Life and Health Insurance - FIN-3660
Abu khaled
chapter20220the20life20and20health20industry.pptx
Life and Health Insurance FIN 3660
Chapter 2
The Life and Health Insurance Industry
Objectives
Distinguish among the three types of business organizations and explain why insurance companies must be organized as corporations.
Distinguish among stock insurers, mutual insurers, and fraternal benefit societies.
Describe the financial services industry and explain how insurance companies function within that industry.
Identify two primary types of insurance regulation in most countries.
Describe the roles that the federal and state governments play in U.S. insurance regulation.
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Types of Business Organizations
Businesses are structured in three basic ways.
A sole proprietorship is owned and operated by one person. The owner receives all profits and is responsible for all the debts of the business.
A partnership is a business that is owned by two or more people known as partners. They divide the profits, and generally each of them is personally responsible for all the debts of the business.
A corporation is a legal entity that is created by the authority of a governmental unit and is separate and distinct from the people who own it. Corporations are different from other businesses in two ways. First, because they can be sued, can enter into contracts, and can own property. The assets and liabilities belong to the corporation itself, not the owners; thus, a corporation continues beyond the death of any or all of its owners.
An asset is an item of value, such as cash, buildings, or investments.
A liability is a company’s debt or future obligation.
Equity represents the owners’ interest; the amount on which owners have a claim.
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Types of Insurance Company Organizations
1. Stock Corporations
Most corporations, including most life and health insurers, are stock corporations, a corporation whose ownership is divided into units known as shares, or shares of stock. A stockholder, or shareholder, is a person or organization who owns stock in the corporation.
Stock insurance companies are insurers organized as stock corporations.
Stockholders elect a board of directors, who are responsible for overseeing the company’s management.
Stockholder dividend is a portion of the corporation’s earnings paid to the owners of its stock.
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Mutual Insurance Companies
2. Mutual Companies
This is an insurance company that is owned by its policyowners, who elect the company’s board of directors.
Mutual insurers historically have been older and larger than stock insurers and thus provide a significant amount of the life insurance in force.
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Fraternal Benefit Societies
3. Fraternal Benefit Societies
Fraternals are nonprofit organizations that are operated solely for the benefit of their members and provide social, as well as insurance, benefits to their members.
Members of such societies share ethnic, religious, or vocational backgrounds, although some allow membership to the general public.
Members elect the officers of a fraternal society who manage its insurance and other operations.
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Insurance Companies as Financial Institutions
4. Financial Institutions
A financial institution is a business that owns primarily financial assets rather than fixed assets.
The financial services industry is made up of various kinds of financial institutions that help people, businesses, and governments save, borrow, invest, and otherwise manage money. In addition to insurance companies, financial institutions include:
Depository institutions accept deposits from and make loans to people, businesses, and government agencies.
Finance Companies specialize in making short- and medium-term loans to people and businesses.
Securities firms specialize in the purchase and sale of securities, which are certificates that represent either an ownership interest in a business or a debt owed by a business, government, or agency.
Mutual Fund companies operate mutual funds, investment vehicles that pool the funds of investors and use the funds to buy a variety of stocks, bonds, and other securities.
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Financial Intermediaries
5. Financial intermediaries
Financial institutions serve as financial intermediaries, which are organizations that collect funds from one group of people, businesses, and governments (suppliers), and channels them to another group (users).
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Evolution of Financial Services Industry
The Financial Services industry including banks have not always been able to sell insurance products.
Gramm-Leach_Bliley Act, known as the Financial Services Modernatization Act of 1999, repealed the Glass Steagall Act of 1933 and removed many of the marketing barriers between banking, securities companies and insurance companies.
Please read this article for some insight into the history of this practice.
http://www.insurancejournal.com/magazines/coverstory/2002/01/14/19219.htm
http://www.nytimes.com/1990/05/31/business/law-allows-banks-to-sell-insurance.html
The financial services industry is characterized by convergence, the movement toward a single financial institution being able to serve a customer’s banking, insurance, and security needs.
Consolidation is the combination of financial service institutions within or across sectors.
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Regulation of Insurance
Many insurance laws are similar in principle throughout the world.
The U.S. has the most extensive insurance regulation in the world, and other countries often study it as they develop their own laws.
Insurance regulatory systems vary from country to country as well.
To operate as an insurer, a company must incorporate in a particular jurisdiction. In the U.S. insurers must incorporate in one state. A domicile is the jurisdiction in which a company incorporates.
A certificate of authority, or license, grants an insurer the right to conduct an insurance business.
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Regulation of Insurance
Two primary focuses of regulation:
To ensure that insurers remain solvent, are able to meet their debts and pay policy benefits when they come due. This is known as prudential regulation.
To ensure that insurance companies conduct their business fairly and ethically. This is called market conduct regulation.
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Solvency Regulation
A company’s solvency is evaluated by applying the basic accounting equation:
Assets = Liabilities + Owners’ Equity
The owners’ equity is the owners’ financial interest in the company, the difference between the amount of the company’s assets and the amount of its liabilities. There are two components:
Capital, the amount of money the owners invested.
Surplus, the remainder of the owners’ equity, or the amount by which the company’s assets exceed its liabilities and capital.
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Solvency Regulation
Mutual insurers do not issue stock, so it has no capital; the owners’ equity for a mutual insurer is just the company’s surplus.
In the U.S., the state oversees the financial condition of insurance companies by reviewing their Annual Statements, an accounting report each insurer prepares each calendar year.
The NAIC has created a general form that all insurers can use.
In addition, state regulators conduct on-site financial condition examinations every three to five years.
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Market Conduct Regulation
Market conduct laws regulate how insurance companies conduct business.
In the U.S. each state regulates the market conduct of insurers operating in the state. All states have laws that prohibit insurers from engaging in a variety of practices that are considered unfair or deceptive.
Many market conduct laws are designed to ensure that customers are presented with fair and accurate information before they buy insurance.
Other laws regulate the form and content of insurance advertisements to make sure that consumers are not misled about the features or limitations of insurance policies.
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Market Conduct Regulation
The state insurance departments perform periodic market conduct examinations of insurers. If it is determined that an insurer has violated state market conduct laws, it may impose sanctions against the insurer.
States also regulate the conduct of the individuals who market and sell insurance. Insurance agents must be licensed by each state in which they conduct business.
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Social Insurance Programs
These are welfare plans that are established by law and administered by a government and provide the population with income security.
May provide cash payments to replace lost income because of old age, disability, death, occupational injuries, and unemployment. It also provides medical care.
Insurance cannot provide products that duplicate the coverage of social insurance programs.
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Taxation
Governments provide tax benefits to encourage people to invest in and employers to provide retirement savings plans.
These incentives benefit insurers because of the increased demand for private financial and insurance products.
There are many interesting topics debated regarding the taxation of insurance companies, such as taxing premiums or taxing revenues.
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