Insurance Types, Market Structures, and Reinsurance Principles

Stock Insurer

Corporation owned by stockholders; profits go to shareholders through dividends and stock value growth.

Mutual Insurer

Corporation owned by policyholders; profits distributed via dividends or rate reductions.

Assessment Mutual

Can assess policyholders extra amounts if financial results are unfavorable.

Advance Premium Mutual

Issues non-assessable policies; premiums paid in advance.

Fraternal Insurer

Provides life/health insurance to members of religious/social organizations.

Lloyd's of London

Insurance marketplace (not an insurer) for specialized risks.

Lloyd's Broker

Represents policyholders, arranges coverage with syndicates.

Lloyd's Syndicate

Groups providing capital, profits, or losses; managed by agents and underwriters.

Insurance Agent

Legally represents insurer; has authority to bind coverage.

Insurance Binder

Temporary contract until the formal policy is issued.

Independent Agent

Represents several insurers; owns policy expirations/renewals.

Exclusive/Captive Agent

Represents only one insurer or group of insurers under common ownership.

Insurance Broker

Represents insured; solicits and places coverage but usually cannot bind coverage.

Surplus Lines Broker

Licensed to place business with nonadmitted insurers (when coverage isn't available in-state).

Direct Writer

Salesperson is an employee of the insurer, paid salary/plus incentives.

Direct Response

Insurance sold directly (TV, internet, etc.).

Group Insurance Marketing

Policies sold through employers, unions, or trade associations with payroll deduction.

Ratemaking

Process of pricing insurance premiums.

Actuary

Professional who analyzes data to set rates/premiums.

Regulatory Goals of Rates

Adequate, not excessive, not unfairly discriminatory.

Gross Rate Components

Loss costs (claims), expenses, profit & contingencies.

Loss Adjustment Expenses (LAE)

Costs of investigating/settling claims.

Exposure Unit

Measurement base for pricing (e.g., per car-year).

Gross Premium

Rate × number of exposure units.

Pure Premium Method

Rate = (Incurred Losses + LAE) ÷ Exposure Units.

Loss Ratio Method

Adjusts rates by comparing actual vs. expected loss ratios.

Merit Rating

Adjust rates based on experience (schedule, experience, retrospective).

Judgment Rating

Rates set by underwriter's judgment (little data available).

Underwriting

Selecting, classifying, and pricing risks to maintain profitability.

Underwriting Principles

Profitability, adherence to guidelines, fairness among policyholders.

Sources of UW Information

Application, agent, inspection, exams, claim history, vendor reports.

Claims Settlement

Verifying covered loss, paying promptly, assisting insured.

First-Party Claim

Paid directly to insured (fire, theft, etc.).

Third-Party Claim

Paid to injured party for insured's liability.

Claim Adjustors

Agent (small claims), staff adjustor, independent adjustor, public adjustor.

Reinsurance

Transfer of risk from primary insurer to another insurer.

Ceding Company

Original insurer transferring risk.

Reinsurer

Accepts the transferred risk.

Retention Limit

Portion of risk kept by the primary insurer.

Cession

Amount ceded to reinsurer.

Retrocession

When reinsurer passes risk to another reinsurer.

Facultative Reinsurance

Case-by-case basis.

Treaty Reinsurance

Applies automatically to all risks in a line.

Proportional Reinsurance

Losses and premiums shared by percentage.

Excess of Loss Reinsurance

Reinsurer pays only above a set amount.

Investments

Premiums invested (life = long-term, P&C = short-term).

Goals of Regulation

Maintain solvency, educate consumers, ensure fair rates, make insurance available.

Domestic Insurer

Licensed and domiciled in the state.

Foreign Insurer

Licensed in one state, domiciled in another.

Alien Insurer

Chartered in foreign country but licensed in U.S. state.

Guaranty Funds

Pay claims of insolvent insurers.

Rate Regulation Methods

Prior-approval, file-and-use, use-and-file, flex rating, etc.

Policy Form Regulation

Prevent misleading or unfair provisions.

Twisting

Persuading insured to switch policies to their detriment.

Rebating

Giving financial inducement not in policy terms.

McCarran-Ferguson Act (1945)

Insurance regulated/taxed by states; federal antitrust laws mostly don't apply.

Financial Modernization Act (1999)

Removed barriers between banks and insurers; contributed to 2008 crisis.

Dodd-Frank Act (2010)

Created FSOC, oversight for systemic risk, SIFIs regulated by Fed.

Arguments for Federal Regulation

Lower costs, more competition, better international negotiation, systemic risk oversight.

Arguments for State Regulation

Tailored to states, NAIC uniformity, allows experimentation, avoids federal inefficiency.

Market Conduct

Practices in sales, underwriting, claims, renewals, and advertising.

Market Conduct Examinations

State exams to prevent unsuitable products, misrepresentation, excessive pressure, unfair rates, improper claim handling.

Staff Claims Representatives/Adjustors

Salaried employee who investigates a claim, determines the amount of loss, and issues payment

Independent Adjustors

Individual or organization that adjusts the claim for a contracted fee (very common after catastrophes

Public Adjustors

Represent the insured and are paid a fee based on the amount of the claim settlement