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Insurance Sector, 2007

U.S. Market Overview

The insurance industry in the United States is divided into three broad categories: (1) property/casualty (P/C), (2) life and health insurance, and (3) reinsurance. About one-third of the life/health sector consists of accident and health products. It also includes a small component of "pure" health insurance, such as coverage from HMOs. In the United States, the insurance industry is regulated at the state level. The United States ranks first in the world in terms of total insurance premiums. In 2005, global premiums totaled $3.43 trillion. U.S. premiums totaled $1.2 trillion, or 33.3 percent of the world market.

In the United States, the industry has recently been adversely affected by many factors: commercial property/liability exposures due to hurricanes and the 9/11 terrorist attack, declining profitability due to lower returns on stock market investments, and a narrowing gap between the industry’s cost of capital and its rate of return. Top domestic competitiveness issues include the state-based regulation of the industry, high capital requirements, the expense of complying with Sarbanes/Oxley, and (for P/C insurers) the asbestos claims exposure. Estimated total U.S. settlement and expenses for asbestos suit settlements are $200 billion, of which U.S. and foreign insurers are expected to shoulder over 60 percent

Some industry officials have been lobbying heavily for a federal insurance regulator. On April 5, 2006, United States Senators John Sununu (R-NH) and Tim Johnson (D-SD) announced the introduction of the “National Insurance Act of 2006” (S.2509) – legislation that would allow life and property/casualty insurers to choose federal rather than state charters under an “optional federal charter” regulatory system. The legislation was referred to the Senate Committee on Banking, Housing, and Urban Affairs, but was not enacted during the 109th Congress. The State Modernization and Regulatory Transparency Act or “SMART Act “ (S.1928) would have left the current state-based insurance regulatory system in place but would have facilitated a major overhaul of that system. It encouraged the states to reform insurance regulation by establishing legislative and regulatory goals that the states would have been required to meet, while preempting state laws and regulations that did not meet federal standards. This bill was likewise not enacted.

The Terrorism Risk Insurance Act of 2002 (TRIA) was enacted in response to the events of September 11, 2001. TRIA created a temporary federal reinsurance program for terrorism insurance and was extended by the U.S. Congress until December 31, 2007. The challenge remains to develop a longer-term public/private partnership that takes into account the unique attributes of terrorism risk from a solvency, market availability, and regulatory perspective.

Reinsurers will be paying billions of dollars in hurricane Katrina claims. The effect of the losses on the primary industry was mitigated by two major factors: the worldwide insurance market assumed approximately 50 percent of the losses; and the insurance industry was experiencing prosperity. In the wake of natural disasters, some insurers are calling for state and federally funded “catastrophe funds” (Cat Funds). Those insurers believe the government should participate in assuming the risk of widespread damage from natural disasters.