Five Competitive Forces In The Insuranc

Five Competitive Forces in the Insurance Industry
Five Competitive Forces Analysis in the Insurance Industry
RichardSmith
Managerial Economics
December 6, 2013
Industry
Insurance is something that is needed by everyone today. It is used by individuals, business, corporations, etc. to help mitigate or minimize their financial risk. Various types of insurance exist today, from home, health, life, auto, travelers, indemnity, boat, renters, and even pet. Competition between insurance carriers is very stiff. In fact, in the United Kingdom (UK), the competition is so stringent, they have created a Competition Commission (CC), which is designed to ensure healthy competition between insurance companies in the UK for the ultimate benefit of the consumers and the economy ("Competition Commission GOV.UK."01).
Many insurance companies have gotten caught up in having an unbalanced pool of insurers because they were not prepared and did not do their homework. The have to be very careful in their underwriting process to ensure they insure the most desirable individuals. Many insurance companies have learned quickly the value in the knowledge and power of information obtained from doing research and the huge financial risk associated with getting stuck with a poor unbalanced pool of insured. Therefore, many insurance companies today are utilizing various tools and setting themselves apart from the competition via the competitive forces in an effort to avoid the financial repercussions associated with not being prepared. That way, they are avoiding the unprofitable pool if risk levels are miscalculated.
Participants and Segmentation of Insurance Groups
There are several participants in the insurance industry. The primary participant is the consumer. Without someone to purchase insurance, this industry would not exist. However, customers are not just purchasing insurance at random; rather, they are purchasing the products and services they truly need. Other key players in the insurance industry include Agents, Adjusters, Underwriters, and other insurance representatives. These participants play a vital role in making sure the rules and regulations of each state are carried out and followed in an effort to avoid legal repercussions.
“Market segmentation involves the grouping of customers with similar needs and buying behavior into segments, each which can be reached by a distinct marketing program. The concept attempts to reconcile differing customer needs with limited company resources, and allows product and marketing offerings to be adjusted to suit different customer groups” (Wind, 1978). Internally with an insurance company, segmentation has also occurred regarding various products to purchase. Therefore, many larger insurance companies have started implemented the aid of tools such as LexisNexis© to help them with their underwriting process to help mitigate their risks.
Drivers of Competitive Forces
Insurance companies are doing everything possible to remain marketable. State Farm Insurance Agent Eddie Causey said, “The competition is stiff. People are trying to save money every day. Therefore, our goal as a corporation is customer retention” (Causey). Apparently, competition is growing rapidly in the insurance industry. According to Porter, the Five forces that Shape Industry Competition are the Threat of New Entrants, Bargaining Power of Suppliers and Buyers, Rivalry among Existing Competitors, and Threat of Substitute Products or Services ("The Five Competitive Forces That Shape Strategy - Harvard Business Review." 03-05). In the insurance industry, there are forces that are strong and some that are weak. Below is a synopsis of each:
1. Threat of New Entrants – This is a weak driving force for a simple reason. It is not a simple task for a new insurance company to come into existence. There are laws, rules and regulations that must be followed prior to an insurance company being formulated. Therefore, larger companies do not have to worry about the threat of newer companies being formed.
2. Power of Suppliers – This is a weak driving force as well because the suppliers of capital aren’t a threat. However, if someone is working at a smaller company and decides to venture out to a larger company, then the competitive force increases to the larger company due to the training, talent and skill set going out the door to the larger company.
3. Power of Buyers – This driver of competitive force is weak on an individual basis. However, if large corporations or groups of people decide to leave an insurance company at one time, the impact of the move could have a strong impact due to the potential loss in millions of dollars.
4. Rivalry among Competition – This drive of competitive force is very strong because the insurance industry is becoming very competitive. There generally aren’t a lot of variations between one insurance company and the next, regardless of whether it is health, auto, life, boat, etc. Additionally, there is little difference between the products being sold between one company and the next. Insurance companies are doing everything they can to attract the most desirable insurers, including streamline their underwriting procedures in an effort to mitigate their risks.
5. Threat of Substitute Products or Services – This driver is very strong, as many insurance companies offer substitutes of their products or services internally. Therefore, there really isn’t an external threat of their products or services being substituted by an external company or force.
Industry Structure
The insurance industry is a large money making industry. The five largest property and casualty insurers in the United States are listed in the chart below in order from largest to smallest ("Top 25 Insurance Companies by Net Premiums Written." pg. 02):
Ranking | Insurance Company | Net Premiums Written |
1 | State Farm Group | $50,808,635 |
2 | Allstate Insurance Group | $24,796,256 |
3 | Liberty Mutual Insurance Group | $21,483,996 |
4 | Berkshire Hathaway Ins (Including Geico) | $21,358,316 |
5 | Travelers Group | $20,594,458 |
There are various types of insurance, but the common forms of policies include Life Insurance guarantees a particular amount of money to a designated person when an insured dies, or it guarantees a specific amount of money to the insured if he or she lives beyond a certain age. Life Insurance has drastically evolved over the years from the aforementioned traditional means. Today, insurance companies tend to offer more of an investment type product such as annuities, mutual funds, or other type of investment items. These type products open the door for insurance companies to branch out into some areas of banking. Health Insurance is another type of insurance that is an insurance against expenses accumulated during an illness of in insured. Liability is sort of like the “catch all” category of insurance. Automobile, property and casualty, business and professional incidents all fall under the liability category.
As far as how ownership of an insurance company is structured, it can come in various forms. However, the two most common forms are shareholder ownership and mutually owned ownership. “If the company is owned by shareholders, it is like any other public company. That is, its shares trade on an exchange like the NYSE, and it is required to report earnings on a quarterly basis. The other type of ownership is called mutually owned insurance companies. Here the company is actually owned by the policyholders, so an account called policyholder’s surplus, rather than shareholder’s equity, appears on the balance sheet. Today, only a small handful of companies are still policyholder-owned.” ("Porters Five-Force of Insurance Industry for Insurance Industry Analysis Report." 4-6)
Influences on Industry Structure
The banking industry is having a rapid influence on the structure of the insurance industry. In the past, laws and regulations made it difficult for the two industries to cross paths. However, recent regulations have allowed insurance companies to take advantage of the opportunity to cross selling banking products to insurance policyholders. This by far is a positive change in the right direction because it allows the policyholders more options. Another influence on the industry is Big Data. Insurance Companies are utilizing the information they obtain thru Big Data to really find out information on an insured prior to issuing them a policy. By doing this, the insurance companies are mitigating their insurance risks. In the past, companies would not have to go to these extremes to insure someone, but with so much fraudulent activities going on today, insurance companies cannot afford to take the risk. They are utilizing data from individuals such as their credit report, financial history, driving records, household income, medical records, and things of this nature to build and Insurance Score on a person. This shows that technology has had an influence on the insurance industry and how it was once structured. This is a trend in a positive direction for the companies because it helps them in their underwriting process get a good understanding of who they are insuring. However, from a policyholder’s perspective, this is negative change because no one has any privacy anymore.
Industry Structure Influenced by Competitor
One structure of the insurance industry that may be influenced by the competition is cost. The bottom line is most people are searching for the best bang for their buck. Therefore, the insurance companies that perform the best are those who display strong competitive cost structures. Additionally, a high tolerance for investment risk is another influencer by the competition. Even though insurance companies may not be able to control all risks in their specific operating environment, those companies that fail are those that do not recognize and address the risk they have at hand and develop feasible ways to manage those identified risks.
Works Cited
"Competition Commission GOV.UK." N.p., Web. 11 Nov. 2013. <https://www.gov.uk/government/organisations/competition-commission>.
"The Five Competitive Forces That Shape Strategy - Harvard Business Review." Harvard Business Review Magazine, Articles, Blogs, Case Studies, Books - Harvard Business Review. N.p., n.d. Web. 11 Nov. 2013. <http://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/>.
"PORTERS FIVE-FORCE OF INSURANCE INDUSTRY for INSURANCE INDUSTRY ANALYSIS REPORT." Scribd. N.p., n.d. Web. 23 Nov. 2013. <http://www.scribd.com/doc/24029717/14/PORTERS-FIVE-FORCE-OF-INSURANCE-INDUSTRY>.
"Top 25 Insurance Companies by Net Premiums Written." Insurance Quotes Online: Auto, Home, Health, Term Life, Renters. N.p., n.d. Web. 20 Nov. 2013. <http://www.insweb.com/insurance-tools/insurance-companies.html>.
Causey, Eddie. State Farm Insurance. Personal interview. 11 November 2013.