Chapter 5: Types of Insurers and Marketing Systems
Property and Casualty Insurance Marketing Major Distributions
- Independent agency System - Exclusive Agency System - Direct writer - Direct Response system - Multiple Distribution Systems
Major Life Insurance Distribution Systems
- Personal selling systems - Financial institution distribution systems - Direct response system - Other distribution systems
Mutual Holding's Disadvantages
- Policyholders financially hurt but the change by reduction of dividends and other financial benefits - Conflict of interest may arise between top management and policy holders ----Ex: top management may be given company stock or stock options for earning higher operating profits, which could result in lower dividends or higher prem's
Mutual holding's advantages
- easier and less expensive way to raise new capital to expand or remain competitive - enter new areas of insurance more easily - Stock options can be given to attract and retain key executive employees
Property and Casualty Insurance Independent agency System Characteristics (3)
1. Business firm that usually represents several unrelated insurer 2. Agency owns the expirations or renewal rights to the business 3. Independent agent is compensated by commissions that vary by line of insurance.
Agent has authority to rep. the insurer based on.. (list of 3 things and def's)
1. Express Authority: specific powers that the agent receives from the insurer 2. Implied Authority: the agent has the authority to perform all incidental acts necessary to exercise the powers that are expressly given 3. Apparent Authority: authority the public reasonably believes the agent possesses based on the actions of the principal.
Changing Corporate Structure of Mutual Insurers (3 trends)
1. Increase in company mergers 2. Demutualization: mutual insurer is converted to stock insurer 3. Mutual holding company: a company that directly or indirectly controls an authorized insurer.
Captive Insurers are formed for 6 Reasons...
1. Parent firm may have difficulty in obtaining insurance 2. Some captives are formed offshore to take advantage of favorable reg. environment 3. The parent's insurance costs are lower 4. Captive insurer makes reinsurance (easier) accessible 5. Captive insurer is source of profit to parent if other parties are insured swell 6. income-tax advantages to parent under certain conditions.
Lloyd's of London Important Characteristics
1. not an insurance company, but is a society of members (corp's, indiv's, and limited partnerships) who underwrite insurance in syndicates 2. Insurance is written by he various syndicates that belong to Lloyd's 3. New individual members or Names who belong to the various syndicates now have limited legal liability - Members must meet stringent financial requirements
Stock Insurer
A corporation owned by stockholders Board of directors has ultimate responsibility for the corporations financial success
Direct response system
A marketing system by which life and health insurance products are sold directly to consumers without face to face meeting with an agent Ex. TV, radio, mail, newspaper, internet, telemarkets
Types of Mutual Insurers
Advanced premium mutual Assessment Mutual Fraternal Insurer
Personal Selling Distribution System Multiple Line Exclusive Agency System (captive agents)
Agents who sell primarily property and casualty insurance also sell individual life and health insurance products.
Property and Casualty Insurance Direct Writer
An insurer in which the salesperson is an employee of the insurer, not an independent contractor.
Other Private Insurers Captive Insurers
An insurer owned by a parent firm for the purposes of insuring the parent firm's loss exposure 3 Types: single (pure) with 1 parent, associate captive with several parents
Blue Cross Blue Shield Plans
Blue Cross: organized as non-profit, community oriented prepayment plans that provide coverage primarily for hospital services. Blue Shield: // except provide payment for phsycians' and surveons' fees and other medical services. ==>Also both sponsor HMO's and PPO's
Two trends of financial service industry
Consolidation and convergence
Mutual Insurer
Corporation owned by the policyholders No stockholders.. Mutual insurer pay dividends to policy holders or give rate reduction in advance
Convergence
Financial institutions can now sell a wide variety of financial products that earlier were outside their core business area
Personal Selling Distribution System Career agents (affiliated agents)
Full time and rep one insurer and paid off commission basis.
Worksite Marketing
Go to a business firm and conduct sales interviews on site with employees interested in purchasing life insurance or annuities.
Personal Selling Distribution System Personal-Producing General Agent
Independent agent who receives special financial consideration for meeting minimum sales requirement.
Personal Selling Distribution System Independent Property and Casualty Agents
Independent contractors who represent several insurers and sell primarily property and casualty insurance
Property and Casualty Insurance Direct Response System
Insurer that sells directly to the public by television, telephone, mail, newspaper, other media. Primarily for homeowners and auto insurance
Savings Bank Life Insurance
Life insurance that was sold originally by mutual savings banks in 3 states: MA, NY, and Connecticut Objective: Provide low cost life insurance to consumers by holding down operating costs and payment of high sales commission to agents
Health Maintanence Organization (HMO)
Organized plans of health care that provide comprehensive health-care services to their members. Broad healthcare services
Mass Marketing
Plan for selling individually under-written property and casualty coverages to group members; auto and homeowners insurance are popular here.
Stock Brokers
Sell life insurance at fixed and variable annuities, better meet both the investment needs and life insurance needs of clients.
Broker
Someone who legally represents the insured, even though he or she receives a commission from the insurer.
Surplus Lines Broker
Special type of broker who is licensed to place business with a non admitted insurer
Types of Private Insurers
Stock insurers Mutual insurers Lloyd's of London Reciprocal Exchanges Blue Cross and Blue Shield Plans Health maintenance organizations (HMOs) Other types of private insurers...
Personal Selling Distribution System (def)
Systems which commissioned agents solicit and sell life insurance products to prospected insureds.
Reciprocal exchange (or interinsurance exchange)
The unincorporated organization in which insurance is exchanged among he members called subscribers - The attorney-in-fact is not personally liable for the payment of claims and is not the insurer. The reciprocal exchange is the insurer
A binder (definition)
a temporary insurance until the policy is actually written.. can be written or oral
Non-admitted insurer
an insurer not licensed to do business in that state
Assessment Mutual
has the right to assess policyholders an additional amount if the insurer's financial operations are unfavorable.
Fraternal insurer
is a mutual insurer that provides life and health insurance to members of a social or religious organization
Lloyd's of London
not an insurer, but is the world's leading insurance market that provides services and physical facilities for its members to write specialized lines of insurance.
Advance Premium Mutual
owned by the policy holders; there are no stockholders and the insurer does not issue assessable policies.
Property and Casualty Insurance Multiple Distribution Systems
property and casualty insurers use more than one distribution system to sell insurance.
Financial Planners
provide advice to clients on investments, estate planning, taxation, wealth management, and insurance. Some are licensed to sell life insurance.
Surplus Lines
refer to any type of insurance for which there is no available market within the state, and the coverage must be placed with a non admitted insurer
Agent
someone who legally represents the principal and has the authority to act on the principals behalf
Property and Casualty Insurance Exclusive Agency Systems (definition)
the agent represents only one insurer or group of insurers under common ownership.
Consolidation
the number of firms in the financial services industry has declined over time because of mergers and acquisitions