Insurance - Industry Overview

LIFE INSURANCE

Premium receipts of life insurance companies grew nearly 6 percent in 1993 to $298.9 billion. Strong annuity sales and modest growth in health premiums led this growth. Life insurance sales were flat. Life insurance in force - the total face value of all policies - grew very little in 1993.

Before reading this chapter, see "Getting the Most Out of Outlook '94" on page 1. It will answer any questions you may have concerning data collection procedures, forecasting methodology, and sources and references. For related topics, see Chapter 42 (Health and Medical Services), Chapter 45 (Financial Services) and Chapter 46 (Securities Industry).

The life insurance industry consists of more than 1,700 companies that engage in underwriting life insurance and annuities. Life insurance companies also engage significantly in underwriting accident and health insurance, and in managing pension and trust funds. These companies are classified mostly in SIC 631 "Life Insurance" and SIC 6321 "Accident and Health Insurance." Stock companies, owned by shareholders, and mutual companies, owned by policyholders, are the two main types of insurance providers.

Life insurance companies get their premium income from three major product areas: life insurance, annuities, and health insurance. There was little growth in premium receipts for life insurance products in 1993. Sales of traditional whole life and term insurance for individuals fell considerably. This was offset by growth in investment-type products - variable and universal and their hybrids - in which policyholders assume much or most of the financial risk of the underlying assets. Many consumers who bought investment-type life insurance were looking for long-term yields higher than banks and money market funds offered. Sales of group life insurance fell in 1993. Income from individual and group annuities rose strongly to $132.6 billion in 1992 (Table 1) and this growth continued into 1993. Despite some consumer confidence problems, individual annuities sold extremely well in 1993 as people with maturing bank certificates of deposit or qualified retirement plans often rolled over the funds into higher-yielding annuities, especially variable products. Insurers with strong balance sheets did well with group annuities. In particular, guaranteed investment contracts (GICs) offered by insurers remained popular with 401(k) plans - the fastest growing part of the retirement investment market.

[TABULAR DATA OMITTED]

Premium growth from health insurance increased again in 1992 and 1993. Cost pressures were the chief reason for this growth. The trend toward managed health care, however, has tempered the increase of health premiums for life insurers. Life insurance companies are major providers of health insurance. Other providers of health insurance include Blue Cross/Blue Shield plans, property/casualty insurers, self-funded employer plans, and government programs.

Growth in investment income for insurers in 1992 and 1993 fell off as interest rates dropped. Other income fell in 1992 because insurers were taking capital losses on mortgages and other troubled assets.

The assets of life insurers increased an estimated 7.5 percent in 1993 to $1.79 trillion. The proportion of corporate bonds remained level from 1991 to 1992 because of the improvements in the bond market, while equities increased their proportion of life insurers assets. The commercial mortgage portfolio of insurers declined both absolutely and as a proportion of assets from 1991 to 1992 (Table 2). Assets consist mainly of financial instruments such as stocks and bonds. These assets back insurance and annuity reserves required to pay expected claims and provide the necessary surplus and capital to meet solvency standards.

[TABULAR DATA OMITTED]

The life insurance industry remained financially sound in 1993. Balance sheets improved in 1992 and 1993 for most companies as they adjusted to the new risk-based capital standards (see Key Developments section). In 1991, a stagnant economy, a depressed real estate market, excessive investments in low-grade corporate bonds, and a sharp drop in consumer confidence were the immediate causes of several large, well-publicized failures. Since then, the bond market has improved, the stock market has grown strongly, and the decline in real estate has leveled off in many regions, although real estate holdings remain the problem for many companies. The overall quality of assets in the portfolios of life insurance companies has improved, demonstrated by a shift from commercial mortgages to more conservative assets such as higher-grade bonds.

Life insurance companies cut operating costs by reducing staff and home office expenses and by focusing on reform of their agency and product distribution systems. As a result, employment in the industry fell again in 1993 to 520,800, down from 537,400. Merger and acquisition activity was strong. Many insurers acquired pieces of troubled companies, while some divested unprofitable product lines and operations. Foreign insurers have been active in acquisitions and investments in the United States, although there was a decrease in this activity in 1992.

Key Developments

Although the financial situation of the industry has improved, the solvency of the insurance industry was the still main issue of 1993, as it has been since 1991 when several large life insurers failed. Congressional inquiries on solvency have focused on the ability of the current state regulatory system to protect the public against insurance company failures. Critics of state regulation contend that the industry is too big, too diverse, and too international for 50 different state regulators to supervise the market and to protect consumers effectively.

Several pieces of legislation were introduced in Congress in 1993 calling for a direct federal role in insurance regulation. Some legislative proposals more narrowly address various aspects of insurance solvency regulation, such as setting federal requirements for foreign insurers and strengthening federal laws for insurance fraud and abuse.

Proponents of state regulation, led by the state regulators, claim the current system has done a good job of protecting policyholders and providing an efficient market, especially compared to what they label as "federal mismanagement" of the banking and savings and loan industries. The states, propelled by the solvency policing program of the National Association of Insurance Commissioners (NAIC), are moving to change licensing and financial standards, screening and surveillance procedures of insurers, and guaranty fund programs and insolvency procedures. New financial standards include risk-based capital requirements based on the amount of assets, underwriting, and other risks an insurer faces, in addition to the current minimum capital and surplus requirements. Under the program, the NAIC will certify any state meeting these standards. Thus, insurers from certified states are more easily received and recognized in other states. The NAIC has certified 22 states so far and more are expected by 1994.

The integration of financial services industries remains a key issue affecting competition in insurance. For years, the banking industry and others have argued that allowing banks to operate more fully in the insurance and securities industries would increase competition in financial services, provide stability to the financial marketplace, improve economic and capital market efficiencies, and provide greater convenience for consumers. In addition, regulatory and market developments in Europe and elsewhere point to a competitive need to integrate U.S. financial services markets. Opponents argue that current restrictions are necessary to protect consumers from unfair practices and to assure the soundness of financial institutions. They say, for example, that banks are in a strong position to unduly tie insurance sales to loans. Many also fear integrating the sectors will only compound current solvency problems in each. (See Chapter 45, Financial Services and Chapter 46, Securities Industries, for a discussion of related developments.) Health care reform is a key U.S. public policy issue. It is widely recognized that health care costs are out of control and that many people have no health insurance or inadequate coverage. In September 1993, the Clinton Administration unveiled its health care plan focusing on universal coverage for all Americans and mandatory employer contributions to pay for health insurance premiums. The proposal is expected to be the subject of protracted congressional debate and intense lobbying from the health care industry and consumers. (See Chapter 42, Health and Medical Services).

Outlook for 1994

Premium receipts for life insurance companies will grow 6 percent in 1994 to nearly $317 billion with sales of individual annuities remaining the strongest part of income growth for insurers. Sales of group pension and annuity products will be flat. Premium receipts from health insurance will rise only modestly due to the uncertain impact of health care reform. Sales of life insurance products should slow in 1994.

Overall, earnings for insurers should be positive as companies focus on profitable lines of business and reduce expenses. Investment income, however, will not be as strong due to lower interest rates. To reduce expenses, life insurers will consolidate operations and pursue strategic mergers as means of controlling costs and maintaining or improving market position. As a result, employment in the life insurance industry, including agencies, will decline again in 1994.

The quality of assets of life insurers should remain strong, and perhaps improve further, as insurers adjust to the new risk-based capital standards. Problems in commercial mortgages will persist, however, and many companies may experience financial problems as a result. In addition, life insurers that specialize in traditional health insurance will have survival problems with or without health care reform as the market moves toward managed care for cost-containment purposes. The number of insolvencies will continue at the same pace as recent years, although it should affect only smaller companies.

Long-

Term Prospects

The long-term prospects for life insurance and annuity products of life insurance companies are fairly good. Demographic variables, such as income growth, wealth accumulation, population and workforce changes, and home ownership will determine the demand for insurance products over the long term. The rate of personal savings in the United States will rise with the movement of the baby-boom population into middle age. The aging of the baby-boom population will raise the demand of individuals for products that provide for retirement income and for health care financing. Health care reform, however, will likely diminish the growth of private health insurance, especially indemnity insurance. New health products and markets, such as long-term health insurance, probably will not replace business lost elsewhere.

Competition in insurance markets will increase. Banks may be authorized to sell and underwrite insurance. Banks, mutual funds and other financial institutions will be offering investment and savings products that directly compete with insurance and annuity products. Foreign insurers will continue to expand into the largely unrestricted U.S. market.

Increased competition, changes in health care financing, and lingering problems in real estate will keep the number of insolvencies up over the next few years. These real estate problems will persist for a couple of years as commercial mortgages mature, but then diminish as insurers restructure their portfolios or real estate markets turn around. The problem of insolvencies has already prompted state level action to strengthen financial standards and tighten the regulation of insurance companies. If the states fail to address the problems adequately, a larger Federal role in insurance regulation may follow.

These conflicting forces and issues will change the nature of industry. Profits margins will likely remain thin and returns on equity will remain below historical levels over the next few years. To compete, life insurance companies will have to specialize in certain market segments, reduce operating costs, increase efficiency and service quality, and improve management of their assets and liabilities. Larger, better capitalized companies will get a bigger share of the market, but smaller niche players will be strong competitors in selected markets. There also will be pressure on the distribution system to reduce costs. Agents will have to accept less compensation or increase production. Insurers will be forced to look for more cost-efficient alternatives such as direct mail, other financial institutions, or financial advisors and consultants. Insurers will be seeking new information and communications technology to increase efficiency in underwriting, distributing, investment, claims, and administrative activities.

Diminished returns on life insurance in the United States also will prompt the stronger insurance companies to look for other investment opportunities. Many life insurance companies, mainly through holding companies, have moved or will move into related financial services including securities, banking activities, and real estate. More U.S. life insurance companies will take advantage of expanding foreign markets, especially in Europe, Asia, and Mexico with or without the North American Free Trade Agreement.

PROPERTY/CASUALTY INSURANCE

Net written premiums for property/casualty insurance increased 3.5 percent to an estimated $235.5 billion for 1993. Increasing rates in personal lines, such as automobile and homeowners' insurance, and selected commercial lines were the main reason for this growth. Rates in most commercial lines, however, remained flat in 1993 because of ample capital in the industry and competition from alternative risk-financing methods. In addition, a slow growing, low-inflation economy helped to minimize insured losses, which aided operating earnings. A decline in operating expenses, evidenced by sharp drops in industry employment, also benefitted earnings. Despite reduced investment income, realized capital gains added to overall earnings in 1993.

Although damage from the Midwestern floods in the summer of 1993 totaled an estimated $10 billion, less than $1 billion was privately insured and should not have a major impact on the insurance industry. Barring any other major disasters for the remainder of 1993, the industry's overall earnings and surplus increases should be positive.

The property/casualty insurance industry provides financial protection for individuals, commercial businesses, and others against losses of property or losses by third parties for which the insured is liable. P/C insurance companies are classified in SIC 633 "Fire, Marine and Casualty Insurance." There are an estimated 3,800 P/C companies. Most are organized as stock companies, some as mutual companies.

The biggest increase in premiums for property/casualty insurers in 1992 was private automobile insurance that, as shown on Table 3, grew $5.6 billion to $88.4 billion. Much of this growth is attributed to rate increases in many states because of prior underwriting losses.

In commercial lines, premiums for workers' compensation dropped 5 percent in 1992 to $29.7 billion following a decade of strong growth. The slow-growth economy and smaller rate increases helped spur the decline of premiums for workers' compensation. Premiums in other commercial lines either fell or were flat in 1992, continuing the. trend begun in 1991. Most notably, liability other than automobile fell again for the fifth year in a row. The use of other risk financing alternatives has especially hit premium growth in liability lines. The decline in liability lines will likely continue in 1993 due to overcapacity, the slow-growth economy, and reduced inflation. A slow economy reduces the number of claims (excluding catastrophe losses) and a reduction in inflation reduces the increase in costs of those claims - thus premium increases can be reduced.

In addition, the abundance of capital kept commercial rates low. The amount of capital available to underwrite risks determines the supply of insurance protection. With an adequate supply of capital, rates (prices) will stay low. A relative decrease in capital - as often happens after major catastrophes - suggests rates in the industry will move upward. The overall financial situation of P/C insurers diminished in 1992 due to the worst year ever for catastrophc losses. Operating losses were $3.3 billion, reflecting the impact of about $23 billion in catastrophe losses. Despite the operating losses, policyholders' surplus grew in 1992 due to earnings from investments (Table 4). The rate of insolvencies remained at approximately the same levels of recent years. Hurricane Andrew and other catastrophes (see Table 5) pushed many smaller insurers who were overexposed in the disaster areas into insolvency, and stressed the balance sheet of many larger insurers.

[TABULAR DATA OMITTED]

Reinsurance premiums to U.S. professional reinsurance companies - those companies that sell insurance that primary insurance companies buy to reduce and spread their risks - increased to nearly $14 billion in 1992, up from $12.7 billion. Reinsurance premiums to non-U.S. reinsurers increased to $10.5 billion in 1992, up from $10 billion. These premium increases were due mainly to rate increases for catastrophe risks and liability lines and reflect even stronger rate increases and tighter markets in Europe and elsewhere. The same trend continued through 1993. The upturn in reinsurance rates suggests that rates in the U.S. primary market may increase soon. However, increased reinsurance rates have not affected the primary market much yet because primary insurers retain most of their risks anyway and have adequate capital.

Asset quality is not a problem for P/C insurers as investments are relatively liquid and secure. There is a concern, however, that insurers have not increased reserves for losses sufficiently. This could affect future performance. Insurers cashed out many of their investments to pay for record losses. But the slow economy and continued low inflation allowed many insurers to reduce their reserves. In addition, some analysts question the reliability of collecting from reinsurance companies.

Insurers moved to streamline operations and reduce expenses in 1992 and 1993. Employment fell 1.6 percent in 1992 and another 1.4 percent in 1993 to stand at 545,400. Many insurers are restructuring and refocusing on core business. Merger and acquisition activity was strong in 1991 and 1992, highlighted by several large acquisitions by foreign firms in 1991. In addition, agents and brokers reported falling income because of reduced commissions and slower business. Many insurers are leaving personal lines to insurers that write the business through their own employees rather that through agents.

Key Developments in 1993

Concerns over the solvency of insurance companies remained strong in 1993 due mainly to the catastrophes of 1992. There were 28 interstate insolvencies of P/C companies in 1992. Despite the 1992 catastrophes, there were only nine P/C insolvencies in the first half of 1993. The incidence and severity of insolvencies in the P/C industry has been at an increased level since 1984.

Congress is investigating solvency problems in the insurance industry. Many members question the adequacy of state regulation to solve these problems and have introduced legislation calling for a larger federal role in insurance. The debate will likely continue through 1994 and beyond.

State regulators, through the National Association of Insurance Commissioners (NAIC), are addressing solvency concerns through a program that will accredit states meeting certain standards for insurance regulation and supervision. Insurance companies from states not following these standards may face severe restrictions on their activities in accredited states. The program calls for stronger financial standards, more examinations of insurers, improved accounting procedures and practices, stiffer requirements for reinsurance credits, and mandatory audits by independent actuaries and accountants. The goal is to detect financially troubled insurers before they fail.

Many states have legislation pending that would meet many of the accreditation standards. So far, 22 states have been accredited and a majority of the states are expected to be accredited by 1994. The NAIC plans to attend the accreditation standards in 1994 to include risk-based capital requirements for P/C companies and possibly to revise investment regulation. These changes will have profound impact on the financial structure of the industry.

Congress is again considering proposals to repeal certain antitrust provisions of the McCarran-Ferguson Act of 1945, the main determinant of the regulatory and economic structure of the insurance industry. The Act allows states to regulate the business of insurance and provides the industry exemption from federal antitrust law, except in cases of boycott, coercion, and intimidation. Although much of the industry opposes the loss of antitrust exemptions, some in the industry consider current antitrust exemptions unnecessary as long as certain data-sharing and cooperative activities are protected. The Clinton Administration supports a narrowing of the antitrust exemptions for the insurance industry with some exemptions for essential activities.

In a related matter, the Supreme Court in 1993 ruled that an antitrust suit by 19 state attorneys general against 32 U.S. and foreign insurance companies and industry organizations could be heard in a federal court. The suit alleges that these entities conspired to boycott the U.S. liability market in the 1980's, making liability insurance unaffordable or unavailable. The ruling, however, narrowed the definition of boycott to raise doubts about the success of the suit.

Congress is investigating allegations of "redlining", a discriminatory practice in which insurers deny coverage in certain geographic areas based on race, income, or other factors. This practice has been particularly associated with inner city areas in which individuals and business are unable to get affordable insurance - if any. The insurance industry has publicly condemned this practice. Pending congressional proposals seek to gather information on insurers activities concerning these alleged practices.

Losses from environmental liability claims are a major concern for insurers and reinsurers. Large claims, especially for toxic wastes and asbestos damages, are filed years - or even decades - after the incidence. For example, a recent study estimated the cost of cleaning up known hazardous waste sites at more than $750 billion over 30 years. This, however, does not include costs of litigation that are usually more than the clean up itself. Often, insurers are stuck with both bills. Because of the unpredictable nature and extent of losses in these areas, insurers find it extremely difficult to set up proper loss reserves. Many proposals have been made to change the Superfund law and to introduce other legislation to more efficiently clean up the sites. These proposals will be debated intensely in 1994 as the Superfund program is scheduled for reauthorization by September 30.

The growth of alternative risk financing methods has changed the nature of competition in commercial insurance over the past few years. Buyers of insurance responded to the liability crisis of the mid- 1980's - in which the availability and affordability of liability insurance became severely restricted - by finding other ways to finance the risks. Many buyers are now "self-insuring" their most predictable business risks. Although a misnomer, "self-insurance" can be as simple as assuming the risk of loss entirely as an expense of doing business. Other buyers are self-insuring by taking larger deductibles on their commercial insurance policies.

When risk funding or risk transfer needs become larger and the risks less predictable, some companies form separate subsidiaries, known as captive insurers. A wholly owned captive usually covers only its parent's risk financing needs, but can insure third parties as well. Two or more companies may set up a "group captive" insurer to share the risks among themselves. For example, doctors and lawyers often set up group captives for professional liabilities such as malpractice insurance.

Companies also form captive insurers in other countries, such as Bermuda, where tax laws and regulatory requirements are less stringent than in the United States. A 1993 industry survey estimates that risk financing alternatives were mote than 36 percent the size of the commercial P/C market. Self-insurance alternatives made up most of this market.

To provide another means of risk financing, the Risk Retention Act of 1981, as amended in 1986, allows the formation of risk retention groups and purchasing groups. A risk retention group, a form of captive, is capitalized by its members and state-licensed to provide liability coverage to its members. Members form purchasing groups to buy insurance from a commercial insurer at a discount. In December 1992, there were 377 purchasing groups and 77 risk retention groups. It is estimated that risk retention groups have almost $500 million of annual premiums. A few large risk retention groups have converted to P/C companies. Environmental impairment, medical malpractice, and product liability are common areas of coverage for risk retention and purchasing groups.

Outlook for 1994

Net written premiums for property/casualty insurance companies will increase 4 percent in 1994 to about $245 billion. Premiums in liability lines will remain flat, mainly due to alternative market options for insurance customers. Property insurance rates should increase somewhat, although they will be curbed by abundant capacity in the industry. Premiums for automobile and homeowners' insurance will grow strongly again, although these products will remain unprofitable for insurers in some states due to local political pressures to hold down premiums.

The overall financial health of the insurance industry should improve in 1994. With premium growth and reduced net underwriting losses, operating earnings for the industry will be positive barring any major catastrophe losses. Adjusting to new risk-based capital requirements will affect companies, and may be especially adverse for those with underwriting problems and inadequate reserves. Investment income will not be as strong because of low interest rates and realized capital gains will not add to earnings as in prior years. Policyholders' surplus will grow especially if rates increase and reserves prove adequate. Insolvencies should not be the problem as in past years, although many small- to mid-size companies with underwriting problems will remain vulnerable to market conditions.

Long-Term Prospects

The long-term prospects of the industry will depend mostly on how much and how fast rates increase over the next several years. Commercial rates will head upward, but will be sporadic and limited. A number of factors suggest rates are heading upward. Reinsurance rates for catastrophe risks are high and increasing. In addition, there is a general fear that many companies have inadequate loss reserves. Thus, insurers may need to start rate increases to bring reserves to adequate levels or face pressure from regulators, rating agencies, and stockholders. Rate increases will be limited by line of business and concern about market share. Capital in the industry is relatively strong, and new capital keeps coming into the industry. Alternative risk-financing markets are strong and business would flee from commercial insurers to these markets if rates jumped. Rates will stay down if low inflation and slow economic growth keep losses in check. Also, pressure from consumer groups will hold rates in personal lines in check.

In this environment, stronger or more efficient companies with a better capital position will get larger market shares. This will be particularly true as the industry adjusts and restructures for risk-based capital standards. Weaker companies will need to streamline or consolidate. They may have to join with stronger companies or find other capital sources. Foreign investment may provide some of this capital. Thus, merger and acquisition activity will likely remain high for the next few years.

Some companies will not survive. Insolvencies could increase if the economy falls or catastrophe losses jump suddenly. The failure of a large P/C company, although not foreseen, could strain the capacity of state guaranty funds. This could lead to other failures as the effects of the failure move through the industry.

INTERNATIONAL COMPETITIVENESS

Insurance and financial markets are becoming increasingly global. Advances in information and communications have made it possible for even the smallest investor to purchase financial instruments from almost anywhere abroad. The rise in personal income and savings in many areas around the world, and the need to protect this wealth, provides significant opportunities for life insurers. This environment makes it possible for life insurance companies to seek premiums and place investments globally.

The growth of multinational companies and international trade and investment has prompted the growth of international nonlife insurance companies and insurance brokers to service the local and global needs of companies for protection from all types of risk. Thus, insurers from Europe, Asia, and the United States have expanded internationally. In addition to providing insurance products, insurance companies also transfer services and technologies such as claims adjusting, risk management, actuarial, investment, and information technologies.

The United States has the largest insurance market in the world with about 34 percent of $1.41 trillion premiums worldwide (see Table 6). Japan is the second largest market with 21.8 percent of world premiums. The United Kingdom, Germany, and France were the next largest markets as premiums in Europe totaled $468 billion in 1991.

           Table 6: World insurance Markets
                    1991 Premiums
                (billions of dollars)
Countries                 Total(1)         Life    Nonlife(2)
Total, all countries       1,414.4        743.6         670.7
United States                486.8        202.9         283.9
Canada                        33.9         17.1          16.7
Europe                       468.6        231.7         236.9
United Kingdom               114.7         75.6          39.1
    Germany                 104.3          40.6          63.8
    France                   80.6          44.1          36.5
    Italy                    34.5           9.2          25.3
    Netherlands              25.9          14.1          11.8
    Spain                    20.5           6.2          14.3
    Asia                    371.6         266.7         104.9
    Japan                   307.8         225.6          82.2
    South Korea              31.7          25.5           6.2
    Taiwan                    8.3           5.8           2.5
  Latin America              14.9           3.2          11.6
    Mexico                    3.5           1.3           2.3
    Africa                   15.7          10.3           5.4
    Oceania(3)               22.9          11.7          11.2 (1)
 Numbers may not add due to rounding.

(2) Nonlife business includes accident and health insurance as well
as property/casual, insurance.

(3) includes Australia, New Zealand, and South Pacific islands.

SOURCE: Sigma, 1993, Swiss Reinsurance Company.

In 1991, Japan had $226 billion in life insurance premiums, followed by the United States with $203 billion. These figures, which do not include health insurance, demonstrate the extent to which the Japanese save through insurance.

The United States, with 42.3 percent of world premiums in 1991, leads the world market for nonlife insurance. Japan had 12.3 percent, Germany 9.5 percent, and the United Kingdom 5.8 percent. The size of the U.S. nonlife market is due mainly to health insurance and to casualty insurance. Private insurers, rather than the public sector, provide much of the health insurance in the United States. Also, compared to other countries, the toll-liability system in the United States leans strongly toward fully indemnifying people harmed as the result of the action or products of others. This shows up in higher premiums for liability insurance.

U.S. insurers have become more active in foreign markets in recent years. Table 7 shows that U.S.-owned insurers in foreign countries had sales (premium income plus investment income plus other income) of $36.2 billion in 1991. Canada, Europe, and Japan are key markets for U.S. insurers. Most foreign sales were from nonlife operations, but U.S. life insurers have recently become more active overseas. For example, U.S. life insurers have moved aggressively into South Korea, Taiwan, and other Asian markets. Mexico is a promising market for U.S. insurers, especially if the North American Free Trade Agreement is enacted.

Table 7: Foreign Insurance Affiliates(1) of U.S. Companies
         (in billions of dollars except as noted)
Item                     1985   1987   1989   1990   1991(2) All
insurance:
  Number of affiliates    617    631    623     627      613
   Total assets           56.4   80.4   94.1   111.6    116.4
   Sales(3)               17.9   27.0   31.5    34.8     36.2
 Life insurance:
  Number of affiliates     87     86     87     109      106
   Total assets           21.3   28.6   33.4    41.5     45.1
   Sales(3)                5.6    7.8   11.1    11.9     13.0
 Other insurance(4):
  Number of affiliates    530    545    536     518      507
   Total assets           35.1   51.8   60.7    70.1     71.3
   Sales(3)               12.3   19.2   20.4    22.9     23.3 (1)

 Affiliates include entities at least 10 percent by a nonbank U.S.
person.

(2) Preliminary estimates.

(3) Sales equals premium income plus investment income plus income.

(4) Include nonlife insurers, agencies, brokerage firms and other
insurance related companies. SOURCE: U.S. Department of Commerce,
Bureau of Economic Analysis, U.S. Direct Investment Abroad, various
issues.

Foreign-owned insurers in the United States had sales of $72.9 billion in 1991, up sharply from $62.6 billion in 1990 due to major foreign acquisitions (see Table 8). Foreign-owned insurers captured more than 11 percent of the U.S. premium market in 1991. Most foreign-owned insurers are from Europe and Canada (see Table 9). Foreign-owned nonlife insurers and other insurance services sold policies worth more than $39 billion in the United States in 1991. Foreign-owned life insurers in the United States recorded $33.7 billion in sales in 1991.

Table 8: Foreign-Owned Insurers in the United States(1)
(in billions of dollars except as noted)
Item                    1985    1987    1989    1990    1991(2)
 All insurance:
  Number of companies      -   1,071   1,155    1,363     1,396
  Total assets          67.2   110.1   170.6    205.6     302.9
  Sales(3)              23.9    39.1    54.4     62.6      72.9
 All insurance:
  Number of companies      -     233     247      248       367
  Total assets          33.8    53.3    77.0     92.2     171.6
  Sales(3)              10.5    16.8    22.2     26.7      33.7
 Other insurance(4):
  Number of companies      -     838     908    1,116     1,029
  Total assets          33.4    56.8    93.6    113.4     131.3
  Sales(3)              13.5    22.3    32.1     35.9      39.2 (1)

 Companies are members of affiliates which are 10 percent more by
any one foreign person. Includes branches and subsidiaries.

(2) Preliminary estimates.

(3) Sales equals premium income plus investment income plus other
income.

(4) Includes nonlife insurers, agencies, brokerage firms and other
insurance related companies.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,
Foreign Direct Investment in the United States, various issues.

             Table 9: Sales(1) of Foreign-Owned
                  Insurance Companies, 1991
                   (in millions of dollars)
                          Foreign-owned           U.S.-owned
Country(2)              insurers in the U.S.   insurers abroad
 All countries                72,910                 36,243
    Canada                    14,920                      -
    Europe                    46,832                 11,071
      Switzerland              7,041                      -
      European Community      36,011                      -
        United Kingdom        13,872                  7,324
        Netherlands            8,323                      -
        Germany                5,640                      -
    Latin America(3)               -                  6,774
    Asia and Pacific           1,074                 10,631
      Japan                      655                      -

(1) Sales equals premium plus investment plus other income for
insurance affiliates 10 percent or more owned by any one foreign
person.

(2) Country of ultimate beneficial owner.

(3) Includes offshore centers such as Bermuda and the Bahamas.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,
Foreign Direct Investment in the United States, and U.S. Direct
Investment Abroad, Preliminary 1991 estimates.

Cross-border trade in insurance, as depicted on Table 10, is a small, but important part of the U.S. insurance market. U.S.-based insurers received more than $5.5 billion of premiums from overseas (exports) in 1992. Premiums of $11.9 billion went to foreign-based insurers (imports) to cover risks in the United States. Most premiums sent abroad went to Europe or the off-shore centers, like Bermuda, for reinsurance. Reinsurance premiums sent abroad represent about one-third of the reinsurance market in the United States.

       Table 10: U.S. Cross-Border Trade in Insurance
                 (in millions of dollars)
Item                                1990      1991      1992
 Net exports(1)                      751     1,028     1,069
 Direct premiums received          2,834     1,845     2,623
 Reinsurance premiums received     2,009     2,192     2,900
 Net imports(2)                    1,910     2,450     1,373
 Direct premiums paid              1,006     1,107     1,348
 Reinsurance premiums paid         9,216     9,962    10,527
 Net balance of insurance trade   -1,159    -1,442      -303 (1)

 Premium receipts of U.S.-based insurance companies from foreign-
based insureds net of losses.

(2) Premium payments of U.S.-based insureds to foreign-based
insurance companies net of losses.

SOURCE: U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transaction data.

Foreign companies have expanded their insurance activities in the United States over the past few years mainly through acquisitions. Foreign outlays for acquisition or establishment of insurance companies in the United States has totaled more than $16 billion since 1981. This included $5.8 billion in 1988, largely reflecting a $5.2 billion investment by Batus Inc. (UK) in the Farmers Group, an insurance company in California. Other recent foreign investments of note include the Axa Groupe (France) infusion of $1 billion in the Equitable Life Assurance Society of New York and the 1991 purchase by Allianz (Germany) of the Fireman's Fund of California, valued at $3.1 billion.

Regulatory and trade developments around the world are creating opportunities for U.S. insurance companies. The European Community (EC) is directing its members to liberalize their markets for insurance. This has already resulted in strong growth. Several EC countries, especially in Southern Europe, have opened their insurance sectors to foreign investment. Japan is progressing with major regulatory reform that should create commercial opportunities for U.S. insurers and brokers over the next few years.

The economies of Latin America, although small, are growing quickly. Many Latin American countries are liberalizing their insurance markets by privatizing government-owned insurers, allowing foreign investment, and deregulating their markets to be more competitive. Even larger opportunities are available in the dynamic Asian economies where business, wealth, and personal incomes are expanding rapidly. Taiwan and South Korea have attracted many U.S. insurers in recent years. China looms as a major market if reforms allowing foreign insurance providers are put in place.

Long-term opportunities for U.S. insurance companies in foreign markets may depend on the effectiveness of the rules and principles the United States is negotiating in the Uruguay Round Group of Negotiations on Services under the General Agreement on Tariffs and Trade. A successful agreement would establish a multilateral set of rules that would provide signatory countries with guidance on international trade and investment in services, including insurance. These rules would allow insurers to enter foreign markets and operate on a equal basis with domestic insurers.

U.S. insurers also would gain from a North American Free Trade Agreement (NAFTA), which the United States negotiated with Canada and Mexico but was not yet ratified by any country by 1993. NAFTA would provide U.S. insurers with expanded investment opportunities in Mexico allowing U.S. insurers to operate equally with Mexican insurers. The Canadian market is already open to foreign insurers. NAFTA also liberalizes some types of cross-border insurance among the countries, such as reinsurance and marine insurance. In addition, it would provide broader access to Mexico's insurance market for agents, brokers, and insurance service firms such as claims adjusters and actuaries. Although the Mexican insurance market had almost $5 billion in total premiums in 1992, the market and opportunities for U.S. insurance companies should expand with a NAFTA.

Additional References

1993 Life Insurance Fact Book, American Council of Life Insurance, 1001 Pennsylvania Ave. NW, Washington, DC 20004. Telephone: (202) 624-2000.

1993 Property/Casualty Insurance Facts, Insurance Information Institute, 110 William St., New York, NY 10034. Telephone: (212) 669-9200.

Best's Aggregate and Averages, A. M. Best Company, Oldwick, NJ 08858. Telephone: (201) 439-2200.

Business Insurance, 740 Rush St., Chicago, IL 60611. Telephone: (312) 280-3174.

International Insurance Council, 1212 New York Ave. NW, Suite 250, Washington, DC 20005. Telephone: (202) 682-2345.

Life Insurance Marketing and Research Association, Inc., P.O. Box 208, Hartford, CT 16141-0208. Telephone: (203) 677-0033.

National Association of Insurance Brokers, 1401 New York Ave., Washington, DC 20005. Telephone: (202) 628-6700.

National Association of Insurance Commissioners, 120 West 12th St., Suite 1100, Kansas City, MO 64105. Telephone: (816) 842-3600.

National Underwriter, National Underwriter Company, 43-47 Newark St., Hoboken, NJ 07030. Telephone: (201) 963-2300.

Reinsurance Association of America, 1025 Connecticut Ave. NW, Suite 512, Washington, DC 20036. Telephone: (202) 293-3335.

Sigma, Swiss Reinsurance Company, 50/60 Mythenquai, P.O. Box 8022, Zurich, Switzerland. Telephone: (01) 208-2543.

Source Book of Health Insurance Data, Health Insurance Association of America, 1025 Connecticut Ave. NW, Washington, DC 20036. Telephone: (202) 223-7845.

Standard and Poor's Insurance Rating Service, 25 Broadway, New York, NY 10004. Telephone: (212) 208-1367.

COPYRIGHT 1994 U.S. Department of Commerce
COPYRIGHT 2004 Gale Group