The Insurance Industry: Navigating the Sea of Change

Article excerpt

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.


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~.


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    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. …