Life Insurance

SIC 6311

Companies in this industry

Industry report:

This classification provides coverage of establishments primarily engaged in underwriting life insurance. These establishments are operated by enterprises that may be owned by stockholders, policyholders, or other carriers.

Industry Snapshot

The insurance industry in America, particularly the life insurance industry, is considered a pillar of the economy, with assets of $4.6 trillion in 2009. Tied as it is to the public interest, the life insurance industry has been subject to governmental scrutiny and legislation almost since its inception in the eighteenth century. Life and health insurance accounted for 59 percent of gross premiums for all insurance types in 2009, with the remainder dedicated to property/casualty.

According to the American Council of Life Insurers, Americans bought $3.0 trillion of new life insurance coverage in 2008. The Insurance Information Institute reported that independent agents were responsible for 56 percent of the market, followed by affiliated agents with 36 percent, direct marketers with 3 percent, and others, including stockbrokers, for the remaining 5 percent. By the end of 2008, total life insurance coverage in the United States was worth $19.1 trillion. Thus, despite the financial problems of the late 2000s, the life insurance business was still a viable aspect of the U.S. economy as the country headed into the second decade of the twenty-first century.

Organization and Structure

Although insurance companies may operate according to similar principles, the life insurance industry is hardly homogeneous. Companies do not charge the same amount for premiums, do not charge for expenses the same way, do not pay the same amount of commission to sales agents, do not provide the same kind or amount of training, do not sell the same products, and are not equally solvent. The one commonality throughout the industry is that licensed life insurance salespeople act as agents for their companies. These agents write several different kinds of life products, or policies, that the company offers.

Companies usually have a number of field offices, or branches. Large insurance organizations strategically place these around the country so that agents may market to as many potential clients as possible. Agents order or issue policies, collect premiums, renew and change existing coverage, and help clients with questions or problems related to coverage. Many agents who begin by working for large life insurance organizations, branch out on their own and become independent agents. They will often continue to retain the company for which they worked, to underwrite the policies they sell.

Nearly all life insurance is issued by either mutual or stock life insurance companies. Mutuals have no stockholders, only policyholders, and the policyholders elect the board of directors who run the company. In this way, mutual policyholders participate in the fiscal management of the company and share in decisions regarding mortality expense, overhead costs, and investment rate of return. In 2009 more than 75 percent of life insurance assets was held in long-term bonds, mortgages, real estate, and other long-term investments.

There are four major categories of life insurance: ordinary, group, industrial, and credit. By the mid-2000s, many different variations of ordinary life insurance were on the market; however, ordinary life can be broadly divided into two types: term and whole life. Term life is purchased for a specific "term" and pays if the investor dies during that term. Term life, which is commonly purchased as a death benefit, is usually one of the least costly life insurance options. Whole life insurance, on the other hand, provides ongoing savings and accrues value as long as the investor continues to pay the premium.

Group life insurance is term life insurance that covers a particular group of people (e.g., employee group, union or association members). Normally, physical exam or individual proof of insurability is not required. Instead, the underwriter bases the policy price on factors such as group size, financial strength of the organization, and turnover. Industrial insurance is low-value life insurance, usually under $1,000, with more frequent premium payments, usually weekly or biweekly collected by an agent at the home of the insured. Industrial insurance is also referred to as debit insurance or burial insurance as it is designed to cover burial costs. Credit life insurance is commonly purchased by mortgage providers to cover the amount of the loan to ensure its payment in full in the event that the borrower dies.

Half of all full-time workers in commerce and industry in the United States are enrolled in retirement plans other than Social Security. Private pension plans are established by private agencies such as commercial, industrial, labor and service organizations, and nonprofit organizations. Individual Retirement Accounts (IRAs) are set up by individuals. Pension plans can be administered by the holder of the plan, placed with banks or trust companies, or insured with life insurance companies.

Background and Development

Life insurance companies in the United States can be traced back to 1759, when "The Corporation for Relief of Poor and Distressed Presbyterian Ministers and of the Poor and Distressed Widows and Children of Presbyterian Ministers" was founded by the Synod of the Presbyterian Church. The oldest insurance company in the world, the firm is still fully operational as the Presbyterian Ministers' Fund. The industry began to take on a more formal, mathematics-based foundation when, in 1789, Professor Edward Wigglesworth at Harvard prepared a modified table of mortality. This was the first crude attempt to predict scientifically the probability of risk, or to compute premiums and reserves on a scientific basis. Comparing the probability of risk to revenues generated from policy sales and the size of claim settlements has been the formula the industry has relied on to establish itself as a viable business.

In 1794, the Insurance Company of North America became the first general insurance company to sell life insurance in the nation, but the company sold only six policies and discontinued its operations in 1804. Nevertheless, the Pennsylvania Company for Insurance on Lives and Granting Annuities was incorporated in 1812 and became the first company formed to issue life insurance policies and annuities. Soon after, the New York Life Insurance and Trust Company formed and became the first company to employ life insurance agents. By the late 1840s, general insurance laws began to come into effect, and in 1851 the state of New Hampshire established the first regulatory body to examine the affairs of insurance companies.

The insurance industry became more structured as the nineteenth century progressed, a result of governmental legislation and self-regulation. Around 1857, the first pension funds for government employees were established, and in 1861, Massachusetts required nonforfeiture values as part of life policies. These and other covenants of the industry began to materialize when publications such as the American Experience Table of Mortality were issued (1868). Covering experiences from 1843 to 1858, this document remained the most frequently consulted mortality table used by American companies until the 1940s. Whether or not the industry should have been granted national jurisdiction and been compelled to abide by national or state regulations was a hotly debated issue. It was not until 1869 that the U.S. Supreme Court held that insurance is not a transaction in commerce, thus affirming the validity of state regulation of insurance.

Insurance agents, the backbone and front line of the industry, were first organized in Chicago in 1869. The issuance of life insurance is transacted by selling the client an insurance policy. In 1873, the first weekly premium policy was issued, and the first industrial insurance agency system was introduced in the United States. The American Express Company played a very active role in formulating employer pension plans, as did the Baltimore & Ohio Railroad Company, which set up the first formal pension plan supported by employer and employee contributions in 1880. This was followed by the establishment of cash surrender values mandated by law in Massachusetts in 1880, and the adoption of pension plans for professors at age 65 with a minimum of 15 years service. This represented the first private college retirement plan in the country. Later, the first pension plan for public school teachers was established in Chicago, and the Steel Company set up the first pension plan in a manufacturing company.

In 1911, the first group life insurance for employees was introduced. World War I prompted the federal government to get involved in insurance as well. Life insurance for military personnel was offered under the War Risk Insurance Act of 1917, subsequently known as U.S. Government Life Insurance. Soon after, the Federal Civil Service Retirement and Disability Fund was created by Congress. Another major advance in the insurance industry occurred in 1921, when Metropolitan Life Insurance Company issued the first group annuity contract. The Revenue Act of 1921 deemed employer contributions to profit sharing trusts to be tax-exempt. Provisions were extended to pension trusts in 1926. The first examinations of life underwriters, those who actually underwrite and issue policies as representatives of insurance companies, were held seven years later.

Regulation.
As the industry developed, the federal government continued to enact legislation with far-reaching effects on the insurance industry. The Temporary National Economic Committee was charged with investigating the industry and making regular reports to Congress regarding its structure and development. Contrary to its previous decision, the U.S. Supreme Court held in 1944 that insurance is commerce and that, when conducted across state lines, is interstate commerce and subject to federal laws. In 1945, the McCarran-Ferguson Act declared that the regulation of insurance by states is in the public interest and granted an exemption from the antitrust laws to the extent that business is regulated by state law.

A major step for federal employees was achieved when the Federal Employees' Group Life Insurance Act of 1954 was introduced. This act ensured that federal employees would be provided group life insurance and accidental death and dismemberment insurance through private insurance companies. In 1965, the Servicemen's Group Life Insurance Act was introduced, providing members of active duty in the uniformed armed services with group life insurance underwritten by private insurance companies with the Veterans Administration. In 1976, the first individual variable life insurance policy was issued, followed by the first "universal" life insurance policy in 1977.

A lot federal regulation was aimed at insuring equal access to insurance regardless of age and sex. The Supreme Court decided in Norris vs. Arizona that employee retirement benefits based on contributions made after August 1, 1983, must be calculated without regard to the sex of the employee. The Retirement Equity Act of 1984 lowered the minimum age for vesting and participation purposes, insured that written consent of the spouse would be required before joint and survivor coverage may be waived under pension plans, and required the payment of a survivor annuity in case of a vested participant who dies before the annuity starting date.

The taxation of life insurance companies has always been a strongly contested issue. The Tax Reform Act of 1984 included universal life insurance within the definition of life insurance, thus preserving its favorable tax treatment. Two years later, the Tax Reform Act of 1986 eliminated the tax deductibility of IRA contributions for highly paid people who are covered by pension plans. Also reduced was the maximum contribution to salary reduction, or 401(k) plans; the deductibility of interest paid with respect to loans on corporate-owned life insurance policies was also limited. A year later, the Revenue Act of 1987 established more expedient funding requirements for underfunded pension plans, a variable rate premium, and a lower full-funding limitation for qualified plans. Finally, in 1988 the Technical and Miscellaneous Revenue Act created a class of life insurance contracts, the policy loans and surrender payments of which are subject to taxation rules similar to deferred annuities and made many changes related to 401(k) plans.

The Bull Market.
Assets of U.S. life insurance companies reached a record high of $2.1 trillion in December 1995. This represented an increase of 10.4 percent, or $201 billion, over 1994. Assets of U.S. life insurance companies were invested in corporate bonds, government securities, stocks, mortgages, real estate, policy loans, and other assets. U.S. life insurance companies increased their holdings in stock by 32 percent over 1994.

Ordinary life insurance accounted for approximately 60 percent of all life insurance in force at the end of 1995. More than doubling from 1985 to 1995, there was $7.5 trillion of ordinary life insurance in force in the United States at the end of 1995, with whole life insurance accounting for more than half of that total. Most of the rest of the ordinary life insurance in force was accounted for by some type of term life insurance. From 1985 to 1995 the amount of group life insurance increased from $2.6 trillion to $4.8 trillion, with term life accounting for nearly all group life insurance in force.

At the end of 1995, life insurance companies covered plans with 65.4 million people and provided retirement income to 6.4 million people. More than 24 million people were covered by government-administered plans at the end of 1995. The federal Old-Age and Survivors Insurance (OASI) system, part of the Social Security program, remained the most comprehensive government retirement program offered. There were 173 million people eligible for Social Security benefits at the end of 1995.

In November 1996 the Dow Jones Industrial Average broke 6500 for the first time. In the bond market, life and health insurers increased their holdings of below-investment grade bonds to 6.1 percent of their fixed income portfolio, still well below the levels maintained during the late 1980s and early 1990s. Insurance investment in mortgage-backed securities continued to decline in 1996 as a percentage of fixed income portfolios, reaching 26 percent after being reduced to 30 percent in 1995 and 33 percent in 1994. Overall, the financial stability of the industry continued to improve.

In the mid-1990s, the life insurance industry also began gradually letting go of the safest investment mentality, left over from bad real estate investments in the 1980s. More companies were looking to pump up the returns in their portfolios, usually consisting of common equities, public bonds, and commercial mortgages. The portion of stock holdings began to rise and more companies began holding commercial mortgages directly.

Net premiums written in 2001 reached $472.7 billion for life and health insurance companies, compared to $405.6 billion 1997. Annuities, which were virtually nonexistent prior to the 1970s, accounted for more than 50 percent of total premiums in 2001. Individual and group life insurance accounted for 26 percent of premiums, while health and accident insurance brought in another 20 percent. It was this reliance on annuities that propelled unprecedented growth in the life insurance industry at the turn of the twenty-first century as a booming economy prompted an unprecedented number of U.S. consumers to invest in retirement vehicles such as mutual funds and annuities. Net income for the industry reached a record $24.1 billion in 2000. However, the stock market plummeted in late 2000 and remained low throughout 2001, a trend that undermined the entire investment industry and more than halved the life insurance sector's net income to $11.4 billion in 2001. The terrorist attacks on the Pentagon in Washington D.C. and the World Trade Center towers in New York City that year, which cost the insurance industry dearly, were also a factor in this downturn.

Consolidation in the late 1990s and early 2000s allowed the industry giants to grow even larger. A record 51 mergers and acquisitions, worth a total of $32 billion, took place among life insurers in 1998. Three years later, although the total number of mergers and acquisitions had fallen to 33, these deals grew in total value to $36.1 billion. In 2001, the top 10 life and health insurance firms in the United States accounted for 41.1 percent of the market in terms of premiums written and 42.3 percent of the market in terms of assets. This compares to the 49.6 percent of the market held by the top 20 life insurers in 1995.

Many life insurance companies set up as mutual companies have taken the step toward demutualization as a means of capitalizing on the bullish stock market. Some companies have opted to move to a mutual holding company first; this allows the company to sell off subsidiaries in anticipation of becoming stockholder owned. In December 2001, Prudential completed its demutualization, joining industry leaders like MetLife and John Hancock.

After suffering through a recessive economy during the early 2000s, the life insurance industry began to see recovery in 2003, which continued into 2005. During 2004, assets for the top 200 life insurance groups increased by 9 percent, following growth of 12 percent during 2003. Roughly 65 percent of Americans were covered by life insurance in the mid-2000s, and, according to a survey conducted by the research firm LIMRA, half of all Americans felt that they were underinsured. However, of this total, 65 percent noted that they felt they were not financially able to invest additional funds in life insurance.

The mid-2000s was marked by an increasing complexity of choices in the life insurance market. Options such as universal life, variable life, hybrid universal-variable life, last-to-die, simple-issue/single-premium policies all continued to grow as life insurance became inextricably tied to overall retirement and wealth planning. However, investment-related policies were often outside the comfort zone for many ordinary consumers, and over half of those surveyed by LIMRA admitted that they did not fully understand their insurance options. This complexity, according to some analysts, was inhibiting sales within the industry. "Consumers are hungering for assistance in deciding how much and what kind of insurance to buy," Robert Kerzner, chief executive officer of LIMRA told Investment News in April, 2005.

Despite the numerous hybrid and investment life insurance options on the market in the mid-2000s, term life still accounted for 43 percent of all policies sold and whole life for 37 percent of policies sold during 2004. In fact, the percentage of policyholders who owned only term life in 2004 grew to 36 percent, up from just 20 percent in 1992. Policyholders who only owned whole life declined from 58 percent in 1992 to 41 percent in 2004. Although ownership was relatively stable during the first half of the 2000s with about 50 percent of all American holding a life insurance policy, long-term numbers were down from 72 percent ownership in 1960.

The Gramm-Leach-Bliley Act of 1999 opened the financial and insurance markets to banking institutions. Although banks immediately jumped into the insurance sector, they did not show much success in competing with traditional insurance companies until the mid-2000s, when they began to make inroads. With a myriad of new products on the market, some of which could be approved electronically in a few minutes compared to days or even weeks, banks found particularly good results with "simple-issue" insurance, particularly insurance investment packages known as "single-premium" life. Steve Garmhausen explained in American Banker in June, 2005, "Single-premium life is a logical fit in the simple-issue format because most of what customers pay for the product goes into the investment portion. The policies include a cash value, which grows over time and can be withdrawn." Bank premiums from single-premium life sales totaled $1.15 billion in 2004, up 56 percent from 2000.

Although dipping slightly from the previous two years, annuities still made up more than half of the life/health product line in 2006. Life insurance made up 26.8 percent of the total of almost $620 billion written, with ordinary life the bulk of that at 20.9 percent of the total. Accident and health premiums constituted 23 percent of the total. In addition, worksite sales of life and health insurance increased 8 percent in 2006 to $4.7 billion, up from $4.4 billion in 2005. By 2009 this figure had reached almost $5.4 billion.

Despite the record $4.7 trillion in assets for the life insurance industry in 2006, technological inefficiencies kept the industry from performing better, according to a survey of industry executives. The 2006 survey, conducted by TowerGroup in partnership with industry publication Insurance Networking News, indicated that executives thought their respective companies lagged in automation of the life insurance underwriting process. Another study, conducted by Celent and released in June 2007, confirmed such concerns in tracking software sales to life insurance carriers. Almost half of the software deals for life insurance carriers involved document management. Moreover, sales steadily climbed over the eight quarters of 2005 and 2006, when the study was conducted. The document management category included document creation, enterprise content management, imaging and state policy/form filing.

The subprime mortgage crisis and meltdown in the financial services sector of the U.S. economy had a negative effect on the life insurance industry in the late 2000s, mostly because of the amount of life insurance assets that are held in investment accounts. The subprime mortgages that had been packaged and sold to investors earlier in the decade were not worth much once housing prices started to fall and homeowners started to default on their mortgages.

Current Conditions

According to the American Council of Life Insurers, of the $4.6 trillion in life insurance assets in 2009, 42 percent were in corporate bonds, 24 percent were in stocks, 14 percent were in government and agency bonds, 7 percent were in commercial mortgages, and 12 percent were in other assets. About 92 percent of assets were invested in the American economy, whereas the remaining 8 percent were held overseas. Benefits paid out by U.S. life insurance suppliers in 2008 included $60 billion to life insurance beneficiaries, $70 billion in annuity payments, $16 billion in disability income insurance benefits, and $5 billion in long-term care insurance benefits.

Despite these enormous numbers, the Insurance Information Institute found that 56 percent of Americans did not have life insurance in 2009--the lowest figure in 50 years. That year insurance companies issued 9.4 million life insurance policies, 1 million fewer than five years earlier.

In 2010, the life insurance industry prepared to deal with the ramifications of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July of that year. The act, which involved hundreds of rule changes and the creation of several new federal agencies, was the government's reaction to the problems caused during the financial crisis of the late 2000s. In late 2010, those involved in the sale of life insurance debated its potential effects on the industry.

Another new development in the industry was the increasing number of life insurance policies sold through banks. According to American Banker, sales of life insurance at banks was up 29 percent in the first half of 2010 as compared to a year earlier. Single-premium life insurance was selling especially well. Said Scott Stathis of research firm Kehrer-Limra in September 2010, "I don't think banks can sustain this growth, but neither will they drop to where they were. The seal is broken, the stuff is flowing and a good percentage of reps are getting used to selling life insurance."

Workforce

There almost 1,000 life insurance companies in operation in the late 2000s. The number had decreased steadily since 1988, when there were more than 2,300 companies.

Agents usually receive some sort of financial assistance from the companies which with they are affiliated, while they build a client base. They are also usually placed on a stipend or retainer, which is often replaced by straight retainer to cover monthly expenses. Life insurance companies often help agents with basic expenses such as office furniture and supplies, though most agents cover their own travel, telephone, entertainment, and other expenses. Agents may receive commissions in two ways: a first-year commission for making the sale (usually 55 percent of the total first-year premium), or a series of smaller commissions paid when the insured pays his or her annual premium (usually 5 percent of the yearly payments for nine years). Most companies will not pay renewal commissions to agents who resign.

Industry Leaders

The largest life insurance provider in the early 2010s, according to the Insurance Information Institute, was MetLife Inc., with 54,000 employees and sales of $41 billion in 2009. MetLife held assets of about $422.8 billion. New York Life Insurance Co. was second with 17,000 employees and $22.2 billion in revenues. Third place was held by Prudential Financial, which had 41,943 employees and $32.6 billion in annual sales. Holding the fourth and fifth place spots were the Teachers Insurance and Annuity Association-College Retirement Equities Fund (TIAA-CREF), with 7,500 employees and $12.7 billion in 2009 sales, and Massachusetts Mutual Life Insurance, with 12,000 employees and $19.3 billion in sales in 2009. Rounding out the top 10 life insurance companies were Northwestern Mutual, AFLAC, Unum Group, Guardian Life Insurance Company of America, Lincoln National, and Genworth Financial.

In terms of number of policies, State Farm was the leader in the term life category, with more than 350,000 policies, and Liberty National had the most whole life policies, with almost 746,000.

© COPYRIGHT 2018 The Gale Group, Inc. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. For permission to reuse this article, contact the Copyright Clearance Center.

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