The insurance industry combines to form a multi-trillion-dollar market dealing in risk. In exchange for a premium, insurers promise to compensate, monetarily or otherwise, individuals and businesses for future losses, thus taking on the risk of personal injury, death, damage to property, unexpected financial disaster and just about any other misfortune you can name. The industry often is divided into categories such as life/health and property/casualty. Life insurance dominates the mix, making up about 60 percent of all premiums. The bigger categories can be subdivided into smaller groups; property insurance, for instance, may cover homeowner's, renter's, auto and boat policies, while health insurance is made up of subsets including disability and long-term care.

But these days, you can find insurance for just about anything--even policies for pets (a market that grew 342 percent from 1998 to 2002, with sales of up to $88 million, according to research firm Packaged Facts), weddings and bar mitzvahs, and the chance of weather ruining a vacation. Even insurance companies themselves can be insured against extraordinary losses--by companies specializing in reinsurance. Celebrity policies always get a lot of press--while rumors that Jennifer Lopez had insured her famous asset (sorry) for $1 billion proved to be unfounded, other such policies do indeed exist. In fact, the phrase "million dollar legs" comes from Betty Grable's policy for that amount (a similar policy is held by TV's Mary Hart); other notable contemporary policies include Bruce Springsteen's voice, reportedly covered at around $6 million.

The world's top five

Though the U.S. is, on average, ahead of the rest of the world in terms of insurance coverage, insurance is a truly global industry. Ranked by 2003 revenue data from the Insurance Information Institute, the top five insurance companies are Germany's Allianz, France's AXA, the Netherlands' ING, New York-based American International Group, Inc. (AIG) and Italy's Assicurazioni Generali. Other leading U.S. insurers include State Farm, MetLife, Allstate, Prudential, Aetna and Travelers.

Consolidation is the name of the game--Hoovers reports that the top ten property/casualty insurers account for nearly half of all premiums written. Perhaps the most notable example of the mergers and acquisitions mania in the industry was the $82 billion merger in 1998 between Citicorp and the Travelers Group, which created Citigroup. Some insurance companies have also begun to reconfigure themselves from mutual insurers, or those owned by policyholders (e.g., State Farm), to stock insurers, or those held by shareholders (e.g., Allstate). This process, known as "demutualization," promises to raise even more capital for insurance companies to indulge in more acquisitions.

Insurance investigations

These days, life at the top for a number of insurance heavyweights has been less than perfect. An investigation by federal and state prosecutors into AIG's accounting practices revealed accounting problems that forced the company to reduce reported profits by nearly $4 billion over five years, largely the fault of former CEO Maurice Greenberg and former CFO Howard Smith. Greenberg, personally picked by AIG founder Cornelius Vander Starr to steer the company, stepped down from his perch in March 2005 after nearly four decades on the job. That May, New York State Attorney General Eliot Spitzer filed a complaint against AIG, Greenberg and Smith, over accusations of securities fraud, common law fraud and a number of violations of insurance and securities laws.

Investigations into insurance industry practices are not uncommon these days. The federal government has taken a keen interest in what is known as "finite" or "financial reinsurance," a specific type of insurance that, at its most basic level, typically involves "a premium laid down by a corporation large enough to cover all the expected losses into an account held with the insurer," according to CFO.com. The carrier is allowed "to return the difference to the insured if the cost of losses is less than the premium; if the losses turn out to be greater, the insured pays an additional premium."

Additional investigations are popping up. In May 2005, the Chubb Corp received a subpoena from federal prosecutors investigating its use of nontraditional insurance that could artificially boost financial results. The announcement came on the heels of a November 2004 statement that Spitzer's team, in an investigation into bid-rigging practices between insurance brokers and insurers, requested information from Chubb, along with a number of other companies. At that point, executives at AIG and Ace had already pleaded guilty to such practices. And, in June 2005, Allstate Insurance agreed to pay $34 million in restitution and fines to settle claims from California insurance regulators, accusing the company of overcharging on 250,000 policies over a five-year period. Also, as of July 2005, Marsh & McLennan stands accused of manipulating bids and receiving kickbacks for funneling business.

Though the headlines have mostly come from major corporations, the ripple effects of such negative press have leaked across the entire industry. To this end, the FBI launched a nationwide review of insurance practices at more than 7,000 companies in May 2005, looking for problems in accounting patterns similar to those at AIG. According to a report in The New York Times the same month, many industry officials were surprised at the FBI review, while some declared it was "premature" for the FBI to associate AIG's faulty accounting with the entire industry.

Branching out

The last 25 years have seen a shift in the industry away from life insurance toward annuity products, focusing on managing investment risk rather than the (inevitable) risk of mortality. With increasing deregulation in the U.S. and Japan, these insurers are moving ever closer to competition with financial services firms. Indeed, the business of the insurance industry doesn't end with insurance. The world's top insurance companies have broadened their array of financial services to include investment management, annuities, securities, mutual funds, health care management, employee benefits and administration, real estate brokerage and even consumer banking. The move towards financial services follows the 1999 repeal of the Glass-Steagall Act, which barred insurance companies, banks and brokerages from entering each other's industries, and the Gramm Leach-Bliley Act of 1999, which further defined permissible acts for financial holding companies. Now insurance companies are free to partner with commercial banks, securities firms and other financial entities.

At the speed of the Internet

Like many other industries, the insurance market has been transformed in recent years by the Internet. Traditionally, insurance products have been distributed by independent agents (businesspeople paid on commission) or by exclusive agents (paid employees). But insurers who sell over the Web reap the benefits of lower sales costs and customer service expenses, along with a more expedient way of getting information to consumers, which is transforming those traditional methods by cutting costs and increasing the amount of information available to consumers. By 2005, Celent Communications estimates that the online insurance market will top $200 billion, or 37 percent of personal insurance premiums, up from 19 percent in 2003. Of course, an automated approach to doing business means fewer salespeople are needed--Celent reports that insurance giant Cigna, for instance, eliminated 2,000 jobs in 2002 because of increased efficiencies. With more IT comes a greater need for IT security--Celent estimated that U.S. insurers would spend roughly $770 million by 2006 on security alone. Aside from the threat of viruses, hackers and the like, regulations have made security a top priority--the Health Information Portability and Accountability Act (HIPAA), for instance, which went into effect in 2003, sets strict standards for the privacy and security of the patient information transferred between health insurers and providers.

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