U.S. FINANCIAL institutions of all kinds have been buffeted by profound economic and regulatory shocks during the past two decades, and the insurance industry has been no exception. As this process has unfolded, the distinctions among financial institutions have become blurred, and the financial sophistication of individuals and corporations has increased. Intensified competition has also led to additional risk-taking by many financial institutions with varying adverse effects among the major segments. Finally, preserving and accumulating capital has become a more acute issue for all U.S. financial institutions, including insurers, as its renascent role as the first line of defense against failure has become more sharply defined.
This report highlights the evolution of the products and services offered by the insurance industry, and the economic forces that are driving this evolution. It also looks ahead to probable future changes in the products and services of insurance companies, as they navigate the sea of change. Particular emphasis will be placed on changes in the industry's product mix, and the pricing and the distribution system for those products from the perspective of the buyers of insurance services. These buyers include both individual and corporate purchasers of life, health and property and casualty insurance products.
TRENDS IN THE LIFE-HEALTH INSURANCE INDUSTRY'S PRODUCTS
This heterogenous industry offers a wide range of products and lacks any significant concentration |Greenless and Duggan~. A general breakdown of its products include: (1) premium-based products, such as life insurance, annuities, and health insurance; and (2) fee-based income sources. The latter includes, for example, third-party management of pension funds.
Significant changes were observed in the life-health industry's product mix during the 1970s, the 1980s and the early 1990s. Frank Schott provides a detailed review of the evolution of this sector of the industry in the next article. In this article, we highlight the industry's product evolution to date, which can best be seen in the changes in its revenue sources over the past thirty years. Among the premium-based revenue sources, income from life policies eroded in relative importance as interest rates rose during the 1960s and 1970s. This reflected a move away from "whole life" polices and toward "term" policies during the 1960s and 1970s. That substitution was motivated, mainly, by consumer disaffection with the returns offered on whole life policies compared with alternative investments |Greenless and Duggan~.
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Table 2 Life Insurance Purchases in the U.S. (Hundreds of Thousands) Ordinary Group Industrial Total 1960 8.734 3.734 12.287 24.755 1970 10.968 5.219 7.582 23.769 1980 14.750 11.379 2.878 29.007 1988 15.579 15.793 0.217 31.589 1989 14.694 15.110 0.156 29.960 1990 14.066 14.592 0.133 28.791 1991 13.471 16.230 0.112 29.813 Variable Variable Universal Universal Life Life Life 1983 0.178 1.185 - 1984 0.223 2.551 - 1985 0.186 3.545 0.101 1986 0.200 3.949 0.259 1987 0.205 3.726 0.410 1988 0.124 3.508 0.343 1989 0.074 3.437 0.320 1990 0.058 3.058 0.345 1991 0.105 2.659 0.329 Source: American Council of Life Insurance, 1992 Life Insurance Fact Book
In short, the buyers of life insurance products "unbundled" the traditional life insurance package. The pure insurance portion was redirected toward low-cost term insurance products. …