Comparison of the UK And USA Insurance Market
In terms of the premium income, the insurance industries in the UK and USA are the largest. 26% of the worldwide insurance premiums are coming from the USA insurance industry. On the other hand, 14% of the premiums are coming from Japan and UK is in the third position providing 7% of the insurance premiums. According to the view of Dicken (2009), the insurance market in USA is larger compare to that of the UK; however in terms of the per capita premiums both the countries are quite similar. The per capita premiums of UK and USA are $4047.5 and $4350.2 respectively. However, the insurance market operation of both the two countries is segregated in terms of the regulation and frameworks (Schanz et al. 2011). The premium income of the leading countries is shown through the following graphs:
Worldwide premium income by country:
(Source: Saeidi and Jorjani, 2012)
The performance of a particular sector depends on the regulatory framework. However, in this context Monheit and Cantor (2004) stated that the stiff regulation may hamper the smooth operation of a sector and hinders the growth. The insurance industry in UK is regulated by financial Conduct Authority (FCA) and Prudential Regulatory Authority (PRA). According to the view of Jensen (2011), ‘twin peaks’ regulatory structure has helped the insurance sector of the country to grow at a very rapid rate. From the year 2006-07, the insurance regulation has moved to Brussels. Therefore, the EU has also given he authority to control the regulatory framework of the country.
In contrast, the US insurance market is not as regulated as the UK. In USA each of the state has given the power to regulate its own companies. However, as mentioned by Khan and Rehman (2012) National Association of Insurance Commissioners has prepared he regulatory frame work of USA. Each of the state has adapted he framework and also given the freedom to prepare its own framework. Therefore, it can be said that the scope of development of the insurance market is much higher in the USA compare to that of the UK. In this context, Kheradyar and Ibrahim (2011) mentioned the higher regulation also involves the additional costs. Due to the strict regulation the premiums of the insurances in the UK market is very high. For example, as EU has recently introduced equality of the car insurance premiums, the women in UK need to pay the higher premium than the previous one. Kyriazis and Anastassis (2007) mentioned that the countries can follow the centralised regulatory framework in order to reduce the market risk. The regulatory frame work can be controlled by G20 (Soumaya, 2012). After the financial crisis of 2008, the failure of AIG, one of the most important players in the insurance market, the adaptation of the centralised framework has given more importance.
After the financial crisis, the regulation of the insurance market has become stricter. As mentioned by Maines and McDaniel (2009), the stricter regulation has affected the insurance market of UK more compare to that of the USA. The reason is: the banking regulatory bodies of UK are the controlling authority of the insurance markets as well. Therefore, the regulations of the banks are also imposed on the insurance companies as well. On the other hand, the case is not same in the case of USA. The major two issues are taken into consideration after the financial crisis is: risk of insolvency and capital adequacy. In terms of the capital adequacy ratio, UK banks are the first in the world. Moreover, the strict regulations in the UK market have imposed barriers for the new companies to penetrate the market.
The major changes in the regulatory framework are the introduction of EU solvency II directive. The directives prescribe the guidelines that are needed to follow by the banks and insurances companies to minimise the risks. The directives have the major implications on UK. As mentioned by Majluf (2010), the regulatory framework has impacted the merger and acquisition decisions of the companies. In order to follow the directives and capital adequacy the merger and acquisition has become very much essential for some of the companies. However, in USA also the directives have impacted the operation of the insurance companies. In order to reduce the risk and create the competitive environment, the insurance companies of USA also are required to follow the rules of the directives. In USA, the insurances companies have taken major steps to reduce the operational risks. The Dodd-Frank Wall Street Reform and Consumer Protection Act 2010, was introduces to cope up with the risks in USA.
Based on the regulations of both the two countries, the operations have been distinguished. In terms of the total number companies USA is much higher. In UK the number of insurance companies is 976 and in USA the number is 6115. Moreover, the employee per firm in UK and USA are: 328 and 376 respectively. Mathuva (2012) stated that due to the lower regulations the scope of operation in USA is wider than that of the UK. However, in terms of the distributions of the insurances, the conditions are quite same in both the countries. The internet is considered as one of the most important mode of distribution of the insurances. The premium income per employees is $971875 and 552609 respectively in the UK and USA. It can be concluded that the UK insurance market is much efficient than the USA.
The significant difference in the market share of the top ten companies in UK and USA indicate that a wide range of differences are present. In terms of the property and casualty 70% market has been acquired by the insurance companies only 46% market has been acquired in the case of USA. Due to the higher capital adequacy, the small companies find it very difficult to enter into the insurance market of UK.
In the health insurance sector, a wide gap has been observed in both the countries. The US expenditure in the health insurance is higher compare to that of the UK. Modigliani and Miller (2009) mentioned that due to the presence of NHS, the health insurance products are not that much spread in the UK. In USA, a stress has been provided on the health insurance products. A recent survey has concluded the major reason of the bankruptcy in the USA is the failure of the customers to pay the medical costs. In the life insurance sector, 75 million families are under the life insurance coverage. The percentage is much lower in UK, only 32% of the people are under the coverage of life insurance. However, Morton (2009) stated that one of the major reasons of hat is the unhealthy life styles of the US citizens. People are been suffering from obesity at a random rate in USA. In the car insurance sector, both the countries are almost in a stable position. Except the few states in USA, car insurance is mandatory in all the other parts. Due to the high amount of premiums in the UK, a significant number of uninsured drivers have been observed. 30% of the drivers are uninsured in UK, whereas, only 14% of the drivers in USA are uninsured.
Percentage of uninsured drivers in UK and USA:
(Source: Myers, 2009)
In terms of the income protection insurance only 10% of the UK people are consuming it. In UK, the people give more importance to the mobile phones and accessories rather than the insurance products. However, the normal people believe that the insurance products will be provided by the state. On the other hand, many people do not find any importance of the insurance products. The ignorance level is much lower in the USA.
The barriers of the new entrants are much higher in UK compare to that of the USA. On the other hand, the efficiency level in USA is much lower compare to that of the UK. The differences in the regulation of both the two countries have impacted the performance of the insurance business. The economic crisis has ushered the need for regulation. The directives of the EU have made it mandatory for the insurance companies to have the sufficient capital. The prescribed capital adequacy to the insurance companies has hindered the entrants of the new companies into the market. It has been observed that the UK insurance companies are much more productive than the USA companies. Therefore, in terms of the profitability the UK companies are higher than the USA companies. In terms of the product diversification, the USA market is much more diversified compare to that of the UK market.
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