This document provides an overview of the insurance industry, detailing its operational basics, regulatory environment, accounting standards, and distribution methods.
Overview of the Insurance Industry
The insurance industry serves to safeguard the assets of its policyholders by transferring risk from an individual or a business to an insurance company. Insurance companies also function as financial intermediaries, investing the premiums they collect for providing this service. The size of an insurance company is typically measured by net premiums written, which represents premium revenues less amounts paid for reinsurance.
The industry is broadly divided into three main insurance sectors: property/casualty (P/C), life/health (L/H), and health insurance.
- Property/casualty (P/C) insurance primarily includes auto, home, and commercial insurance.
- Life/health (L/H) insurance largely consists of life insurance and annuity products.
- Health insurance is offered by private health insurance companies, some L/H and P/C insurers, and government programs such as Medicare.
Regulatory Framework
All types of insurance are regulated by the individual states, each having its own set of statutes and rules. State insurance departments are responsible for overseeing insurer solvency, market conduct, and to varying degrees, reviewing and ruling on requests for rate increases for coverage. The National Association of Insurance Commissioners (NAIC) develops model rules and regulations for the industry, many of which require approval by state legislatures.
Federal legislation also supports state-level oversight. The McCarran-Ferguson Act, passed by Congress in 1945, affirms that continued state regulation of the insurance industry is in the public interest. Additionally, under the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, insurance activities—whether conducted by banks, broker-dealers, or insurers—are regulated by the states. However, challenges to state regulation have occurred and continue from some federal government segments and certain financial services firms.
Accounting Principles
Insurers are required to use statutory accounting principles (SAP) when filing annual financial reports with state regulators and the Internal Revenue Service. SAP is more conservative than the generally accepted accounting principles (GAAP), which are established by the independent Financial Accounting Standards Board (FASB), and evolved to enhance the industry’s financial stability. The Securities and Exchange Commission (SEC) mandates publicly owned companies to report their financial results using GAAP rules.
Insurers outside the United States use standards that differ from both SAP and GAAP. The development of global markets highlighted the need for more uniform accounting standards. In 2001, the International Accounting Standards Board (IASB), an independent international accounting standards-setting organization, began work on a set of standards called International Financial Reporting Standards (IFRS), which it hopes will be used worldwide. Since 2001, over 100 countries have either required or permitted the use of IFRS. In 2007, the SEC voted to stop requiring non-U.S. companies using IFRS to re-issue their financial reports for U.S. investors using GAAP. By 2008, the National Association of Insurance Commissioners (NAIC) began exploring ways to transition from SAP to IFRS. Also in 2008, the FASB and IASB undertook a joint project to develop a common and improved framework for financial reporting.
Distribution Channels
Historically, property/casualty and life insurance policies were almost exclusively sold by agents. These agents could be either captive agents, representing a single insurance company, or independent agents, representing several companies. Insurance companies that sell through captive agents and/or via mail, telephone, or the Internet are referred to as “direct writers”.
Since the 1990s, the distinctions between direct writers and independent agency companies have blurred as insurers started using multiple channels to reach potential customers. Additionally, in the 1980s, banks began exploring the possibility of selling insurance through independent agents, usually by acquiring agencies for that purpose. Other distribution channels include sales through professional organizations and workplaces.
