Insurance Providers

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.

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.

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.

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

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. ordinary life insurance company. fraternal insurance company

home service insurance company

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.

Federal government insurance programs

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)

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.

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.

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.

Lloyd's Associations

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.

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.

Fraternal Benefit Society

A fraternal benefit society is an organization of people who share a common ethnic, religious, or vocational 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.

Which of the following does NOT provide independent ratings of insurance companies' financial strength and claims-paying abilities? Securities and Exchange Commission A.M. Best Duff and Phelps Moody's

Securities and Exchange Commission

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.

State government insurance programs

workers' compensation unemployment insurance state-run medical insurance plans

Mutual Companies

-Mutual insurance companies 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.

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).

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.

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 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.

Stock Companies

Stock insurance companies 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.

Surplus (Excess) Lines Insurance

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.

Which of the following is an example of an unauthorized insurance company in Illinois? 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 C, a non-admitted Florida company whose products are approved by the Illinois insurance department. Company A, an Illinois company that holds a certificate of authority.

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.

Why would a large manufacturer choose to self-insure rather than buy an insurance policy from an insurance company? To cover severe losses. To save insurance premiums by paying relatively minor losses. For tax abatement purposes To avoid having to comply with individual state laws

To save insurance premiums by paying relatively minor losses

Reinsurance

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.

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

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. -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.

Self-insurers

Self-insurance is not a type of provider but rather an approach to risk management. Either individuals or businesses can self-insure by creating a reserve fund with their own money. In most cases, self-insurer refers to a large company that is willing and financially able to retain certain risks and to pay for losses that arise from those risks. It uses its own funds to pay claims as well as the administrative costs of running an internal insurance program. Self-insurance is an example of the retention form of risk management.

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.