Chapter 5

Multiple distribution system

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.

Other distribution systems

Other life insurance distribution systems include worksite marketing, sales by licensed stock brokers, and sales by financial planners who provide investment advice to clients.

Direct response system

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.

Explain the legal distinction between an agent and a broker.

An agent is someone who legally represents the insurer and has the authority to act on the insurer's behalf. In contrast, a broker is someone who legally represents the insured.

Financial institution distribution systems

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.

Major types of mutual insurers

Mutual insurers include advance premium mutuals and assessment mutuals.

Briefly describe several tends 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.

Exclusive agency system

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.

Independent agency system

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.

Characteristics 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.

Characteristics of a reciprocal exchange

A reciprocal exchange can be defined as an unincorporated organization in which insurance is exchanged among the members (called subscribers). In its purest form, insurance is exchanged among the members; each member of the reciprocal insures the other members, and in turn is insured by them. Thus there is an exchange of insurance promises, hence the name reciprocal exchange. In addition, the reciprocal is managed by an attorney-in-fact, usually a corporation that is authorized to seek new members, pay losses, collect premiums, and perform other administrative duties.

Direct response system

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.

Direct writer

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.

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.

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.

What is a mass-merchandising plan in property and liability insurance?

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.

Personal selling systems

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.

Who owns the policy expirations or the renewal rights to the business under the independent agency system?

The agency owns the expirations or renewal rights to the business. If a policy comes up for renewal, the agency can place the business with another insurer if it chooses to do so.