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Global Insurance Market: US and UK Insurance Industry

Introduction

Insurance is a form of risk management used to protect people and their properties from uncertainties. In case of an accident, the policy holders are paid premiums based on the terms of contract. Insurance policies in the UK and the US share some common characteristics. The industries in both countries require the loss incurred to be definite. The time, place, and cause of the loss must be identified before compensation. In addition, insurance companies in the two countries require the loss to be accidental. The companies do not compensate for speculative and deliberate losses. Furthermore, the loss is required to be large enough to enable the insurance company cover the cost of the loss and policy at the same time.

The number of insurance companies operating in the US has increased in the aftermath of the 2006 economic crisis that led to the collapse of many businesses. Entrepreneurs have insured their businesses as a precaution against economic uncertainties. In 2010, the Federal Insurance Office (FIO) was established in the US to monitor the activities of insurance operators. FIO is tasked with the responsibility of developing and coordinating federal policies with regard to international insurance. The organisation represents the country in international conferences, such as the International Association of Insurance Supervisors. Since 2006, the UK insurance industry has recorded a significant growth. The insurance industry has supported economic growth of the two countries. However, it will take time for the UK insurance industry to overtake that of the US.

Methodology and Data Analysis

Overview

The researcher adopted a descriptive survey design to analyze the data used in the study from the respondents. Descriptive survey method was preferred since it ensures a comprehensive description of the situation at hand. The methodology eliminates any possible bias in the collection of data. It addresses several questions pertaining to the issue, including ‘what’, ‘where’, and ‘how’ of a phenomenon. The sample used in this study consists of an unbalanced data set of 2 countries, which are the UK and the US. The researcher complemented the data collected from the survey from information gathered from other sources. The other sources included review of literature touching on consumption of insurance services in the two countries, together with regulatory measures put in place in the insurance market. The researcher also relied on information obtained from the 2012 update provided by Bek and colleagues. The current study adopted a stratified random sampling technique. There are various reasons why the author opted for this sampling technique. One of the reasons is the fact that the population used in the study was largely heterogeneous.

Instruments for Data Collection

The researcher used data from both primary and secondary sources. Primary data was collected using close-ended and open- ended questionnaires. The questionnaires were self administered. Secondary data was collected from 15 journal articles accessed from different sources. The articles were mainly accessed from the university library. Media reports, including newspapers, were also used in the study.

Data Analysis and Data Presentation

Data from the questionnaires was analysed using descriptive statistic methods. In addition, the researcher made use of data analysis software provided by the university. The software used in this case was SPSS. The software was selected as it offers the researcher extensive data handling capabilities. It can also analyse both large volumes and small volumes of data. As such, the program enhances the effectiveness of the research process.

Summary Findings

Insurance Companies in the UK and the US

The significance of the role played by insurance companies is recognised by many people in contemporary society. A case in point is the resolutions of the first UNCTAD conference held in 1964. The conference recognised the significance of the insurance industry and the role it plays in economic growth. The industry not only facilitates economic transactions through risk transfers and indemnification, but also promotes financial intermediation. In most cases, insurance companies operating in the global market promote financial stability, and help to mobilise savings. In addition, the insurance company facilitates economic growth by managing risks and uncertainties, facilitating trade and commerce, as well as mitigating losses that characterise the volatile and risky global market (Banks & Carl 2009, p. 78).

There are several fundamental differences and similarities between the US and the UK insurance industries. For instance, the provision of healthcare through the National Health Service has affected the operations of insurance companies in the two countries. As a result of the universal health cover, the market for private health insurance in both countries is not extensive. There are major differences between the health insurance systems adopted in the US and the UK. The system adopted in the former is more market oriented and commercial in nature. Medicare and Medicaid offer healthcare to the aging group and to the low income earners. The National Health Service in the UK is funded by the government. What this means is that the medical services are offered by the government (Brown, Olivi, Mitchel & Jame 2002).

Several factors affect what Banks & Carl (2009) refer to as ‘take- up’ of health insurance cover in the two countries. The same factors affect the functions of private healthcare providers. Take-up and the functions of the private providers is spurred by shortage of funds, concerns with resource allocation, as well as long waiting lists characterising public healthcare providers. In the case of the US insurance industry, it is evident that the deploring socialised medical cover has various shortcomings. The medical cover caters for only those people who can afford it, leaving out the rest. It also tends to benefit individuals whose employers can meet the health insurance bill, leaving out those individuals working for employers who cannot afford cover. On their part, insurance companies in the UK are more focused on purchasing of houses, as well as life insurance and assurance (Brown et al. 2002, p. 45).

The insurance industry in the UK is less developed compared to that in the US. A comparative analysis of insurance companies in the UK and those in other leading economies, like the US, highlights the potentials of the former’s insurance industry. A case in point is a comparison of the relative importance of the insurance industry. The ‘importance’ is measured using a percentage ratio of all premiums collected and total GDP in a given year. Such an analysis reveals that insurance penetration is above 10 percent in the US. However, the penetration is slightly lower in the UK, where it stands at 8.5 percent (Klein 2003).

There are significant gaps between the various insurance companies operating within the UK. An analysis of the companies, however, reveals that insurance penetration in the market is very low. The UK’s insurance industry is characterised by more than 1000 companies. The companies employ over one million people, both indirectly and directly. In addition to their own staff, the insurers indirectly employ numerous professionals, including over one million brokers, agents, and financial intermediaries. The development shows an employment growth of about 0.5 percent (Brown et al. 2001, p. 89).

In the case of product and price regulations, significant changes have affected the insurance industry in the US over the past few decades. The insurance companies have acquired security firms and banks, fanning rivalry within the securities industry. Insurance companies have developed products that compete directly with those offered by banks and security firms in the two countries.

Insurance regulation in the US has its historical origins in the early 1800s. The insurance industry in the country is still regulated by the state. What this means is that the state retains the principle responsibility of regulating insurance firms operating within the country’s boundaries. The principle responsibility of financial regulation with regard to an insurer is delegated to the company’s domiciliary state. Each state is responsible for regulating the practices of all insurers operating in its jurisdiction. The state applies a rules- based approach in regulating the financial condition of insurers. The same is evident when the state regulates the practices of insurers in the market. The operations of insurance companies are regulated from an accounting perspective. The accounting perspective is reflected in numerous laws, rules, and regulations that govern every aspect of the operations of insurers and financial service providers (Cawley & Philipson 2009, p. 826).

The UK’s financial service market is characterised by ‘deregulation’. In the past, the insurance industry was characterised by a dense regulatory network. Private forms of regulation have effectively tackled the many problems that statutory regulation is supposed to deal with. Private regulations manifest themselves through the stock exchange market. Statutory regulation controls the proliferation of destructive mechanisms and leads to an appropriate regulatory framework for the investment market. The various mechanisms of statutory regulation in the UK lack an appropriate accountability framework. The statutory frameworks operate outside the rule of law and are not accountable to the state or the parliament. Most of the regulatory frameworks are determined by the EU. Insurance firms operating in the US and the UK are different with regard to their respective approaches to insurance regulation. U.S enacted its first regulation in 1869. Some of the significant elements of this endeavour include concerns over pricing, products, and customer protections (Chiappori 2000, p. 106).

The UK’s insurance industry is the third largest in the world. It accounts for 7% of the world’s total premium income (TPI). The chart below is a breakdown of the TPI in the world.

World’s Total Premium Income
Figure 1: World’s Total Premium Income

Penetration rates in the UK are the highest in Europe and second highest in the world. There is a relationship between economic growth and the growth of the insurance industry in the UK (Chiappori et al. 2002, p. 89). The UK insurance industry employs 290,000 people. It provides more than a quarter of all financial service jobs in the UK. The number of employees in the insurance sector is twice that of employees in the electricity, water, and gas sectors.

There are more than 1000 insurance companies in the UK. Approximately, 568 of the companies are involved in general insurance. 159 companies are involved in long-term insurance, while 45 companies operate both in general insurance and long-term insurance. The largest ten companies handle 83 percent of business in the insurance industry. The total net premia of this industry is significant. For the general category, it stands at approximately $30 billion. It stands at approximately $90 billion for the long-term category. In total, net premia accounts for only 17 percent of total investment in the stock market (Meyer 2009, p. 759).

The figure below represents insured capital by lines of business (property) in the UK:

Insured Capital by Lines of Business (Property) in the UK
Figure 2: Insured Capital by Lines of Business (Property) in the UK

Research shows that almost every adult and every business in the UK is involved with the insurance industry in some way. Over 19.6 million households possess contents insurance. More than 16.5 million possess buildings insurance. About 2.1 million claims were made in 2010. In total, 9,400 million pounds was paid out to households every day. In addition, 24.3 million private vehicles and 4.4 million commercial vehicles were insured (Finkelstein & Kathleen 2003, p. 67).

The UK insurance industry handles general insurance business. It includes insurance on motor vehicles, household items, as well as commercial and health insurance. 309 insurers are in a position to carry out long term business, such as investing in the UK’s financial market. Regulation of insurance companies in both countries with regard to products and tariffs influences the consumption of life insurance. Research in the banking sector shows that regulations enhancing private monitoring, such as disclosures and restriction of activities, impact on developments in the banking sector (Friedman & Markl 2007, p. 78).

Research shows that insurers consider the trust and reliability of policy holders as one of the main factors that determine the success of the industry. However, trust and reliability is the least significant factor with regard to the use of new technology like internet. The security, communication, and understanding of customers are significant factors that highlight the need for policy in the market. According to Westerfield (2003), efficiency, productivity, and scale of economies in the UK and the US insurance industries remain high. Many below-medium-size companies operate with increasing returns to scale. On their part, above-medium-size companies operate with decreasing returns to scale. A significant number of firms in both countries have achieved constant returns to scale. It is evident that, for years, the insurance industry has made significant gains in total factor productivity. The gains are indication of an upward trend in scale and allocative efficiency (Klein 2003, p. 62).

The insurance industry has spurred economic growth in both countries. An effective national insurance sector is an essential feature of a functional economic system. Such an insurance sector leads to economic growth and fosters infrastructural development. Uneven progression of non-life insurance has various implications. For example, it increases the risks of economic strategies adopted by players in the economy. The increased risk negatively affects economic growth (Monheit et al. 2009, p. 105).

The insurance sector in the United Kingdom and the United States of America fosters economic growth in several ways. The industry offers a broad insurance cover directly to firms. As such, it augments the firms’ financial status and overall financial effectiveness. The insurance industry fosters entrepreneurial practices and attitudes. It spurs innovation and market dynamism. As such, insured firms are in a better position to compete in the financial market. Insurance companies offer social protection, augmenting the efforts made by the government to uplift the wellbeing of the citizens. The industry enhances liquidity and mobilises savings. Business organisations can access capital from insurance companies, leading to economic development. Finally, the insurance industry promotes a sensible risk management portfolio for firms and households. As such, it leads to sustainable and responsible economic development (Newhouse 2006, p. 26).

Conclusion

Insurance companies are essential for economic growth. Research shows that the companies have a positive effect on the economy through risk transfer, indemnification, and financial intermediation. A world without an insurance industry will be less developed economically and less stable. The risk transfer function of the insurance industry contributes to a stable operating environment for other companies and reduces the level of capital required by undertakings to avert risks. It has helped many companies to concentrate on their resources and core business. The insurance sector enables companies to realise new investments through research and development guidelines. Companies are encouraged to innovate by developing and commercialising new products. The approach is significant to SMEs that do not have access to the capital market. Some of the SMEs are critical players in innovation.

Insurance companies protect business firms and individuals against adverse events. As a result, the insurance sector offers a safety net that allows policy holders to operate effectively in spite of the challenges they face. As an institutional investor, the insurance industry offers a long term source of finance for various firms in the economy. As a result, it contributes to a sustainable economic growth.

References

Banks, J & Carl, E 2009, UK annuitants: briefing note no. 5, Institute of Fiscal Studies, London.

Brown, R Olivi, S Mitche, S & Jame, M 2002, Mortality risk, inflation risk, and annuity products, University of Pennsylvania Press, Philadelphia.

Brown, R Olivia, S Mitchell, J Poterba, M & Markl, J 2001, The role of annuity markets in financing retirement, MIT Press, Cambridge, Mass.

Cawley, J & Philipson, T 2009, ‘An empirical examination of information barriers to trade in insurance’, A.E.R., vol. 89, pp. 827–46.

Chiappori, P 2000, Econometric models of insurance under asymmetric information, Kluwer, London.

Chiappori, P Bruno, J Bernard, S & Francois, S 2002, Asymmetric information in insurance: general testable implications, University of Chicago, Chicago.

Finkelstein, A & Kathleen, M 2003, Private information and its effect on market equilibrium: new evidence from long-term care insurance, NBER, Cambridge, Mass.

Friedman, M & Markl, J 2007, ‘The cost of annuities: implications for saving behaviour and bequests’, Q.J.E., vol. 105, pp. 135– 54.

Hurd, D & Kathleen, M 2002, ‘The predictive validity of subjective probabilities of survival’, Econ. J., vol. 112, pp. 966–85.

Klein, R 2003, ‘Comparative health care policy: lessons for (and from America)’, American Journal of Public Health, vol. 93, pp. 61-63.

Meyer, D 2009, ‘Unemployment insurance and unemployment spells’, Econometrica, vol. 58, pp. 757–82.

Monheit, C Wilso, R & Arne, H 2009, Informing American health care policy. the dynamics of medical expenditure and insurance surveys, 1977-1996, Jossey-Bass Publishers, San Francisco.

Newhouse, J 2006, Free for all? Lessons from the RAND health insurance experiment, Harvard University Press, London.

Rothschild, M and Josep, S 2006, ‘Equilibrium in competitive insurance markets: an essay on the economics of imperfect information’, Q.J.E., vol. 90, pp. 629–49.

Westerfield, L 2003, National health care: law, policy, strategy, Praeger Publishers, London.

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