Insurance Providers
Two groups:
Private insurers and government providers.
Industrial Life
-Traditionally offered as "burial insurance," industrial life insurance offers individual coverage in small face amounts, usually less than $10,000 (and frequently between $1,000 and $2,500). These policies generally require no medical exam to qualify. Typically, an insurance agent meets with the policyowner at home, weekly or monthly, to collect the premium. For this reason, industrial insurers are commonly called "home service" companies today.
Alien Insurers
A company that is incorporated in a country outside the United States and is doing business in the United States.
Foreign Insurers
Any company that does business in a state other than the one in which it is domiciled.
General Agency System
One of three distributions systems to bring an insurer's policies to market; in a general agency system, the agency head is an independent contractor. The contractor is responsible for agency expenses and staffing, and is not an employee of the insurer.
Ordinary Life
Provided by so-called "ordinary" companies, ordinary life insurance generally includes life insurance issued in face amounts greater than $25,000 (in some cases, $1 million or more). Premiums are payable monthly, quarterly, semiannually, or annually. Ordinary insurance includes virtually every type of life insurance and annuity product covered in this course. It is especially popular with consumers looking for larger face amounts and flexible policy options. -Face amounts= the amount of the death benefit stated in a life insurance policy. In a universal life policy, the face amounts is called the "specified amount"
Domestic Insurers
The insurance company's domicile (home office) is its state of incorporation. Insurers doing business in the state which they are domiciled.
key points insurance providers
-Mutual companies issue participating policies, which pay policy dividends to their policyowners. -Industrial life insurance offers individual coverage in small face amounts, usually less than $10,000 (and frequently between $1,000 and $2,500). Ordinary life insurance generally includes life insurance issued in face amounts greater than $25,000 (in some cases, $1 million or more). -Insurance is primarily regulated at the state level. To conduct business, insurance companies (as well as agents and brokers) must be licensed or certified by the state(s) in which they want to transact business. -No producer should ever sell a product as "insurance" if it is sold by an unauthorized company.
Managerial System
One of three distributions systems to bring an insurer's policies to market; in a managerial system, the agency head is an employee of the insurer. The insurer is responsible for agency expenses and staffing.
Career (or captive) agency system
Agency system under which the agent is employed by one insurance company. The agent works at a branch of the company under the supervisions of a general agent. The agent receives 50% or more in commissions as compensation for an initial sale, and an additional reduced commission at the time of each yearly renewal.
Domestic, Foreign, and Alien Insurers
Insurers are also categorized by their location (or domicile) as domestic, foreign, or alien: -Insurers doing business in the state in which they are domiciled (that is, headquartered) are classified as domestic companies in that state. -A company that does business in states other than the one in which it is domiciled is classified as a foreign company in those states. For example, an insurance company domiciled in Ohio and admitted in Nebraska is a foreign company in Nebraska while it is a domestic one in Ohio. A company that is incorporated in a country outside the United States and doing business in the United States is classified as an alien company in every state where it is admitted.
Private Insurance Providers
Private insurers come in a variety of forms. While people are most familiar with commercial insurers, there are many other sources of insurance protection.
Reciprocal Insurance Exchanges
A reciprocal insurance exchange is an unincorporated group of individuals (called subscribers), working together through an attorney-in-fact, who each agree to pay a pro rata share of any loss suffered by any other member. It is essentially a formal risk-sharing arrangement.
Surplus (Excess) Lines Insurance
A specialized insurance coverage that is offered when either of these conditions arise: (1) a risk or a part of a risk is identified for which there is no market available through the original or producing agent; or (2) a state bars the scale of a specific type of coverage or otherwise prevents insurance companies from providing coverage for a particular risk or restricts them from charging adequate rates. Also called excess lines insurance, surplus lines insurance is not a type of insurance company or product. It is a market for insurance not available from any admitted company within a state. Applicants seeking insurance for a unique risk may turn to a surplus lines broker in their state to find an insurer outside of the state that will provide the desired coverage. It is more common with property and casualty insurance than life and health insurance. For example, an Illinois resident who inherits a Florida orange grove may find it impossible to locate an insurer domiciled in Illinois that offers citrus crop insurance. A surplus lines broker in Illinois, however, may procure that specialized coverage through a Florida-based company that provides citrus crop insurance but is not admitted to do business in Illinois.
Other Private Insurance Providers and Sources
In addition to stock and mutual insurance companies, certain other groups provide insurance, including: medical care service providers fraternal benefit societies industrial (home service) insurers reciprocals Lloyd's associations self-insurers risk retention groups risk purchasing groups surplus lines insurers reinsurance companies
Risk Retention Groups
A risk retention group (RRG) is an insurance company that provides self-insurance services to owner-members. These members all have a business, occupation, or professional relationship with one another. RRGs give companies the basic infrastructure needed to successfully band together for self-insurance purposes. RRGs are a relatively new type of insurer, born out of the federal Risk Retention Act of 1986. The act requires that an RRG follow the insurance laws of at least one state.
Medical Care Service Providers
While many stock and mutual insurance companies sell health insurance, an increasingly large share of medical coverage today is provided through entities called *medical care service providers.* Popular examples include HMOs and PPOs. These organizations blend characteristics of commercial insurance companies and medical care providers. Service providers are more fully covered in the health course. --PPOs= A managed care arrangement made up of a network of health care providers. This group contracts with a sponsoring organization- an employer, an insurer, or a third party administrator- to provide health care services. These services are offered at negotiated reduced fees to the sponsoring organization's members or employees.
Admitted and Non-Admitted Insurers
Insurance is primarily regulated at the state level. To conduct business, insurance companies (as well as agents and brokers) must be licensed or certified by the state(s) in which they want to transact business. A company that has received a certificate of authority from the state. This certificate permits the company to transact insurance within the state. It certifies that the company has met the state's requirements for conducting the business of insurance. Admitted Insurers are also called "authorized insurers. An admitted insurer is a company that has received a certificate of authority from a state in which it wants to transact insurance business. This certificate allows the company to transact insurance within the state. It certifies that the company has met the state's requirements for conducting insurance business. An insurer must be separately admitted in every state in which it transacts business. A non-admitted insurer is one that transacts business in a state for which it does not hold a certificate of authority. This is common, for example, with surplus lines (or excess lines) insurance. Unless it involves surplus lines insurance, producers who solicit or sell insurance for a non-admitted company face penalties. Do not confuse a non-admitted company with an unauthorized company. A non-admitted company is a legitimate insurance company that does not hold a certificate of authority in a particular state. An unauthorized company is one that is presenting the products it sells as "insurance" when in fact the product is not a valid insurance product (and the company is not a legitimate insurance company). For example, some companies sell prescription drug cards and present this as an "insurance card." No product can be called insurance if it is not approved by the state's department of insurance. No producer should ever sell a product as "insurance" if it is sold by an unauthorized company. -Surplus lines insurance= coverage that is offered when either of these conditions arises: (1) a risk or a part of a risk is identified for which there is no market available through the original or producing agent; or (2) a state bars the sale of the specific type of coverage or otherwise prevents insurance companies from providing coverage for a particular risk or restricts them from adequate rates. -Producer= Anyone who sells insurance for another and gets a policy from the insurer; also called an agent.
Home Service Companies (Industrial Insurance)
Structured as either a stock or mutual company, home service companies (traditionally called debit companies) are not so much a unique form of insurer as they are a distributor of a class of insurance called industrial life insurance. Industrial life insurance is best understood in comparison to its counterpart: ordinary life insurance.
Risk Purchasing Groups
A risk purchasing group is a group of persons or entities with similar risks who form an organization for the purpose of buying insurance on a group basis. These persons are usually members of a similar business or trade. Purchasing groups( group of persons or entities with similar risks who form an organization for the purpose of buying insurance on a group basis) do not engage in self-insurance (as do risk retention groups). Instead, groups such as tax preparers or real estate appraisers might form purchasing groups to buy and provide liability or errors and omissions insurance for their members. Purchasing groups do not make insurance available for the general public; they exist to provide coverage for their members
Lloyd's Associations
An insurance market; it provides: a meeting place for transacting insurance business; underwriting information; a forum for settling disputes and claims, and other regulatory and administrative services. Lloyd's of London is not an insurance company nor does it sell insurance. It is an association of individuals and companies that band together to underwrite unique insurance risks on their own accounts. In many ways, Lloyd's is like a stock exchange: It offers a forum for large companies and brokers to find insurers. Much of the business that is brought to Lloyd's represents complex, unique, and very large risks. A member can be either a person or a company. Members are organized into syndicates, with each syndicate specializing in a particular risk. However, each member is held personally liable for the insurance business that it underwrites.
Fraternal Benefit Societies (nonprofit)
An organization composed of individuals who typically share a common ethnic, vocational, or religious affiliation. -Fraternal benefit societies are entities that: --have no capital stock; --have a representative form of government; --exist not for profit but solely for the benefit of their members and their beneficiaries; and --operate on a lodge system with a ritualistic form of work. Fraternal societies may provide insurance to their members. Fraternal insurers are nonprofit organizations that operate under a special section of the insurance laws of the state in which they are approved. They specialize primarily in life insurance and annuity products that are usually available only to the society's members. -Fraternal insurers= Mainly life insurance providers whose insureds are also members of lodges or fraternal organizations, -
Insurer Financial Status (Independent Rating Services)
One way to distinguish insurers is by their financial strength and claims-paying ability, as measured by any of several different rating services. Among the most well-known and respected of these rating organizations are: -A.M. Best -Standard and Poor's -Moody's -Duff and Phelps Although they use different letter grades for their rating categories, these rating services generally use the same criteria in rating insurers. Insurance company rating services measure insurers' present and future financial strength. These ratings are based on various factors including capital, liquidity, management, competitive advantages, and ability to raise capital to finance its strategic plans.
Mutual Insurance Companies (Mutual Companies)
Owned by policy owners; mutual companies have no stockholders -are owned by their policyowners; they have no stockholders. Similar to stock insurers, mutual insurance companies have minimum capital requirements and are governed by a board of directors. But a mutual company's board of directors is elected by the policyowners. Mutual companies issue *participating policies*, which pay *policy dividends* to their policyowners. Policy dividends, which cannot be guaranteed, are typically not taxable since they are viewed as a return of excess premiums. In recent decades a number of mutual insurance companies have transformed themselves into stock companies through a complex and lengthy process known as *demutualization*. Though much rarer, a stock company may convert to a mutual company through a process called mutualization. --Policy Dividends- An amount returned to the owner of an participating insurance policy out of an insurance company's surplus funds.
Commercial Insurance Companies
The two largest types of commercial insurance companies are stock insurance companies and mutual insurance companies. Both can market, sell, underwrite, and issue life, health, and property and/or casualty insurance.
Insurer Marketing Distribution Systems
To bring their policies to market and to sell them, insurers generally use one or a combination of the following types of distribution systems: -career (or captive) agency system—This distribution system uses producers who primarily, if not exclusively, represent one insurer. There are two common subsets of career agency systems: --managerial system—The insurer employs sales representatives through regional offices, branches, or agencies. The agency head (called a general manager, or GM) is an employee of the insurer. The insurer is responsible for agency expenses and staffing. --general agency system—The agency head is an independent contractor (called a general agent, or GA) who employs sales representatives. The contractor is responsible for agency expenses and staffing and is not an employee of the insurer. -independent agency system—The agency is not affiliated with any single insurer and in fact represents multiple companies. Managers of independent agents, sometimes called personal producing general agents (PPGAs), are solely responsible for hiring, dismissing, and managing producers (brokers). -direct response system—Through mass market advertising such as mail, TV, Internet, or phone, insurers market and sell directly to consumers, without the use of sales representatives. Whether an insurer uses the managerial system or the general agency system, it still needs a sales staff to sell its products. Those sales people may be agents or brokers. Today, agents and brokers are typically called producers.
The accompanying chart illustrates the grading system used by one ratings service.:
A+= -Superior -The highest claims-paying rating; extremely strong capacity to honor insurance contracts and likely to remain so over a long period of time A, A-= -Excellent -Strong to very strong capacity to honor insurance contracts B+= -Very Good -Adequate ability to meet insurance contract obligations under most circumstances but likely to exhibit less stability in changing economic conditions than companies in higher rating categories B,B-= -Good -Ability to honor insurance obligations under stressful circumstances regarded as speculative C+= -Fair C, C-= -Marginal -Ability to honor insurance obligations under stressful circumstances regarded as extremely speculative; company vulnerable to liquidation and may be under regulatory supervision D= -Liquidation -Company has been placed under an order of liquidation
Reinsurance
An insurer that sells insurance to the public enter into an agreement wit another insurance company to accept some of its risk. The insurer accepting some of the risk being transferred is known as the reinsurance company. When insurers underwrite especially large policies, they typically try and spread the risk with other insurers to minimize the risk they face should a loss occur. Called reinsurance, this is done through a formal agreement in which both the risk and the premium is shared with one or more other companies. The insurer seeking to transfer some of its risk is the primary insurer (also known as the ceding company). The insurer accepting some of the risk being transferred is known as the reinsurance company. The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer indemnifies the ceding company for its share of the claim. The policyowner may never be aware of this arrangement; when a claim is paid, it is paid entirely by the ceding company that issued the policy.
Functional Divisions Within Insurance Companies
Broadly speaking, insurers divide their operations into marketing and sales, underwriting, claims, and actuarial: -The marketing and sales division employs home office employees to promote the product and producers who represent the insurer and sell its policies. Direct response insurers will advertise and sell their products to the public through this division, using either direct selling methods (without agents) or mass marketing. -The underwriting division is responsible for evaluating the insurable risks and determining appropriate premium rates and coverage's. -The claims division receives reports of claims on policies, investigates them, determines how to respond to these reports, and decides whether to pay the claimant, reject the claim, or offer some other settlement. -The actuarial division is responsible for rating risks, determining appropriate cash reserves on claims, and calculating dividends on participating life insurance policies (discussed more in the Life course)
Government Providers
Federal and state governments provide social insurance programs that differ from private insurance in several ways: -Coverage extends to all eligible citizens. -Citizen-participants receive benefits as a social right under law and not through a policy. Changes to benefits can only happen through changes in the law. -Funding is through taxation, not through payment of premiums. (Medicare Parts B and C are an exception since beneficiaries do pay premiums.) Government insurance serves a social purpose. For example, it provides a minimum level of protection or medical care for a population that would otherwise not have it. Federal and state governments offer different types of insurance. Federal government insurance programs include: --Social Security Insurance (formally known as Old-Age, Survivors and Disability Insurance, or OASDI) --Medicare (formally known as Supplemental Medical Insurance, or SMI) --Medicaid (which is federally mandated and subsidized but state-administered) State government insurance programs include: --workers' compensation --unemployment insurance --state-run medical insurance plans -OASDI= Old Age, Survivors, and Disability Insurance program. Provides monthly benefits amounts are determined by the worker's contributions to Social Security. -Medicare= A federal health insurance program specifically for people age 65 and over and for certain disabled persons. Medicare is funded by payroll taxes. It extends the Social Security program beyond retirement, disability, and survivor benefits into the field of medical expense benefits. Coverage provided under Medicare is divided into for parts: A through D -Medicaid= A program funded by the state and Federal funds and administrated by the states. This program pays for healthcare for the financially needy, regardless of age. -Workers Compensation= State administrated program that protects people who are injured or become sick on the job.
Stock insurance companies (Stock Companies)
Owned by stockholders, these companies pay dividends, when declared, to their stockholders. are owned by stockholders, just like many other major public companies. The stock of these companies may be publicly traded on stock exchanges or privately held by small groups of investors or even families. These companies pay stock dividends, when declared, to their stockholders. Stocks dividends are generally taxable to the stockholder. Stock insurers have minimum capital requirements and are governed by a board of directors elected by their stockholders.
quiz 2
The insurance company function that is responsible for evaluating the insurable risks and assigning appropriate premium rates. sales division actuarial division underwriting division claims division The underwriting division is responsible for evaluating insurable risks and assigning appropriate premium rates. Question 2 The Royale Insurance Company, headquartered in Toronto, Canada, conducts business legally in New York. In New York, Royale is a(n) foreign insurance company alien insurance company unauthorized insurance company domestic insurance company An alien insurer is one that is domiciled in a different country Question 3 The federal Risk Retention Act of 1986 contains guidelines for which of the following entities? risk retention groups surplus lines insurance companies reinsurance companies risk purchasing groups The RRA '86 does not apply to surplus lines insurers. Question 4 Why would a large manufacturer choose to self-insure rather than buy an insurance policy from an insurance company? For tax abatement purposes To save insurance premiums by paying relatively minor losses. To avoid having to comply with individual state laws To cover severe losses. Self-insurance is often used to cover relatively minor losses. You answered 50% of the questions correctly Question 1 Lisa is a producer for an insurance company that sells its products to the general public and which specializes in life insurance policies designed for burial and last expense purposes, generally with face amounts of $10,000 or less, for which she oftentimes collects premiums weekly. Lisa most likely represents a(n) home service insurance company social insurance provider. fraternal insurance company ordinary life insurance company. Representing fraternal benefit societies, fraternal insurers sell only to the society's members. Most fraternal insurers sell ordinary life insurance products. Question 2 The Excalibur Insurance Company, headquartered in Iowa, conducts business legally in Nebraska. In Nebraska, Excalibur is a(n) alien insurance company foreign insurance company domestic insurance company nonadmitted insurance company Insurers doing business in the state in which they are domiciled are classified as domestic companies in that state. Question 3 All the following are characteristics of a stock insurance company EXCEPT they have minimum capital requirements that must be met before they can conduct business. they are governed by a board of directors. they may issue dividends. they are owned by policyowners. Stock insurance companies are owned by stockholders. Mutual insurance companies are owned by their policyowners. Question 4 Which of the following is an example of an unauthorized insurance company in Illinois? Company C, a non-admitted Florida company whose products are approved by the Illinois insurance department. Company B, an Illinois company that does not hold a certificate of authority and sells products that are not approved by the Illinois insurance department. Company D, a Canadian company that holds a certificate of authority in Illinois. Company A, an Illinois company that holds a certificate of authority. An unauthorized company is one that is presenting the products it sells as 'insurance' when in fact it is not an admitted company and its product are not approved by the state insurance department.