Insurance Industry in Europe and America - Coursework Example

Executive Summary Insurance industries in America and Europe have currently been facing challenges caused by external forces besides increased regulatory action and the actions regarding enforcement. This paper will examine the various external forces affecting the insurance industry and bring out the effects it causes in the insurance industry. There exist means through which insurance companies have responded to the external forces that affect them; this includes raising their rate and abolishing other policies that have great effects on their operations. Insurance industries face a great future in the years to come due to the complexities of the risks that occur frequently. The world as a whole is not as risky today as it was in the previous years; it is only the pace of innovation, which is faster as compared to the time of the industrial revolution. The future of insurance industries, therefore, will depend on how it will real with the world’s fastest developing country and regulations that govern this industry. Insurance industry has become fundamental to today’s welfare because most of the developed economies, especially in Europe and America, have emerged to where they are without existence of risks. Therefore, society would have limited chances of mitigating risks; thereby protection of various assets from losses would be greatly impaired. Hence, it is crucial for the insurance industry to innovate its products at prices that are competitive so that it is able to benefit all its stakeholders. There are various challenges in today’s world ranging from natural changes, social and economic changes, political spheres stakeholder expectations changing from time to time and innovations have affected the insurance industry. The insurance industries in Europe and America have been exposed and impacted heavily by the external forces because their business entails risk management. Consequently, there must be interventions in place to regulate economically sound goals such as correcting the market failure, protecting the customers and ensure there is systematic stability. Without proper regulation, both innovation and entrepreneurship in Europe and America will be deterred thereby slowing down the rise of wealth creating activities. External forces effect to insurance operations Many environmental forces have affected the way insurance companies carry out their operations; such as government regulations which involves broad policies that oversees the insurance companies by regularly reviewing and revising the laws governing the insurance sector and at the same time approves the amount of budget allocated to the insurance sector. There has been an increase in staff in the insurance sector, and these has been able to enhance automation thereby allowing regulators boost in both quality and intensity of the financial oversight in the insurance sector; hence, increased expansion in the consumer protection activities. The key external factor affecting the insurance industry has been the ability to deliver the various insurance products. While the insurance industries are able to control factors such as transportation and vehicles, it is unable to control other external factors such as the transport network of information technology network, among others. There has been the perception that most insurance industries in America and Europe have been conservative at the same time being ahead in innovation and adoption of new technologies. For instance, there has been the insurance information technology infrastructure that has resulted to various strategic challenges such as the introduction of cloud computing, outsourcing popularity and even information technology assets being consumerised. These have changed the way insurance sector balances its cost control at the same time delivering service to its customers. However, the most important change is that of the culture adopted, as it requires the development of applications and various business teams to collaborate in order to deliver a meaningful change in the industry. Having a variety of products to offer customers greatly depends on the amount of resources available to tailor these products. For instance, climatic condition is able to affect how a business is and will require additional resources for the smooth running of its activities. Insurance industry largely requires industry domains for core systems application in the company in the form of administering policies, billing and checking on claims, and above all, it must demonstrate the ability to integrate components that are listed in the insurance industry. In addition, natural disasters have affected the long term running of insurance companies by spurring long run growth; for instance, all climatic disasters apart from drought lead to an increase in growth of the insurance sector. Geological disasters are the disasters that affect the economy causing a decrease in economic growth. The key attribute of these disasters is triggering an increase in growth rates is the increase witnessed in human capital accumulation, increase in technology and lower growth rate resulting from loss of human capital from the previous loss of human life. Moreover, these disasters affect the stocks that are available naturally; a good example is Hurricane Isabel that caused 550 million dollar damage to timber in Northern part of Carolina. Before NFIP is able to compensate victims affected by flood, it must ensure its program has received premiums from its insurance holders (Brown 2010, p.372). Physical capital is vital for production of commodities to satisfy humans, hence having a greater amount of physical capital yields higher per capital income and natural disaster are responsible for the destruction of physical capital. Furthermore, demographic changes greatly affect the running of insurance industries because they occur based on myriad reasons, and this ends up destroying the client base. Demographic factors such as costs of living and unavailability of green space causes people to relocate to another region, and this usually have a tremendous effect on businesses. The high healthcare costs are due to factors outside the health care system, and one external cause is the economy (Bodenheimer 2005, p.849). Economic recession witnessed lately affected the insurance sector greatly in getting capital support necessary for coverage e.g. bonds for catastrophe. In addition, the banks during this economic recession became conscious of the risks that were evidenced by monetary cries and the way it spread across the world. These have now made insurance to be integral in the prevention of future financial crisis and establishment of laws governing financial service providers who do not recognize the importance of insurance companies. Effect of external forces on insurance industries The various external forces have affected insurance industries in several ways over the past few years creating challenges for the growth of insurance companies. UK and USA experience reduced economic growth, and this has resulted in the continuation of implementing fiscal measures that will be able to reduce inflation and in the end dampen the overall growth of the industry. There has been the continued existence of low interest rate in both in the European and American markets. In Europe, the existing euro debt crisis has had a direct impact to those with investment holdings in the European countries. Political risk has also been a hindrance in the insurance industries, and it is likely to cause more instability in the coming years. External forces have also caused the insurance industries to develop various regulatory aspects affecting their companies. Rising health insurance premiums in the USA have reduced the workers’ probability of getting employment (Sood, Ghosh and Escarse 2009, p.1450). In the USA, the insurance regulations are currently undergoing Solvency Modernization Initiative which is aimed at reviewing certain aspects such as the requirements needed in risk based capital evaluation. European Union, on the other hand, has made developments on Solvency II, which has been on the development process since the turn of the new century. It is expected that, in the first half of 2013, the announcement of finalization of Solvency II will be done after carrying out amendments on specific technical components regarding Solvency II. Insurance Industry Response to External Forces Most insurance companies recently have implemented the practice of buying re-insurance in its effort to come to par with the external factors that affect the industry. For instance, if an individual insures a building for one million dollars, the insurance company will have a treaty with a re-insurer, pay ten percentage of the value of the building, and later pay the portion of the claim that remained. The terror attack that took place at the World Trade Center made re-insurers charge insurers, who later passed the costs to its consumers driving the premiums up. Insurers have invested the customers’ money in order to make most of it in stocks and bonds so that in case of markets having a slump, they will have a rate of return that will drop significantly. The industry has also adjusted the interest rates of their products in order to affect the costs incurred in borrowing money. Aversion of risks has fared poorly in the prediction of how an individual will purchase insurance against low or high probability risk (Schwarcz 2010, p.558). Events have caused most insurance companies to limit the coverage given to its customers, especially those that were cheap and easy to access such as medical malpractice insurance. After the September 11 attack in the USA, there was terrorism exclusion that was added in the insurance policies, in the US making insurance for high building expensive and difficult to get. Insurance industries went ahead and increased rates of premiums especially for companies that experience losses frequently. American’s litigiousness culture has made insurance companies increase rates to its consumers because the proliferation of lawsuits has increased. Catastrophes such as terror attacks, floods and earthquakes that have been occurring every year has caught the insurance industries short making them raise the rate so that they can be able to recoup the losses. Future of the Insurance Industry Insurance industries have a great future because they provide security in the way people will seek insurance due to the financial crisis that are experienced. Therefore, it is important for the insurance industry to be partly mutualized and to possess an additional layer of security for its policyholders. Customers will not be interested in insurers who are risky even if they will offer cheaper premiums, they want an insurance company that offers conservative investment policies, is prudent and has high security levels. The complexity of the risks faced today requires insurance companies to have a faster rate of innovation in order to keep up with the globalization and the scientific discoveries that are happening currently, and in particular, the information technology revolution. America has chosen to appeal to the private sector in acquiring health insurance using several economic incentives (Banja 2000, p.18). Globalization has greatly affected the insurance industry and made it become optimistic about the future markets. Business in America is valuable, therefore, the industry is required to learn from the past and penetrate new markets to Europe and other countries in order to enlarge the client base. In conclusion, various external forces have compounded challenges that insurance industries are facing in the rating, underwriting of insurance and claims made in the insurance sector. Besides these, the external forces affecting the insurance sector directly correlates to internal issues and in particular are natural catastrophes and terrorism. Other sectors of the internal issues come to rely on insurance making the insurance sector find it difficult to meet all these challenges, and at the same time be at peak with effectiveness financially and ethically. It is important then for the insurance industry to focus on the various external forces that affect its operations and try to find solutions to the challenges they are facing. The best strategy the insurance industry should adapt is ensuring there is the availability of proper tools and structures that are able to allow the industry gain competitive advantage. This will make the industry adapt to the new challenges at a faster rate hence creating confidence to its customers in the field of risk management. References Banja, J. 2000. The Improbable Future of Employment-Based Insurance. Hastings Center Report, 30(3), pp. 17-25 Bodenheimer, T. 2005. High and Rising Health Care Costs. Part 1: Seeking an Explanation. Annals of Internal Medicine, 142(10), pp. 847-854 Brown, M. 2010. Anything But A Breeze: Moving Forward Without Nfip Wind Coverage. Boston College Environmental Affairs Law Review, 37(365), pp. 365-392 Sood Neeraj, Ghosh Arkadipta and Escarse Jose. 2009. Employer-Sponsored Insurance, Health Care Cost Growth, and the Economic Performance of U.S. Industries. Health Services Research, 44(5), pp. 1449-1464 Schwarcz Daniel. 2010. Insurance Demand Anomalies and Regulation. Journal of Consumer Affairs, 44(3), pp. 557-577 Read More