the agents are the sells people that represent the company. The agents can sell just their own services, they should know about the competitors to offer competitive rates to their customers. In this channel the customer services is one of the best.

INTERNET MARKETING, while the Internet has grown, this channel has been important not only for this industry but for all markets. All the life insurance companies have in their web pages information about the services that they offer, and some of them can make direct sells through their pages. However, people prefer to make this kind of purchases through other channels that offer more customer service if they have questions.

History of the business of insurance

Insurance has been in our society since a long time ago, and Great Britain owes its existence in the 17th century where companies start to cover risk of the commodities (spices, tea, sugar, etc.) that people imported / exported all around the world. Insurance sector started to grow because companies started to move more products and also, they wanted to cover the risk for their cargoes and insurance industry gave them certainty to make those transactions real. For this reason, this industry has been important for the economy, and will be present of every development in the future by creating new types of policies with the opportunities that the new developments could make, giving certainty for the new transactions and big changes, as the insurance industry has done.

How is this industry actually?

Competitive Rivalry.

“In the Insurance industry there were 5,977 insurance companies in 2016 in the United States (including territories), including P/C (2,538), life/annuities (872), health (858), fraternal (85), title (55), risk retention groups (247) and other companies (1,314), according to the National Association of Insurance Commissioners.”

Analyzing this market by the competitors is easy to understand that there is an aggressive competition by the number of companies in the market that are trying to offer different kind of covers for the customers with a competitive price. From a customer view it is better to have as many options to compare the details and chose the best deal, but from the companies it is an aggressive environment where companies try to attract customers with low cost and high-impact marketing campaigns.

Supplier Power.

In the Insurance market there are representative companies that have built strong positions and loyalty by the customers. Although, the companies build a relationship based in trust with the customers, these could easily switch to a cheaper alternative.

“The U.S. insurance industry’s net premiums written totaled $1.1 trillion in 2016, with premiums recorded by life/health (L/H) insurers accounting for 53 percent and premiums by property/casualty (P/C) insurers accounting for 47 percent, according to S&P Global Market Intelligence.”

“P/C (Property/Casualty) insurance consists primarily of auto, home and commercial insurance. Net premiums written for the sector totaled $533.7 billion in 2016.”

“The L/H (Life/Health) insurance sector consists primarily of annuities and life insurance. Net premiums written for the sector totaled $597.7 billion in 2016.”

Usually clients prefer to make these kind of decisions with companies that offer competitive prices, or companies that show strong to support their clients’ coverage. In the 2 groups of insurance (Property / Casualty – Life / Health) there are representative companies that have been in the market for a while, building strong relationships with their clients.

Top 10 Writers of Life Insurance/Annuities by Direct Premiums Written, 2016

Buyer Power.

The insurance companies have as many buyers as people and business. However, those buyers have low power to drive the prices down because it depends on the risk and not in the number of the buyers in the market. However, it is easy for a buyer to change of insurance companies because it is not any cost to switch from services to those of a rival.

Threat of Substitution.

In the case of insurance, the substitution is a unique context. The insurance is an intangible service that a customer buys if in the future the customer face inconvenient. Because the customer is paying for cover a risk, the substitution could be either that the customers risk decrease considerably that they don’t have to worry and pay for that, or that they don’t want to pay for the risk and they could face the risk without “fail”.

Threat of new entry.

As we see, the insurance is one of the oldest market that means that the insurance has been cover business and people’s risk to develop a better society. Compare with other markets, insurance market has a high specialist knowledge, for those who want to build a new company or want to sell insurance have to pass an exam that allows them to be in the market. This is a competitive market and it is going to demand time and high cost if a new company enter to make a difference and take some customers from the companies that are already stablished.

Porter’s 5 Forces

Opportunities and threats of the industry

Insurer market have been facing the technology era, the products that technology made for decrease peoples risk are increasing, all cutting-edge products try to do better the job for people. Nowadays we can see how brands like TESLA are doing “smart” products that could be a threat for the insurance business if in the future those cars are less like to have an accident or to be robed. The same context is happening in the house market, and in this case the products are already developed.

Insurance for property in the case of houses have to change soon if the companies want to keep the people or business who buy insurance to cover safety and security in their properties. In the other hand, those devices with High technology are going to be more expensive, and usually people like to cover expensive things because in case that something happen, they would lose more than normal devices. Although, new technology could be better in the terms of less risky, is going to be more expensive and people might cover it because of the price rather than the risk that could happen to their property.

But Technology also represents an opportunity to this market, since thousands of people start to use their devices to purchase or just to use “online money” the Cyber risk has increased considerably, that could be another risk that insurance companies could cover.

It also is very important for commercial insurance, we have seen how data is stolen from big companies, and the commercial market always want to show the maximum secure for the data from their customers. That is why is a risk that the commercial market wants to cover and is willing to pay to show how they care about their customers.

Furthermore, technology give insurance companies another important opportunity. With all the information that companies can have from their customers, and by using analytic tools, insurance companies could know better the customers and develop specific products for their customers by covering their needs and wants.

It is important to analyze the new target that has been created and getting bigger, the Millennials, this is a group of people that have similar behavior characterizes and one of the most common behaviors is tht these group of people are less conservative that people used to be. That means that Millennials are more comfortable with the risk. It is a big threat for insurance companies that should understand this target and offer different products than the regulars. By understanding how new generations think and what they care more about, is going to drive the new opportunities to this business for the future.

Finally, the weather conditions represent the biggest challenge for the insurance market. In the last years, we have faced bigger and bigger problems that in the past we could control but now is getting worst. It was not too difficult to be certain about an average of probability about the risk from weather catastrophes, but now the uncertainty is bigger and the risk has increased. The catastrophes lately have become stronger, that is why the risk is more but companies don’t know how more. In my opinion, it is a challenge to know how the policies could be if companies don’t know what is the risk that are facing. Furthermore, insurance companies are not prepared if a weather catastrophe is bigger than the funds that they have from the policies. This should be an important theme that concern everyone; how people, companies and government are going to be prepared to face big catastrophes.

Bibliography

  1. Understand Insurance(Australia, 2008) http://understandinsurance.com.au/what-is-general-insurance
  2. Zevnik, R. W. (2004). The Complete Book of Insurance: Understand the Coverage You Really Need. Naperville, Ill: Sourcebooks, Inc. (Institude, 2008) https://www.iii.org/fact-statistic/facts-statistics-industry-overview
  3. Zevnik, R. W. (2004). The Complete Book of Insurance: Understand the Coverage You Really Need. Naperville, Ill: Sourcebooks, Inc. (Deloitte, 2018) https://www2.deloitte.com/us/en/pages/financial-services/articles/insurance-industry-outlook.html
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