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WIKI ANALYSIS
The basics of insurance are simple - one company offers a guarantee future payment for a contracted event. The company offering the guarantee charges a premium for insuring against the event's occurence - in doing so, the insurance company is protecting the client against certain circumstances, say physical capital loss due to a natural disaster. The insurance company assumes all financial responsibility associated with the client’s losses.
Where the business gets complicated is in the calculations of premiums. This involves the use of complex stochastic probabilty models meant to simulate the likelihood of a given event’s occurrence. Not all events are created equal, from an insurance perspective - for some types of insurance a company can accurately predict the probability of occurence (say, automobile insurance, which has such a large sample to study that companies can make accurate predictions and judgments about demographic groups). For events that are harder to predict (say, the future value a Mortgage-Backed Security (MBS)) insurance companies take on greater risk when they issue policies.
The insurance sector itself is segmented into four distinct sub-sectors: Life Insurance, Property & Casualty Insurance, Accident & Health Insurance, and Miscellaneous Insurance.
Insurance Industry Sub-Sectors
Life 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:
Property & Casualty Insurance
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:
Accident & Health Insurance
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:
Financial Guarantors/Assurance
Assurance/guarantor companies provide insurance against default on credit instruments. They collect premiums to insure bonds against defaults and/or losses in value through insurance policies generally called "insurance enhancement products". Some examples are:
Miscellaneous Insurance
Companies within the Misellaneous Insurance Sub-Sector:
Whats Moving the Insurance Sector
Retiring Baby Boomer Generation/Convergence of Insurance Sector and Financial Industry
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.
Changing Interest Rates
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.
Companies in the Insurance Industry (103)
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