Introduction
Finance and insurance industry is one of the leading industries in financial transactions and credit creation. This industry mainly deals in various services and products which involves the creation, liquidation, and change of the ownership of financial assets while also facilitation financial transactions ( Hussain & Prieto, 2016 ). The industry is engaged in raising funds by either taking deposits or issuing securities which are then used to acquire financial assets through either providing loans or purchase of securities. The financial industry sector provides various services such as asset-based finance leasing, insurance, investment banking, and venture capital while they put themselves at risk, the finance, and insurance sector channel funds from the lenders to borrowers in a process known as financial intermediation.
Industry and Goods and Services
The finance and insurance sector plays a crucial role in the pooling of the risks and in underwriting the insurance and annuities. The sector is involved in the collection of fees and premiums which are then used to create a reserve which is used to make investments. The insurance through the collection of the premiums and creation of a reserve plays a key role in the mitigation of the risks. They protect people from uncertain financial losses that could arise thus help in increasing the financial stability in the economy. This is done mainly by providing specialized services as well as engaging in financial intermediation, insurance, and other financial programs. Finance and insurance sector is a wide industry which can further be divided into subsectors depending on the kind of services they offer and how they raise funds. While others raise funds through the process of deposit taking, others raise funds through bonds ( Hussain & Prieto, 2016 ). This different method of raising funds brings in the difference in the various subsectors within the industry. Finance and insurance industry plays a key role in the economy because it helps in boosting of the investment through the provision of capital venture funds. The insurance sector on the other hand protects the economy from sinking by protecting the businesses of individuals.
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Market Structure
The four major market structures are perfect competition, monopoly, monopolistic competition and oligopoly. Perfect competition is a market structure in which there are a large number of small firms competing against each other. Monopolistic competition on the other hand refers to a market structure in which there are a large number of firms competing but selling slightly differentiated products. This differentiation provides some power to the individual firms unlike in the perfect competition where no firm has control over the market price. Oligopoly market structure involves a small number of firms dominating the market due to the existence of barriers to entry. Monopoly is a market structure in which a single firm controls the entire market and has the highest level of market power.
The market structure which best suits in this industry is a monopolistic competitive market. There are many investors in the finance and insurance sector with each offering similar products but have been differentiated to look different from one another. The products offered are not perfect substitutes because they have been differentiated through branding and quality of the service to make them look different. Customers will always make rational decisions while choosing the type of finance and insurance firm to deal with depending on the kind of services offered, the quality, costs, and branding ( Nicoletti, 2017 ). Many firms operating in this industry spend a lot of efforts and resources trying to differentiate their products and services to make the customers feel that their services are more superior to that of other competitors. The firms in the industry invest heavily in marketing and promotion so that they can gain a competitive advantage over the competitors. However, the huge promotional funds are only invested within a short period because, in the long run, it could be costly for the firms. Even though the number of firms in the finance and insurance market is limited due to huge initial capital, the available firms offer homogenous products differentiated using either brand or quality.
Edward Jones, Veterans United Home Loans, Pinnacle Financial Partners and PrimeLending are some of the dominant firms in the finance and insurance industry in the United States. These firms have engaged in various strategies to maintain competitive advantage and increase their dominance in the market. Through the provision of a variety of services such as insurance services, credit and venture capital to customers, these firms engage in the differentiation of their products and services so that they look slightly different from each other. Customers choose the firm depending on the branding, price, and quality. However, the prices are not so different because the firms are just but passive price takers.
Economic Trend
The trend in the finance and insurance industry has over the past years reported growth both in terms of customers and revenue. Due to the increasing number of people seeking financial assistance for investment and rising need to take insurance to mitigate against uncertainties, firms within the industry are reporting a huge increase in the new customers at a rate higher than the new firms are joining the industry ( Nicoletti, 2017 ). Because of the increasing number of customers and the fact that the industry is becoming lucrative and attractive, it is expected that there will be increased competition in the future and this will bring down the profits. This will subject the firms in the industry to increase their marketing and promotional strategies to remain dominant in the industry. Compared to the previous years, the industry has witnessed rapid growth, an indicator that the industry is set for more future growth both in terms of revenue and customers.
Figure 1: Financing Trend
Source: CB Insights
Government Intervention
The government plays a key role in the regulation of the prices in the finance and insurance prices. Through the department of insurance, the government regulates the rates at which insurers charge as premiums to the customers ( Baltensperger et al., 2014 ). At the same time, the finance markets prices are regulated by the government through the central bank which sets the interest rates that banks can charge its customers, the amount it can lend and borrow. The prices in the finance industry are strictly regulated because it has a direct effect on the economy and cannot be left to be controlled by the forces of demand and supply. Firms in this industry are merely price takers who go with the rate provided by the state. However, there is usually a slight difference in the prices and rates that are allowed to individual firms to adjust depending on their costs.
Conclusion
Finance and insurance industry plays a crucial role in supporting the economy and shielding it from economic uncertainties. The topic provides relevant knowledge on the importance of various sectors in the economy and how the various market structures operate to keep the economy running. By providing venture capital funds and other forms of finance, the finance and insurance industry promotes investment and help in the development of the economy.
References
Hussain, K., & Prieto, E. (2016). Big data in the finance and insurance sectors. In New Horizons for a Data-Driven Economy (pp. 209-223). Springer, Cham.
Nicoletti, B. (2017). The future of FinTech: Integrating finance and technology in financial services . Springer.
Baltensperger, E., Buomberger, P., Iuppa, A. A., Keller, B., & Wicki, A. (2014). Regulation and intervention in the insurance industry-fundamental issues. The Geneva Reports , 1 (1), 1-63.
