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United States Insurance Report Q2 2010
Business Monitor International, March 2010, Pages: 93
The United States Insurance Report provides industry professionals and strategists, corporate analysts, insurance associations, government departments and regulatory bodies with independent forecasts and competitive intelligence on the United States' insurance industry.
This is BMI’s first report on the US’ insurance sector. The main aim of this report is to analyse the US’ non-life and life insurance segments in a global context.
One of the challenges revolves around the way in which accident and health insurance is treated. In most countries whose insurance sectors are surveyed by BMI, health insurance is considered part of the nonlife segment. In the US, however, only is small proportion of the entire health insurance sector is provided by property/casualty insurers, which are broadly analogous to non-life or general insurers in other countries. A larger proportion of health insurance is provided by life/health insurers, which, but for their involvement in accident and health insurance, would be broadly analogous to life insurers in other countries. However, the majority of health insurance coverage is provided by specialist health insurance plans, which are considered generally (and by us) to lie outside the mainstream insurance sector. In order to determine a data series for the US non-life segment that is consistent with those calculated for other countries, we have used as a starting point the property and casualty direct premiums disclosed by the Insurance Information Institute (III) in its 2010 Insurance Fact Book. We have added the net health insurance premiums identified by the American Council of Life Insurers (ACLI) in its annual statistical publications. Accordingly, we consider that non-life premiums rose from US$598,828mn in 2005 to US$637,197mn in 2006, US$651,078mn in 2007 and US$654,649mn in 2008. These figures include health premiums written by life insurers that rose from US$118,687mn in 2005 to US$141,198mn in 2006, US$151,462mn in 2007 and US$165,034mn in 2008.
Conversely, life premiums (actually mostly contributions to individual and group annuities, together with premiums for individual and group life insurance, together with minor lines), rose from US$447,301mn in 2005 to US$478,479mn in 2006, US$515,257mn in 2007 and US$520,915mn in 2008. It appears to us that the health plans wrote around US$437bn in 2008. This is not included in our figures. The US insurance sector accounts for about one-quarter of total premiums written by non-life and life companies worldwide. Around one-third of all reinsurance sold world-wide is bought by US firms. Aside from its absolute size, we suggest that it stands out from other national insurance markets for the following reasons:
It is comparatively fragmented, even though a process of consolidation has been underway for some years. Companies such as State Farm (in the non-life segment) and MetLife (in the life segment) have powerful brands, access to economies of scale and several other advantages. Nevertheless, their respective 12% of total property/casualty premiums and 13% of life/health premiums are unusually large in that they are in double digits. Even in analyses of particular lines, double-digit market shares are the exception rather than the norm. Among the health plans, whose premiums we have not included in the premium figures discussed above, the largest player appears to be United Health Group, with a market share of 13%.
Mutuals account for substantial minority of the market. Conventional wisdom would suggest that, in the country with the world’s largest and most sophisticated capital markets, almost all insurance companies would be listed public companies in order to facilitate access to capital. The success and size of companies like New York Life and State Farm is that some of the leading players do not need such access and instead focus on delivering the benefits of mutual status to their policyholders/ members.
Foreign groups account for about one-eighth of each of the non-life and the life segments. Zurich is the largest foreign player in the overall non-life segment, while ING, AEGON and John Hancock have top- 10 positions in the overall life segment. The foreign groups present all have the economies of
scale, both within the US and in their businesses elsewhere, to compete.
The US is too big for foreign multinationals to ignore. Absolute size of the opportunity that is available to foreign multinationals means that all large companies with international aspirations should have clear reasons for not being active in the US – if that is their decision. The US economy and insurance sector may not be growing as rapidly as that of say China, but the restrictions and the relative sizes of entrenched local players are far less of a problem. Furthermore, the regulatory environment if vastly more transparent.
Similarly, the vast majority of US insurance companies see no need to pursue expansion abroad. We estimate that AIG accounted for one-sixth of non-life premiums and one-third of life premiums written by US companies outside the US in 2006. In spite of AIG’s well publicised financial problems – which do not stem from its traditional property/casualty or life/health businesses – we suspect that the same is broadly true today. In spite of its disposal of key businesses in Brazil and Taiwan over the last year or so and many smaller assets, AIG is still the US insurer with the largest global footprint. However, its global orientation makes AIG the exception rather than the rule.
Reinsurance is the main section of the market where foreign and (ultimately) foreign owned companies have the edge. The Lloyd’s market in London, leading Bermuda-based reinsurers, such as XL and multinationals such as Swiss Re, Munich Re and Hanover Re, account for about 80% of the
reinsurance premiums written annually in the US.
Unsurprisingly, auto-related lines are enormous businesses for the non-life insurers. In 2008, for instance, private passenger auto premiums amounted to more than US$160,000mn, while commercial auto premiums were in excess of US$26,000mn. However, the sophistication of the US non-life market, together with the high level of litigiousness, means that auto-related lines are a smaller percentage of total non-life premiums than they are in other countries. Conversely, liability insurance is more important in the US than it is in most other markets. Medical malpractice liability insurance alone, for instance, is a US$11,000mn business.
The popularity of individual annuities is an aspect of the US life sector which sets it apart from its counterparts in other countries. Annuities can be fixed or variable, immediate or deferred and are distributed through a variety of channels. In 2008 contributions to ordinary individual annuities were more than US$220,000mn. Contributions to group annuities were nearly US$127,000mn. Ordinary life and group life insurance premiums were US$137,000mn and nearly US$31,000mn respectively. Diversity in distribution channels is a distinctive feature. In most countries whose insurance sectors are surveyed by BMI, insurers tend collectively to focus on one or two distribution channels. In the US, however, both non-life and life insurers are substantial users of tied agents, independent brokers, in-house sales networks, direct sales channels (including the internet) and (for life insurers), stockbrokers, financial planners and banks. This is another sign of the competitive pressures.
Aside from focusing on particular distribution channels, insurance companies also differentiate themselves by pricing, product features and brand.
Competitive pressures contribute to the typically slow growth rates of both non-life and life segments. Life penetration is also constrained by the abundance of organised savings products that fall outside the purview of the insurance sector. Nevertheless, the absolute increases in premiums that BMI forecasts for the next five years are substantial.
There is no federal regulator of the entire insurance sector. Insurers are subject to regulation by the relevant authority in the state in which they are chartered and must be licensed by regulators in other states in which they operate. Some companies are arguing for a federal regulator to be set up. However, although the existing regime gives rise to interstate inconsistencies and additional costs, it has generally served the insurers and their customers well. Aside from AIG, whose problems did not originate in its insurance businesses, failures of insurance companies have tended to be few and small. The US is an important domicile for captive insurance companies. This is despite the proximity and attractions of well-established offshore domiciles such as Bermuda and the Cayman Islands.
Issues To Watch
A Very Mixed Environment For Non-Life Insurers’ Profits At the end of December 2009 the Property Casualty Insurers Association of America (PCI) and research company the Insurance Services Office (ISO) noted that the net profits of the private property/casualty insurers had recovered somewhat in the first nine months of 2009. Profits had slumped from US$49.6bn in the first nine months of 2007 to just US$4.4bn in the corresponding period of 2008. For the first three quarters of 2009 profits were US$16.2bn, helped by a drop in the combined ratio (claims and underwriting expenses per US dollar of premium) from 105.5% to 100.7%. This in turn was driven by lower claims costs. However, this was offset by a fall in net investment gains (including both investment income and realised gains/losses on investments) from US$28.5bn to US$26.2bn. The insurers achieved an annualised rate of return (net profit on average policyholders’ surplus) of 4.5%, or about half the usual level. Because of the contraction in the US economy in the first three quarters of 2009, net premium growth was -4.5% year-on-year (y-o-y), a record low. The insurers also had to contend with lower interest rates and therefore lower income. The insurers were helped by a reduction in catastrophe losses from US$21.1bn in the first nine months of 2008 to US$10.9bn in the first nine months of 2009.
US Credit (Non-Government Bond) Markets
As we note elsewhere in this report, the US life/health insurers (broadly the life segment as BMI sees it) are major investors in non-government bonds. Figures cited by the III, but sourced from the National Association of Insurance Commissioners (NAIC, the umbrella group for the state and territory insurance regulators) indicated that bonds accounted for just over 71% of the life/health insurers’ investment assets of US$3,013bn at the end of 2008. No less than 70% of these bonds were from ‘industrial and miscellaneous’ issuers (as opposed to governments and public utilities). Collectively, the US life/health insurers are one of the largest pools of capital that are exposed to any increase in volatility in US credit markets. Conversely, a decision by the life/health insurers to reduce exposures to bonds (which accounted for more than 75% of total investment assets in 2004) could have an adverse effect on credit markets.
Higher Costs
At a time when premiums are stagnant or contracting, and while investment income remains under downwards pressure for many insurers, particular costs are increasing. In early February 2010 the III noted that the costs of US healthcare and legal services rose by between 3% and 6% in 2009, even though the overall annual consumer price index (CPI) dropped 0.4%. The implication is that it may be difficult for life/health companies, property/casualty companies and health plans to contain claims costs over the coming year or so. This is despite the fact that lower claims assisted the profitability of the non-life companies through the first nine months of 2009. However, thanks to low catastrophe costs in 2009, the recovery in global financial markets, the pick-up in the market for catastrophe bonds following the turmoil in the immediate wake of the collapse of Lehman Brothers in September 2008, there is an abundant supply of capacity in the global reinsurance market. As the Reinsurance Association of America (RAA) notes, ‘the downward trend in reinsurance catastrophe pricing since 2007 has resumed.’
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