The objective of this research is to shed some light on the life
insurance sector of the United States of America. The insurance industry has
gained popularity over the years as one of the excellent risk management tools
to investors. Insurance is a contract between parties where the insurer
provides indemnification against loss or liability arising from specified
events during a specified period in exchange for fees normally called as an
insurance premium. To gain an overview of the life insurance industry in the U.S
the characteristics of this industry were analyzed in terms of the competition,
performance, and rules and regulations. A SWOT analysis was also undertaken to
provide more insight into the research to evaluate the life insurance industry.
As the primary source of information was not available due to various constraints,
the research was undertaken based on secondary sources of data. However, utmost
caution was undertaken to ensure that all the information gathered are from
reliable sources. All data which have been used in this research has properly
been referenced to the sources using the APA style (7th ed) of reference.
Insurance
was introduced in the United States of America around the time all the states
were merged into a single nation and the insurance sector have been growing
tremendously since then. The first ever insurance company in the U.S was The Philadelphia
Contributionship co-founded by Benjamin Franklin and he was Americas’ first
insurer (Beattie, 2019). The company started off with providing fire insurance
being the first type of insurance offered to the public and as time progressed
numerous types of insurance were developed based on the new risks that had
arisen in the modern business (The Philadelphia Contributionship, n.d.). Currently the insurance
sector in the United States is broadly classified into ‘Life & Health’ and ‘Property
& Casualty’.
Life
insurance is a contract where the insurer guarantees to pay a death benefit to
the beneficiary of the insured party upon the death of the insured party in
exchange for a premium either paid as a lump sum or in instalments to the
insurer by the policy holder. The first life insurance policy was introduced in
the U.S seven years after the introduction of fire insurance policy (Beattie,
2019). The types of life insurance in the U.S can be broadly divided into
permanent and term life insurance. As the name suggests permanent life
insurance is for the whole life and term life insurance provides coverage for a
specified period of time. The insurers are always on the look out to sell policies
which transfer the risk of policy to the insured party and thus more interested
in term life and universal life policies which transfer the risk to the insured
party unlike the whole life policy (McFie, 2018)
Some
of the major leading life insurance companies in the U.S are the Northwestern
Mutual, New York Life, MetLife Inc., Prudential Financial etc. The source of
revenue for these companies is the collection of premium from the policy
holders. Additionally, these companies reinvest these collected premiums in
other low-risk investments and earn interest from it. The excess of revenue and
interest over the claims and expense will be accounted for as profits in the
books (Aggarwal, 2017). However, these companies have shifted their focus to
underwriting of annuities instead of the usual traditional life insurance. Such
annuities allow the policy holders to earn a fixed or variable income stream
for a specified term or whole life (Insurance Information Institute, 2018).
2. Literature Review
Competition: The
life insurance industry is more competitive compared to other sectors as the
policies here are more collective, with the price and purchasing convenience
being the main differentiators (Value Line, n.d.). Customer preferences,
growing needs of customers, insurance product designs, and market segmentation
have always forced life insurers to introduce creative products which have
further increased competition within the life insurance industry (Shankar,
2005). As of 2019, Northwestern Mutual, New York Life Insurance Company,
MetLife Inc, and Prudential Financial were the four largest life insurance
companies in the United States, holding 5% of the total market share,
surpassing Lincoln National Corporation, MassMutual, John Hancock, and
Transamerica which hold around 3% of the total market share (Carpenter, 2019).
Performance: In
the USA, revenue from life insurance premiums alone increased by 6% in 2018
compared to 2017 (Insurance Information Institute, 2018). However, in mid-2019,
the life insurance industry faced its highest decline in profitability mainly
due to one-off transactions to reinsurers and captive insurers (Littlejohns,
2019). However; later that year, profitability shifted back to its increasing
pace as a result of a hike in life direct premiums, ordinary life premiums and
group life premiums (Friedman et al., 2019).
As
of 2019, in terms of individual life insurance, Northwestern Mutual has the
largest market share of 8.4% with direct premiums written of $11 million
succeeding Lincoln National Corporation (6.2%), New York Life (6.0%) and
Massachusetts Mutual Life Insurance Co (5.9%) (Insurance Information Institute,
2018). However, in terms of group life insurance, MetLife Inc exhibited a
better performance with a market share of 20.8% surpassing Prudential Financial
Financial (9.7%), New York Life (8.7%), and Securian Financial Group (7.2%)
(Insurance Information Institute, 2018).
Effect of Coronavirus Pandemic: According to Fitch Ratings, despite the coronavirus pandemic, 68%
of ratings of life insurance companies were affirmed with a stable outlook
which included Northwestern Mutual, New York Life, MetLife Inc, Prudential
Financial, etc. This was a result of strong balance sheets which included good
asset quality and strong capitalization and liquidity positions (Fitch Ratings,
2020). Furthermore, it got easier for applicants to get insurance coverage due
to social distancing guidelines as various life insurers have expanded their
automated underwriting practices and waived their paramedical requirements to
comply with these guidelines (Franklin, 2020).
However,
some insurance companies have adjusted their coverage option to deal with the
market volatility caused by the pandemic. This included Prudential Financial,
which has decided to suspend its 30-year term life policies due to
unprecedented market and the anticipated low-interest-rate environment (Barlyn,
2020). Other insurers have also brought changes into its policies by suspending
applications for individuals aged above 60 and 70 (Franklin, 2020).
3. Rules and Regulations
In
the USA, insurance and reinsurance companies are mainly regulated at the state
level; and as a result, an insurer has to obtain charter from one domicile
state and licenses from each state it plans to issue its policies (Rogan, 2019). As of 2018, there were 773 registered life
insurers in the USA (Rudden, 2019). State insurance regulators are also the
members of the National Association of Insurance Commissioners (NAIC), an
organisation which operates to standardize insurance regulations across the
states (Boehning, 2020).
According
to a report published by the NAIC (n.d.), insurance agents must also be
licenced to sell insurance policies and must comply with the regulations which
the states have imposed. It states that consumers are protected by the state
regulation
by ensuring
that the insurance policies comply with the state law, is fair and reasonable
and do not contain any gaps in the terms of the coverage which might cause
consumer confusion. However, setting of premiums of life insurance is not
subject to any regulatory approval. Furthermore, Insurer companies which do not
comply with the regulatory requirements face the risk of suspension/revocation
of its license and fines for regulatory violation (NAIC, n.d.).
It
is also possible for foreign insurers to conduct business in the USA provided
that the insurers files their audited financial statements, copies of auditors’
report and name of their representatives to the NAIC to prove that they have a
minimum capital of $45 million, a skilled management team with a healthy track
record and is a US-based trust fund (Boehning, 2020). AIA Group, Allianz SE,
and AXA S.A. are some of the foreign companies that conduct its businesses in
the USA (Bajpai, 2020).
4. Strengths and Opportunities
Economy:
Life insurers transform household savings into long-term productive investments
thus providing stability for the overall economy. Additionally, life insurers promote financial
stability and growth, facilitate trade and commerce, allow more efficient capital
allocation, and enable risks to be identified and managed more efficiently
(Cummins et al., 2018). As of 2016, insurance companies in the USA alone
comprised 2.7% of the total GDP (Cummins et al., 2018) and in 2018, the service
sector contributed about 68% to the total GDP within which, finance, insurance
and real estate alone accounted for a fifth of the total economy (Kajumdar,
2019).
Digitalization:
Insurers are dependent on converting raw data such as customer information,
customer trends, and business environment into intelligence (Sumathi &
Sivanandam, 2006) and use it to detect and mitigate various types of risk and
generate income. Implementation of information and communication technologies
backed by the introduction of Big Data assists insurance companies in this
cause and further boosts its business development (Kędra et al., 2019).
Digitalization can further enable life insurers to find new ways to create and
modernize insurance products and services, to mitigate risks, to control cost
effectively and to improve efficiency in business operations. (Silverberg et
al., 2016).Financial technologies or FinTech helps firms to enhance and
automate its financial products which in-turn would aid businesses, investors
and other stakeholders (Al Hammadi & Nobanee, 2019). For the life insurance
industry, FinTech has helped to develop automated underwriting processes, risk
free purchasing methods and customer personalized insurance products (Baumann,
2018).
Artificial Intelligence (AI): Artificial Intelligence is the simulation of humans’ intelligence
in machines which enables it to find solutions to problems or reach a specific
goal on its own (Frankenfield, 2019). It has numerous benefits for the
financial sector which includes machine learning and robotic process automation
to addressing the challenges in an industry (Almutairi and Nobanee, 2020). In
the life insurance industry, AI aids in customer service, fraud detection, and
underwritings. From chatbots to processing insurance claims, AI has played a
key role in the functions of insurance companies like Allstate, Geico, and
Lincoln Financial (NAIC, 2020b). Additionally, AI systems can help insurers to
develop new products and services based on different geographies and customer
segments by information retrieval, data management, and robotic process
automation (Lötscher & Anand, 2018). Machine learning, which is considered
to be a subset of artificial intelligence, further aids the life insurance
companies to detect, measure, and report various types of risk by making
statistical decisions based on numeric data (Al Mazrouei & Nobanee, 2020;
Hapon, 2019).
5. Weaknesses and Threats
Coronavirus Pandemic: Due
to the on-going coronavirus pandemic, interest rates in the USA collapsed and
are expected to stay the same for the foreseeable future. As a result,
insurance companies would not be able to yield healthy returns from its
investments; forcing it to turn away their customers (Scism, 2020) and change
its insurance policies (Franklin, 2020). This would significantly reduce
profits in the near future as the insurers would solely have to focus on
collecting premiums for profit generation.
Cyber Security Risk: As
life insurance companies migrate towards digital platforms, one of the main
responsibilities that arise is to protect and safeguard the sensitive
information of its customers from cyber security threats (Deloitte, 2016).
There have been major cyber breaches in the USA which has forced the government
to expand its scrutiny in cyber security resulting in increased legislation and
regulations (NAIC, 2020a). One of the major consequences of cyber-attacks on
insurance companies apart from lawsuits and legal fees would be the loss of
consumer trust; which would in-turn diminish its market share and brand value
(Deloitte, 2016).
Cultural Changes:
Customers of the future are digitally savvy; their preferences have shifted
from in-person sales interaction to shareable and subscription-based models,
from traditional products to personalized and on-demand products. These
cultural changes possess a threat to insurance companies that largely rely on
field agents to carry on generating sales; as it is proved to be increasingly
expensive and ineffective in an era of increasing digital platforms and
distribution channels (Baumann & Sharps, 2018). In response, life insurers
must digitalize their platforms to comply with the needs of the future
customers and protect the interests of their traditional customers at the same
time.
6. Conclusion
In
conclusion, the research has shown that the life insurance industry in the USA
is one of the major driving factors behind the growth of its overall economy. Despite
the coronavirus pandemic, major insurers have not yet shown any fall in its
performance due to its strong financial positions. Actively responding to
cultural trends and digitalizing its platforms have granted the insurers a grip
to exhibit a healthy performance throughout the years.
The fall
in interest rates possesses an active threat to the life insurers in the USA.
If this trend continues, profitability of the insurers would continue to fall throughout
the coming years which would further disrupt its future settlements and
shareholder returns. The changing cultural trends possess threats for the
traditional customers, the insurers and the insurance agents. By digitalizing,
the insurers are exposed to cyber security threats such as theft and fraud.
Moreover, it would also have to cut down its workforce of insurance agents
which in turn would reduce sales from the traditional customers. Artificial
Intelligence is another option which can automate many functions of the life insurers
and perform its operations more effectively and efficiently; however, it is relatively
a new field and it comes with many uncertainties and unforeseeable risks.
As
the situation in the USA is unstable and unprecedented due to the on-going
coronavirus pandemic, insurers should keep away from further investments while
also bringing changes to its current policies. It have to actively respond to
the changes in its business environment by investing in its IT and security
systems and by bringing a balance between customers of the future and the
traditional customers.