Professor`s Name

Professor`sName

EconomicIssues Facing Financial and Insurance Industries

Tableof Contents

Introduction 2

Objectives 2

Theoretical background 3

Data analysis 4

Findings 4

and suggestion 7

Conclusion 8

Works Cited 11

Introduction

Financialand insurance industries combined provide one of the largest sourcesof employment and financial aid to American citizens. Banks, whichform the bulk of the financial industry, act the intermediariesbetween users and savers of capital. Insurance companies eliminateuncertainty in the minds of investors and assist in the improvementof financial resources. Insurances ensure continuity of businessesand cover against losses and health (Katzetal.30).Both institutions pay taxes to the government and assist inregulating the movement of cash and inflation. The financial sector`srole in the economic development of a country cannot be ignored(Meropolet al. 3889).During the last few years, however, financial reform andcommunication and technological advancement have occurred andsignificantly transformed their ways of doing business (Richardetal.43).Technology has moved transactions from banking halls into the phonestablets and computers of their customers. The new trends and emergingissues have varying impact on the insurance and financial industries.

Objectives

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.

Theoreticalbackground

Traditionally,risk theory viewed the insurance firms from within too much. However,in the insurance firms, exist the environment of the economy withwhich competition with other insurance firm and other institutionswhat offers close substitutes to services of insurance, this is lifefact, which appears to flee largely the interest of risk theorists(Katzetal.30).Even if the implications of evasion risk for regulatory policy andinsurance decision-making were widely discussed in many indemnitysolvency literature, many literature mainly did not provide auniversally accepted theoretical framework from which accepted riskprobability might be determined. Moreover, Karl Borch’s booktreated the determination of appropriate risk probability as firmexogenous.

Thearticle that set forth the financial theories primarily argued thatfinance should be studied vigorously in insurance studies. Moreover,the question of economic theory in indemnity solvency is applied forillustration of this point (Katzetal.30).It is better to treat probability wreck as external constraints,which are negotiations enforced by regulators, a method endorsed bythe likelihood of ruin while respecting the complex astringentprocess undertaken by many claim-holders who are self-centered(Richardetal.32).This permits meaningful evaluation regulator constraints includingfinancial requirement inside a precise theoretical framework.

Inthis, analysis of the finest financial decisions in the unregulatedinsurance market context is discussed. It provides the understandingthat general characterization of the theory of insurance firm, whichdemonstrate that major methodological shortcomings are prevalent inthe literature of the economy (Katzet al. 30).Furthermore, determination of optimal cost of the insurer is usefulwhen enforcing and writing various contracts. To avoid taxations,insurer employs the lowest possible capital (Meropolet al 3889).Explicitly the existence of the bankruptcy, tax shields, cost, andagency facilitate the arrival to the optimal capital and employmentis expected escalate.

Dataanalysis

Thisstudy generated both quantitative and qualitative data. Thequantitative data acquired was analyzed using the descriptive methodof data analysis (Richardetal.21).The questionnaires were analyzed through coding, editing, and thenputting data into a computer for analyzing by a descriptive methodusing SPSS. The tendencies and variability were measured usingdescriptive method. The findings were then discussed individually.

Findings

Effectsof competition

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 (Katzetal.30).

Forinstance, insurance companies and even banks face new and extremechallenges in the competitive environment. This is because a changein the services which has become the main marketing base throughinnovations and ingenuity including the creation of new services andthe delivery of those services to consumers at the right time, placeand 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.

Governmentpolicy

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 in many cases such regulation constricts the normalcycle that exists and creates economic expansion, new jobopportunities, and credit. Creating that right balance can be key toeconomic development since the high expenses that result from theunnecessary regulation of the industry reduce resource devolution tolending (Richardetal.34).The last decade has seen the collective regulatory burden onfinancial institutions essentially more than double. This hasconstricted tremendously the facilitation of credit that if uncheckedcould threaten 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 (Meropolet al 3885).This has created a shift in bank activity to non-bank institutionssuch as credit unions denying the government a vital tax stream.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 (Katzet al. 30).The regulation process is a time consuming distracting management andtalent from innovations and not creating a safer system.

Costs

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.They trickle down on the consumers who incur higher premium costs duedo the costs of administration.

Cyberrisks

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 (Katzetal.30).Any damage or loss of data through breached network systems resultsin the exodus of customers whose private information has been leaked.The sophistication of cyber criminals and the dynamic nature ofthreats posed by the changing technology make these institutionsprimary targets. High costs involved in the adoption and integrationof new technology regularly with security always being a step behind.The concern raised on the growing number of attacks with only afraction required to cause a serious disruption(Merton, Robert, and ZviBodie 48).

Asuccessful attack creates additional costs due to the security andthe subsequent loss of trust by customers.

Naturalcatastrophes

Inthe case natural catastrophe such as an earthquake, tsunami,hurricane or flooding from storms huge loses are incurred (Richardetal.20).With the increase in the rate at which climate change is takingeffect and creating extreme weather patterns, insurance companiesoccasionally find themselves facing huge claims from their clients inlight of such calamities. This increases the cost of covering at thereinsurer the effect of which is ultimately paid through high premiumrates by clients. Such kinds of high-risk uncertainty can even leadto the withdrawal of players from the market.

Productdevelopment

Concernthat the changing markets are not met by an equally dynamic changeand development of the product is on a high level (Richardetal.30).The lack of innovations and the inability of these institutions tocreate new products tailored along the changing tides createrigidness in these industries(Katz etal.30).Emerging issues such as the emerging cyber risks, drones, hoverboards and driverless cars create a new and existing field that isyet to be fully integrated into the insurance industry. This createsa risky market that is supply driven rather than supply driven.Product development is important in creating a new product that istailored according to the available current needs of the consumer.

and suggestion

Giventhe degree of concurrence and the kind of decision process involvingdifferent stakeholders, many roles of public and private sectors mayhelp to solve the problems of the high risk of catastrophes(Richard etal.50).Moreover, individual remains non-committed to give up-frontmitigation measures cost with the promise of efficiency, in the longrun, opportunities for banks and insurer to join forces are stillthere to alleviate this concern. Moreover, one-way of ensuringfinancial issues are solved by lowering premium after reflecting onthe expected future losses. The banks can also provide low-interestloans to property owners for life assurance as a financial mitigation(Laudon 35).It is expected that premium deduction is more than annual loans, andthis assures the all homeowners will adopt mitigation measures, whichare cost-effective.

Anothernotable strategy is stakeholders to join resources to promote a newfinancial institution that can provide reinsurance for properprotection of insurer from the high risk of financial loss from thecatastrophes(Meropol etal3885).The chances available to convince investors to be willing to takegreater risks by investing stronger finances are minimal compared toanticipate return from their investment(Laudon 53).The issue of ambiguity related to the estimated future losses andconflicting assumptions of the experts in developing catastrophesleaves the investors confused hence making them decide to investfunds is a challenge hence calls better financial instruments(Meropoletal.3895).Government policies should regulate the insurance companies to avoidthe existence of firms with the aim of risking money from investors(Laudon 61).This will also reduce the issues of high competition of insurancecompany creating a healthier environment to invest

Conclusion

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 cyber security 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.

WorksCited

Katz,Jerome A., and Richard P. Green.&nbspEntrepreneurialsmall business.Boston: McGraw-Hill Irwin, 2009: 20-40

Laudon,Kenneth C., and Carol GuercioTraver.&nbspE-commerce.Pearson/AddisonWesley, 2007: 30-67

Meropol,Neal J., et al. &quotAmerican Society of Clinical Oncology guidancestatement: the cost of cancer care.&quot&nbspJournalof Clinical Oncology&nbsp27.23(2009): 3868-3874.

Merton,Robert C., and ZviBodie.&nbspThedesign of financial systems: towards a synthesis of function andstructure.No. w10620.National Bureau of Economic Research, 2004:40-200

RichardP. Green et al.Industry Report Financial Services.New York: Economist Intelligence Unit,&nbsp2000. Print: 20-50