Business Economics: Prudential Life Insurance - Term Paper Example

Prudential Life Insurance It is not uncommon to hear stories of once rich families who came to demise when one or both of their parents died. The natural event of death and terminal illness, preventing someone from continuously earning for someone’s family has created a market for life insurance. “Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individuals or individuals death or other event, such as terminal illness or critical illness and in return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums” (Wikimedia Foundation, Inc., 2009). The insurance company works this ways: “The insurance company collects premiums from policy holders, invests the money (usually in low risk investments), and then reimburses this money once the person passes away or the policy matures” (Investopedia ULC). “In the U.S., the Gramm-Leach-Bliley Act of 1999 legislated that banks, brokerages, insurance firms and other types of financial institutions can join together to offer their customers a more complete range of services” and this has lead to a lot of mergers and acquisition” (Investopedia ULC). The Life Insurance Business of Prudential operates under the umbrella organization Prudential Financial Inc which is listed under the New York Stock Exchange. Prudential Financial Inc started with the life insurance and asset management business with a clientele of approximately 50 million individuals (Prudential Financial Inc, 2009). Its insurance business covers life insurance, annuities, long-term care insurance and Auto, Home, RV, Watercraft and Personal Liability Insurance. Prudential life insurance creates value through offering wide range of insurance that fits each individual. The delivery of insurance is designed to fit the specific need of the person. Examples of these are the varieties of life insurance of Prudential Life such as for wealth preservation and long-term death benefit. The company has its office in New Jersey and other states all-over the country. FACTORS AFFECTING DEMAND There are several factors that can affect the demand. Normally, textbooks would mention prices, income, taste, number of buyers, prices of related goods (whether substitute or complement) and expectations (whether on future prices or future income) (Mankiw, 1998). In this paper, we are going to discuss at least four – prices, income, number of buyers and expected future prices. Price change is the most common determinant of demand. The law of demand says that “as a general rule, the demand for a product varies inversely with its price, lower prices stimulate demand and higher prices dampen it” (BusinessDictionary.com). A decline in price increases the consumer’s purchasing power, making them demand more while a price increase lessens the consumer’s purchasing power dampening the quantity demanded. Obviously, the quantity demanded is negatively related to the price (Mankiw, 1998). The changes in price is shown in a graph by a movement along the demand curve. On the left-upper part, is the high price and lower quantity demanded while on the right-lower part of the demand curve is the lower price and higher quantity demanded. This is so prevalent that it has become a law in Economics. The number of buyers determine the over-all demand in the market. Obviously, the greater the number of buyers, the larger the over-all demand is. This determinant of demand is usually in reference to the market demand rather than the individual demand. More often, when one is considering a business, especially when it is a foreign investment, one considers the total population of the whole economy. A greater number of population, espeically the ones who can afford the product or service would promise hefty profit. This is the reason why China is becoming much a favorite among investors, because of its large number of population. The large number of population simply adds up to a large over-all market demand. Income is also a determinant of demand. Normally, a higher income would result to an increase in price. Higher income increases the purchasing power of an individual, tehrefore allowing him to demand more of a product or service. On the other hand, lower income means a person has less to spend so the demadn also decreases. However, this is not always the rule as sometimes demand for products or services deline with the rise in income. These are what we call the inferior goods. The goods in which the demand increases with an increase in income are called normal goods, while the opposite are the inferior goods (Mankiw, 1998). Example of normal goods are education and food. On the other hand, we observe the number of people taking a bus ride declining as the income increases. It is because, with higher income, people can opt to buy a car or ride a cab, thereby decreasing the demand for bus rides. Expectations also affects the individuala and market demand. Expectation of future prices allows someone to plan on spending so that more will buy when the price is low. If the future price of product or service is expected to be high, then consumers have the reason to do the buying in the present, before the prices change. This event is usually done before Christmas when people expect goods to be more expensive. The pre-Christmas buying is usually observed aroudn the world. On the other hand, a consumer has the reason to delay spending when prices are expected to be lower in the future. Spending can be patterned according to price expectation. THE SUPPLY AND DEMAND DIAGRAM The graph above shows how a change in one of the determinants of demand changes the equilibrium price and quantity. An example if a change in income, and in this particular case, it is an increase. An increase in income, given we have a normal good; will increase the demand for the product. That is why we observe a shift of the demand curve to the right as shown by the arrow. An increase in a non-price determinant of demand makes the demand curve shift outward or to the right. After the shift to the right, the equilibrium price and quantity also change. The old equilibrium price of PI was increased to Pf, while the equilibrium quantity demanded increased from Qi to Qf. This is the effect of the increase in one of the determinants or factors of demand. The Market Structure There are different types of market structures. This is one of the highly discussed topics in Microeconomics. Market structures determine the level of prices, of quantity and also the level of competition in the industry. In this paper, we are going to cover three types of market structures; the perfectly competitive market, monopoly and oligopoly. The perfectly competitive market has these characteristics; price-taking behavior of firms, no barrier to entry, product homogeneity and many buyers and sellers (Robert S. Rubinfeld, 2005). The most prominent characteristic of these is having many buyers and sellers A perfectly competitive market has a free flow of new sellers and buyers in the market. The barrier to entry is sometimes the large sunk cost upon entry to the industry, but this one is not usually present in a perfectly competitive market, which makes it attractive to businessmen. This means that if the business goes unprofitable, they can just leave the industry without much loss. The products in a market with perfect competition are usually homogenous, which actually heightens the competition among the firms. Lastly, a market with perfect competition leaves no power to any buyer or seller to dictate the price. The price is determined by the interaction of these many agents of the market. This feature reveals that the competition in the market is so stiff so that none is deemed to have the market power. This is the market where Prudential Life Insurance exists. These kinds of market are usually also observed in the automobile industry. With big automobile companies in the US, including the Japanese and European automobile companies, the competition has become so stiff. Markets can be also monopolistic. A monopoly is a market formed when “a certain firm is the only one that can produce a certain good; it has a monopoly in the market for that good” (Moffat). “A monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it” (Wikimedia Foundation, Inc.). “In a real world monopoly, such as the operating system monopoly, there is one firm that provides the overwhelming majority of sales (Microsoft), and a handful of small companies that have little or no impact on the dominant firm” (Moffat). More practically, monopoly refers more to the power in the entire industry rather than just the mere number of players. This means that even though there are also other players, but there is one dominant player with the power to dictate the price and quantity supplied, we will consider the market monopolistic. Another feature of a monopolistic market is that the firm’s demand curve is identical to the market demand curve (Moffat). Some of its features are legal and natural barrier to entry and patents. As mentioned, natural barriers to entry may include large start-up cost or sunk cost. With these features, the monopolist has the power to dictate price, usually by restricting the level of quantity supplied. That’s why we observe higher prices in a monopolistic market. Generally, a monopolistic market is characterized by absence of competition, low level of quantity supplied, higher prices and inefficiency. Lastly, we have the oligopoly, a market dominated by small number of sellers. “Because there are few participants in this type of market, each oligopolist is aware of the actions of the others” and “the decisions of one firm influence, and are influenced by, the decisions of other firms” (Wikimedia Foundation, Inc., 2009). Usually the level of competition is determined according to the presence of collusion. If the players, few as they may seem act independently, the level of competition remains high. CONCLUSION The insurance industry falls under the perfectly competitive market. It has the features of a market with perfect competition; such as many buyers and sellers, no barriers to entry, homogenous product and price-taking behaviour. The industry also covers a lot of products such as auto insurance, health insurance and even travel insurance. The country boasts of large number insurance companies. Until recently, there are more than 50 insurance companies in the USA. Some of these are big names such as AIG, CNA (the 7th largest US commercial insurer), and New York Life which is the #1insurer in the United States (InsuranceUSA). “Over the years, there has been a big shift in the life insurance industry. Instead of offering straight insurance, the industry now tends to sell customers on more investment type products like annuities. As a result, insurance companies have been able to compete more directly with other financial services companies such as mutual funds and investment advisory firms. To capitalize on this, many insurance companies even offer services such as tax and estate planning” (Investopedia ULC). This is one of the strengths of Prudential Life Insurance. Due to the stiff competition in the industry they were able to diversify and tie their insurance business with their other businesses. To boost the demand for their product, Prudential Life Insurance designed ways to differentiate and enhance their products so that it will widen its target market. This is basically a way to increase the demand, as noted previously. The greater the number of market scope, the higher is the possibility for profit. Among Prudential Life Insurance products are Life Insurance, Annuities, Long-term care insurance and Auto, Home, RV, Watercraft and Personal Liability Insurance. Aside from these products, the company also offers planning help and advice for women and for those are plan to retire. Their product variety also covers Mutual Funds, Estate Preservation and Education Funding. With much competition in the perfectly competitive market, Prudential Life Insurance cannot resort to price-cutting in order to outdo the competitors. Instead to boost the demand, it has to opt for product improvement. This is exactly what they did with their annuities. They made it similar to an investment. Their “Variable Annuities” for example covers death benefit, but apart from this, it has investment options, income options and tax deferral. Their annuities also include an “Immediate Income Annuities” wherein one can begin receiving annuity payments after making one purchase payment. Given this innovations, we believe that Prudential Life Insurance is on the right track. Works Cited BusinessDictionary.com. (n.d.). Retrieved April 30, 2009, from http://www.businessdictionary.com: http://www.businessdictionary.com/definition/law-of-demand.html InsuranceUSA. (n.d.). Retrieved April 30, 2009, from http://www.insuranceusa.com: http://www.insuranceusa.com/insurancedirectory.php Investopedia ULC. (n.d.). Retrieved April 30, 2009, from http://www.investopedia.com: http://www.investopedia.com/features/industryhandbook/insurance.asp Mankiw, N. (1998). Principles of Macroeconomics. Orlando, Florida: Harcourt Brace College Publishers. Moffat, M. (n.d.). http://economics.about.com. Retrieved April 30, 2009, from http://www.about.com: http://economics.about.com/cs/microeconomics/a/monopoly.htm Prudential Financial Inc. (2009, March). Retrieved April 30, 2009, from http://www.prudential.com: http://www.prudential.com/view/page/public/15280 Robert S. Rubinfeld, D. S. (2000). Microeconomics (5th ed.). New Jersey: Prentice Hall, Inc. Wikimedia Foundation, Inc. (n.d.). Retrieved April 29, 2009, from http://en.wikipedia.org: http://en.wikipedia.org/wiki/Monopoly Wikimedia Foundation, Inc. (2009, April 29). Retrieved April 29, 2009, from http://en.wikipedia.org: http://en.wikipedia.org/wiki/Life_insurance Wikimedia Foundation, Inc.,. (2009, April 29). Retrieved April 30, 2009, from http://en.wikipedia.org: http://en.wikipedia.org/wiki/Oligopoly Read More