The Five Competitive Forces that Shape Strategy
Insurance is one of the crucial industries required by each and every individual today. It is used by businesses, corporations and individuals to assist in mitigating or reducing their financial risk. Different types of insurance are present today, including life, health, home, travelers, auto, renters, pet and even boat. Many insurance companies have quickly realized the importance of the knowledge and power of information. These factors can be derived from undertaking research and heavy financial risk that are related to getting stuck with a poor and not balanced insurance pool (Nektarios, 2010). Competition between the insurance carriers is high. In fact, this competition in the United Kingdom is strict to such extent that Competition Commission has been generated. It is intended to guarantee healthy competition between the insurance companies in the United Kingdom for the benefit of the consumers and economy.
Participants and Segmentation of Insurance Groups
There is a number of participants in the insurance industry. The key contributor is the consumer. This industry would not have been existent if there was nobody to purchase insurance, but consumers are not only buying insurance haphazardly, that is, they buy the products and services they truly require (Porter, 2008). Other important players in the industry are adjusters, underwriters, agents and other insurance representatives. These participants play a key role in ensuring that regulations and rules of the state are undertaken and followed in a bid to avoid legal consequences.
Market segmentation is the alliance of customers with analogous needs and division of buying behavior, which can be reached by a distinct marketing program. This notion attempts to reunite differing customer needs with limited resources and allows offerings to be accustomed to suit different buyers (Epetimehin, 2011). Internally, segmentation also occurs regarding various products. Therefore, many large insurance companies have started to implement the tools such as LexisNexis to help them with their underwriting process and risk mitigation.
Drivers of Competitive Forces
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Power of Buyers. This driver of competitive force is weak on an individual basis. However, if large corporations or groups of people decide to leave an insurance company at one time, the impact of this action could be strong due to the potential loss of millions of dollars.
Power of Suppliers. This is a weak driving force as well, because the suppliers of capital are not a threat. However, if someone is working at a smaller company and decides to venture out to a larger company, then the competitive force increases due to the training, talent and skill set moving to the larger company.
Threat of New Entrants. This driving force is weak. It is not a simple task for a new insurance company to come into existence. There are laws, rules and regulations that must be followed prior to an insurance company being formulated. Therefore, larger companies do not have to worry about the threat of new companies being formed.
Rivalry among Competition. This driver of competitive force is very strong, because the insurance industry is becoming more competitive. Generally, there is no big difference between one insurance company and another, regardless of their differences in offerings.
Threat of Substitute Products or Services. This force is very strong, as many insurance companies provide substitutes of their services and products internally. Thus, there is no external threat of their products or services being substituted by another company (Porter, 2008).
The insurance industry is a large money-making business. There are various types of insurances, but the common forms of policies include life insurance that guarantees a particular amount of money to a designated person in case of death. Life insurance has drastically evolved over the years from its traditional form. Today, insurance companies tend to offer more investment products such as annuities, mutual funds, etc. These products open the door for insurance companies to branch out into some areas of banking. Health insurance is another type of insurance against expenses accumulated during an illness of an insured (Nektarios, 2010). Liability is the widest category of insurance. Automobile, property and casualty, business and professional incidents all fall under the liability category.
With respect to the form of planning of ownership of an insurance company, it can appear in diverse forms, but the two most general forms are mutual and shareholder ownerships. If the company is owned by shareholders, it is similar to any other public company. Therefore, its shares are trade on an exchange and an account of their earnings has to be provided on a quarterly basis (Viswanathan & Cummins, 2003). On the other hand, a mutually owned insurance company is actually owned by the policyholders. Therefore, an account called policyholders surplus appears on the balance sheet. At present, only a small handful of companies are still policyholder-owned.
Influences on the Industry Structure
The banking industry has a considerable influence on the structure of the insurance industry. In the past, laws and regulations made it difficult for the two industries to cross paths. However, recent regulations have allowed insurance companies to take advantage of the opportunity of cross selling banking products to insurance policyholders. This is a positive change in the right direction, because it gives the policyholders more options. Another influence on the industry is that of Big Data. Insurance companies are utilizing the information they obtain through the Big Data to evaluate an insured prior to issuing policy. By doing this, the insurance companies are mitigating their insurance risks.
Industry Structure Influenced by Competitors
One part of the insurance industry that may be influenced by the competition is cost. The bottom line is that most people are searching for the best price. Therefore, the insurance companies that perform well display strong competitive cost structures (Viswanathan & Cummins, 2003). Additionally, high tolerance for investment risk is another influential factor. Even though insurance companies may not be able to control all risks in their specific operating environment, some of them fail because of inability recognize and address the risks they have at hand.
In conclusion, several insurance companies have found themselves being caught up in an unbalanced pool of insurers by being poorly equipped and not conducting due diligence responsibly. They are supposed to be very careful in the underwriting process to make sure that they insure the most enviable individuals. In the past, there was no need for organizations to insure individuals. However, with increasing fraudulent schemes, insurance companies cannot afford to take the risk. This is a trend in an affirmative direction, but from the policyholders view, this is a negative change, since there is no more privacy.