SIC 6311
LIFE INSURANCE



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.

NAICS Code(s)

524113 (Direct Life Insurance Carriers)

524130 (Reinsurance Carriers)

Industry Snapshot

The insurance industry in America, particularly the life insurance industry, is considered a pillar of the economy, with assets of $3.3 trillion in 2001. Tied as it is to the public interest, the life insurance industry has been subject to governmental scrutiny and legislation almost since its inception more than two centuries ago. There were about 1,549 companies that underwrote life insurance and annuities at the end of 2000, with premiums totaling $472 billion in 2001, compared to $405 billion in 1997. Thanks to an unprecedented level of consolidation in the late 1990s and early 2000s, the top 10 life and health insurance companies accounted for more than 40 percent of these premiums in 2001.

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 previously worked for large life insurance organizations branch out on their own and become independent agents. They will often continue to retain the company they worked for to under-write 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. With $5.2 billion worth of life insurance in force, mutuals accounted for 35.7 percent of all the life insurance in force with U.S. life companies in 1995. Stock companies, on the other hand, are owned by their stockholders. They provided $9.4 billion worth of life insurance, or 64.3 percent of the total. Other sources of life insurance include fraternal societies and the federal government. Taking all of these sources into account, there was $12.9 trillion of life insurance in force at the end of 1995, or an average of $131,600 per American household.

There are four major categories of life insurance: ordinary, group, industrial, and credit. 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. Industrial life insurance decreased over the decade from $28.2 billion in 1985 to $20 billion in 1995. The amount of credit life insurance, which is designed to pay the balance of loans in case the borrower should die, increased from $199.5 billion in 1993 to $231.3 billion in 1995.

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) or Keogh Plans 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. 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 governmentadministered 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.

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 scientifically predict 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 this 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 servicemen 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 anti-trust 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 under-funded 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.

Managers of insurance company investment portfolios were rewarded with a fairly stable year in 1996, after 1995 when interest rates rose dramatically. 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.

Continuing its record-setting trend, life insurance in force reached a record high in 1995 of $12.6 trillion, an increase of 7.7 percent over 1994. Life insurance remained by far the largest segment of all insurance sold. Purchases of individual and group life insurance in 1995 were $1.6 trillion. Traditional whole life and combination insurance accounted for 55 percent of policies sold, a decrease from 58 percent in 1993. Universal and variable life insurance accounted for 21 percent of new sales. Approximately 78 percent of all U.S. households owned some form of life insurance in 1994, and the average amount per insured household was $159,100.

The average size of life insurance policies sold also continued to increase. In 1995 the average new individual policy was $82,310, compared to $79,710 in 1994 and $75,350 in 1990. Approximately half of all new policies bought in 1994 were for people between the ages of 25 and 44, with 38 percent of those insured buying term policies and 22 percent buying universal or variable life policies.

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.

Current Conditions

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 non-existent 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 which 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 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. In 2001 the top 10 U.S. life insurance companies, ranked by direct premiums, were American International Group, Hartford Life Inc., Metropolitan Life, ING Group, AEGON USA Inc., Prudential of American Group, New York Life, Nationwide Group, Mass Mutual Financial Group, and GE Financial Assurance Group.

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 of 2001, Prudential completed its demutualization, joining industry leaders like MetLife and John Hancock.

The Internet has changed how many industries conduct business, yet the life insurance industry was embracing the Internet slowly in 1999. Some companies have had early success in this direct-selling environment; yet the industry as a whole spent only 3.5 percent of its revenue on information technologies, and only 25 percent of the companies in the industry were selling on the Internet in the late 1990s. This is expected to increase in the early 2000s as customers become accustomed to 24-hour-a-day, 7-day-a-week shopping opportunities.

Workforce

There were approximately 1,549 U.S. life insurance companies in operation in 2000. The number has decreased steadily since 1988, when there were 2,343 companies.

Agents usually receive some sort of financial assistance from the companies they are affiliated with 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.

Incomes of insurance agents vary greatly. Income depends on the agents' own skill and knowledge of the industry, as well as the strength of the industry and market. Each year, about 20,000 agents qualify for the "Million Dollar Round Table" by selling policies with a face value of more than $1 million. Agents in their first five to 10 years on the job earned an average of $42,000 in the early 1990s. Those with 10 or more years selling life insurance averaged $65,000 a year.

America and the World

Widely varying economic conditions, personal income levels, living and health standards, and other circumstances make it difficult to make direct comparisons of national levels of life insurance ownership between countries. One statistical measure that reduces the influence of these diverse factors is the ratio of life insurance in force to national income. This ratio has generally shown improvement in most countries since 1984. In the United States, for example, that ratio was 191 percent in 1994, indicating that the amount of life insurance in force in the United States equaled 191 percent of U.S. national income. In 1994, Japan led all nations, followed by Korea (349 percent), South Africa (250 percent), Canada (245 percent), Ireland (233 percent), and The Netherlands (220 percent). Other countries whose life insurance in force exceeded their national income included Australia, France, Sweden, Norway, Denmark, and Germany.

Beyond 2000, U.S. life insurers face the prospect of having increasingly larger global competitors operating in their own market. At the end of 1995, there were only three U.S. life insurers ranked among the top 10 insurers globally based on assets. Prudential ranked fifth in the world, followed by Teachers Insurance Annuity Association (TIAA/CREF) at eighth, and Metropolitan Life at tenth. Three of the top four largest insurers were based in Japan. Since 1950, when 74 percent of all insurance premiums originated in North America, the percentage of total premiums has shifted away from the United States. By the mid-1990s, only 32 percent of all insurance premiums originated in North America, and 68 percent came from the rest of the world.

U.S. life insurers have established international operations largely through acquisitions and joint ventures. New opportunities were expected to open up in Europe toward the end of the 1990s, as European countries began to dismantle their welfare states and privatize such areas as pension coverage, health, and unemployment insurance. Latin America was a hot market for U.S. life insurers in the mid-1990s, as companies were attracted by stabilizing economies, growing middle classes, and the privatization of some state-run pension programs. Aetna Inc., for example, was expected to invest as much as $390 million for a 49 percent stake in a joint venture with Brazil's largest insurer, Sul America Seguros. Other life insurers with expanded operations in Latin America included Metropolitan Life, ITT Hartford Group, New York Life, and Principal Financial Group. The expansion continued in the late 1990s, when Aetna set up a joint venture with a Polish bank in 1999 to sell retirement products in Poland and Prudential formed a new life insurance company in Argentina.

While U.S. companies looked overseas to expand sales, many European companies looked to the United States as fresh markets for their products. In 1999 two European companies announced plans to acquire U.S. insurers—Transamerica by Aegon and Life USA by Allianz.

Further Reading

"Insurance." U.S. Industry & Trade Outlook '99. New York: McGraw-Hill, 1999.

King, Carole Ann. "A Brief History of Key Events Leading to S.900." National Underwriter Life & Health-Financial Services Edition, 22 November 1999.

Life/Health Insurance. New York: Insurance Information Institute, 2002. Available from http://www.financialservicesfacts.org .

National Underwriter Life & Health-Financial Services Edition, 29 November 1999.

Standard & Poor's. "Life Insurance Industry Stable, According to Standard & Poor's." The Consumer Insurance Guide, July 1999. Available from http://www.insure.com .

Stein, Robert W. "Riding the Demutualization Wave." Best's Review, June 2002.



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