SIC 6331 Fire, Marine, and Casualty Insurance

SIC 6331

This classification covers establishments primarily engaged in underwriting fire, marine, and casualty insurance. These establishments are operated by enterprises that may be owned by stockholders, policyholders, or other carriers.

NAICS CODE(S)

524126

Direct Property and Casualty Insurance Carriers

525190

Other Insurance and Employee Benefit Funds

524130

Reinsurance Carriers

INDUSTRY SNAPSHOT

In the mid-2000s, the fire, marine, and casualty insurance segment was experiencing "hard market" conditions, in which premium costs rose and insurance coverage was more difficult to obtain as underwriters became more conservative to protect against losses. The hard market was the result of a downturn in the economy, which reduced profits from the industry's investments, and significantly increased payouts from catastrophic events. Although the industry was already entering a hard market by the late 1990s, the terrorist attacks of September 11, 2001 cost the industry an estimated $50 billion, the largest single-event payout in history. A record annual net loss of $7 billion was recorded in 2001, which compared negatively to a net income of $20.7 billion in 2000.

By the mid-2000s the economy had stabilized, and the industry returned to profitability. Despite four hurricanes in the third quarter of 2004, the industry that year reported the first underwriting profit in 26 years. However, in the first quarter of 2005, eight catastrophic events led to property and casualty insurance payouts of $2.1 billion, the second costliest quarter since the first quarter of 1996, which had payouts totaling $2.6 billion. Significant issues for the industry in the mid-2000s included the future of terrorist risk insurance and asbestos litigation. Competition among the top firms was stiff in this mature market.

ORGANIZATION AND STRUCTURE

The fire, marine, and casualty insurance industry, commonly known as the property/casualty industry, is part of the larger primary insurance industry, which also encompasses life and health insurance. In addition to these three types of primary insurance, the reinsurance industry serves life, health, and property/casualty companies. Some companies participate in more than one primary industry segment.

Companies within the property/casualty industry provide financial protection for businesses, individuals, and other entities against property loss or losses by third parties for which the insured is liable. The two major segments of the industry are business and personal insurance, each of which accounts for almost 50 percent of the total dollar amount of property/casualty insurance premiums written.

Within all segments of the property/casualty industry, several types of insurance are available. Although most property/casualty insurance traditionally is written to cover homes, automobiles, and other property, other types of coverage include workers' compensation, product liability, and medical malpractice. Commercial lines, which includes general liability, medical malpractice, workers' compensation, and allied lines, accounted for approximately 52 percent of the industry's premiums in the mid-2000s. Personal lines accounted for the remaining 48 percent, with auto insurance totaling 34 percent of the industry's premiums and homeowners' insurance accounting for 11 percent of premiums.

The entire insurance industry, including life, health, and property/casualty, is comprised of four functional groups: insurers, who carry the risk of their clients; field organizations, which provide client services such as settling claims and writing insurance; intercompany associations or bureaus that, among other things, establish standards of practice, influence legislation, and determine rates; and associations of agents and brokers that promote the interests of the field organizations.

Financial Structure

Insurance companies generate profits by selling, or underwriting, policies to customers and then investing those revenues in income producing assets. Therefore, insurers may derive revenues, or losses, from collecting premiums on insurance as well as from investment income. Insurers are in the precarious position of selling products and services before they are sure how much these products and services will cost to provide.

One factor distinguishing the property/casualty industry from other primary insurance industries is the nature of its investment activities. Future liabilities tend to be short term and are much less predictable compared to the life and health insurance industries. In addition, most property/casualty policy claims are settled quickly, so insurers must invest predominantly in assets that can be quickly converted to cash. Stocks and bonds typically constituted almost 70 percent of property/casualty industry assets in the mid-2000s.

BACKGROUND AND DEVELOPMENT

The concept of insurance developed in response to society's desire to spread the consequences of a loss that would normally fall upon a single individual over the members of a large group exposed to the same hazard. Through a system of equitable contributions, members of a large group can reduce the risk of disastrous personal loss. The result is an atmosphere of certainty, rather than uncertainty, regarding accidental or disastrous occurrences.

One widely cited definition of insurance emanated from a court case in Great Britain in 1806 which stated, "Insurance is a contract by which the one party, in consideration of a price paid to him adequate to the risk, becomes security to the other that he shall not suffer loss, damage, or prejudice by the happening of the perils specified to certain things which may be exposed to them."

Insurance companies concern themselves only with pure risk, which involves only the negative possibility of loss. Conversely, insurers must avoid insuring business risk, or speculative risk, which involves the chance of loss as well as gain. In addition, the clients insured by companies must stand to lose by the occurrence of the event contemplated, or the arrangement would amount to little more than a wager and would be unenforceable or illegal.

Other conditions that must be met in order for a group to be insured against an event are the insurer being able to quantify the risk of the event occurring; persons exposed to the risk feeling a sense of responsibility for the loss; the ability of the insurer to shoulder the burden of loss; and the events involved being purely subject to chance.

Property/casualty insurance is limited to loss or destruction of property by fire, windstorm, hazards of the sea, earthquake, water leakage, explosion, riot and civil commotion, vandalism, theft, forgery, and vehicle collision. In addition, loss of property can result from liabilities related to compensation of injured workers, property damage caused to others, and negligence concerning the use of personal property.

Evolution

Organized systems of fire, casualty, and marine insurance have existed since at least the fifteenth century when a marine insurance industry emerged to serve Italian traders. The industry did not develop into a form resembling what exists today until the seventeenth century in England, following The Great Fire of London in 1666. This event prompted the development of a sophisticated fire insurance industry, which helped to lay the groundwork for the gradual development of a broader property/casualty industry. Rapid industrialization in the western world during the nineteenth and twentieth centuries sped the industry's development, as a decrease in individual independence magnified the benefits of insurance.

In the United States, the hazards of wind, water, damage, and explosion were added to the established lines of fire insurance until the early twentieth century. Other forms of insurance followed, such as personal accident, which covers costs related to illness and accident; liability; and workers' compensation insurance. A turning point occurred in the U.S. property/casualty industry in 1948, when states began allowing insurance companies to write policies on several lines of insurance, rather than limiting companies to just one segment of the market. This practice, called multiple-line underwriting, had long been in practice in the rest of the world. Significant trends shaping the industry in the 1990s included an increased emphasis on computers and automation in virtually all aspects of the market and the continued globalization of the industry. The trend continued into the late 1990s.

Regulation and Legislation

One aspect of the U.S. property/casualty industry that separates it from insurance industries in most other countries, aside from its sheer size, is its detailed system of government regulation. Until the 1940s...

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