Context Setting

Tiburon Strategic Advisors is a market research & strategy consulting firm serving the brokerage and investment management industry. This report provides a comprehensive understanding of insurance products and distribution channels, and predictions for the future. This release shares some of the report's highlights covering an overview of the industry, importance of risk management & insurance products, factors driving the industry, industry scandals, and tax status threats.

More Information

Detailed Table of Contents for this Report

Order this and/or Other Tiburon Research Reports

Read About Tiburon Research Reports

Insurance Industry Overview

The number of employees in the insurance industry has varied slightly over the years, but has remained relatively flat. Over the last ten years, the industry has only seen an increase of 30,000 employees. Today, there are a total of about 1.4 million insurance industry employees.

However, the number of insurance agents, brokers, & service employees has been steadily increasing. During the same ten year time frame, the number of agents, brokers & service employees has grown by 154,000. This growth is attributed to the ever expanding distribution channels within the industry.

Depending on the measure, Met Life, Prudential, and Blue Cross & Blue Shield are the largest insurance companies.

By comparing products and markets, we can see a number of trends:

Captive agents are increasingly scarce in life insurance
Captive agents remain dominant in the property & casualty market
Banks are the strongest outside channel at selling annuities
Full-service brokers seek to participate in insurance sales
Online sales are still small
Independent reps are becoming a large sales force in insurance
Upscale competitors are also interested in insurance

Importance of Risk Management & Insurance Products

Insurance products can be organized into six areas:

Health Care Insurance
Disability Insurance
Long-Term Care Insurance
Property & Casualty Insurance
Annuities
Life Insurance

It is across these areas that specific products take shape. Evolving technology and changing consumer demands continually drive insurance companies to refine their products.

Four Factors Driving a Complicated Industry

There are four reasons the insurance industry is complicated:

Confusing Corporate Structures
State Regulations
Mutual Status of Leading Companies
Importance & Confusing Scales of Ratings Agencies

Consolidations & Complicated Corporate Structures
Many of the larger companies, like AIG for example, have very complicated business structures. AIG divides its business into four separate business units, including general insurance, life insurance & retirement services, financial services, and asset management. Beyond these four categories, there are further divisions into domestic and foreign units for example. As companies continue to consolidate, corporate structures will only become more complex.

Insurance industry consolidation comes in three specific forms. Insurance companies acquiring both other insurance companies and non-insurance companies, and other companies acquiring insurance companies.

First, insurance companies have been acquiring other insurance companies. There are two main factors driving this trend:

Improved Manufacturing Efficiencies
Distribution Expansion

Insurers seek to improve manufacturing efficiencies by gaining market share and spreading expenses over a larger revenue base. Bigger firms can also focus on acquiring companies relating to their core competencies, while shedding unprofitable businesses. Consolidation can significantly broaden an insurer’s distribution base, as intense competition forces insurance companies to expand their geographic and demographic reach. Due to consolidation within the insurance industry, the top ten companies now control half of total insurance assets.

Secondly, insurance companies are diversifying through acquisitions of two types of companies, including asset managers and broker/dealers. Acquisitions of asset managers allow insurance companies to sell additional products through captive or independent agents. Acquisitions of broker/dealers allow insurers to broaden their sales distribution.

On the other hand, some insurance companies started selling their asset managers and broker/dealers. Northwestern Mutual sold asset manager Mason Street Funds to American Century in 2005 and sold broker/dealer RW Baird in 2004. Mutual of New York sold Advest to Merrill Lynch in 2005.

The third type of consolidation is other companies buying insurance companies. There are two types of companies involved in the purchase of insurance companies, including banks and foreign insurers. There have been few banks buying insurance companies in recent years; however more banks have been buying insurance agencies. Some of the bigger bank acquirers have included Wells Fargo, Wachovia Bank, and BB&T.

Foreign companies have also been buying US insurance companies. The majority of which have involved European firms.

State Regulations
Insurance is one of the few state regulated industries, which creates different regulations and additional subsidiaries. For example, New York requires in-state subsidiaries. Thus, a Chicago based insurer would be required to create a subsidiary in order to conduct business in New York.

However, regulation gaps across individual states may prompt more federal government attention in the insurance industry. Supporters of federal government attention include the Government Accountability Office, which released a recommendation for federal oversight; and the ABA Insurance Association, which supports the creation of a national insurance commissioner within the Treasury Department.

Demutualization in the Insurance Industry
Demutualization has exploded across the industry because of the large amounts of potential capital. While mutual insurers are busy converting into stock companies to join the buyout binge that has gripped the industry, the market capitalization of these firms as public stock firms will be in excess of $100 billion. However, even though seven of the top ten life insurance companies are still mutual companies, the total number mutual companies is quite small relative to stock companies. Specifically, mutual companies only make up 8% of all insurance companies.

Importance of Ratings Agencies
Ratings agencies are utilized among consumers and advisors alike to reveal the financial strength of insurance companies. They are absolutely necessary within the insurance industry, but cause some added confusion. Each ratings agency has a unique rating scale, differing from other agencies. Some of the more prominent agencies include AM Best, Duff & Phelps, Moody’s, and Standard & Poor’s.

Insurance Industry Scandals

The insurance industry has experienced repeated industry scandals that it must overcome:

Product Misrepresentation
Fake Policies
Cut Rate Plans
Non-Independent Associations
Discount Drug Card Scams
Predatory Pricing
Churning
Non-Vanishing Premiums
Viatical Scams
Race Biased Underwriting
Improperly Denying Claims
Money Laundering
Sales Incentives
Excess Compensation Packages & Loans
Market Timing
Annuities in Tax Deferred Accounts
Recently Sold Products Underperforming
Finite Reinsurance
Contingency Commissions & Bid Rigging

The most recent insurance scandals are likely to result in more disclosure requirements for insurance agents and brokers. The National Association of Insurance Commissioners (NAIC) has issued model legislation, which would require insurance agents and brokers to tell customers how they are paid by insurers, including any contingent commissions. Written consent from customers would also be required to collect contingent commission payments.

But even after all of the regulatory action taking place, insurance industry executives don’t seem overly motivated to change many of their practices. Two-thirds of executives believe that the time currently spent on compliance is sufficient, and nearly half of executives feel implementing new best practices is not necessary.

Tax-Free Status Under Legislative Threat

Life insurance continues to be under legislative threat, threatening one of its core competitive advantages, which is the lack of taxation. The fear is that the insurance industry, which is almost always seen as the big bad wolf, will have trouble fighting its case against tax for working families, or tax cuts for married people.

The tax benefits under threat are at multiple levels in insurance products:

• Dividends, Interest, & Capital Gains

• Distribution & Payouts

To better understand the developments in the insurance industry, executives can purchase the full Tiburon research report where the key learnings highlighted above are covered in greater detail. Please contact Brian Cotter at BCotter@TiburonAdvisors.Com.

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Tiburon Strategic Advisors

Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer market research & strategy consulting services to all types of financial institutions and investment managers:

The firm has served almost 300 corporate clients and completed over 850 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets.

Tiburon holds a series of CEO Summits semi-annually for its executive-level clients. Attendance is by invitation only and attendance at the Summit is limited to 75 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights. Please contact Tiburon’s Managing Principal Chip Roame at CRoame@TiburonAdvisors.Com or (415) 789-2541 if you are a Tiburon client and have an interest in attending a future Tiburon CEO Summit.

Tiburon offers thirteen online business benchmarking tools that are available to all types of financial advisors in an effort to help them benchmark their business practices and build more successful businesses. The sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors, www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 advisors have used these tools. By completing one of the online surveys, financial advisors can access a FREE copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results.

Tiburon has published twenty-three ~100-300+ page research reports, which offer detailed analyses of growing business segments; each is available for $5,000; these reports can be ordered by contacting Brian Cotter at BCotter@TiburonAdvisors.Com or (415) 789-2546.

Tiburon’s weekly research releases, like this one, are emailed for free to interested industry executives, media representatives, conference planners, and individual financial advisors. Over 40,000 industry executives now receive these releases. Feel free to sign up to receive future research releases at Tiburon’s web site (www.TiburonAdvisors.Com) if this release was passed to you by a colleague and you would like to receive them directly in the future.

Tiburon expanded its workforce in 2005-2006. New research managers will develop proprietary research content for Tiburon research reports and client projects and new marketing managers will enhance the firm's web site, weekly research releases program, and the firm's relationships with media representatives, conference planners, and its clients & executive program members. The firm is seeking to add principals in 2006.

Tiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon’s executive programs directly or ask that they be included in any ongoing Tiburon project.

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--- JUNE 9, 2006 ---
*************************************************************************** Tiburon recently released a new research report titled Insurance Products & Risk Management: Helping Clients Manage Life's Risks Through Health Insurance, Disability Insurance, Long-Term Care Insurance, Property & Casualty Insurance, Annuities, & Life Insurance. This market overview release presents an overview of the industry and shares some of the report's highlights, including the importance of risk management & insurance products, the factors driving this complicated industry, a dozen insurance industry scandals, and the industry's tax status threats *************************************************************************** Context Setting Tiburon Strategic Advisors is a market research & strategy consulting firm serving the brokerage and investment management industry. This report provides a comprehensive understanding of insurance products and distribution channels, and predictions for the future. This release shares some of the report's highlights covering an overview of the industry, importance of risk management & insurance products, factors driving the industry, industry scandals, and tax status threats. More Information Detailed Table of Contents for this Report Order this and/or Other Tiburon Research Reports Read About Tiburon Research Reports Insurance Industry Overview The number of employees in the insurance industry has varied slightly over the years, but has remained relatively flat. Over the last ten years, the industry has only seen an increase of 30,000 employees. Today, there are a total of about 1.4 million insurance industry employees. However, the number of insurance agents, brokers, & service employees has been steadily increasing. During the same ten year time frame, the number of agents, brokers & service employees has grown by 154,000. This growth is attributed to the ever expanding distribution channels within the industry. Depending on the measure, Met Life, Prudential, and Blue Cross & Blue Shield are the largest insurance companies. By comparing products and markets, we can see a number of trends: Captive agents are increasingly scarce in life insurance Captive agents remain dominant in the property & casualty market Banks are the strongest outside channel at selling annuities Full-service brokers seek to participate in insurance sales Online sales are still small Independent reps are becoming a large sales force in insurance Upscale competitors are also interested in insurance Importance of Risk Management & Insurance Products Insurance products can be organized into six areas: Health Care Insurance Disability Insurance Long-Term Care Insurance Property & Casualty Insurance Annuities Life Insurance It is across these areas that specific products take shape. Evolving technology and changing consumer demands continually drive insurance companies to refine their products. Four Factors Driving a Complicated Industry** There are four reasons the insurance industry is complicated: Confusing Corporate Structures State Regulations Mutual Status of Leading Companies Importance & Confusing Scales of Ratings Agencies Consolidations & Complicated Corporate Structures Many of the larger companies, like AIG for example, have very complicated business structures. AIG divides its business into four separate business units, including general insurance, life insurance & retirement services, financial services, and asset management. Beyond these four categories, there are further divisions into domestic and foreign units for example. As companies continue to consolidate, corporate structures will only become more complex. Insurance industry consolidation comes in three specific forms. Insurance companies acquiring both other insurance companies and non-insurance companies, and other companies acquiring insurance companies. First, insurance companies have been acquiring other insurance companies. There are two main factors driving this trend: Improved Manufacturing Efficiencies Distribution Expansion Insurers seek to improve manufacturing efficiencies by gaining market share and spreading expenses over a larger revenue base. Bigger firms can also focus on acquiring companies relating to their core competencies, while shedding unprofitable businesses. Consolidation can significantly broaden an insurer’s distribution base, as intense competition forces insurance companies to expand their geographic and demographic reach. Due to consolidation within the insurance industry, the top ten companies now control half of total insurance assets. Secondly, insurance companies are diversifying through acquisitions of two types of companies, including asset managers and broker/dealers. Acquisitions of asset managers allow insurance companies to sell additional products through captive or independent agents. Acquisitions of broker/dealers allow insurers to broaden their sales distribution. On the other hand, some insurance companies started selling their asset managers and broker/dealers. Northwestern Mutual sold asset manager Mason Street Funds to American Century in 2005 and sold broker/dealer RW Baird in 2004. Mutual of New York sold Advest to Merrill Lynch in 2005. The third type of consolidation is other companies buying insurance companies. There are two types of companies involved in the purchase of insurance companies, including banks and foreign insurers. There have been few banks buying insurance companies in recent years; however more banks have been buying insurance agencies. Some of the bigger bank acquirers have included Wells Fargo, Wachovia Bank, and BB&T. Foreign companies have also been buying US insurance companies. The majority of which have involved European firms. State Regulations Insurance is one of the few state regulated industries, which creates different regulations and additional subsidiaries. For example, New York requires in-state subsidiaries. Thus, a Chicago based insurer would be required to create a subsidiary in order to conduct business in New York. However, regulation gaps across individual states may prompt more federal government attention in the insurance industry. Supporters of federal government attention include the Government Accountability Office, which released a recommendation for federal oversight; and the ABA Insurance Association, which supports the creation of a national insurance commissioner within the Treasury Department. Demutualization in the Insurance Industry Demutualization has exploded across the industry because of the large amounts of potential capital. While mutual insurers are busy converting into stock companies to join the buyout binge that has gripped the industry, the market capitalization of these firms as public stock firms will be in excess of $100 billion. However, even though seven of the top ten life insurance companies are still mutual companies, the total number mutual companies is quite small relative to stock companies. Specifically, mutual companies only make up 8% of all insurance companies. Importance of Ratings Agencies Ratings agencies are utilized among consumers and advisors alike to reveal the financial strength of insurance companies. They are absolutely necessary within the insurance industry, but cause some added confusion. Each ratings agency has a unique rating scale, differing from other agencies. Some of the more prominent agencies include AM Best, Duff & Phelps, Moody’s, and Standard & Poor’s. *Insurance Industry Scandals* The insurance industry has experienced repeated industry scandals that it must overcome: Product Misrepresentation Fake Policies Cut Rate Plans Non-Independent Associations Discount Drug Card Scams Predatory Pricing Churning Non-Vanishing Premiums Viatical Scams Race Biased Underwriting Improperly Denying Claims Money Laundering Sales Incentives Excess Compensation Packages & Loans Market Timing Annuities in Tax Deferred Accounts Recently Sold Products Underperforming Finite Reinsurance Contingency Commissions & Bid Rigging The most recent insurance scandals are likely to result in more disclosure requirements for insurance agents and brokers. The National Association of Insurance Commissioners (NAIC) has issued model legislation, which would require insurance agents and brokers to tell customers how they are paid by insurers, including any contingent commissions. Written consent from customers would also be required to collect contingent commission payments. But even after all of the regulatory action taking place, insurance industry executives don’t seem overly motivated to change many of their practices. Two-thirds of executives believe that the time currently spent on compliance is sufficient, and nearly half of executives feel implementing new best practices is not necessary. *Tax-Free Status Under Legislative Threat* Life insurance continues to be under legislative threat, threatening one of its core competitive advantages, which is the lack of taxation. The fear is that the insurance industry, which is almost always seen as the big bad wolf, will have trouble fighting its case against tax for working families, or tax cuts for married people. The tax benefits under threat are at multiple levels in insurance products: • Dividends, Interest, & Capital Gains • Distribution & Payouts To better understand the developments in the insurance industry, executives can purchase the full Tiburon research report where the key learnings highlighted above are covered in greater detail. Please contact Brian Cotter at BCotter@TiburonAdvisors.Com. ***************************************************************************** Tiburon Strategic Advisors Tiburon Strategic Advisors, based in Tiburon, CA, was formed in 1998 to offer market research & strategy consulting services to all types of financial institutions and investment managers: The firm has served almost 300 corporate clients and completed over 850 projects since its founding, and today, its knowledge base includes mutual fund distribution, separately managed account programs, alternative investments, wealth management, insurance products, banking services, the fee-only financial advisor market, the CPA firm market, the family office market, and various international markets. Tiburon holds a series of CEO Summits semi-annually for its executive-level clients. Attendance is by invitation only and attendance at the Summit is limited to 75 senior industry executives. Visit the CEO Summits section of Tiburon's web site for details on current and past CEO Summits, including attendee lists, meeting agendas, and highlights. Please contact Tiburon’s Managing Principal Chip Roame at CRoame@TiburonAdvisors.Com or (415) 789-2541 if you are a Tiburon client and have an interest in attending a future Tiburon CEO Summit. Tiburon offers thirteen online business benchmarking tools that are available to all types of financial advisors in an effort to help them benchmark their business practices and build more successful businesses. The sites include www.BrokerBestPractice.Com for wirehouse & regional brokers, www.FABestPractices.Com for fee-only financial advisors, www.IndependentRepBestPractices.Com for independent reps, and www.PrivateBankerBestPractices.Com for private bankers. Almost 5,000 advisors have used these tools. By completing one of the online surveys, financial advisors can access a FREE copy of the relevant comprehensive Tiburon research report, which summarizes and analyzes the collective results. Tiburon has published twenty-three ~100-300+ page research reports, which offer detailed analyses of growing business segments; each is available for $5,000; these reports can be ordered by contacting Brian Cotter at BCotter@TiburonAdvisors.Com or (415) 789-2546. Tiburon’s weekly research releases, like this one, are emailed for free to interested industry executives, media representatives, conference planners, and individual financial advisors. Over 40,000 industry executives now receive these releases. Feel free to sign up to receive future research releases at Tiburon’s web site (www.TiburonAdvisors.Com) if this release was passed to you by a colleague and you would like to receive them directly in the future. Tiburon expanded its workforce in 2005-2006. New research managers will develop proprietary research content for Tiburon research reports and client projects and new marketing managers will enhance the firm's web site, weekly research releases program, and the firm's relationships with media representatives, conference planners, and its clients & executive program members. The firm is seeking to add principals in 2006. Tiburon has built three executive programs (CEOs-in-Residence, Financial Advisor Roundtable, and Consulting Fellows) in an effort to bring the experiences of additional senior level industry executives to Tiburon clients. Feel free to contact any of the members of Tiburon’s executive programs directly or ask that they be included in any ongoing Tiburon project. *****************************************************************************