If someone wants to do a research on the structure and performance of Property and Casualty Insurance industry he/she must evaluate basic elements such as background, key market considerations, overall market structure, its competitors, latest trends and developments of property and casualty insurance and is related to home, causality, fire and automobile.
The proposition of market power blackguard by insurers is connoted on the existence of economies of scope and scale. Economies of scope and scale for the property and casualty insurance industry are figured on different product cost function model.As has been observed in other financial service industries, economies of scope do not come out to be important in the property and casualty industry and economies of scale come out for small firms and turn diseconomies for the largest firms in the industry. Background The property and casualty insurance industry, which referred as non-life throughout the world, offers financial protection for not only individuals but also to commercial units, and others against losses of property or by third parties for which the insured is liable.They are classified under fire, marine, and casualty insurance companies.
More than 3,300 companies sell some form of p/c and related lines of insurance, including marine coverage and security and fidelity bonds. Most p/c insurers are organized as stock companies, with some organized as mutual companies. “(Choi, 2002) Property and casualty offers their products covering automobile, homeowners, commercial property both individual and totally commercial, medical malpractice, general liability, and marine insurance furthermore accident and health insurance policies are also comes under these firms. StructureProfits and losses for property and casualty insurers are subject to large variations, largely as a result of unanticipated risks such as natural disasters. However, investment of capital and surplus accounts and money set aside as loss reserves and unearned premium serves have allowed property and casualty insurers to generate enough income to continue their functions despite underwriting deficits. “Net premiums for p/c insurers totaled approximately $300 billion in the late 1990’s.
The highest growth rate in net premiums occurred in the area of financial guaranty, which grew 15 percent from 1996 to 1997 but accounted for only $3. billion worth of total premiums in 1997. ” (Baranoff, 2003) the investments of property and casualty companies are about ? of a trillion dollars in the late 1990’s, representing 88% of entire assets. Funds used for investment by property and casualty insurers incline to be invested in vehicles like bonds and stocks, that can provide a handsome rate of return in a short time, since property and casualty insurers need to have ready access to cash to pay claims in case of a disaster.
The greater part of investment by property and casualty insurers is placed in fixed income securities i. e. onds, which accounted around 67 percent of entire investment; whereas common stock accounted around 23 percent, and the remainder was divided among collateral loans, real estate, mortgages, and cash and other short-term investments. “The number of establishments in property and casualty insurance has declined in the past 5 years. The total now stands at slightly over 12,000 establishments.
Employment in the industry has likewise fallen during the same period. The total workforce now engaged in P&C insurance is slightly above 600,000. ” (Epermanis, 2006) This is an industry with moderate concentration.The twenty largest are responsible for approximately two-thirds of the industries total revenues. This has been a profitable business lately with the absence of major natural catastrophes. Investment Decisions Basically Property and Casualty insurance company are involved in two main operations, first is the insurance, where the main functions are the assessment of risk, the setting of appropriate premiums to compensate for the risks being assumed and the paying of claims; and secondly investing, where premiums must be invested pending the need for payment of claims and other purposes.
Typical risks covered by property and casualty insurers include the risk of loss or damage to property, the risk of being held liable for causing loss or damage to others and other more specialized risk situations. It is important to highlight from the above summary the conservative nature of an insurer’s investments, and the role of preservation and maximization of policyholder’s surplus. Both these points are critical to the insurer’s ability to make timely and complete payments to its policyholders on their loss claims.Application of modern portfolio theory plays a role in the insurer making proper allocation decisions on the investment side to ensure timely availability of the right amount of funds to pay losses. Reinsurance is a tool for controlling risk on the liability side.
Both modern portfolio theory and reinsurance, therefore, can mitigate some of the insurer’s problems in estimating the correct price for its products, and soften the blow of unforeseen events that affect business adversely. The insurer’s need for risk mitigation tools such as modern portfolio theory and reinsurance is critical.This is because, when an insurer prices its products it takes an actuarial “guess” at the real cost of the product, however, the company typically will not know the true cost of the product until years later, when most claims have been filed against the policy, and the total amount of losses and related expenses are finally known. Many events, expected and unexpected, can occur from the time the insurer receives the premium for the insurance and invests it to the time it pays out the last dollar in losses.
For example, on the underwriting side, losses could be far higher than estimated due to an unexpected catastrophe. On the investment side, returns on investments could be far lower than estimated due to an unexpected market shock or dislocation. Either way, the pricing risk exists in that the insurer will not receive enough premiums or return on investment of the premium to cover losses, and the insurer will suffer a loss in its total portfolio of investments and liabilities.Some commentators have opined that an insurer may rely almost entirely on an optimized investment portfolio and forego buying reinsurance coverage in order to mitigate unforeseen perils and market events that affect the company’s bottom line. That is, these commentators suggest an insurer may, in the face of unattractive reinsurance arrangements, be better off securitizing its insurance risks within its optimized investment portfolio, rather than purchasing reinsurance. Insurance is one of the cornerstones of competition.
Covered risks are more likely to be taken, particularly in the fields of shipping and air travel, where random natural events can cause massive loss. ” (Khorshid, 2004) However, reinsurance typically has a salutary effect on the investment as well as the liability side of the ceding insurer’s balance sheet. Hedging and Arbitrage Hedging involves taking an opposite position from an existing risky position so the two cancel out and you lower your overall risk.Talking about property and casualty insurance industry, hedgers start with an existing risky position and then find some type of financial assets that has a payoff profile opposite of the existing asset owned. When the two are combined into the portfolio, the two patterns of returns cancel each other out and risk is reduced or eliminated. The rate includes a charge for the risk of random variation from the expected costs.
This risk charge reflects in the determination of the appropriate total return consistent with the cost of capital and, therefore, influences the underwriting profit provision.The rate also includes a charge for any systematic variation of the estimated costs from the expected costs. This charge reflects in the determination of the contingency provision. When an individual risk’s experience is sufficiently credible, the premium for that risk modifies to reflect the individual experience, provided to the impact of individual risk rating plans on the overall experience. On the other hand arbitrage involves simultaneously buying and selling the same asset in two different markets at two different prices in order to exploit pricing inefficiencies across markets and earn risk less profits.
In property and casualty insurance industry they attempt to exploit pricing inefficiencies in order to earn short term trading profits. In the process, they force rational pricing across markets and encourage the “Law of One Price” to prevail. "The growing perception of deposit insurance as the cornerstone of financial stability and its record in providing protection at minimal cost led to the creation in 1970 of federal insurance funds for securities firms and credit unions and to state guaranty funds for insurance companies. (D'Arista, 1994)When incurred losses and loss adjustment expenses are estimated, they consider development of each and determine the expected loss development which is subject to the principles set forth in the Casualty Actuarial Society’s Statement of Principles Regarding Property and Casualty Loss and Loss Adjustment Expense Reserves.
Recent Trends and Developments In general, the insurance industry should grow at the same rate as the economy but probably will be restricted by the forces that have determined its performance over the past few years.The maturity of the U. S. market and the high degree of competition in the industry will keep prices down, profit margins thin, and consolidation the norm. The market should favor insurance consumers.
Insurers will look to offer new financial services and enter foreign markets, although cautiously, to achieve their revenue and profit goals. For non-life insurers, which have faced higher than expected large-scale losses, any potential downturn in the market resulting in lower than expected investment gains may place a greater focus on the industry’s underwriting losses.Conclusion The actuary, by applying the ratemaking principles in this Statement, property and casualty insurance industry will derive an estimation of the future costs associated with the transfer of risk. Other business considerations are also a part of ratemaking. By interacting with professionals from various fields including underwriting, marketing, law, claims, and finance, the actuary has a key role in the ratemaking process.
