Factors Affecting the Insurance Industry
The insurance industry is an important industry. It offers a wide range of products including car insurance, life and health insurance among others. These products are some of the reasons as to why the industry has grown exponentially over the past years. However, insurance industry is faced with many challenges that affect its productivity and profitability.
Political and legal factors
Political and legal factors are some of the leading factors affecting the insurance industry. This is based on the fact that they incorporate regulatory factors into insurance business. Insurance industry experts assert that there is a substantial relationship between the demand for insurance products and a country’s political surrounding.
If a country is enjoying political stability, insurance companies are bound to enjoy huge profits. In simple terms, insurance demand is usually proportional to a country’s political environment. Unstable political economy depressed the demand for the products and services offered by an insurance company.
Additionally, government policies affect insurance industry. They determine the type of products and services than an insurance company can trade in. As a matter of fact, there are products that must be traded in and there are those that are optional.
Government policies also dictate tax concessions for insurance companies. This means that there are concessions that can be afforded and others that cannot be based on the type of insurance products that a company deals with.
Rate of return
Rate of return is also one of the leading factors that affect insurance industry. Insurance companies have their own safe investments including Treasury notes. It has been proven that insurance companies earn less when interest rates are low. Insurance companies on the other hand also enjoy huge profits when interest rates are high.
Insurance companies also own mortgage back securities and different mortgages. These investments are however faced with a lot of challenges including poor credit rating on the side of consumers. They also pay less compared to the past years when insurance companies would pay a lot of money. In the long run, insurance companies experience defaults, slow and non-payments.
The return rate from investments therefore affects the industry because of slow growth rate.
Management of risk and actuarial science are also tied with economic factors. These factors generate issues including
- Premiums that are paid by insurers- these premiums are invested in very poor economic output. They offer less return for insurers and higher premiums in the end. Therefore, insurers take more risks by themselves.
- Fraudulent claims also affect the industry especially during economic downturn, lack of money and high rates of unemployment.
- Companies also often fail to relocate to other countries and pull of out of markets that are not doing well.
- Insurance management of risk also affects the industry. In a downturn economy, businesses make less profit. When this happens, businesses are also not willing to take risks.
- Insurance policies also affect insurance industry. Each policy is created to suit an individual and to create a rate that is favorable to that person. This is often based on statistics and a company’s rating rules.
Competition and demand for insurance products also affect insurance industry.