Sunday, August 14, 2022
UncategorizedInsurance and Reinsurance in the United States: Trends and Market Projections

Insurance and Reinsurance in the United States: Trends and Market Projections

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Photo by Luke Stackpoole on Unsplash
Photo by Luke Stackpoole on Unsplash
  • The largest global reinsurance provider in relation to total Net Premiums is Swiss Re
  • The most catastrophic event for the insurance industry is Hurricane Katrina
  • Approximately 75% of Global Reinsurers’ assets are currently held in bonds.
  • The total capital that was dedicated to the global reinsurance industry was approximately USD $658 billion in 2020- reflecting a year-by-year growth rate of 7%.

The U.S. insurance market has remained extremely competitive in the last 12 month, with a plethora of multi-line and specialized insurance firms operating both regionally and nationally through multiple different distribution channels.

According to the 2020 year-end data, there were over 2,500 domestic U.S. property and casualty insurance companies, with premiums that exceeded USD $710 billion. Total invested assets were calculated at approximately USD $1905 billion. 

Market competition persists in both the personal and the commercial lines of authority; this is despite introduced product regulations which impose fixed limits on the pricing flexibility in certains lines within the sphere of casualty and property insurance. Other (less competitive) markets present larger challenges in this area in comparison to others.

In the less competitive markets, certain publicly-run operations and coverage plans will likely play a crucial role, and currently licensed insurance firms may become slightly restricted in their ability to adequately exit the market. 

In relation to insurance M&A activity, the U.S. market has seen increasing consolidation. In 2020, for example, there were 13 life and health M&A-related deals, and 52 property/casualty ones involving either U.S. or Bermuda insurance firms. When examining Bermuda and U.S. brokers, this number spiked up to 555 deals. 

The proliferation of new technologies in the insurance and reinsurance market- particularly in relation to Artificial Intelligence (AI), will continue to irrevocably reshape the industry in the coming years. Leading industry figures will need to adequately adapt to the changes if they want to maintain their field-relevance.

Domestic reinsurance firms within the U.S. are relatively small in number, despite bringing in over USD $440 billion in premiums in 2020. This is because a very significant percentage of the total reinsurance purchased by US insurers is provided either by: a) non-U.S. reinsurers, or b) U.S. insurers that are part of a non-American parent company. 

The Regulatory Framework For Insurance and Reinsurance Activities: A Quick Overview

Unlike a lot of other markets, the U.S. insurance industry is regulated primarily on a state level- not by the federal government. 

Having said that, insurance companies that show a systematically high degree of risk usually become subjected to ‘’heightened supervision’’ by the U.S. Federal Reserve. Similarly, insurance groups that own savings and loans or private banking companies are usually regulated by the Federal Reserve (as bank holding companies).

Insurance and Reinsurance companies are regulated by recognised state government officials in their domiciliary state (state of incorporation), as well as in the non-domiciliary states where they own an insurance license.

Such regulations were specifically introduced so as to protect consumers (policyholders) rights via the supervision of: a) insurance company licensing, b) product regulation, c) insurance producer licensing, d) the regulation of insurance firm investments, e) market conduct rules, and f) financial reports from the insurance companies. 

These direct regulations extend only to licensed insurance producers and insurers, not to the aforementioned insurance groups. Insurance groups have been conventionally regulated indirectly- via oversight of the interactions between licensed entities and the groups’ affiliates, or, in some cases, through the U.S. Financial Stability Oversight Council and the Federal Reserve. 

A Contract Law Perspective: What is the Difference Between an Insurance and a Reinsurance Contract?

Insurance can be defined quite differently to Reinsurance, and- depending on the specific situation and context, can cover regulations, tax, legal trusts and estates, and financial reporting.

From a contract law perspective, an insurance contract is merely an agreement where one party (the insurance provider): a) voluntarily agrees to confer a benefit of monetary value to the insured party if and when a previously specified event occurs, b) that event is beyond the control of either party, and c) this is done in return for receiving premium interest payments from the insured party. 

In a lot of states within the U.S the so-called ‘’pooling’’ of risk is another crucial component of insurance; this means that the party aspiring to become insured must have a material (or insurable) interest that would be greatly and negatively impacted by the happening of the previously specified event. 

For contextual purposes, such a material interest could be present if the property was legally owned by them, or if the property served as a security for repayment of a specific mortgage or loan. In simple terms, the ‘’insured’’ property needs to have a certain extent of quantifiable, real value to the individual looking to get it insured (this is a mechanism made to prevent widespread insurance fraud). 

A contract of reinsurance, on the other hand, is merely an agreement between a ceding insurer and a different insurance firm (the reinsurance) under which the reinsurer voluntarily agrees to partially indemnify the ceding party for losses incurred on a specified major claims event in exchange for regular premium payments. Because such agreements are usually conducted between two parties with relatively ‘’equal’’ bargaining power, they are not regulated to the same extent that insurance contracts are.

Final Words

The insurance and reinsurance industries will undoubtedly see a plethora of fascinating, innovative changes within the next decade or so.

As briefly touched on above, the growing presence of AI and Tech technology- as well as the prolific e-commerce industry, is expected to play a significant role in the sphere of insurance. 

With businesses and customers alike becoming increasingly accustomed to relying on automated responses, powerful software, and real-time virtual assistants, it will be up to the leading insurance and reinsurance players to adequately invest in AI and properly incorporate it within their business structure so as to increase total customer utility.

We hope you enjoyed reading. 

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