RMIN 4000: Ch. 5 Types of Insurers and Marketing Systems

Major types of private insurers

1. stock insurers

2. mutual insurers

3. Lloyd’s of London

private insurer - stock insurer

corporation owned by stockholders

objective is earn profit for stockholders by increasing stock value and paying dividends

• always trying to increase stock value to appease stockholders

• stockholders with significant shares elect a board of directors who appoint business executives

private insurer - mutual insurer

corporation entirely owned by policyholders

profits may distributed to policyholders by dividends or rate reductions

• policyholders elect a board of directors who appoint business executives

• relatively few policyholders vote, so the board of directors has effective management control of the company

3 types of mutual insurers

mutual insurer - advance premium mutual

premiums are fixed upfront and expected to cover all claims and expenses; those beyond what the company anticipated are paid for from the company’s surplus (net worth)

insurer does not issue an assessable policy

vast majority of mutual insurers today

mutual insurer - assessment mutual

insurer that has the right to assess policyholders an additional amount if the company’s financial situation is unfavorable

very few assessment mutual companies exist today because it is hard to collect assessments, especially as they become more expensive

companies that issue assessable policies are smaller insurers that operate in limited geographic areas and offer limited coverages

mutual insurer - fraternal insurer

nonprofit organization that provides health and/or life insurance only to its members, who are tied together by religion or other social factor

very few of these exist today

demutualization

when a mutual insurer is converted to a stock insurer

Lloyd’s (of London)

world’s leading insurance market (not a company) where members join together to form underwriting syndicates to insure and pool risks that require complex lines of insurance

write 7 lines: property, casualty, marine, energy, motor, aviation, reinsurance

Lloyd’s Structure

brokers represent policyholders/insurance buyers to arrange coverage with syndicates

syndicate is a group of investors that pools capital to offer insurance contracts in the market; members receive profits or bear losses

• often specialize in certain lines of insurance

• most are corporations or limited partnerships or high net worth individuals

managing agent: manages syndicates

underwriters: work for syndicates to assess risks and determine premiums

agent

someone who legally represents the principal (insurance company) and who has the authority to act on the company’s behalf

• typically has the authority to bind coverage

• principal (insurance company) is legally responsible for all acts of the agent when the agent is acting within their scope of authority

• acts based on expressed authority, implied authority, and apparent authority

insurance binder

temporary insurance based on the agent’s word until the insurer actually underwrites the policy

binders can be oral or written

common in P&C insurance, not life insurance

independent agent

usually represent multiple unrelated insurers and legally represent all of them

exclusive or captive agent

only represents one insurer or group of insurers under common ownership

distribution - exclusive agency system

agents represent one insurer or group of insurers under common ownership

agents usually don’t own expirations or renewal rights to policies

carriers provide resources and training to agents since they only sell products for the specific insurance company/principal and they want you to succeed

exclusive agency agents in p&c are called exclusive (captive) agents

more common in personal lines or for small businesses

distribution - independent agency system

business firm that usually represents several unrelated insurers and has agents who are authorized to write business on behalf of these insurers

• agency owns expirations or renewal rights to business (can place a business with another insurer)

• agents often authorized to adjust small claims, and larger agencies may provide loss control services

benefits of independent agency system

the agent may find coverage that is better suited for the client since they aren’t limited to one insurer, and they can switch coverage when policy is terminated or up for renewal

can be beneficial to businesses that require many types of coverage (an exclusive agent may represent a company that doesn’t provide every type of coverage you need)

independent vs exclusive agency system clients

independent agency system: those seeking maximum choices, flexible solutions, prioritizing comparing rates

exclusive agency system: those who prefer familiarity, value straightforwardness, seeking exclusive offerings or specialized bundles

broker

someone who legally represents the insurance buyer

• solicit applications and place coverage with appropriate insurer

• generally don’t have authority to bind coverage

• earn a commission from the insurer

especially important in commercial P&C coverage

large brokerage firms

very important in commercial P&C coverage

often knowledgable on specialized insurance markets

handle accounts of large corporate insurance buyers and provide other risk management services

surplus lines broker

someone who is licensed to place coverage with a non-admitted or surplus lines insurer

wholesalers who do not have contact with the applicant seeking coverage

they get involved if a buyer cannot find coverage from an admitted insurer

common for high risk businesses like trampoline parks, axe-throwing involving alcohol, large apartment buildings, nursing homes/daycares (misconduct issues) and hotels/motels (trafficking issues)

non-admitted /surplus lines insurer

insurer not licensed to do business in the state

insurance for which there is no available market in the state

producer must make a diligent effort to place insurance with admitted company before seeking coverage in surplus lines market, usually receive 3-5 declinations (rejections) from licensed insurers

direct writer

in p&c insurance, this is an insurer whose sales representatives are employees and not independent contractors

insurer pays the employees salary and sales expenses “salary plus” arrangement

direct response

insurer sells directly to consumer by television or some other media

insurance company will do this to eliminate commission fees for brokers/agents, which could mean lower rates; they could also have a target audience

primarily used to sell simple or personal lines, homeowners, auto

not useful for commercial p&c, which involves complex contracts and rating considerations

benefits of using broker/agent

brokers/agents know what kinds of questions to ask

many direct response systems only sell the most basic coverages that excludes many loss exposures, and people are led to buy this

Group Insurance Marketing

methods to sell individual insurance policies to employer groups, labor unions, trade associations

products sold through group representatives

employees typically pay for insurance by payroll deduction