Effects of External Forces and Future of the Industry - Essay Example

? Table of Contents Introduction 2 External Forces 2 Risks 2 Economic Risks 3 Environmental Risks 3 Geopolitical Risks 3 Societal Risks 4 Technological Risks 4 Insurance Demand 4 Substitutes 5 Insurance Supply 6 Capital 6 Expertise 6 Future of Insurance 7 Conclusion 7 References 8 Insurance Industry: Effects of external forces and future of industry Introduction In the modern business industries insurance industry have greatly impacted and being impact by the market. The industry has revolved and has managed to survive and flourish in short period of time. The factors affecting the insurance market in positive and negative manner is fully utilized so as to benefit from the opportunities and counter the risks that the industry faces (Atkins & Bates, 2008). The various impacts of the risks that affect the insurance industry are analyzed along with their impact upon the demand and supply of insurance. Nonetheless the impact of the demand and supply upon the insurance and upon the industry as a whole is examined along with their impacts upon alternation of the industry structure. Factors that affect various insurance operations are determined with the intensity of their impact regarding the change in supply and change in the insurance industry thus resulting in the change in the structure. The future of the insurance amounting to various factors that accounts for the change in the industry and how they shall be impacting the industry in the future is analyzed. The scope of the industry in the future regarding changes in the demand and supply along with the structural changes that shall be evolved so as to benefit from the external factors is determined (Rejda, n.d.). The response of the industry regarding the factors is analyzed in current and future terms and the future of the insurance industry is determined regarding change and the external factors. The impacts of the market conditions are crucial as it determines the demand and supply of insurance and thus evaluated as per its impact. External Forces The external forces impacting the insurance industry are numerous amounting to the change in the structure of the industry and various insurance operations. External forces have greatly impacted the industry, which resulted in various changes in the industry that benefited the industry, and some have badly impacted the insurance industry (Dr. Amal, et al., 2012). The external factors of the insurance industry are discussed in detail below. Risks The insurance industry is to account and tackle risks that are faced by various entities. The change in the intensity of the risk determines the demand and supply of insurance. The structural risks that have evolved in the recent years when the company mergers enhanced and various companies started consolidating the risk increased. There are various risks factors affecting the insurance industry and they are categorized differentially along with the nature and impact (Coomber, 2006). The change in the risks that are to be faced the insurance industry changed in accordance so as to manage those risks. Economic Risks The economic risks increased when the global crises in various economies increased and thus impacted the insurance industry. Major systematic financial failures resulting in the closure of many corporates such as Enron and Lehman Brothers Bank has gathered the intention towards reconsideration of risk (Jeffrey & Amy, 2004). The economic changes around the world have caused the insurance industry to realize the intensity of the risks that in increasing and thus account for the changing and increasing risk of economy to incorporate in its operations and structures. The financial imbalances around the globe and the change in the incomes have caused the insurance industry to reanalyze the demand of the insurance. Environmental Risks The definition of the risks totally changed when the environmental changes in the globe began much of a concern. The development and the impact of the risks that is faced by the environment caused the insurance industry as how the operations of the entity impact the environment and thus the insurance policies change and so do the demand of the insurance industry. The mismanagement of the natural resources that are utilized around the world increased the risks to the environment and thus changes in the insurance operations accordingly. The increasingly emission of the greenhouse gasses has impacted the insurance providers to change their policies regarding customers involved in such activities (Born & Klimaszewski-Blettner, 2013). Geopolitical Risks The geopolitical risks have evolved the insurance criteria that are being implied in the industry so that the insurance covers the risks that are involved. The risk of increased terrorist activities around the world and the have increased the risks that faces the insurance industry as the demand of insurance increased and the covered insurance should account for the faced risk of terrorism. The increase in the risk of failure of global governance thus amounting to political tensions and the revival of trading legislations between the economies amounts to reconsideration of the insurance policies that the entities have engaged (Giarini, 2009). Societal Risks The societal risks that faces the whole world s (Abdalelah & Zaid, 2011)food shortage and water crises impacts the insurance industry to a huge extent where the insurance providers recalculate the insurance coverage in accordance with the region and the crises faced in that region. The characteristics of the risks involved in such category impacts the insurance industry to the extent of their operations and coverage (Maresova, 2012). The mismanagement of the migration of people from state to state has impacted the insurance policy holders to account for the change in their policies as the coverage needed to be altered regarding the faced risks. Technological Risks The rapid changes in technology has amounted for many of the risks that are integrated in the change in the technology as the risks of committing crime changes and there are many other risks that the change in the technology gave rise to (PWC, 2013). The increase in the risks due to the technological changes impacted the insurance industry to account for the risks by altering their policies and the range of the insurance cover that the policy provides. The change in the technology gave rise to cyber-attacks and became the reason for critical system failures. The increased risks due to technology impacted the insurance industry to re-measure the amount and the intensity of the risk facing the entity and thus deriving the policies accordingly. The technological progressions have transformed the industry. The progressions have led to an increase in cybercrime risks. Now there happen to be many ways to raid and damage the systems of any company or organization. An example case of Saudi Aramco may be taken. Saudi Aramco happens to be the world’s largest oil producer. A virus attack had hit its network, damaging around about 30,000 workstation computers (BBC News Technology , 2012). With technological progressions, viruses have been now much enhanced and in order to have an impact. Insurance Demand In accordance with the market conditions the insurance industry is affected by the demand and supply of the market. Amongst the variety of reasons affecting the demand of the insurance, one of them is the risk. The increase in the risks that faces the entities along with the intensity of the risks have raised the demand of the insurance industry as people get more concerned about their insurance coverage and needs to mitigate the risks (Victorian & Sarah, 2013). There are various factors that has revived the insurance industry demand and supply along with the risks. The insurance demand is affected by factors, as there are insurance substitutes available in the market that decreases the demand of the insurance. The reduction in the substitutes shall increase the demand of insurance. Substitutes The amount and the availability of the substitutes available for a particular product and/or service will affect the demand of the product. Similarly the substitutes available for the insurance have hampered the demand of the insurance. Insurance is made so as to account for the financial losses that one can face and mitigate it by compensation provided in result of a loss. There are alternatives to insurance such as self-insurance where entity develops a large fund so as to mitigate the financial loss that is at risked. The self-insurance is done by making the retention of large portion of the risk by insurance instead of the completely insuring for the complete risk. The increase in the trend of the mitigating the insurance cost along with insuring the risk by retention of the amount of insurance has impacted the demand of the supply to decrease (Dwight, et al., 2010). Despite of paying insurance premiums so as to mitigate the risks faced by the entities, risk management technique of self-insurance has certainly decreased the demand of the insurance as the entities are now managing the risks in a different manner. The decrease in the demand of the insurance has given rise to lower the price of the insurance that the insurers charge. The decreased demand has reduced the prices and the level of service that the insurers provide. The increasing phenomenon of captives where the companies insure the parent company is beneficial for the insurance companies. The companies specifically set up so as to provide insurance to the parent companies and to the customers of the whole group sets up the demand. The demands of the customers so as to comply with the insurance provide more benefits to the insurance companies. Being the parent company the scope is wide and so do the range of customers and thus the companies set up so as to provide insurance to the parent company and its customers, increases the customer base for the insurance companies. The captives have much of the benefits for the group as whole as the cost of the insurance decreases. The reduction in the reinsurance cost due to the availability of the direct access to the markets directly. The exposure of the risk can easily be identified from the experience and the risk that is faced by the group and thus is helpful for the insurer to identify the premiums with convenient. Insurance Supply The supply of the insurance is dependent upon economic activities of the state that varies depending upon various conditions. The economic stability of the economy determines the supply of the insurance, as the stable economic environment shall increase the operation of the insurance companies where the risks and premiums are accounted for with stability and approximation. Although the economic conditions does determine the supply of the insurance to much extent but the sheer economic conditions is not able to determine the supply of insurance. Capital The economic environment is directly affected by capital. The capital requirements of the insurance companies are an important factor from which the supply of the insurance can be determine. The determination of the supple of insurance can be inferred from the capital provision to the insurance companies so as to fund the operations of the insurers. Insurers are not determined to be successful bankers and thus the supply of the insurance in the market can be determined where the capital provision to the insurers by the banks. The sufficiency of the capital to the insurance companies so as to fund the operations will adequately measure the supply of the insurance in the market. The sufficient capital for the insurance companies in be increasing the supply of the insurance and where the capital provision is not sufficient enough then the supply shall be limited as the insurers shall not be able to cover the risks and manage their operations. Expertise The level of expertise in the insurance provision determines the supply of the insurance in the market. The level of expertise in the insurance company shall be able to effectively utilize the resources and manage to coop with the economic conditions of the market and thus shall be able to increase the supply of insurance (Omboi, 2012). Human resource is much crucial for every type of industry so as for insurance where the expertise of the insurers shall be able to deal with the conditions prevailing in the market and realizing its potential and thus increasing the supply of insurance. The high level of expertise in the insurance industry shall be able to tackle the problems like capital provision and market conditions whereas determining the demand increasing factors so that the supply of insurance is coped with the demand of insurance. Poor expertise shall not be able to realize the market conditions and economic possibilities and thus will result in the loss of supply of insurance. Future of Insurance Insurance is increasingly beneficial for many of eh entities especially related to the business world and thus the future of the insurance is much towards increasing considering various factors that are now affecting it. Better understandability and measurement of the risk along with the possibility of effectively countering risks for insurance industry shall prove to be beneficial for the insurance industry in future. There are various conditions and factors are to be taken into account when the future of insurance industry is determined. The market performance of the economies and the growth of market shall be increasing the demand of insurance in the future. The effect of climate change that is impacting the environment shall determine the impact of insurance to the extent of climatic change (Mills, 2006). One of the major impacts of Islamic insurance that is affecting the insurance industry is increasing and the insurance industry is needed to calibrate in accordance with the Islamic laws. The impacts of the factors when accounted for in the insurance industry shall prove to be beneficial for the insurance industry, as they will flourish the industry. (World Economic Forum, 2012) Conclusion The external factors that are affecting the insurance industry conclude that the integration of the insurance industry with the economic conditions of the markets shall be benefiting the industry. The measurement of the risks and steps taken in order to minimize the impact of risks determine the demand and supply of the insurance. The coincidence of the insurance industry with the prevailing market conditions determines the performance of the industry, as due to advancement in technology the measurement of the risks is feasible and fast. Although there are various risks that are affecting the insurance industry but the impact of the risks can be minimized and is used to utilize for the benefits of the industry. The future of the insurance industry is successful depending upon the integration of the Islamic insurance and depiction of market performance. The management of risks and the understandability of the market conditions make the future of the insurance industry successful and flourishing. References Abdalelah, S. S. & Zaid, A. A., 2011. Factors Critical in Marketing Strategies of Insurance Companies in Saudi Arabia. International Journal of Marketing Studies , 3(3), pp. 104-120. Atkins & Bates, 2008. Insurance.. New York: Global Professional Publishing. Born, P. & Klimaszewski-Blettner, B., 2013. Should I stay or should I go? The impact of natural disasters and regulation on U.S. property insurers’ supply decisions. The Journal of Risk and Insurance , 80(1), pp. 1-36. Coomber, J. R., 2006. 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