Insurance Companies
An insurance company provides financial protection against potential risks and losses by collecting premium payments and writing policies addressing those risks and losses. Insurance companies must abide by regulations designed to ensure consumer protection, financial stability and ethical business practices.
Mutual and proprietary insurers both provide life, health, and property/casualty coverage options.
Intermediation
Insurance intermediation services are essential in providing consumers with access to products they need. Services provided include underwriting, financing and monitoring of policies; as well as monitoring insurer solvency levels, conducting market-conduct reviews, responding to consumer complaints and offering education about insurance. Intermediaries also serve as advocates on consumers’ behalf regarding policy matters.
Insurance companies differ from other financial intermediaries by funding their assets with contingent liabilities, which only become actual or terminate upon prespecified events that are unpredictable at contract formation time.
This creates a dynamic interaction between uncertainty of liabilities’ duration and asset policy. For example, an unexpectedly long expected duration of liabilities could alter its term structure, thus impacting value creation for an insurance company. To manage this risk effectively, insurers can focus on increasing product profitability through improved margin management practices while scaling to increase efficiencies and reduce risks.
Investments
Insurance companies invest in an array of assets, from securities and real estate to investment service providers and venture capital funds. However, China’s Insurance Regulatory Commission prohibits them from making such investments.
Insurance company profits are calculated as the difference between earned premium and incurred loss, making for a complex calculation that depends on several variables affecting profitability; such as when policyholder deaths result in higher than anticipated claims payments but lower earned premiums than expected.
Savvy investors can spot pockets of opportunity despite these challenges, including investing in specialty carriers and brokers who can take advantage of hard market conditions, or ecosystem players offering superior climate data for risk pricing at a granular level. Furthermore, other opportunities exist within areas that use technology to innovate underwriting – for instance partnering with IT or data-and-analytics vendors who support specific processes or value chains.
Financial stability
Insurance companies provide many financial stability services, such as life-cycle annuities, investments and real estate financing to both businesses and households. Long-term financing also plays a part in economic stability and community development – but these goals must be balanced against their risk management needs and liquidity reserves.
As major intermediaries of retail savings and large holders of financial instruments, insurers can cause market instability with major purchases or sales of financial products. Their activities may even interconnect with banks via interbank markets and payment systems; so that if one insurer experiences stress it could create systemic contagion for other parts of the financial system.
The Federal Reserve is creating a framework for consolidated supervision of its supervised insurance companies and systemically important insurance holding companies (SLHCs) that engage predominantly in insurance business. This may involve increased capital requirements, liquidity requirements, corporate governance standards for risk management practices as well as resolution planning requirements for systemically important firms.
Regulation
The National Association of Insurance Commissioners (NAIC) promotes state-based regulation of the business of insurance. Their primary purpose is to safeguard policyholders by creating guaranty funds and regulating rates; additionally they assess insurers to ensure they adhere to state laws and regulations.
Before selling policies in their state, most states require insurance companies to be licensed. This process ensures the owners of the company possess sufficient experience and competence, and have sufficient capital reserves to cover potential claims and maintain solvency. They may even need to establish a minimum legal reserve.
State regulators conduct regular examinations of an insurance company’s products, sales practices and financial reporting practices as well as investigating consumer complaints and making operational improvements recommendations. State regulators may issue civil penalties or license suspension or revocation penalties against an insurance provider; furthermore they provide special consumer services like toll-free numbers, informational websites and educational seminars that help address consumer questions or complaints.
