Lloyd’s of London is a famous group in London which has come together as insurance providers with the objective of pulling together all assets so that risk can be diversified. The Lloyds’ serves as neutralized marketplace for financial bankers. The larger base of assets allows spreading of risk and the pool become more stable. The main business is that of general insurance. The model is sustainable and risk spreading is achieved. Insurance market implications
Demand for property and casualty (P&C) insurance depends on economic activity, business investment, employment, consumption and asset prices. Similarly, demand for life and health (L&H) insurance is influenced by household disposable income and employment, particularly in the United States, where employers purchase the majority of health insurance. As a result, premium growth within global insurance markets is anticipated to benefit from the 3.9% annualized increase in world GDP forecast over the five-year period. Moreover, unemployment rates in developed nations are forecast to decrease over the next five years. For example, the unemployment rates in the United States and the United Kingdom are each expected to fall slowly from 2015 to 2020. Such decreases will spur demand from employers for life and health insurance, providing the industry with an avenue for growth.
Demand for L&H products are expected to make a quicker recovery compared with P&C insurance, which typically requires a strong recovery in consumer sentiment and disposable income. The sale of automobiles, boats, appliances and other big-ticket items will exhibit relatively small gains and, therefore, so will the insurance coverage required for these items. However, competition from both primary insurers and self-insurance options are anticipated to increase substantially over the five-year period. Any online technology that enables customers to easily and conveniently select and purchase insurance coverage from a variety of underwriters will be beneficial for brokers and agents. However, if this same technology allows potential customers to bypass brokers and agencies throughout the insurance buying process, commission growth for brokers and agencies will be tempered.
Insurance brokers and agents play distinct roles in the insurance market. Brokers are generally independent and represent the buyer during the insurance purchasing process. By acting in the interests of buyers, brokers are able to augment their traditional brokerage offerings with various fee-based risk advisory services. In contrast, agents represent one or more insurers in the transaction process. In most cases, agents simply represent an outsourced sales function. Both brokers and agents earn commissions from insurance sales. Commissions depend on transaction activity (i.e. policy volume) and insurance pricing.
Demand for insurance products and risk-management services normally fluctuates in line with general economic activity. In years of average economic growth, the great majority of property and casualty (P&C) insurance premiums represent renewal business from the year prior. Individual insurance sales depend on automobile sales, housing construction, big-ticket item trade, healthcare consumption and expanding incomes (i.e. life risk). Alternatively, demand for the industry's commercial-oriented services relies mainly on the size and health of the corporate sector. For example, the need for workers' compensation insurance is heavily influenced by total employment, while demand for risk advisory services and commercial property and liability insurance depends on aggregate economic activity. The P&C insurance and reinsurance markets are cyclical in nature, as they shift between market softening and hardening. Agents and brokers benefit from hard cycles, or increasing prices, as most commissions are earned as a percentage of the premium sold.
Over much of the five-year period, the industry has endured weak pricing conditions in the P&C and reinsurance markets. Market softening was well on its way just prior to the five-year period, following one of the most dramatic hard cycles in history. Price declines prior to the five-year period meant that industry operators recorded relatively benign growth, despite sizable increases in policy volume. Falling prices also damaged the industry's bottom line. Essentially, the commission per policy sold decreased at a more rapid pace than brokers and agents were able to cut costs.
Brokers and agents faced substantial challenges during the recession. The global credit crisis and subsequent recession led to falling demand for life, health and P&C insurance. Demand sank as confidence crashed, unemployment surged, household incomes shrank and consumption collapsed. The fall in demand more than offset declining capital surplus and prompted more (albeit small) price cuts. Capital surplus was eroded by mounting realized and unrealized capital losses and weakening underwriting results. Insurance brokers and agents were damaged by both falling policy volume and declining prices.
In the post-crisis environment, pricing has generally stabilized with insurance demand slowly recovering and profitability improving. For example, the industry's average profit margin is anticipated to reach 15.3% of revenue in 2015, rising from 13.8% in 2010. Demand for insurance is improving as economies return to growth, unemployment declines and household incomes start rising. Currently, rebounding profit is proving to be enough to prevent any serious market-wide price hardening. But once a surge in demand occurs to the point where it outstrips supply, market hardening is anticipated to occur and cause prices to rise. This trend has already started in 2012 and is expected to continue in the short- to mid-term.
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