Insurance: A Financial Pillar?

Insurance is widely regarded as a subsector of the financial services industry. Financial services are economic services tied to finance and provided by financial institutions. The financial services sector provides financial services to people and corporations. This segment of the economy is made up of a variety of financial firms including banks, investment houses, lenders, finance companies, real estate brokers, and insurance companies. Financial services include accountancy, investment banking, investment management, and personal asset management. Financial products include insurance, credit cards, mortgage loans, and pension funds. Insurance companies offer insurance policies and annuities, which can be financial instruments.

Insurance policies as financial instruments

Insurance companies are not typically considered financial instruments in their own right. However, they do produce different types of alternative financial instruments, including insurance policies and annuities.

Insurance policies are not considered securities, but they do share many characteristics with financial instruments. They are legally binding contracts that provide monetary benefits when certain conditions are met. For example, in the case of life insurance, a payout is triggered by the policyholder's death.

Insurance policies are also based on a contract between two parties, and they have a specified value. They can be seen as a form of financial protection or reimbursement against losses.

Annuities as Financial Instruments

Annuities are a more traditional type of financial instrument. They require an investor to make either a lump-sum investment or systematic investments over time. In return, the annuity manager promises to pay out a disbursement based on the terms of the annuity.

Most variable and indexed annuities must be registered as securities with the Securities and Exchange Commission (SEC). Fixed annuities are usually considered financial instruments, although they are not required to register.

Insurance Companies and Financial Instruments

While insurance companies themselves are not financial instruments, their tradeable stock or debt in the secondary market may be considered as such.

Insurance companies are known for providing insurance policies and annuities, which, as discussed, can be considered alternative financial instruments.

Financial Instruments Defined

Financial instruments are generally defined as securities that can be traded. They are tools that money managers use to seek different types of allocations. They can be complex, such as derivatives or structured products, or more basic, such as stocks and bonds.

Financial instruments can be divided into two main types: cash instruments and derivative instruments. Cash instruments are directly influenced by the markets, whereas the value of derivative instruments is based on a vehicle's underlying components, such as assets or interest rates.

While insurance companies and pension funds are not usually considered financial instruments, components of their businesses can be. Insurance policies and annuities, in particular, exhibit many characteristics of financial instruments and can be viewed as alternative forms.

Insurance companies and annuities

Annuities are insurance contracts sold by insurance companies. They are long-term contracts where individuals invest their money in return for income in the form of regular payments. Annuities are mainly used for retirement income purposes and can be structured in different ways, including immediate or deferred, and fixed, variable, or indexed.

Immediate annuities are purchased with a one-time contribution and provide income payments to the annuitant within one year of purchasing the contract. Deferred annuities are purchased with either a single contribution or flexible contributions over time and provide income payments to the annuitant that begins at some future date.

Fixed annuities provide a guaranteed minimum rate of interest and fixed periodic payments to the annuitant. Variable annuities allow the owner to receive larger future payments if the investments of the annuity fund perform well and smaller payments if they perform poorly. Indexed annuities are fixed annuities that provide a return based on the performance of an equity index, such as the S&P 500, but also contain a minimum guaranteed interest rate.

Annuities can be a good option for individuals seeking stable, guaranteed lifetime income, looking to save more for retirement in a tax-deferred investment vehicle, or wanting asset protection with the potential for growth. However, it's important to note that annuities are complex financial products and may not be suitable for everyone. It's always recommended to consult with a financial professional before purchasing an annuity contract.

Insurance sales agents

The role of an insurance sales agent involves a range of tasks, including:

• Contacting potential clients to expand their customer base
• Interviewing prospective clients to understand their financial situation and discuss existing coverage
• Explaining the features of various insurance policies
• Analysing clients' current policies and suggesting additions or changes
• Customising insurance programs to suit individual clients' needs
• Handling policy sales and renewals
• Assisting clients with the insurance claims process
• Maintaining client records

According to the US Bureau of Labor Statistics, the median annual wage for insurance sales agents was $59,080 in May 2023. The projected employment growth for insurance sales agents is expected to be 8% from 2022 to 2032, which is faster than the average for all occupations. This growth is likely to be strongest for independent sales agents as insurance companies increasingly rely on brokerages to control costs.

To become an insurance sales agent, a high school diploma is typically required, although some employers may prefer candidates with a bachelor's degree. Additionally, insurance sales agents must be licensed in the states where they plan to work. This involves passing state exams and meeting continuing education requirements.

While the career of an insurance sales agent can be lucrative, it also comes with challenges. Agents often face rejection and need to have strong networking and hustling skills. However, for those who can navigate the difficulties, the paycheck and flexibility can make it a rewarding career choice.

Insurance underwriting

Insurance is indeed considered finance, as it is a part of the financial services sector. This sector includes banking, investing, taxes, real estate, and insurance, all of which provide financial services to people and corporations.

Underwriters are trained professionals who use specialised software, data from actuaries, and statistical analysis to determine the level of risk. They consider various factors, such as age, gender, medical history, driving record, credit score, and other personal information.

The underwriting process helps insurance companies decide whether to accept a policy, what conditions to apply, and how to price the premium to ensure profitability. It ensures that the cost of the cover is proportionate to the risks presented by the individual.

Underwriters may also work with agents or brokers to create policies that work for the customer while managing the company's risk. They can make exceptions or alter conditions to reduce risk and may step in to review a policy if conditions change or if there is a change in the customer's risk profile.

Underwriting is a critical function in the insurance industry, as it helps manage risk and determine pricing. It is a complex process that involves data analysis, statistics, and guidelines provided by actuaries.

Insurance brokerage

Insurance is considered a part of the financial services sector, which includes banking, investing, taxes, real estate, and insurance. Financial services are economic services tied to finance and provided by financial institutions.

Brokers can be particularly useful for those with complicated insurance needs, such as landlords or small business owners who require multiple policies. They can also be beneficial for those who want to understand the ins and outs of their policy, including exclusions and limits, or for those who want a personal relationship with their broker.

Brokers are typically paid through commissions from insurers or broker fees charged to their clients. Most states require brokers to disclose commission rates and fees upfront. In some cases, such as in Florida, there are caps on broker fees.

Insurance brokers are distinct from independent agents, who work entirely on commission and are limited to selling certain policies from specific companies. In contrast, brokers work with multiple companies and are not limited to specific policies.

In summary, insurance brokerage is a vital part of the financial services sector, helping clients navigate the complex world of insurance and find policies that meet their unique needs.

Frequently asked questions