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