Industry Overview: Insurance
In the simplest terms, insurance is the transfer of risk, from the insured to the insurer, in exchange for a premium. In other words, insurance equals peace of mind. In exchange for a payment or payments to the insurer, the insured knows that, should some unpredictable ill befall him or his property, the insurer will be responsible for resolving some or all of the problem (depending on the terms of the insurance agreement). For example, the purchaser of health insurance knows that her health insurance plan will be there to pay for her treatment should she get sick; that her property and auto insurance carriers will be there to pay for repairs should her house be damaged by fire or replacement should her car be stolen; and that her life insurance carrier will provide her family with the money it needs to live on should she die unexpectedly.
While what happens to the individual insurance customer or to his property is unpredictable-you never know when someone's going to get sick, or get into a car accident, after all-the insurer stakes its viability on its ability to predict losses that will be incurred on a macro level. Typically an insurer covers many policyholders for a given kind of loss, and so is able to predict what its costs to cover those policyholders' losses will be over time. Insurance companies make a profit by charging more in premiums than they predict they will have to pay out over time for losses.
Insurance is big, big business. Some 1,800 U.S. insurance companies offer personal and commercial product lines including basic health/life and property/casualty protection as well as a long list of other coverage ranging from automobiles to mortgages to insurance for insurance companies (known as reinsurance). These products protect customers from losses resulting from illegal actions, medical needs, theft, earthquakes and hurricanes, and a variety of other causes.
Covering policyholders' losses is only the beginning of what goes on at insurance companies. For example, they mount huge marketing campaigns to convince customers that they need protection in general and the company's products in particular.
They also function as financiers, deriving a large part of their revenues from investments. Insurance companies must maintain enormous reserves of capital to back up potential claims obligations. They invest those reserves in stocks, bonds, and real estate, within the United States and overseas, providing an enormous amount of liquidity to financial markets and giving the industry an influence on the national economy far out of proportion to its size. That can be a risk, as when industry-wide overinvestment in Latin America during the 1970s led to huge losses for the entire industry and repercussions far beyond the insurance industry itself.
Continuing a long-term trend, insurance companies are responding to global competition and the need for cost efficiency by forming strategic alliances, merging into conglomerates, and buying smaller companies. (In 2005 alone, the following deals were announced: MetLife's acquisition of Travelers; UnitedHealth Group's acquisition of PacifiCare Health System; Lincoln National's acquisition of Jefferson-Pilot; Swiss Re's acquisition of the property and casualty business of GE Insurance Solutions; and WellPoint's acquisition of WellChoice.) This trend is doing away with the independent agencies that used to define the industry. Consolidation also enables insurers to offer a fuller range of insurance products instead of specializing in certain realms such as property or casualty. The downside is that it usually leads to a net loss in jobs.
In 2005, Hurricane Katrina hit the Gulf Coast in what was the nation's biggest, costliest natural disaster. Estimates as to how much it's going to cost to rebuild the affected area typically exceed $100 billion-and an estimated $60 billion of that is being paid out by insurers. One result of Katrina's costs has been an increase in property insurance rates. Another result: An estimated 200,000 people in Louisiana alone have or will lose their employer-sponsored health insurance as companies in the region cut spending, lay off employees, and go out of business. (Katrina also had a devastating effect in Mississippi.) All this, just a year after Charley, Francis, and Ivan caused some $22 billion in insured damage in 2004.
Health Care Crisis
With the baby boomers entering retirement age, the U.S. health care system is in deep, deep trouble. People are living longer these days-resulting in an increased demand for health care services. In order to maintain profit levels, health insurers have taken to charging more and more in return for less and less. For instance, many diseases that used to be covered by health plans aren't anymore, and health care premiums and deductibles for services that are still offered are skyrocketing. This is bad news for everyone except insurers. It's also not tenable over the long haul; as health care gets worse and worse for Americans, there's sure to be greater demand for health care reform, and possibly even-egads!-the institution of a national health care system of some sort (beyond Medicare and Medicaid, which serve the elderly and the indigent). Health insurers are among those spending millions on lobbying and PR efforts to sway public opinion and government policy to allow them to continue to rake in profits, but at some point, many experts suggest, the fecal matter is going to hit the fan.
Among the biggest news in the insurance industry in recent times was the civil lawsuit filed by New York Attorney General Eliot Spitzer against Marsh & McLennan, accusing that firm of rigging bids and preferentially treating companies that paid it special fees; in 2005, Marsh settled the suit for $850 million. Then, in 2006, AIG settled charges that it had engaged in price fixing and accounting chicanery-to the tune of $1.64 billion. And you thought the corporate ethics scandals of the early 2000s were over!
Life and Health Insurance
The policies in this sector provide benefits packages that policyholders pay a premium to enjoy. Health insurance has gone through some major overhauls, including the replacement of fixed-fee Blue Cross Blue Shield-inspired policies with managed care networks. The life insurance business is experiencing slow growth, and life insurance companies are likely to be merging with banks and securities firms. Hartford, Prudential, and MetLife are U.S. leaders in the life insurance game, while Aetna and CIGNA rule the HMO realm.
Property and Casualty Insurance
The focus in this sector is on protection for owners of cars, homes, and businesses from loss, damage, and injury. Competition is fierce in this sector, and profits are falling. Only the strong will survive as weaker companies continue to tank and even more secure ones sell off this line.
Brokers act as go-betweens, uniting buyers and sellers of insurance and creating the contracts that bind them. Furthermore, they play the role of risk consultants for large clients, researching industry information to advise companies on managing risk exposure. Major players include Aon and Marsh & McLennan Companies.
In the simplest terms, reinsurance is the insurance of insurance companies. Insurance companies pay reinsurers to assume some or all of the risk the insurers have taken on in writing policies for their clients. Insurers use reinsurance to protect against the risk of unusual losses. Reinsurers write reinsurance because their business allows them to pool enormous numbers of individual insurance risks, making their risks even more predictable than the risks faced by primary insurers.
The insurance industry enjoys more demand for its products today than ever before. As the U.S. population grows and the Baby Boomers reach old age, demand in areas like health insurance, auto insurance, and homeowners insurance will be especially strong.
However, ongoing consolidation and technology advances make it unlikely that job opportunities in many functional areas will grow at a strong rate in the insurance industry. The Bureau of Labor Statistics projects 8 percent growth between 2002 and 2012, half of the 16 percent growth average for all industries combined.
When companies combine, redundant positions tend to be eliminated. And as interactions with insurance clients, as well as internal business processes, become increasingly automated, there will be less demand for employees in the roles the new technologies have replaced; insurance agents and underwriters are expected to be most negatively impacted by the increasing role of technology in the industry.
Job opportunities in some functional roles in the industry are expected to grow, though. For instance, adjusters will not be replaced by technology; face-to-face interaction with the customer is key to this job function-so this area should see solid employment growth. And agents who can sell a variety of types of insurance or financial services will face much better prospects than traditional insurance agents.
Get Met, Get a Life
Insurance people work hard for their money, but no one expects them to work the hours investment bankers endure. If you have a family or simply other interests you like to pursue, most jobs in this industry allow you a fair amount of flexibility and your weekends off.
Information systems specialists will find plenty of work-supporting LANs, AIs, CASEs (computer-aided software engineering tools), client/server systems, image processing, pen-based computers (for all those on-site sales), and a host of other needs. Got an innovative idea? Many of the big firms would love to give you some bucks to develop it for them.
Not Just Actuarial Tables
Interested in direct marketing? Want to learn more about derivatives and financial planning? These are hot and getting hotter right now; and even at a fairly junior level, you probably won't have to work under a lot of layers of bureaucracy. Environmental claims are another important growth option for those of you with a science/social policy bent. Interested in training? Insurance needs you. In fact, just about anything you can think of that isn't actuarial is a possible option in this industry.
The Incredible Shrinking Insurance Business
Computerization, consolidation, and competition. Watch your back. No job is safe right now. If you're not replaced by a "systems environment," you'll be replaced by the takeover company's bigger, better department. Or your whole division will be outsourced to some outfit in South Carolina. Layoffs are common these days.
How Do You Feel About Org Charts?
Okay, so the industry's somewhat in disarray at the moment. This does not mean chaos reigns anywhere inside these august firms. There's a right way and a wrong way to do things. The times may be a-changin' but most insurance companies make banks look loose. If you have a problem with bureaucracy, this is going to be a tough fit.
Is It Cold in Here?
One downside of working in insurance is that the industry has a reputation for being callous and inhumane in its practices. Many health insurers won't insure AIDS patients, and won't pay for prescription drugs for patients with certain chronic diseases, such as depression. Apparently patients with conditions like these come with too much pain (and tests and long-term hospitalizations) and not enough gain to make it worth anyone's loss ratio. Grapple with your conscience now. Your interviewers aren't interested in debating this one with you. They've got a business to run.
Do you like to play the odds or do you prefer to set them? As an actuary, your job will be to predict the risk to insure people, property, and businesses. Mathematics and statistics will help you make these decisions. You'll also need to know general social trends and laws that affect risk. Most actuaries have college degrees. Many have advanced degrees. Salary range: $40,000 to $125,000 or more.
Agent or Broker
Think of being an agent or broker as giving advice for a living. You'll tell others how they can best protect their valuables. Then you'll sell them a policy. Knowledge of insurance contracts is essential. A college degree is not a requirement to be an agent, but many agents are college grads. Salary range: $30,000 to $50,000 or more.
These folks negotiate claims when people lose something by theft, fire, flood, whatever. You'll need to be good with people, because your job is to be fair to those the company insures, while being fair to the company, too. A college degree is not a requirement to be an adjuster, but many agents are college grads. Salary range: $35,000 to $65,000.
The service rep is the liaison between the agent who sells the policy and the company that writes the policy. You'll need to know your company's products and work well with others. A college degree is also usually required. Salary range: $25,000 to $40,000.
Loss-control specialists try to prevent accidents and losses from happening by scouting out, say, the shop floor. Knowledge of safety management or engineering and a college degree are generally prerequisites for this sort of job. Salary range: $35,000 to $50,000 to start.
Large corporations like Intel and Procter & Gamble hire risk managers to help them figure out how to save money. Risk managers advise upper management on the best type of insurance to buy or on how the workplace can be made safer. They also help manage employee benefit plans. Most risk managers have advanced degrees or several years of work experience. Salary range: $70,000 to $105,000 to start.
The underwriter's central question is a variation of Hamlet's: To insure or not to insure this applicant? The applicant's exposure to risk generally determines the type of policy offered, and the price. A college degree is a must in this field. Salary range: $30,000 to $75,000.
This isn't the sort of job you think of when you think insurance, but every big insurer needs IT experts to manage its information. If you like computers and figuring out the best ways to work with the huge networks and vast databases that insurance companies invariably develop, here's a job for you. A technical degree is a plus, but not essential. Salary range: $35,000 to $100,000 or more.
- Know why you want to work in insurance. And when you interview, show that you're personable. Agents, claims adjusters, service reps, and risk managers all deal with a wide array of people, and they must be able to get along well with all of them. Tact is an important quality, and it's important to be assertive, too. If you get a tough question, don't back down.
- It's no accident that ads for insurance companies feature families prominently, and objects, such as rocks, that represent strength and permanence. Insurance is all about security-and more than securing investments, valuables, and lives against the unexpected catastrophe. It's about making people feel secure-giving them peace of mind. If you are good at putting people at ease, you're well suited to represent an insurance agency.
- Insurance is also about your company's security. Aetna, Prudential, State Farm, and other well-known insurers didn't get big by insuring everybody; they got big by carefully calculating risks and making sensible bets. Caution is an inherent part of this business. Risk managers get paid to figure out how to prevent accidents and save money on claims; in actuary, you need to slice numbers thin to spot good and bad bets. Underwriters match policies to people, based on these bets. But never think you're playing against the odds to win: Insurance companies sell peace of mind and they profit when more people buy into it than collect.
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