Role of Insurance Companies and Real Estate Investment Trusts Play in Serving the Individual Market - Assignment Example

Compare and contrast the role that insurance companies and Real E Investment Trusts play in serving the individual, industry and the property market. Illustrate your answer with examples and charts where appropriate. Role of Insurance Companies Insurance is the increasing necessity of today’s life. Insurance companies are the best and the only place that can offer insurance. The increasing importance of the insurance companies can be realized by the fact the increasing role that insurance companies are playing in the lives of the individuals, industry and the market. The role of insurance companies can be categorized hedging risk and capital formation. Insurance companies are a big help in hedging many different types of risks that can result in minimizing the losses. Another role of insurance company is to provide and mobilize resources for the development of any country’s economy. The function of any insurance company is to provide insurance to protect individuals, the industries and the markets against losses that they can not afford. The insurance company does this by transferring the risks of the individuals, industries, business and so to itself. The company then reimburses the affect individual for the losses mentioned in the policy or the agreement. Insurance Company Serving the Individual In today’s fast paced world, where there is no time for individual to look after their health and lives, insurance companies come to aid. How? The need of people to protect themselves against different risks that life offers, insurance company provides a vast range of products that caters the needs of different individuals. Some of the products that insurance company offers are health insurance, life insurance and so on. The need of type of insurance depends on the people and their needs. Like pointed out before, life is full of unexpected surprises. These surprises can either lead to financial profits or financial losses. For instance, whenever anyone drives, there is always a possibility of running into a severe accident either accident of individual’s life or that of the property. If this does happen, how can anyone cope up with the losses as a consequence of the accident? This loss can be reduced by the insurance that the insurance companies offer. Auto insurance can help protect the individual from the loss of investment in a car or other form of transport. It can also help in covering against losses as a result of an accident with uninsured vehicle. The greatest example of this is the natural calamities that have occurred over the time. One such calamity occurred in Cayman Islands in 2004. The destruction was caused by the Hurricane Ivan. According to the report presented by the World Bank and IMF about 17% of the population was relocated and damage done by the hurricane was 75%. The per capita damage was almost $75,000 per head. According to the report the estimated cost of damage was %150 million to the public infrastructure, $3200 million to private infrastructure totaling up to $3350 million in aggregate losses. The insured damage was about $1.4billion. Most of the homeowners were insured only against their outstanding mortgage loans. This is just one role that the insurance company serves the individuals. Other products that insurance company uses to serve its individual clients are disability insurance, health care policy, personal insurance and other policies. As the establishment of the insurance company plays an important role in every aspect of life, it also plays an important role in any financial plan that is designed by the individuals or the companies. Insurance can help protect an individual, their loved ones against accidents, illness and more severe as death. According to an article ‘The Role of Insurance in Your Financial Plan’ it is stated that: “Until something happens, such as a car accident, an illness, or the death of a loved one, paying for insurance may seem like buying something youll never use. But even if you never submit a claim, insurance is an investment in your future, as important as pensions and personal investments. Indeed, many financial planners argue that you should have an adequate insurance safety net in place before considering investment strategies” Insurance Company Serving the Property Market The role that insurance company plays is not limited to the lives of the individuals. It extends its reach to the physical assets owned by the individuals. In case of any theft, calamity or any other situation that can cause a loss of the property, insurance can help in bearing the losses. One type of insurance offered by the companies is homeowner insurance. This allows anyone to rebuild or to refurnish the respective person’s home or any property. Some of the type of insurance offered also serves to cover almost 80% of home replacement value so that the cost of repairs can be covered. Another type of insurance is one that protects the individual against loss to property as a consequence of fire. Insurance Company Serving Industry According to US statistics of Labor, the insurance industry accounts for almost 62% of jobs and other insurance related agencies such as brokerages account for 38% of jobs. In 2006, the statistics showed that insurance industry had paid about 2.3 million in wages and salary. The graph below depicts the situation in the US insurance market. In today’s world market and industry insurance has become one of the most essential elements to operate the economies and the industry smoothly and efficiently. If there were no insurance companies and no insurance the commercial sector would not be able to perform its functions properly. The insurance companies’ provides the business to transfer their risk cost effectively. The risk could be associated with transactions or activities with the business parties. If the businesses were not insured banks and financial institutions would not lend their money to the corporations as they would be a constant threat of losing the money as the business world largely operates on credit. In addition to the above importance of insurance company for providing insurance, different governments require that the businesses should be financially insured. This is done to protect the different business parties against the loss that they might face in doing business. For example, a retail business owner has to have product liability insurance; doctors should have malpractice insurance and so on. Role of Real Estate Investment Trust Real Estate Investment Trust is a corporation that invests in real estate reducing and/or eliminating the corporate income tax. The structure of the REITS is the same as that of the mutual funds. The only difference is that mutual funds invest is stocks. Now-a-days it is really profitable to invest in the real estate which is why everyone wants to invest in it. Successful stories of the real estate like people making almost $100,000 in a month have led more people to invest in this sector. Many people do not have time and expertise to invest in the sector. Therefore, they go to the REIT. By investing in the Real Estate Investment Trust, a person is investing in real estate without actually buying a property. The basic role of the Real Estate Investment Trust is to Create portfolios that are diversified and can reduce the risk. The Real Estate Investment Trust must achieve a premium risk that is above the risk free rate. As the inflation rates are increasing, REIT hedge against this inflation. They aim to deliver strong cash flows. The REITs achieves its role by investing in the all types of property as shown in the graph taken from ‘The Investor’s Guide to Real Estate Investment Trusts.’ REIT serving the individuals Individual investors can make a lot of profit by investing through the REITS. The company leads the way so that the investors can gain maximum disclosure to the types of real estate in the market not just nationally but internationally as well. REITS offer both institutional investors as well as retail investors with opportunities to gain admission to the investors’ choice of asset by providing them liquidity. Because of this, the REITs play a vital role in the allocation of capital to asset class efficiently and effectively. Till the 1990s, Real Estate Investment Trusts played an insignificant role in the world of real estate investment. This was because they were restricted by the law not to operate or run the real estate. But as the years passed, this law changed. Now REITs can own as well as manage the real estates and earn lots of profits. Real Estate Investment Trust serves as a great and useful tool in diversification and portfolio rebalancing. Through the share price appreciation, REITs are responsible for providing a continuous stream of income in the form of dividend as well as capital gains to the investors. Investors are able to purchase the shares in REITs as easily as in any other public limited company. The shares of REITs are also highly liquid as they can be traded on the stock exchanges. According to ‘The Investor’s Guide to Real Estate Investment Trusts’ it is said that not considering any business line, Real Estate Investment Trust develop the properties that they acquire and run them as ongoing business and generate income from them. Despite this they are always on the lookout of new opportunities for growth of income by acquiring and developing new properties. In addition to that, mortgage focused REITs invest heavily in residential mortgagees and commercial mortgages. REIT serving the industry Real Estate Investment Trust is serving many industries as depicted above by the graph. They invest in industrial areas, shopping malls and so on. One industry that has benefitted most by the development of REIT is the health care industry. According to ‘REITs: A Growing Healthcare Financing Option’ it is important for a healthcare industry to manage its capital and assets efficiently. With the advent of REITs, healthcare industry now knows that it is important to invest in the patient care rather than in the real estate. As the industry moves away from investing in the real estate it is in need of capital to run its business. The REIT that specializes in healthcare purchases the real estate for the health care industry on long-term lease basis. Thus REITs provide the capital by purchasing the properties of healthcare and earning investment return through the leases. In this way, the hospitals sell their office buildings and patient centers to the Real Estate Investment Trust. For example Baptist Health System sold five of its properties to a REIT for $30 million, thus providing Baptist Health System with a large amount of financial savings. Comparison of Insurance Company and Real Estate Investment Trust Keeping the above discussion about the role of the insurance company and the REIT, both the businesses can be easily contrasted against each other. As it is known, insurance company provide the benefit or hedging against the losses that might occur in the life of an individual or an industry. Today’s businesses and individuals would not a take a step in the pool of risks if they were not insured. Insurance company offers many new products that keep changing as the time passes and more and more need for insurance is derived by the increasing number of risk in the economy and to the health of the individual. Also the natural calamites and situations are now more often which causes a lot of property damage. The insurance company is also growing is this respect. In contrast, the Real Estate Investment Trust provides a means to safeguard the money of the people from investing in unknown real estate. They provide a system through which anyone can easily invest in real estate industry without any threat or fear of loss and risk. By using the REITs they also can get a high return. REITs work like the mutual funds. They are highly liquid and can be traded as shares in a secondary market. REITs also have helped the industry like the health care industry already mentioned. Works Cited Insurance. US Department of Labor. Retrieved 14/08/08 from REITs: A Growing Healthcare Financing Option. Retrieved 14/08/08 from The Investor’s Guide to Real Estate Investment Trusts. NAREIT. Retrieved 14/08/08 from The Role of Insurance in Managing Recovery from Disaster in Small States. September 24, 2005. World Bank and IMF. Retrieved 14/08/08 from The Role of Insurance in Your Financial Plan. Financial Protection. Retrieved 14/08/08 from Read More