Thursday, April 23, 2020

7 Questions about U.S. Life Insurance – What it does and why it matters.

What do life insurance companies do?

They assume risk against charging premiums; this is called underwriting. What risk? Since when is life a risk? In reality, life insurance companies protect life; as the name says: Life insurance companies insurance life against risks scaring it:

  • Loss of income (through annuities, i.e. contracts providing for a variable or fixed stream of income to contract holders or their beneficiaries over a certain period of time – often a contract holder’s lifetime)
  • Accidental death (through life insurance policies)
  • Disability
  • Dismemberment

Why is the U.S. life insurance industry important?

There are two reasons why this industry matters:

  • It provides security to individuals.
  • It is a major investor in many asset classes, in particular bonds (74 % of life insurance assets in 2015).

How diverse are life insurance companies?

That depends on what we look at:

  • They differ substantially in terms of products, services, and fees.
  • Their solvability also varies substantially.
  • Their sales set-up is, however pretty much the same: They all sell through licensed salespeople, acting as agents for all life insurance companies. In 2018, the sales market was dominated by independent agents (50 % of sales), followed by affiliated (= captive) agents, direct marketers, and others, including stockbrokers.

How are life insurance companies organized?

Life insurance companies are organized either as mutual or stock companies. Mutuals have no stockholders but only policyholders and the latter elect the board of directors leading the mutual company.

What are the main categories of life insurance?

There are 4 main categories of life insurance:

  • Ordinary life insurance comes in two forms: Term life insurance is bought for a specific term and pays if the investor dies during that term. Whole life insurance provides ongoing savings and accrues value as long as the investor continues to pay the premium.
  • Group life insurance covers a particular group of people such as employees, union members, or association members. Here, the insurance company does not price its product based on the insurability of the group’s members. The focus is on group size, financial strength of the organization, and turnover.
  • Industrial (= debit = burial) insurance is designed to cover burial costs.
  • Credit life insurance covers the amount of a loan to ensure its payment in case the borrower dies.

Can you explain the history of U.S. life insurers?

No. But I can give a few milestones:

  • The first U.S. life insurance company was the "The Corporation for Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed Widows and Children of Presbyterian Ministers” It was created in 1759; marketing considerations did not play a role when choosing the company name.
  • Since 1789, the industry is based on the mathematical attempt to estimate the probability of risk and cover its occurrence with the sale of polices and their investment of the sales revenue over time.
  • The industry is regulated since ever. The first regulatory body was established in New Hampshire in 1851. At the beginning, life insurance was considered as transaction in commerce, which meant that U.S. federal Law did not apply to the industry until, in 1869, the Supreme Court decided otherwise. Today, the U.S. life insurance industry is still mainly regulated at state level, unless in case the business is conducted across state lines, when federal law applies.
  • Insurance agents appeared first in Chicago, in 1869.
  • The first employer pension plan for employees was established by the Baltimore & Ohio Railroad Company, in 1880.
  • In 1921, the Metropolitan Life Insurance Company created the first group annuity contract.
  • Employment in the U.S. life insurance sector peaked in 1987 (578,000 employees) and, today (2017), stands at 340,800.
  • In the recent history, the life insurance industry has more and more consolidated. In 2010, the total number of life insurance companies in the U.S. was 917.
  • In 2018, Americans bought 3 trillion USD of new life insurance coverage; 60 % of Americans had some form of life insurance.

Who are the top U.S. life insurers?

MetLife, Prudential Financial, Massachusetts Mutual, American International Group, Lincoln National, Principal Financial Group, AXA, Transamerica, and Jackson National Life.

Source: Encyclopedia of American Industries – Direct Life Insurance Carriers