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External analysis (Porter’s Five Forces)
Risk of Entry By Potential Competitors
In the insurance industry, one important indicator for its attractiveness to new players is insurance density, which is the average amount of insurance premium paid per capita. The US is sixth in the world with $5,965 with Canada and Luxembourg having $ 57,520 and $11,174. In terms of penetration, which is the ratio of the total premiums held in the country to its GDP; the US has 11% which is again 6th in the world. In comparison, Luxembourg and Ireland has 44% and 20% respectively.
The US is the most developed country in the world and the fact that it is not leading insurance coverage means that there is still room for growth in the US market.
Threat of Substitutes
The rationale for life insurance is to provide financial protection to one’s dependents in case of untimely death. The only entity that can in some way provide for this economic loss in the government and its program. The US welfare system is both admired and maligned depending on who benefits. Currently, the effective amount that a US citizen can expect for complete dependence on welfare is $9,000. Some people can use this as an excuse not to buy life insurance. (Worstall, 2015)
The Medicare program of the US government provides health care only for citizens aged 65 and above but for some people, this is enough to cover their risk. Before age 65, they look at health products and lifestyle as substitutes that will mitigate the risk of ill health before Medicare takes effect. There is a huge industry for health food and fitness services such as food supplements and gyms. (What is Medicare, n.d.)
Intensity of Rivalry among Established Firms
Among the top 20 insurance companies in the world, 3 are US companies namely MetLife, Prudential Financial and Aflac. Four are from Canada, six are Europe and one is from HK. All of these are operating in the US making it a highly intensive customer market. (Largest life insurance companies, n.d.)
As an indicator, we will look at the life insurance sector. The top US firms in the US are the following with their market shares.
MetLife 7.7%
Northwestern Mutual 6.5%
New York Life 5.6%
Prudential 5.3%
Lincoln National 4.4%
MassMutual 3.8%
John Hancock 3.2%
Transamerica 3.0%
(Carpenter, n.d.)
The variances between these top players are small which indicates the intensity of the rivalry.
Bargaining Power of Suppliers
Insurance had been a financial product since the 17th century. The concept is well understood by most people but there are still many who do not have any form of insurance. In spite of its obvious benefits, there is still a challenge to market and sell insurance which makes the bargaining power of insurance firms to be considered low.
Generally, there is the challenge of low differentiation among products but with the modern use of data analytics, there is now an opportunity to customize insurance products more widely than ever. If the insurance companies will not be able to create more products that will be fit customers, then customers can stay unconvinced about insurance or about the company providing it. (Organ, 2014)
Bargaining Power of Buyers
The US has only 11% penetration which implies that penetration in the insurance industry worldwide is still underserved. With many good insurance companies, the customer has many choices which gives it high bargaining power.
There is a large premium on great sales people for successful insurance companies. The job of an insurance underwriter is still a significant one (Macedo, 2009). This is an indicator that the insurance market is still a buyer’s market. People still need to be convinced rather than just being shown products.
Works Cited
“Insurance Indicators”. OECD.stat, n.d. Web. 24 April 2016. <https://stats.oecd.org/Index.aspx?DataSetCode=INSIND>.
Worstall, Tim. “The Average US Welfare Payment Puts You In The Top 20% Of All Income Earners”. Forbes, 4 May 2015. Web. 24 April 24, 2016. <http://www.forbes.com/sites/timworstall/2015/05/04/the-average-us-welfare-payment-puts-you-in-the-top-20-of-all-income-earners/#252897199d8f>.
“What is Medicare / Medicaid?”. Medical News Today, n.d.. 24 April 2016 <http://www.medicalnewstoday.com/info/medicare-medicaid>.
“Largest life insurance companies worldwide as of March 2015, by market capitalization (in billion U.S. dollars)”. Statista, n.d. Web. 24 April 2016 <http://www.statista.com/statistics/376359/largest-life-insurance-companies-by-market-cap/>.
Carpenter, J.William. “Biggest Life Insurance Companies in the US (PRU, MET)”. Investopedia, n.d. 24 April 2016 <http://www.investopedia.com/articles/personal-finance/092915/biggest-life-insurance-companies-us.asp>.
Organ, Thomas. “How life insurers can differentiate themselves in the marketplace”. LifeHealthPro, 2014 January 7. Web. 2016 April 24 <http://www.lifehealthpro.com/2014/01/07/how-life-insurers-can-differentiate-themselves-in?t=life-practice-management&page=2&slreturn=1461502054>.
Macedo, Leon. “The Role of the Underwriter in Insurance”. The World Bank: Primer series on insurance, Issue 8, 2009, September 2. Print. Washington, DC: The International Bank for Reconstruction and Development/The World Bank.
