Companies within the Insurance sector are largely interested in helping private, public, and institutional clients hedge against risk. The way in which insurance companies aim to reduce the risk of their clients, on the most basic level, is through offering a guaranteed future payment for a contracted event. By charging clients a premium for this guaranteed future payment given that the contracted event occurs, the insurance company is providing its client with the assurance that under certain circumstances, say physical capital loss due to force majeure, the insurance company will assume all financial responsibility associated with the client’s losses. Calculations of this premium involve use of complex stochastic probability models meant to simulate the likelihood of a given event’s occurrence.
As there are countless origins of risk, there are countless insurance products available to hedge against those risks; however, the insurance sector itself is segmented into four distinct sub-sectors: Life insurance, property and casualty insurance, accident and health insurance, and miscellaneous insurance.
Life insurance deals with policies that are written to hedge against the risk of death, accidental death, and in some cases, sickness. In many cases, liability to the insurer is limited based on cases dealing with suicide, war, riot, and fraud.
Companies within the Life Insurance Sub-Sector:
Casualty insurance deals with policies that are written to hedge against the risk of unforeseen accidents. Some examples are insurance policies for auto accidents or losses incurred at sea (Marine Insurance). In general, casualty insurance hedges against risks associated with liability and crime.
Companies within the Casualty and Property Insurance Sub-Sector:
Health insurance deals with policies that are written to hedge against the risk of unexpected or unexpectedly high health costs. Interestingly, the insurer of health insurance policy can either be from the private sector or the public sector, subsidized by taxes.
Companies within the Accident and Health Insurance Sub-Sector:
Companies within the Misellaneous Insurance Sub-Sector:
As the first of the baby boomers are set to retire within the next few years, financial and insurance firms remain pitted in a battle to provide them with financial funds to fuel their retirement. The traditional methods of retirement finance such as social security, 401ks, and corporate pension plans are becoming increasingly riskier as government legislature struggles to find a solution to social security deficits and companies find it harder and harder to meet the promises of current pension plans. Since the lines between financial institutions and insurance institutions has been blurred with the repeal of the 1999 repeal of the Glass-Steagall Act, which restricted the ability of insurance companies to provide financial services, aging baby boomers have become an increasingly attractive market to insurance companies.
To compete with the corporate pensions plans provided by the company, insurance companies are offering annuities to retirees. Annuities come in many, often complex, forms and packages. However, the underlying concept remains the same: purchase of the annuity is made with an upfront lump sum, with the promise of a steady periodic income as long as the contract requires.
Generally speaking, interest rates will affect any firm involved in any type of investment or firm that issues corporate debt or equity. Changes in the interest rate will invariably change the fundamental values of both equity and debt, since the fundamental value of debt is determined by the time weighted average of payments discounted by current short or long interest rates, and the fundamental value of equity is determined by the value of a firm today along with any projects in the future discounted by some factor over the risk free interest rate.
Systematically, the interest rates are roughly set through the supply and demand of money in the economy, most of the time with help from the Federal Reserves’ monetary policy.