Supplement to Best’s Review November 2021 2021 Edition An overview for those working with and in one of the world’s most interesting and vital industries. TheINSURANCE INDUSTRYAbout AM Best AM Best is the only global credit rating agency with an exclusive focus on the insurance industry. Best’s Credit Ratings are recognized worldwide as an indicator of WKH¿QDQFLDOVWUHQJWKDQGFUHGLWZRUWKLQHVVRILQVXUDQFH companies. AM Best is also a source of insurance related data and market intelligence, covering thousands of companies worldwide through analytical resources and news coverage that provide a critical perspective for informed business decisions. +HDGTXDUWHUHGLQWKH8QLWHG6WDWHVWKHFRPSDQ\KDVR൶FHV in Oldwick, New Jersey; London; Mexico City; Singapore; Hong Kong; Dubai and Amsterdam, and does business in more than 100 countries. Visit www.ambest.com.Table of Contents Chapter 1: Industry Overview For Those Interested in the Insurance Industry ...........2 Insurance: Financial Protection From Risks .............3 By the Numbers ...................................3 How Insurers Make Money ..........................5 The Economics of Insurance .........................6 How Insurance Is Sold ..............................7 Important Functions of Insurance Organizations .........9 Insurance Entities .................................11 Chapter 2: Property/Casualty Property/Casualty Market at a Glance .................16 Property/Casualty Coverage Types and Lines of Business ..18 Commercial Lines of Business .......................20 Chapter 3: Life Life Market at a Glance ............................26 Life Insurers Chasing Wider Range of Opportunities ....28 Important Lines of Life Business and Products. . . . . . . . . . 30 Annuity Products .................................31 Accident & Health Products .........................33 Chapter 4: Health Health Market at a Glance ..........................37 Developing Issues for Health Insurers .................37 Major Types of Health Plans .........................39 Products and Terms ...............................40 Common Health Insurance Terms ....................41 Chapter 5: Reinsurance/Alternative Risk Transfer Overview of Reinsurance ...........................44 Developing Issues in Reinsurance ....................45 Alternative Risk Transfer and Risk Financing ...........46 Insurance-Linked Securities and Structured Transactions ..47 Chapter 6: Fiscal Fitness & AM Best Insurance Stands the Traditional Business Cycle on Its Head .................................54 The Risk of Financial Impairment ....................55 Overview: Best’s Credit Rating Evaluation ..............56 AM Best’s Insurance Information Products and Services .............................58 Spotlights On High Alert: Rising Risks of PFAS Claims and Litigation Capture New Attention .............................13 Insurers Turn to Apprenticeships ....................14 Strength Through Specialization .....................22 Independent Streak ...............................24 Cryptocurrency: Insurance Industry Tests the Waters With New Initiatives .................34 A Healthy Dose of Reality ...........................42 Winds of Change: Derechos, Snowstorms and Other Catastrophes Are Becoming a Growing Problem for Insurers ......................................49 Laboratory of the Minds ............................. 52 The Greening of Insurance Asset Management .........622 BEST’S GUIDE TO UNDERSTANDING THE INSURANCE INDUSTRY 2021 Edition Published by AM Best AM BEST COMPANY, INC. Oldwick, NJ CHAIRMAN, PRESIDENT & CEO Arthur Snyder III SENIOR VICE PRESIDENTS Alessandra L. Czarnecki, Thomas J. Plummer GROUP VICE PRESIDENT Lee McDonald AM BEST RATING SERVICES, INC. Oldwick, NJ PRESIDENT & CEO Matthew C. Mosher EXECUTIVE VICE PRESIDENT & COO James Gillard EXECUTIVE VICE PRESIDENT & CSO Andrea Keenan SENIOR MANAGING DIRECTORS Edward H. Easop, Stefan W. Holzberger, James F. Snee ART & PRODUCTION SENIOR MANAGER Susan L. Browne DESIGN/GRAPHICS Angel M. Negrón Tell Us What You Think Is this publication helpful to you? Did you find the information you were looking for? What other information do you wish we had included? Send your thoughts to news@ambest.com. Copyright © 2021 AM Best Company, Inc. and/or its affiliates. ALL RIGHTS RESERVED. No portion of this content may be reproduced, distributed, or stored in a database or retrieval system, or transmitted in any form or by any means without the prior written permission of AM Best. While the content was obtained from sources believed to be reliable, its accuracy is not guaranteed. For additional details, refer to our Terms of Use available at AM Best website: www.ambest.com/terms. Visit http://guides.ambest.com to order additional copies. For Those Interested in the Insurance Industry AM Best publishes Understanding the Insurance Industry to provide a clear picture of how the insurance industry operates, generates revenue and provides opportunities for people of varied talents and interests. It’s designed to provide readers with a high- level overview of the insurance industry, particularly how it operates in the United States. It’s also designed to be a gentle and broad introduction to the insurance industry for students, new employees, prospects and those who would like to learn more about one of the most interesting and important ¿QDQFLDOVHUYLFHVLQGXVWULHV We’ve designed this book in six sections: the property/casualty sector (also known as nonlife insurance), life, health, reinsurance and alternative risk transfer, and the function of AM Best in the industry. Articles were prepared by members of AM Best’s editorial team. Some content is extracted from Special Reports produced by AM Best, from articles in Best’s Review PDJD]LQHDQGIURPUHSRUWLQJVSHFL¿FDOO\ for this edition. Additional copies of this book are available by ordering online. If you have suggestions for future topics or areas of focus, please send your comments to news@ambest.com. Even more information, including monthly analytic broadcasts, topical webinars and other multiplatform resources are available at www.ambest.com. ISSN 2375-7280 ISBN: 979-8756289831CHAPTER 1: INDUSTRY OVERVIEW www.ambest.com3 Insurance: Financial Protection From Risks ,QVXUDQFHSURWHFWVDJDLQVWWKH¿QDQFLDOULVNVWKDWDUHSUHVHQWDWDOOVWDJHVRISHRSOH¶V lives and businesses. Insurers protect against loss — of a car, a house, even a life—and SD\WKHSROLF\KROGHURUGHVLJQHHDEHQH¿WLQWKHHYHQWRIWKDWORVV7KRVHZKRVX൵HUWKH loss present a claim and request payment under the insurance coverage terms, which are outlined in a policy. Insurers typically cannot replace the item lost but can provide ¿QDQFLDOFRPSHQVDWLRQWRDGGUHVVWKHHFRQRPLFKDUGVKLSFDXVHGE\DORVV All aspects of life include exposure to risk. Individuals and businesses are presented with a choice: Accept the consequences of a possible loss, or seek insurance coverage in the event RIDORVVUHGXFLQJWKHH[SRVXUHWRULVN7KRVHZKRGRQ¶WSURFXUHLQVXUDQFHFRYHUDJHDUH UHVSRQVLEOHIRUWKHIXOOORVV7KRVHZKRREWDLQFRYHUDJHVXFFHHGLQ³WUDQVIHUULQJWKHULVN´ to another organization, typically an insurance company. Purchasing insurance is the most common risk transfer mechanism for the majority of SHRSOHDQGRUJDQL]DWLRQV7KHPRQH\SDLGIURPWKHLQVXUHGLVNQRZQDVWKHSUHPLXP,Q UHWXUQWKHLQVXUHUDJUHHVWRSD\DGHVLJQDWHGEHQH¿WLQWKHHYHQWRIWKHDJUHHGXSRQORVV By the Numbers Insurance takes advantage of concepts known as risk pooling and the law of large numbers. Many policyholders pay a relatively small amount in premiums to protect WKHPVHOYHVDJDLQVWDSRVVLEOHODUJHUORVV:KHQDVX൶FLHQWQXPEHURILQVXUHGVPDNH that same choice, the funds available to pay claims increase and the chances of any single person or group exhausting the available funds grow smaller. In risk pooling, insurers can accept a diverse and large number of risks, so long as many people participate in the insurance process, and the insured risks are individually unpredictable and infrequent. Although an insurer may accept risks from DODUJHQXPEHURISHRSOHRQO\DVPDOOSRUWLRQRIWKRVHDUHOLNHO\WRVX൵HUDQLQVXUHG ¿QDQFLDOORVVGXULQJWKHSHULRGRILQVXUDQFHFRYHUDJH5LVNSRROLQJDOORZVLQVXUHUVWR pay claims to the few from the funds of the many. :KDWLQVXUHUVVHOOLVSURWHFWLRQDJDLQVWHFRQRPLFORVV7KHVHORVVHVDUHRXWOLQHGLQ contracts or documents known as insurance policies. Insurers that cover life and health usually do not cover property or liability, which is the domain of property/ casualty insurers. Life and health insurers cover three general areas: s Protection against premature death. s Protection against poor health or unexpected medical costs. s 3URWHFWLRQDJDLQVWRXWOLYLQJRQH¶V¿QDQFLDOUHVRXUFHV4 CHAPTER 1: INDUSTRY OVERVIEW Insurance Density – Annual Per Capita Insurance Premiums (2020) Nonlife insurers, known as the property/casualty sector in the United States and &DQDGDLQJHQHUDOR൵HUWZREDVLFIRUPVRIFRYHUDJH s Property insurance provides protection against most risks to tangible property RFFXUULQJDVWKHUHVXOWRIFROOLVLRQ¿UHÀRRGHDUWKTXDNHWKHIWRURWKHUSHULOV s Casualty, or liability, insurance is broader than property and is often coverage of an individual or organization for negligent acts or omissions. A well-known form of casualty insurance, auto liability coverage, protects drivers in the event they are found to be at fault in an accident. A driver found to be at fault may be responsible for medical expenses, repairs and restitution to other people involved in the incident.CHAPTER 1: INDUSTRY OVERVIEW www.ambest.com5 How Insurers Make Money Insurance companies primarily make money in two ways: from investments and by JHQHUDWLQJDQXQGHUZULWLQJSUR¿W²WKDWLVFROOHFWLQJSUHPLXPWKDWH[FHHGVLQVXUHG losses and related expenses. It all begins with underwriting. Insurers, whether life or nonlife, must assess the risk and gauge the likelihood of claims and the value of those claims. Insurance companies invest assets that are set aside to pay claims brought by SROLF\KROGHUV7KHLQWHUYDOEHWZHHQWKHWLPHWKHLQVXUHUUHFHLYHVWKHSUHPLXPDQGWKH WLPHDFODLPDJDLQVWWKDWSROLF\LVPDGHLVNQRZQDVWKH³ÀRDW´ If an insurer has predominantly short-term obligations, asset portfolios should be relatively liquid in nature (i.e., publicly traded bonds, commercial paper and cash). CHAPTER 1: INDUSTRY OVERVIEW 6 ,IWKHQHHGVDUHORQJWHUPDSRUWIROLRFRQWDLQLQJ¿[HGLQFRPHVHFXULWLHVVXFKDVERQGV and mortgage loans, may also include preferred and common stocks, real estate and a variety of alternative asset classes. Life insurers also establish separate accounts for nonguaranteed insurance products, such as variable life insurance or annuities, which provide for investment decisions by policyholders. Property/casualty insurers traditionally have been more conservative with the asset side of their balance sheets, primarily due to the high levels of risk on the liability side. For example, catastrophe losses can wipe out years of accumulated premiums in some lines. ,QWKHHQGWKHLQVXUHUEXLOGVXSDGLYHUVL¿HGSRUWIROLRRI¿QDQFLDODVVHWVWKDWZLOO HYHQWXDOO\EHXVHGWRSD\R൵DQ\IXWXUHFODLPVEURXJKWE\SROLF\KROGHUV 7KHJOREDOUHFHVVLRQRIWKHSUHYLRXVGHFDGHKXUWQHDUO\DOODVSHFWVRIWKHLQVXUDQFH industry, as many companies experienced declining revenues and investment losses. &RPSDQLHVWKDWZHUHWUDGLQJULVNLHULQVWUXPHQWVVXFKDVFUHGLWGHIDXOWVZDSVVX൵HUHG most severely. Few winners emerged. However, the mutual insurance sector managed to remain somewhat unscathed by the downturn. Meanwhile, a chronic low interest rate HQYLURQPHQWOLPLWHGWKHDELOLW\RIOLIHDQGRWKHULQVXUHUVWREHQH¿WIURP¿[HGLQYHVWPHQWV VXFKDVERQGV7KDWPD\EHFKDQJLQJGHSHQGLQJRQHFRQRPLFFRQGLWLRQVWKDWFRXOGVSXU KLJKHULQÀDWLRQ The Economics of Insurance More than 2,603 single property/casualty companies and 752 single life/health insurance FRPSDQLHVDUHLQFOXGHGLQ$0%HVW¶V¿OHVIRUWKH8QLWHG6WDWHVDQG&DQDGD$0 Best’s global database includes information on more than 10,812 insurance companies worldwide. Insurers pay claims in property, liability, life, health, annuity, reinsurance and other forms of coverage. In the United States alone, the broader insurance industry provides employment to 2.8 million people. Insurance organizations play a vital role in the U.S. and other economies. 7KH\SURWHFWLQGLYLGXDOVDQGEXVLQHVVHVIURP¿QDQFLDOORVV0RQH\WKH\UHFHLYHDV SUHPLXPVLVLQYHVWHGLQWKHHFRQRP\3URWHFWLRQIURP¿QDQFLDOORVVSURYLGHVDVHQVH of security to individuals and businesses, which are freer to pursue business and SHUVRQDORSSRUWXQLWLHVZLWKOHVVZRUU\DERXW¿QDQFLDOGHYDVWDWLRQ%XVLQHVVHVFDQ US Insurance Industry Jobs by Sector – 2021 Life and health insurance carriers957,900 Insurance agencies and brokerages869,800 Direct property and casualty insurers557,400 Third-party administration of insurance funds198,100 Title insurance and other direct insurance carriers 105,900 Claims adjusting 57,200 Reinsurance carriers25,600 Source: U.S. Department of Labor, Bureau of Labor StatisticsCHAPTER 1: INDUSTRY OVERVIEW www.ambest.com7 D൵RUGWRSXUFKDVHUHDOHVWDWHDQGHTXLSPHQWWRKLUHPRUHHPSOR\HHVDQGIXQGWUDYHODQG expansion. Premiums collected from insureds, often known as policyholders, are invested by LQVXUDQFHRUJDQL]DWLRQVXQWLOWKH\DUHSDLGRXW,QYHVWRU:DUUHQ%X൵HWWKDVIDPRXVO\ FKDPSLRQHGWKHYDOXHRI³ÀRDW´²IXQGVKHOGE\LQVXUDQFHFRPSDQLHVXQWLOWKH\PXVWEH paid—as an important source of investment capital. However, insurers must be cautious and risk-averse with the majority of their investments, both to satisfy regulators’ demands and to be able at any moment to pay claims. Insurance companies are large holders of bonds, particularly those issued by corporations DQGVLPLODUVRXUFHV7KH\LQYHVWVPDOOSRUWLRQVRIWKHLUDYDLODEOHIXQGVLQVWRFNV/LIH insurers have traditionally played larger roles in real estate investments, although a portion of those investments has shifted from direct ownership of commercial properties to more liquid investments in real estate investment trusts and the like. Insurers have also funded mortgages for commercial borrowers and developers, who in turn use the money to build commercial centers, shopping centers, apartments, warehouses and houses. 7KHLQVXUDQFHLQGXVWU\LVSDUWRIWKHODUJHU¿QDQFLDOVHUYLFHVLQGXVWU\ZKLFKLQFOXGHV banks, brokerages, mutual funds, credit unions, trust companies, pension funds and VLPLODURUJDQL]DWLRQV7UDGLWLRQDOEDUULHUVEHWZHHQLQGXVWULHVKDYHGLVDSSHDUHGLQSDUW Mutual funds can be sold by insurance companies and banks. Equities brokers handle cash management accounts. Banks have become active sellers of life insurance and annuities and other insurance products. Insurers themselves have developed products that include savings, protection and investment elements. How Insurance Is Sold Insurance is sold through a variety of channels, including face-to-face by insurance agents and brokers, over the internet, through the mail, by phone, in workplace programs and WKURXJKDVVRFLDWLRQVDQGD൶QLW\JURXSV Insurance agents generally represent the insurance company. Insurance brokers usually represent the insured client but can sometimes act as an insurance agent. 7KHLQVXUDQFHDJHQWRUSURGXFHUFDQEHDNH\FRPSRQHQWLQWKHXQGHUZULWLQJSURFHVVE\ taking the role of intermediary. Unlike the underwriter, the agent is positioned to meet with the applicant, ask pertinent questions and gauge responses. Information gathered from the interview may become the EDVLVWKHXQGHUZULWHUXVHVLQGHFLVLRQPDNLQJ$VDEHQH¿WWRWKHFRQVXPHUPDQ\ agents—called independent agents—represent several insurance companies, and may have a better view of each company’s risk-selection threshold.Next >