INSURANCE BUSINESS MODEL
The business model of an insurance company is closely linked to the
types of products it sells. It is therefore easiest to use a product segmentation
to describe the different insurance business models. Typically two
types of insurance companies are distinguished.
• Life insurance companies sell insurance policies related to a person’s
life. When a customer buys such an insurance policy it can be
structured such that the customer receives a benefit either as long
as he is alive (e.g. pension, life annuity) or when he dies (e.g. life
insurance), or a combination of both. In order to be entitled to this
benefit, the customer needs to pay a premium. This can be a one-off
payment, in which case it is called a single premium life insurance,
or a periodic premium (typically annually).
• Non-life insurance is quite a broad definition, but covers all insurance
policies that are not directly related to an individual’s life. This means
that non-life insurance companies can be health insurance companies,
but also property and casualty insurance companies.
A product segmentation of the insurance industry is just one way
to describe the different insurance business models. There are several
other aspects that determine a business model. A very important one
in the insurance industry is the distribution network. Distribution can
be organized through brokers, independent agents, bank channels, tied
agents, or direct selling.
Bank and Insurance Business Model
Although there are many different types of insurance companies,
they all have one common denominator: their reason for being is ‘risk
pooling’. Thus, the question arises: Why do insurance companies add
value to society if their sole purpose is to pool risks? Indeed, pooling
risks does not result in mitigation of risks, it only spreads the costs
among a greater number of people. Then, why is there a demand for
insurance products at all? The answer lies in the fact that most human
beings are inherently risk averse. If one is risk averse, one can maximize
his expected utility – a measure of relative satisfaction – by buying
insurance. This can be illustrated by a simple example.
Consider two individuals playing in a lottery. Person A is risk averse and person B is risk
seeking. The risk preferences of persons A and B can be expressed by a concave and
a convex utility function, respectively. In other words, the utility of risk-averse person
A increases relatively less for every additional dollar payout. This is also known as the
law of decreasing marginal utility. Most people exhibit the same feature as person A. The
utility of risk-seeking person B increases relatively more for every additional dollar payout.
Alternatively put, person B’s utility accelerates as a function of payout. Therefore, person
B will always seek risk, because the additional utility that can be achieved outweighs the
associated extra risks. Graphically, the utility functions of persons A and B are shown in
Figure 2.1. Persons A and B both have a utility of 0 if the payout is 0, and a utility of 100
if the payout is 100. However, if the payout is 50, person A has a utility of 75, whereas
types of products it sells. It is therefore easiest to use a product segmentation
to describe the different insurance business models. Typically two
types of insurance companies are distinguished.
• Life insurance companies sell insurance policies related to a person’s
life. When a customer buys such an insurance policy it can be
structured such that the customer receives a benefit either as long
as he is alive (e.g. pension, life annuity) or when he dies (e.g. life
insurance), or a combination of both. In order to be entitled to this
benefit, the customer needs to pay a premium. This can be a one-off
payment, in which case it is called a single premium life insurance,
or a periodic premium (typically annually).
• Non-life insurance is quite a broad definition, but covers all insurance
policies that are not directly related to an individual’s life. This means
that non-life insurance companies can be health insurance companies,
but also property and casualty insurance companies.
A product segmentation of the insurance industry is just one way
to describe the different insurance business models. There are several
other aspects that determine a business model. A very important one
in the insurance industry is the distribution network. Distribution can
be organized through brokers, independent agents, bank channels, tied
agents, or direct selling.
Bank and Insurance Business Model
Although there are many different types of insurance companies,
they all have one common denominator: their reason for being is ‘risk
pooling’. Thus, the question arises: Why do insurance companies add
value to society if their sole purpose is to pool risks? Indeed, pooling
risks does not result in mitigation of risks, it only spreads the costs
among a greater number of people. Then, why is there a demand for
insurance products at all? The answer lies in the fact that most human
beings are inherently risk averse. If one is risk averse, one can maximize
his expected utility – a measure of relative satisfaction – by buying
insurance. This can be illustrated by a simple example.
Consider two individuals playing in a lottery. Person A is risk averse and person B is risk
seeking. The risk preferences of persons A and B can be expressed by a concave and
a convex utility function, respectively. In other words, the utility of risk-averse person
A increases relatively less for every additional dollar payout. This is also known as the
law of decreasing marginal utility. Most people exhibit the same feature as person A. The
utility of risk-seeking person B increases relatively more for every additional dollar payout.
Alternatively put, person B’s utility accelerates as a function of payout. Therefore, person
B will always seek risk, because the additional utility that can be achieved outweighs the
associated extra risks. Graphically, the utility functions of persons A and B are shown in
Figure 2.1. Persons A and B both have a utility of 0 if the payout is 0, and a utility of 100
if the payout is 100. However, if the payout is 50, person A has a utility of 75, whereas
Figure 2.1 Risk preferences expressed by utility functions.
Bank and Insurance Capital Management
person B has only a utility of 12.5. The lottery in which A and B are participating pays
100 with a probability of 50% and 0 with a probability of 50%. The expected utility of the
lottery is 50 (= 0*50% + 100*50%) for both A and B. Suppose persons A and B can
purchase an insurance product that ensures a payout of 50 in exchange for the proceeds
of the lottery ticket. This means that, if the payout of the lottery ticket is 0, the insurance
product still pays out 50. However, if the payout of the lottery ticket is 100, the insurance
product only pays 50. For A this is an attractive insurance product as it increases his
expected utility from 50 to 75 (a payout of 50 generates 75 utility for person A). This
confirms the statement that risk-averse people have demand for insurance products. In
contrast, person B does not benefit from buying this insurance as this decreases his
expected utility from 50 to 12.5.
The above example shows that insurance products are of interest to
risk-averse individuals and actually ‘add value’. Since society as a whole
can be classified as risk averse, the insurance industry has grown to be
one of the major industries of the developed world.
One of the major client differences between banks and insurance
companies is that bank clients retain legal ownership of their deposited
money whereas legal ownership of deposited money by insurance clients
is transferred to the insurance company in the form of a premium.
The insurance client can become a creditor of the insurance company
at a later stage, should the conditions under the insurance contract
materialize.
U.S. insurance companies List
·
21st Century Insurance
·
Acuity
·
ACE Limited
·
Aetna
·
Aflac
·
Alleghany Corporation
·
Allied Insurance
·
Allstate
·
American Automobile
Association
·
American Family Insurance
·
American Income Life
Insurance Company
·
American International
Group (AIG)
·
American National Insurance
Company
·
Ameritas Life Insurance
Company
·
Amica Mutual Insurance
·
Applied Underwriters
·
Arbella Insurance Group
·
Assurant
·
Assurity Life Insurance
Company
·
Auto-Owners Insurance
·
AXA Equitable Life
Insurance Company
·
Bankers Life and Casualty
Company
·
Berkshire Hathaway
·
California Casualty
·
Cincinnati Insurance
Company
·
CNA Financial
·
Colonial Life &
Accident Insurance Company
·
Combined Insurance
·
Commerce Insurance Group
·
Conseco
·
Country Financial
·
Chartis
·
Chubb Corp.
·
Elephant.com
·
Encompass Insurance Company
·
Erie Insurance Group
·
Esurance
·
Evergreen USA RRG
·
FM Global
·
Family Heritage
·
Farmers Insurance Group
·
Federated Mutual Insurance
Company
·
First Catholic Slovak
Ladies Association of the United States of America
·
FirstComp Insurance Company
·
First Insurance Company of
Hawaii
·
GAINSCO
·
GEICO
·
General Re
·
Genworth Financial
·
GMAC Insurance
·
Gracy Title Company
·
Guarantee Insurance Company
·
Guardian Life Insurance
Company of America
·
GuideOne Insurance
·
Hanover Insurance
·
The Hartford
·
HCC Insurance Holdings
·
Infinity Property &
Casualty Corporation
·
IntelliQuote Insurance
Services
·
Jackson National Life
·
John Hancock Insurance
·
K&K Insurance
·
Kansas City Life Insurance
Company
·
Kentucky Farm Bureau
·
Knights of Columbus
·
Liberty Mutual
·
Lincoln National
Corporation
·
Markel Corporation
·
MassMutual Financial Group
·
Merchants Insurance Group
·
Mercury Insurance Group
·
MetLife
·
Mutual of Omaha
·
National Life
·
Nationwide Mutual Insurance
Company
·
New Jersey Manufacturers
Insurance Company
·
New York Life Insurance
Company
·
Nonprofits Insurance
Alliance Group
·
Northwestern Mutual
·
Ohio Mutual Insurance Group
·
Omega
·
OneBeacon
·
Oxford Health Plans
·
Pacific Life
·
Pacificare
·
PEMCO
·
Penn Mutual
·
Philadelphia Contributionship
for the Insurance of Houses from Loss by Fire
·
Philadelphia Insurance
Companies
·
Physicians Mutual
·
Principal Financial Group
·
Primerica
·
Progressive
·
Protective Life
·
Prudential Financial
·
QBE
·
The Regence Group
·
Reliance Insurance Company
·
RLI Corp.
·
Safe Auto Insurance Company
·
Safeco
·
Safeway Insurance Group
·
Secura Insurance Company
·
Sentry Insurance
·
Selective Insurance
·
Shelter Insurance
·
Southern Aid and Insurance
Company
·
Standard Insurance Company
·
State Auto Insurance Group
·
State Farm Insurance
·
Sun Life Financial
·
Symetra
·
TIAA-CREF
·
The Main Street America
Group
·
The Norfolk & Dedham
Group
·
The Travelers Companies
·
Trupanion
·
Unitrin Direct Auto
Insurance
·
Unum
·
USAA
·
West Bend[disambiguation
needed]
·
West Coast Life
·
Western Mutual Insurance
Group
·
Western & Southern
Financial Group
·
Westfield Insurance
·
White Mountains Insurance
Group
·
Workmen's Auto Insurance
Company
·
Zurich NA
·
Main article: Life annuity
·
Allstate
·
American Family Insurance
·
American Fidelity Assurance
·
Amica Mutual Insurance
·
AXA Equitable Life
Insurance Company
·
Bankers Life and Casualty
·
Conseco
·
Farmers Insurance Group
·
Fidelity Life
·
Genworth Financial
·
ING Group
·
Jackson National Life
·
John Hancock Insurance
·
Lincoln National
Corporation
·
MetLife
·
Mutual of Omaha
·
Nationwide Mutual Insurance
Company
·
Old Mutual
·
Pacific Life
·
Protective Life
·
Prudential Financial
·
Standard Insurance Company
·
State Farm Insurance
·
Thrivent Financial for
Lutherans
·
TIAA-CREF
·
Transamerica Corporation
·
UNIFI Companies
·
United of Omaha
·
Western & Southern
Financial Group
Health
insurance {main medical insurance}
·
AARP
·
Aetna
·
American Family Insurance
·
American National Insurance
Company
·
Amerigroup
·
Anthem Blue Cross and Blue
Shield
·
Assurant
·
Blue Cross and Blue Shield
Association
·
Centene Corporation
·
Cigna
·
Coventry Health Care
·
EmblemHealth
·
Fortis
·
Golden Rule Insurance
Company
·
Group Health Cooperative
·
GHI
·
Health Net
·
HealthMarkets
·
HealthPartners
·
HealthSpring
·
Highmark
·
Humana
·
Independence Blue Cross
·
Kaiser Permanente
·
Kaleida Health
·
LifeWise Health Plan of
Oregon
·
Medica
·
Medical Mutual of Ohio
·
Molina Healthcare
·
Premera Blue Cross
·
Principal Financial Group
·
The Regence Group
·
Shelter Insurance
·
State Farm
·
Thrivent Financial for
Lutherans
·
UnitedHealth Group
·
Unitrin
·
Universal American
Corporation
·
WellCare Health Plans
·
WellPoint
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