Risk Management and Insurance
As people, we are faced with the possibility of loss in our everyday lives. Be it a car accident, illness, Property loss, or even death. As early as the millennia B.C, modern profit insurance was demonstrated in a contract of a loan of trading capital to traveling merchants. The first insurance company formed in the United States was in Charleston, South Carolina during 1732. Later in 1752, Benjamin Franklin helped spread insurance by creating the Philadelphia Contributionship which ensured that houses burned by the fire were now insured. In his policy, he refused to ensure all wooden houses because of the great risk associated. Later in the 1830s, other insurance companies arose and up to now insurance has become an accepted practice in all states.
Insurance was created to eliminate the risk associated. Risk management and Insurance has created a discipline in which various methodologies are brought to bear on a significant problem. Insurance creates certainty from the standpoint of the insured by reducing the possibility of financial loss. In order to do this, the insured decreases the risk of uncertainty by extending the risk over a group of similar exposures to predict the individual chance of loss and also by transferring the risks from the individual to the group. The main function of Insurance is to provide Security for the insured, that is, seeing to it that their expenses, due to the loss, is reduced or taken care of. Because of possible risks, individuals or groups takes precautions by selecting agents or Insurances to resolve their financial problems.
Throughout history, insurance has and is still undergoing changes in how they operate. Changing customer demands, advances in technology, changing the legal environment, expansion of the social security system, the impact of catastrophe exposure, shifting demographics, and evolving regulations are just some of the factors combining to shake the industry to its root. Insurers are expecting insurance companies to speed systems by creating an easier form of ways such as easy to compare among insurances, more customer service available online and 24/7, etc. For many years, one of the primary assets of insurance companies was the use of insurance agents. Agents were mostly seen door to door to spread insurance and also to pick up monthly premiums from clients. (Forbes) With technology, insurance companies now use electronic premium billing and payment services in order to meet the needs of their customers. Advances in technology allow insurers to examine through data quickly and efficiently by focusing on producing approaches to risk management, reducing liabilities, and lowering premiums to meet customers requirements. Customers are able to easily get access to their data and perform transactions in days or hours rather than weeks or months. (Subramanian, S. (n.d.).
Changes in the laws of society have always and will continue to have an impact on the insurance industry. The Patient Protection and Affordable Care Act is an example of how legislation can influence the insurance industry signed by President Barack Obama on March 23, 2010. With the recent passing of the Affordable Care Act, several health insurances are subject to changes in the years to come. Whiles others critics this law, others defend it. Not only does the Affordable Care Act expands health insurance coverage (Medicaid), it also eases the connection between health insurance and jobs, and intends to lower the price of insurance for those physically or mentally ill by controlling the health insurance market. It also has two other laws, one requires insurance companies to accept all individuals into the program even if they are sick or healthy, (HealthCare.gov Glossary. (n.d.)), Looking to protect individuals seeking new insurance or renewing an existing insurance and the other law requires individuals to obtain an insurance. (Impact of Healthcare Legislation on Health Insurance Companies. (n.d.)).
A few other changes that have been effective from now until several years are; one the prohibiting of annual and lifetime limits on coverage as of September 2010 which could increase the probability of additional future cash for insurers. Second, is the justification of any premium increases by insurance companies. Third, is to make insurance plans easier for some to afford, expanding the demand for more Americans to obtain health insurance etc. With both negative and positive reactions to the recent changes, the Affordable Care Act will allow millions of uninsured Americans to gain coverage which will increase the competition in the industry. Further, causing it to be difficult for insurance companies to keep up the premium prices for their customers (Impact of Healthcare Legislation on Health Insurance Companies. (n.d.)).
The insurance industry also faces challenges such as the impact of climate changes and terrorism. According to a report published by Impact Forecasting, the overall losses for last year reached $330 billion natural catastrophes which left insurers to pay an amount of $134 billion. Economic losses from weather disasters, reached $344 billion surpassing the $294 billion in 2005. The largest catastrophe in 2017 was the Atlantic hurricane seasons Harvey, Irma and Maria causing alone an estimate of $220 billion in damage or 68 percent of 2017’s annual economic loss. Followed by the Hurricanes is the wildfire outbreak in the state of California causing a nearly of $13 billion economic damages. (Crouch, & Fenimore. (n.d.).) According to the U.S. Government Accountability Office, the increasingly severe droughts, hurricanes, floods, and other catastrophic events is due to the rising temperatures. With a little to no cause of these damages, insurers are interested in the results for the risks they underwrite. With the increase of continued catastrophic losses, predictions and increasing premiums by insurance companies will continue to be effective.
Similar to the issue of climate change, terrorism is the other attack insurers faces. The insurance industry faced a total of $31.6 billion dollars from the aftermath of 9/11. (Investopedia. (2015, April 24) From this incident, the U.S passed the Terrorism Risk Insurance Act (TRIA) in 2002, allowing the public and the private sector to share losses in the case of an attack of terrorism. TRIA was renewed in 2005 and in 2007, Congress enacted the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) extending the act to 2014. Terrorism being random, those only at risk at known to purchase them.
The Social Security System has benefited a lot of Americans in a period of years. According to the Social Security Administration’s for the June 2016 record, 60.5 million people are currently receiving Social Security benefits part of which are retirees. (Williams, S. 2016, August 27). For retired workers, their benefits are to an average of $1348.49 per month. Most people rely on Social Security benefits to provide for them. The program provides support to 48 percent married elderly couples and 71 percent monthly income to single elderly individuals (Williams, S. 2016). The process is based on taxes that workers make into the system. While employed, you pay into Social Security and later during your retirement age, you receive these benefits back. These taxes take the form of the Federal Insurance Contribution Act (FICA) taxes that are taken from paychecks. The taxes are then used to pay other retirees who are getting benefits and the remaining money is placed into trust funds. The amount your average salaries gained during your unretirement days that the Social Security retirement program will benefit will change depending on your interest and when you choose to start your benefits. Generation X (people born between 1946 and 1964) contributes to approximately 20% of the total population. For their beneficiaries, the Social Security System has been designed. The problems faced by Social Security System are; there is a higher number of the retirement of baby boomers, and there is an increase in the life expectancy of people. During the mid-1960s, the age of retirement was 70 years and above those years it increased to 78 years. While the program will not disappear completely, future Social Security benefits are expected to be reduced by one-third of what retirees expect to receive, that is, instead of receiving $2,500 monthly, they will be receiving $1,925. Financing should be separated from the transfer and the insurance components of Social Security benefits. A variety of plans have been suggested ranging from financing the transfer and the insurance components of social security benefits separately and Increasing the average retirement age of the citizens from 62 to 70 years. A set of reform proposals addressed will help change the Social Security Programs, the legislation still continue to work to make the Social Security Program a better one.
In the last few years, the International Association of insurance supervisors (IAIS) known for developing international insurance principles, standards, and guidance papers, has lay the foundation for change through the establishment of the Insurance Core principles and the growth of the Common Framework for the supervision of Internationally active insurance Groups (ComFrame). Comframe has been criticized by the IAIS to reduce reporting and compliance demands on IAIGs, companies have been skeptical about the program. The U.S Insurance Regulation system is continuously improving the changes in the investment markets and creating new federal laws. These changes were mainly focused by the National Association of Insurance Commission (NAIC) to modernize regulation of surplus lines insurance and promoting adoption of the interstate insurance Product regulation compact. As improvement has been efficient in smaller states, larger states are still facing a slower progress due to large bureaucracies, information systems problems and a challenging political environment. (Vaughan, E. J., & Vaughan, T. M. (n.d.)). The McCarran-Ferguson Act is an example of new federal that needed to be amended. The McCarran-Ferguson Act is a United States federal law passed by Congress in 1945. The Act provided that the business of insurance and every person engaged shall be subject to laws of the state laws or regulations that regulate the business of insurance. Repeals against this Act has surfaced right from when these laws were enacted. The recent approach was in February 2007 were legislation introduced both the House and Senate to repeal the limited antitrust exemption provided by McCarran-Ferguson Act in which the repeals is still taking place as of now.
The ongoing transformation of, changes in customer demands, advances in technology, changes in the legal environment, expansion of the social security system, the impact of catastrophe exposure, shifting demographics, and evolving regulations, that the insurance industry is going through will help give its customers what they expect from their insurance companies. As technology continues to grow and society keeps readjusting, insurance companies that are able to adapt effectively will grow.