HW_3 genral insurnce

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Types of Private Insurers

• Size of the insurance market, 2013
• Life and health insurers: 850 - these insurers sell life and health insurance products, annuities, mutual funds, pension plans, and related financial products
• Property and casualty insurers: 2623 - these insurers sell property and casualty insurance and related lines, including inland marine coverages and surety and fidelity bonds

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Exhibit 5.1 Top Ten Writers of Insurance Annuities by Direct Premiums Written, 2013 (in thousands of $)

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Exhibit 5.2 Top Ten Writers of Property/Casualty Insurance by Direct Premiums Written, 2013 (in thousands of $)

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Types of Private Insurers (Continued)

• Insurers can be classified by their organizational form:
• Stock insurers
• Mutual insurers
• Reciprocal exchanges
• Lloyd’s of London
• Blue Cross and Blue Shield Plans
• Health maintenance organizations (HMOs)
• Other types of private insurers

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Types of Private Insurers (Continued)

• A stock insurer is a corporation owned by stockholders
• Objective: earn profit for stockholders by increasing the value of stock and paying dividends
• Stockholders elect board of directors
• Stockholders bear all losses
• Insurer cannot issue an assessable policy

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Types of Private Insurers (Continued)

• A mutual insurer is a corporation owned by the policyowners
• Policyowners elect board of directors, who have effective management
• Policyholders may receive dividends or rate reductions

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Types of Private Insurers (Continued)

• There are three main types of mutual insurers:
• An advance premium mutual is owned by the policyowners; there are no stockholders, and the insurer does not issue assessable policies
• An assessment mutual has the right to assess policyowners an additional amount if the insurer’s financial operations are unfavorable
• A fraternal insurer is a mutual insurer that provides life and health insurance to members of a social or religious organization

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Types of Private Insurers (Continued)

• The corporate structure of mutual insurers is changing due to:
• An increase in company mergers
• Demutualization, whereby a mutual company is converted into a stock insurer
• The creation of mutual holding companies
• A holding company is a company that directly or indirectly controls an authorized insurer

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Exhibit 5.3 Mutual Holding Company Illustration

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Types of Private Insurers (Continued)

• Lloyd’s of London is not an insurer, but a society of members who underwrite insurance in syndicates
• Membership includes corporations, individual members (called Names), and limited partnerships
• New individual members now have limited legal liability
• Corporations with limited legal liability and limited liability partnerships can also join Lloyd’s of London
• Members must meet stringent financial requirements
• Lloyd’s is licensed only in a small number of jurisdictions in the U.S.

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Types of Private Insurers (Continued)

• A reciprocal exchange can be defined as an unincorporated organization in which insurance is exchanged among the members (called subscribers)
• Insurance is exchanged among the members; each member of the reciprocal insures the other members
• It is managed by an attorney-in-fact
• Most reciprocals are relatively small and specialize in a limited number of lines of insurance

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Types of Private Insurers (Continued)

• Blue Cross and Blue Shield Plans are generally organized as nonprofit, community oriented plans
• Blue Cross plans provide coverage for hospital services
• Blue Shield plans provide coverage for physicians’ and surgeons’ fees
• Most plans have merged into one entity
• Many sponsor HMOs and PPOs
• Some plans have converted to a for-profit status to raise capital and become more competitive

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Types of Private Insurers (Continued)

• A Health Maintenance Organization (HMO) provides comprehensive health care services to its members
• Broad health care services are provided for a fixed prepaid fee
• Cost control is emphasized
• Choice of health care providers may be restricted
• Less costly forms of treatment are often provided

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Types of Private Insurers (Continued)

• A captive insurer is an insurer owned by a parent firm for the purposes of insuring the parent firm’s loss exposures
• A single parent, or pure, captive is an insurer owned by one parent
• An association captive is owned by several parents
• Savings Bank Life Insurance refers to life insurance that is sold by mutual savings banks, over the phone or through Web sites

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Agents and Brokers

• An agent is someone who legally represents the principal and has the authority to act on the principal's behalf
• Authority may be:
• Expressed
• Implied
• Apparent
• The principal is legally responsible for all acts of an agent when the agent is acting within the scope of authority

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Agents and Brokers (Continued)

• A property and casualty agent has the power to bind the insurer
• A binder provides temporary insurance until the policy is actually written
• A life insurance agent normally does not have the authority to bind the insurer
• The applicant for life insurance must be approved by the insurer before the insurance becomes effective

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Agents and Brokers (Continued)

• A broker is someone who legally represents the insured, and:
• solicits applications and attempts to place coverage with an appropriate insurer
• is paid a commission from the insurers where the business is placed
• does not have the authority to bind the insurer
• A surplus lines broker is licensed to place business with a nonadmitted insurer
• Surplus lines refer to any type of insurance for which there is no available market within the state, and coverage must be placed with a nonadmitted insurer

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Life Insurance Marketing

• The majority of life insurance policies and annuities sold today are through personal selling distribution systems
• Commissioned agents solicit and sell life insurance products to prospective insureds
• Career, or affiliated, agents are full-time agents who usually represent one insurer and are paid on a commission basis.
• In a multiple line exclusive agency system, agents who sell primarily property and casualty insurance also sell individual life and health insurance products.

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Life Insurance Marketing (Continued)

• Independent property and casualty agents are independent contractors who represent several insurers and sell primarily property and casualty insurance
• A personal-producing general agent (PPGA) is an independent agent who places substantial amounts of business with one insurer and has a special financial arrangement with that insurer
• Brokers are independent agents who do not have an exclusive contract with any single insurer

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Life Insurance Marketing (Continued)

• Many insurers today use commercial banks and other financial institutions as a distribution system
• A direct response system is a marketing system by which insurance products are sold directly to consumers without a face-to-face meeting with an agent
• Acquisition costs can be held down, but complex products are difficult to sell this way

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Life Insurance Marketing (Continued)

• Other forms of life insurance distribution include:
• Worksite marketing
• Stock brokers
• Financial planners

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Property and Casualty Insurance Marketing

• The independent agency is a business firm that usually represents several unrelated insurers
• Agents are paid a commission based on the amount of business produced, which vary by the line of insurance
• The agency owns the expirations or renewal rights to the business; it may bill the policyholders and collect premiums, but most insurers use direct billing
• Agents may be authorized to adjust small claims and may provide loss control services to their insureds
  

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Property and Casualty Insurance Marketing (Continued)

• Under the exclusive agency system, the agent represents only one insurer or group of insurers under common ownership
• Agents do not usually own the expirations or renewal rights to the policies
• Agents are generally paid a lower commission rate on renewal business than on new business
• Exclusive agency insurers provide strong support services to new agents

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Marketing Systems
in Property and Liability Insurance

• A direct writer is an insurer in which the salesperson is an employee of the insurer, not an independent contractor.
• Employees are usually compensated on a “salary plus” arrangement
• A direct response insurer sells directly to the consumer by television or some other media
• Many property and casualty insurers use multiple distribution systems

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Group Insurance Marketing

• Many insurers use group marketing methods to sell individual insurance policies to:
• Employer groups
• Labor unions
• Trade associations
• Products are sold through group representatives, employees who receive a salary and incentive payments based on sales.
• Some property and liability insurers use mass merchandising plans to market their insurance
• Employees typically pay for insurance by payroll deduction