Introduction ………………………………………………………………. 2
Objectives ………………………………………………………………… 2
Findings …………………………………………………………………… 3
Conclusion ……………………………………………………………….….. 7
EconomicIssues Facing Financial and Insurance Industries
Thefinancial and insurance industries combined provide one of thelargest sources of employment and financial aid to American citizens.Banks which form the bulk of the financial industry act theintermediaries between users and savers of capital. Insurancecompanies eliminate uncertainty in the minds of investors and assistin the improvement of financial resources. Insurance ensures thecontinuity of business and cover against losses and health. Bothinstitutions pay taxes to the government and assist in regulating themovement of cash and inflation. The financial sector`s role in theeconomic development of a country cannot be ignored. During the lastfew years, however, financial reform and communication andtechnological advancement have occurred and significantly transformedtheir ways of doing business. Technology has moved transactions frombanking halls into the phones tablets and computers of theircustomers. The new trends and emerging issues have varying impact onthe insurance and financial industries.
Theobjective of this research paper is to determine the economicchallenges facing the financial sector and the insurance industry.Economic conditions created that can ensure that these industriesthrive and either continue to create jobs or adversely affect theperformance of these institutions. Competition among key players inthe banking sector and insurance has been seen as a major issue. Withthe continued entry into business of new players almost every year,the industry has seen a tremendous increase in the number ofindependent institutions offering these services
Theincreasingly competitive environment across both insurance and thefinancial services industry has increased the intensity of the needto develop alternative channels of delivery. Because the success andsurvival of such organizations depend on environment and strategythat can integrate the internal capabilities of the organization,coming up with new and advanced policies that tackle changes in theeconomic environment faster than the competition can creates an edgeand a distinguishing factor between organizations in the sameindustry.
Forinstance, insurance companies and even banks face new and extremechallenges in the competitive environment. This is because of achange in the services which has become the main marketing basethrough innovations and ingenuity including the creation of newservices and the delivery of those services to consumers at the righttime(Laudon, Kenneth, and Carol Guercio Traver 132),place and speed because essentials in the world of financial servicesdepend on the innovations created by this completion. This, in turn,guarantees the delivery of quality services and products to gain thecompetitive advantage, loyalty and customer satisfaction.
Rulesand regulations set forth by the legislature have the largest effectson the financial and insurance industry. Bank regulation is createdto ensure that there are safety and dependability of the bankingsystem. It is many cases such regulation constricts the normal cyclethat exists and creates economic expansion, new job opportunities,and credit. Creating that right balance can be key to economicdevelopment since the high expenses that result from the unnecessaryregulation of the industry reduce resource devolution to lending. Thelast decade has seen the collective regulatory burden on financialinstitutions essentially more than double. This has constrictedtremendously the facilitation of credit that if unchecked couldthreaten the role of these financial institutions in communitydevelopment.
Theunequal regulation between banking and non-banking financialinstitutions has provided non-banking financial institutions with acompetitive advantage despite both offering identical products andservices. Non-bank financial institutions enjoy less regulatoryoversight, tax treatment, and consumer compliance. This has created ashift in bank activity to non-bank institutions such as credit unionsdenying the government a vital tax stream(Meropol, Neal J., et al).Creating new measures and regulations that will enhance equalityacross all financial institutions by ending the special taxprivileges accorded to credit unions and farm credit systems easingthe restriction of mortgage service rights and capital treatmentthrough legislation.
Theinsurance industry is also facing a wide range of regulatoryinitiatives which have seen an increase in the cost of insurance andcreation of a new class of risks (regulatory compliance). Theseregulations change regularly and the time required to implement theseregulations becomes the problem. The regulation process is a timeconsuming distracting management and talent from innovations and notcreating a safer system.
Thehigh costs involved in the compliance and the capital requirementsaffect the growth and profitability conditions that are unfavorabletowards the innovation of the industry. These discourage theexpansion of the industry and increase the costs of doing business.This trickles down on the consumers who incur higher premium costsdue do the costs of administration.
Therisk of network intrusion and software failure causes anxiety amongboth financial institutions and insurers. The safety of digital datastored in the cloud-based storage system is of prime concern due tothe nature of data that these companies collect. Any damage or lossof data through breached network systems results in the exodus ofcustomers whose private information has been leaked. Thesophistication of cyber criminals and the dynamic nature of threatsposed by the changing technology make these institutions primarytargets. High costs involved in the adoption and integration of newtechnology regularly with security always being a step behind. Theconcern raised on the growing number of attacks with only a fractionrequired to cause a serious disruption(Merton, Robert, and Zvi Bodie 48).
Asuccessful attack creates additional costs due to the security andthe subsequent loss of trust by customers.
Inthe case of insurance huge losses incurred as a result of a naturalcatastrophe such as an earthquake, tsunami, hurricane or floodingfrom storms. With the increase in the rate at which climate change istaking effect and creating extreme weather patterns, insurancecompanies occasionally find themselves facing huge claims from theirclients in light of such calamities. This increases the cost ofcovering at the reinsurer the effect of which is ultimately paidthrough high premium rates by clients. Such kinds of high-riskuncertainty can even lead to the withdrawal of players from themarket.
Concernthat the changing markets are not met by an equally dynamic changeand development of the product is on high level. The lack ofinnovations and the inability of these institutions to create newproducts tailored along the changing tides create rigidness in theseindustries. Emerging issues such as the emerging cyber risks, drones,hover boards and driverless cars create a new and existing field thatis yet to be fully integrated into the insurance industry. Thiscreates a risky market that is supply driven rather than supplydriven.
Productdevelopment is important in creating a new product that is tailoredaccording to the available current needs of the consumer.
Financialinstitutions and the insurance industries have together created jobopportunities and assisted in the formation of the new business. Theyprovide an important tax revenue source to the government. Numerousmicroeconomic factors influence this role. Government policy is byitself one of the main sub-factors that have helped shaped theseindustries. Political interference through regulation to create aperceived consumer protection mechanism only creates ineffectivesystems that focus mainly on the regulation processes neglecting theimportance of innovation and product improving.
Technologybased factors such as the inclusion of cybersecurity to prevent asecurity breach on customer data and the continuous improvement ofsecurity systems to ensure intruders are repelled. The rising costsresulting from cyber security and the sensitivity of the nature ofdata that these organizations hold makes them targets of cyberhacking. Any damage or loss of information can create a lot ofdistrust among clients leading to lose of business.
Competitionsin the industry and the difficulty encountered by new firmsattempting to join these markets by established players. Thecompetitiveness and diversity of the industry are an important sourceof innovation and improvement of the product. Product developmentcontinues to be a major impediment to the creation of consumertailored products that are in line with current trends. This makesthese industries rigid and ineffective due to their supply-drivennature. The insurance and financial industries may require governmentinvolvement to a certain level that will ensure that proper andnon-exploitative business practices are followed however the amountof regulation that is effective and not a bottleneck towards businesscontinuance.
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