Purchasing life insurance is a widely accept money management approach in United States. People are willing to buy life insurance to avoid paying inheritance tax and financial hardship for families due to their death. It has been found that life insurance industry, being a financial intermediation, has contributed significantly to economic growth over a 30-year period (USAID, 2006) in USA.
However, a research by Standard & Poor’s (S&P) (Gaskel, 2011) has drawn attention, which shows that the number of individual life insurance purchased annually has dropped 42% from 17500 policies in thousands to about 10000 policies in thousands in the past 20 years. Despite the substantial contribution to economic growth, the problem that the overall coverage of life insurance has been dropping in USA comes to exist.
Life insurance is defined as a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money (the “benefits”) upon the death of the insured person (Wikipedia, 2012). This essay will focus on the causes and effects of the problem. After considering the causes and effects, some possible solutions will be suggested so as to counter these causes. The most significant cause of this problem may be economic downturn in recent years. Many family’s finances are in a precarious period.
People cannot afford life insurance because they are concerned more with the ability to pay mortgage and other bills. Incorrect awareness and inadequate knowledge about life insurance have also contributed to this problem. A recent LIMRA (2012) study found that many customers over estimate the cost of life insurance by as much as three times. Besides over estimating the cost, some customers said that they are afraid to make wrong decision without enough information. Facing competitions from other financial sectors could be another cause for the problem.
With the development of whole financial market, customers have more products chosen to manage their money. Although increased competition may result in improvement in business efficiency, many companies still maintain inefficiency operation and will be unsustainable in the long run. The major effect of this problem is that agents who cannot get enough commissions from selling life insurance may resign the jobs. Insurance companies are different from other companies in terms of its unique agent-customer relationships.
If the number of customers decreases, the capacity of life insurance companies to support their agents is limited. The left agents may require higher commission rate, which would result in higher cost in operating business. Finding and training new agents would cost a lot and be a long way to go. Some companies are possible to shut down business. Drop in overall coverage could trigger companies to cut in some services. They may cut back on the services customers expect to have, such as well-rained agents and a wide choice of products (Costonis, & Shatto, 2010). As a result, the number of customers would even drop further.
When a company is in economic recessionary times, it is a challenge for its ability to manage risk. Inadequate risk-management practices would result in large economic losses even insolvencies during economic downturn. To response to this, life insurance companies could upgrading their financial risk management and control systems to reduce their exposure to risk and better manage the amount they accept (Cummins, & Santomero, 1999)). Besides maintain risk management system, another possible solution is that companies can cut down unnecessary cost to maximize profits.
As regards customers’ lacking of knowledge, companies can advertise to promote their products. Agents should not only provide needs-based analysis but also recommend type and amount of products for customers. To compete with other financial sector firms, life insurance companies should provide products more comprehensive and efficient financial services to clients. They also can become strategic partners with other financial sector firms to provide financial services such as loans, savings, banking and other insurance from gaining economics of scale.
The problem that the life insurance coverage in USA is dropping needs to be concerned. Causes that have been identified include economic downturn during recent years, customers’ shortage of knowledge and competitions from other financial sectors. Effects of this problem include fewer agents, higher cost and even fewer customers. Possible solutions include upgrading financial risk management and control system, advisement to promote product, improve services efficiency and being strategic partners with other financial sector firms. All these solutions can contribute partly to solve this problem.
However, it is foreseen that the problem may not be able to be solved in the short run, as economic downturn is the biggest obstacle that will continue in the short run. Life insurance companies should still take action to minimize the possible losses.
REFERENCE: Costonis, M. , & Shatto, D. P. , (2010). The Life Insurance Industry Needs To Get With The Times. Retrieved from: http://www. accenture. com/us-en/Pages/insight-life-insurance-industry-modernize-summary. aspx Cummins, J. D. , & Santomero, A. M. , (1999). Changes In The Life Insurance Industry: Efficiency, Technology And Risk Management.
London: Great Britain by IBT Global. Gaskel, G. , (2011). U. S. Insurance Industry Outlook. Retrieved from: http://insuranceexecevent. com/Executive-Conference-Presentations/GregoryGaskel. pdf? 59ac56 LIMRA, (2012). 2012 Life Insurance Awareness Monthly. Retrieved from: http://www. limra. com/newscenter/pressmaterials/12FOL. pdf USAID, (2006). Assessment On How Strengthening The Insurance Industry In Developing Countries Contributes To Economic Growth. Retrieved from: http://pdf. usaid. gov/pdf_docs/PNADF482. pdf Wikipedia, (2012). Life Insurance. Retrieved from: http://en. wikipedia. org/wiki/Life_insurance.