FIN:3400 CH 5 REVIEW
What are the characteristics of a typical mass merchandising plan?
Mass merchandising in property and liability insurance is a plan for insuring individuals in a group. Property and liability insurance is sold to individual members of a group, such as auto and homeowners. Individual underwriting is used; rate discounts are typically given; premiums are paid by payroll deduction; and employers do not usually contribute to the plan.
Identify the major types of mutual insurers
Mutual insurers include advance premium mutuals and assessment mutuals.
Compare a stock insurer to a mutual insurer with respect to each of the following: a. Parties who legally own the company b. Right to assess policyholders additional premiums c. Right of policyholders to elect the board of directors
(a) A stock insurer is owned by stockholders who share in the profits and losses of the company and legally own the company. A mutual insurer is owned by the policyholders. (b) Stock insurers cannot issue assessable policies. A few small assessment mutuals have the right to issue assessable policies. However, advance premium mutuals do not issue assessable policies. Once the insurer's surplus exceeds a certain amount, the states will not permit a mutual insurer to issue an assessable policy. The advance premium mutual generally is larger and financially stronger than the assessment mutuals mentioned earlier. (c) In a stock company, the stockholders, not the policyholders, have the right to elect the board of directors. In a mutual company, the policyholders also have the right to elect the board of directors.
A luncheon speaker stated that "the number of life insurers has declined sharply during the past decade because of the increase in company mergers and acquisitions, demutualization of insurers, and formation of mutual holding companies." a. Why have mergers and acquisitions among insurers increased over time? b. What is the meaning of demutualization? c. Briefly explain the advantages of demutualization of a mutual life insurer. d. What is a mutual holding company? e. What are the advantages of a mutual holding company to an insurer?
(a) Mergers and acquisitions have increased because insurers wish to reduce their operating costs and overhead expenses; also, mergers and acquisitions occur because some insurers want to acquire a new line of insurance or enter a new area of business. (b) Demutualization means that a mutual insurer is converted into a stock insurer. (c) Demutualization increases the ability of an insurer to raise new capital, provides greater flexibility to expand, makes it possible to grant stock options to key employees, and may provide tax advantages. (d) Because demutualization is slow, some mutual insurers have been reorganized as a holding company. A holding company is a company that directly or indirectly controls an authorized insurer. A mutual insurer is reorganized as a holding company that owns or acquires control of a stock insurance company that could issue common stock. The mutual holding company would own at least 51 percent of the subsidiary stock insurer if the latter issues common stock. (e) Holding companies make it easier for insurers to raise new capital, to enter new areas of insurance more easily, and to grant stock options to key employees.
Describe the basic features of mutual insurers
A mutual insurer is a corporation owned by the policyholders. The policyholders elect the board of directors who appoint the executives to manage the company. Because relatively few policyholders bother to vote, the board of directors has effective management control of the company. A mutual insurer may pay a dividend or give a rate reduction in advance. In life insurance, a dividend is largely a refund of a redundant premium that can be paid if the mortality, investment, and operating experience of the company is favorable. Dividends, however, cannot be guaranteed
Describe the basic characteristics of stock insurers.
A stock insurer is a corporation owned by stockholders who participate in the profits and losses of the company. The stockholders elect a board of directors who appoint the executive officers to run the company. The board of directors has the ultimate responsibility for the company's financial success
The corporate structure of mutual insurers has changed over time. Briefly describe several trends that have had an impact on the corporate structure of mutual insurers
The corporate structure of mutual insurers has changed because of three major trends. First, there has been an increase in company mergers and acquisitions over time, which has reduced the number of active insurers. Second, many mutual insurers have converted to a stock form of ownership, which is called demutualization. Finally, because demutualization is slow, some insurers have formed holding companies. A holding company is a company that directly or indirectly controls an authorized insurer, such as a stock insurer
A newspaper reporter wrote that "Lloyd's of London is an association that provides physical facilities and services to the members for selling insurance. The insurance is underwritten by various syndicates who belong to Lloyd's." Describe Lloyd's of London with respect to each of the following: a. Liability of individual members and corporations b. Types of insurance written c. Financial safeguards to protect insureds
(a) New individual members (called Names), who belong to the various syndicates, now have limited legal liability with respect to insurance written as individuals. Corporations can also join Lloyd's of London with limited legal liability. (b) Lloyd's writes a considerable amount of ocean marine and property and casualty insurance. Life insurance generally is written only on a short-term basis. Lloyd's is also famous for writing insurance on heterogeneous exposure units, such as strike insurance for major league baseball players. (c) Each member must post a substantial underwriting deposit. All premiums are deposited into a premium trust fund, and withdrawals are allowed only for claims and expenses. A central guarantee fund pays the loss if an individual underwriter becomes financially insolvent.
Describe briefly the following distribution systems in the marketing of life insurance. a. Personal selling systems b. Financial institution distribution systems c. Direct response system d. Other distribution systems
(a) Personal selling distribution systems are systems in which commissioned agents solicit and sell life insurance products to prospective insureds. Agents who sell life insurance include career agents for life insurance companies, independent agents in property and casualty insurance who also sell life insurance, and agents in property and casualty insurance who represent insurers that use the exclusive agency system. (b) Many insurers today use commercial banks and other financial institutions as a distribution system to market life insurance and annuity products. These systems are referred to as financial institution distribution systems. (c) The direct response system is a marketing system by which life and health insurance is sold directly to customers without the services of an agent. Insurers use Web sites, television, telephones, mail, and other mass media to market the insurance. (d) Other life insurance distribution systems include worksite marketing, sales by licensed stock brokers, and sales by financial planners who provide investment advice to clients.
Describe briefly the following distribution systems in the marketing of property and casualty insurance. a. Independent agency system b. Exclusive agency system c. Direct writer d. Direct response system e. Multiple distribution systems
(a) Under the independent agency system, the agent is an independent businessperson who represents several companies. The agent is authorized to write business on behalf of these companies, and in turn is paid a commission based on the amount of business produced. In addition, the agency owns the expirations or renewal rights to the business. Finally, the independent agent is compensated solely by commissions that vary by line of insurance. (b) Under the exclusive agency system, the agent represents only one company or group of companies under common ownership. Agents under the exclusive agency system do not usually own the expirations or renewal rights to the policies. (c) This term is used in two ways. First, a direct writer refers to a company in which the salesperson is an employee of the insurer and is not an independent agent. Employees of direct writers are usually compensated on the basis of a salary plus a bonus or commission that is related to the amount of insurance sold. Second, the term "direct writer" also refers to companies who use the exclusive agency system to sell property and casualty insurance. (d) The direct response system refers to insurers that sell through the mail or other mass media, such as newspapers, magazines, radio, or television. No agents are used to sell the insurance. (e) A multiple distribution system describes a marketing system in which more than one distribution system is used. For example, some independent insurers also sell directly to consumers over the Internet or by television.
Explain the basic characteristics of Lloyd's of London.
Lloyd's of London has several important characteristics. First, Lloyd's technically is not an insurance company, but is a society of members (corporations and individuals) who underwrite insurance in syndicates. Second, as noted earlier, insurance is written by various syndicates, and members receive profits or bear losses in proportion to their share in the syndicate. Third, new individual members or Names who belong to the various syndicates now have limited legal liability. Fourth, corporations with limited legal liability can also join Lloyd's of London. In addition, individual members must meet stringent financial requirements. Finally, Lloyd's is licensed only in a small number of jurisdictions in the United States.
