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Chapter 25Chapter 25TYPES OF INSURERS TYPES OF INSURERS

AND MARKETING AND MARKETING SYSTEMSSYSTEMS

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LECTURE OUTLINE LECTURE OUTLINE

I. I. Types of Private Insurers Types of Private Insurers II.II. Agents and Brokers Agents and Brokers III. Types of Marketing Systems III. Types of Marketing Systems IV. Mass Merchandising of IV. Mass Merchandising of

Property and Liability Insurance Property and Liability Insurance

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Types of Private Types of Private InsurersInsurers

A. A. Stock InsurersStock Insurers Ownership and governance: owned by stockhOwnership and governance: owned by stockh

olders olders Status of the policy owner: contracts are nonaStatus of the policy owner: contracts are nona

ssessable ssessable Dominant in the property and liability industryDominant in the property and liability industry

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

B. B. Mutual Insurers Mutual Insurers Ownership and governance: owned by policy owners Ownership and governance: owned by policy owners Dominant in the field of life insurance Dominant in the field of life insurance There are several types of mutual insurers,including thThere are several types of mutual insurers,including th

e following:e following: assessment mutualassessment mutual : an insurer that the right to assess p : an insurer that the right to assess p

olicyowners an additional amount if the experience is uolicyowners an additional amount if the experience is unfavorable.nfavorable.

Advance premium mutualAdvance premium mutual : owned by the policyowners, : owned by the policyowners,but it does not issue an assessable policy.but it does not issue an assessable policy.

Factory mutualFactory mutual :a specialized insurer that insures only s :a specialized insurer that insures only superior properties.uperior properties.

Fraternal insurerFraternal insurer: a mutual insurer that provides life an: a mutual insurer that provides life and health insurance to members of a social or religious ord health insurance to members of a social or religious organization .ganization .

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

B.B. Mutual Insurers (Continued)Mutual Insurers (Continued) Changing corporate structure of mutuaChanging corporate structure of mutua

l insurers because of mergers, demutual insurers because of mergers, demutualization, and formation of mutual holdilization, and formation of mutual holding companiesng companies

Demutualization means that a mutual iDemutualization means that a mutual insurer is converted into a stock insurer. nsurer is converted into a stock insurer.

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Types of Private Types of Private Insurers (Continued)Insurers (Continued) There are three principal methods by which a There are three principal methods by which a

mutual insurer can convert to a stock insurer. mutual insurer can convert to a stock insurer. (See Exhibit 25.1)(See Exhibit 25.1)

Pure conversionPure conversion:a mutual insurer amends its :a mutual insurer amends its articles of incorporation and is reorganized as articles of incorporation and is reorganized as a stock insurer.a stock insurer.

MergerMerger:a mutual insurer and stock insurer :a mutual insurer and stock insurer are joined together as a single company,and are joined together as a single company,and the stock insurer is the surviving companythe stock insurer is the surviving company

Bulk reinsuranceBulk reinsurance:a mutual insurer cedes all of :a mutual insurer cedes all of its assets and liabilities to a stock its assets and liabilities to a stock company,and the mutual insurer is then company,and the mutual insurer is then dissolved.dissolved.

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Exhibit 25.1 Alternative Exhibit 25.1 Alternative Modes of Modes of

DemutualizationDemutualization

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Exhibit 25.2 Mutual Exhibit 25.2 Mutual Holding Company Holding Company

IllustrationIllustration

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

C. C. Reciprocal Exchange Reciprocal Exchange The reciprocal is managed by an attorney-in-The reciprocal is managed by an attorney-in-

fact, usually a corporation that is authorized to fact, usually a corporation that is authorized to seek new members, pay losses, collect seek new members, pay losses, collect premiums, and perform other administrative premiums, and perform other administrative duties. duties.

A A reciprocalreciprocal is an unincorporated mutual. In its is an unincorporated mutual. In its purest form, insurance is exchanged among purest form, insurance is exchanged among the members; each member of the reciprocal the members; each member of the reciprocal insures the other members and, in turn, is insures the other members and, in turn, is insured by them. Thus, there is an exchange of insured by them. Thus, there is an exchange of insurance promises; hence the name insurance promises; hence the name reciprocal reciprocal exchange. exchange.

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

D. D. Lloyd's Associations Lloyd's Associations Lloyd's of LondonLloyd's of London American LloydsAmerican Lloyds

Lloyd's of LondonLloyd's of London Lloyd’s technically is not an insurance Lloyd’s technically is not an insurance

company,but is an association that provides company,but is an association that provides physical facilities and services to the physical facilities and services to the members for selling insurance.members for selling insurance.

The insurance is actually written by the The insurance is actually written by the various syndicates that belong to Lloyd’s.various syndicates that belong to Lloyd’s.

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

Lloyd's of London (Continued)Lloyd's of London (Continued) The individual members(called Names) The individual members(called Names)

who belong to the various syndicates who belong to the various syndicates have unlimited liability with respect to have unlimited liability with respect to insurance written as individuals.insurance written as individuals.

Corporations with limited liability can join Corporations with limited liability can join Lloyd’s of London.Lloyd’s of London.

Individual members must also meet Individual members must also meet stringent financial requirementsstringent financial requirements

Lloyd’s is licensed only in a small number Lloyd’s is licensed only in a small number of jurisdictions in the United States.of jurisdictions in the United States.

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Types of Private Types of Private Insurers (Continued)Insurers (Continued)

E. E. Blue Cross and Blue Shield plans Blue Cross and Blue Shield plans F. F. Health Maintenance Organizations Health Maintenance Organizations

(HMOs) (HMOs)

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Agents and Brokers Agents and Brokers

A. A. Legal Status of an Agent Legal Status of an Agent An agent is someone who legally An agent is someone who legally

represents the insurer and has the represents the insurer and has the authority to act on the insurer’s behalf.authority to act on the insurer’s behalf.

There is an important difference There is an important difference between a life insurance agent and a between a life insurance agent and a property and liability insurance agent:property and liability insurance agent:A life insurance agent usually does A life insurance agent usually does

not have the authority to bind the not have the authority to bind the company.He or she is merely a company.He or she is merely a soliciting agent who induces persons soliciting agent who induces persons to apply for life insurance.to apply for life insurance.

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Agents and Brokers Agents and Brokers (Continued)(Continued)

There is an important difference There is an important difference between a life insurance agent and a between a life insurance agent and a property and liability insurance agent: property and liability insurance agent: (Continued)(Continued)

In contract, a property and liability In contract, a property and liability insurance agent typically has the insurance agent typically has the power to bind the company power to bind the company immediately with respect to certain immediately with respect to certain types of coverage.types of coverage.

This relationship is normally created This relationship is normally created by a binder,which is temporary by a binder,which is temporary evidence of insurance until the policy evidence of insurance until the policy is actually issued.is actually issued.

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Agents and Brokers Agents and Brokers (Continued)(Continued)

B. Brokers B. Brokers Represent insureds Represent insureds May provide services such as risk management, loMay provide services such as risk management, lo

ss control, and knowledge of commercial insuranss control, and knowledge of commercial insurance marketsce markets

Brokers are important in the surplus lines market.Brokers are important in the surplus lines market. Surplus lines refer to any type of insurance for whicSurplus lines refer to any type of insurance for whic

h there is no available market within the state, and h there is no available market within the state, and the coverage must be placed within a nonadmitted the coverage must be placed within a nonadmitted insurer.insurer.

A nonadmitted insurer is an insurer not licensed to A nonadmitted insurer is an insurer not licensed to do business in the state.do business in the state.

A surplus lines broker is a special type of broker whA surplus lines broker is a special type of broker who is licensed to place business with a nonadmitted io is licensed to place business with a nonadmitted insurernsurer

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Agents and Brokers Agents and Brokers (Continued)(Continued)

What What is the legal distinction is the legal distinction between an agent and a broker? between an agent and a broker? An agent is someone who legally An agent is someone who legally

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

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Types of Marketing Types of Marketing Systems Systems

A. Life Insurance Marketing Systems A. Life Insurance Marketing Systems Agency building systemAgency building system: a marketing system b: a marketing system b

y which an insurer builds its own agency force y which an insurer builds its own agency force by recruiting, financing, training, and supervisiby recruiting, financing, training, and supervising new agents. ng new agents.

Nonbuilding agency systemNonbuilding agency system : : a marketing syst a marketing system by which an insurer sells its products throuem by which an insurer sells its products through established agents who are already engagegh established agents who are already engaged in selling life insurance. Under this system, ad in selling life insurance. Under this system, an insurer enters into contracts with successful n insurer enters into contracts with successful agents who agree to sell the insurer's products.agents who agree to sell the insurer's products.

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Types of Marketing Types of Marketing Systems (Continued)Systems (Continued)

A. Life Insurance Marketing Systems A. Life Insurance Marketing Systems (Continued) (Continued) Direct response systemDirect response system : : a marketing a marketing

system by which life and health system by which life and health insurance is sold directly to customers insurance is sold directly to customers without the services of an agent. without the services of an agent. Insurers use web sites, television, Insurers use web sites, television, telephones, mail, and other mass telephones, mail, and other mass media to market the insurance.media to market the insurance.

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Types of Marketing Types of Marketing Systems (Continued)Systems (Continued)

B. Property and Liability Insurance Marketing B. Property and Liability Insurance Marketing Systems Systems Independent agency system:Independent agency system:

the agent is an independent businessperson the agent is an independent businessperson who represents several companies. The who represents several companies. The agent is authorized to write business on agent is authorized to write business on behalf of these companies and, in turn, is behalf of these companies and, in turn, is paid a commission based on the amount of paid a commission based on the amount of business produced. business produced.

the agency owns the expirations or renewal the agency owns the expirations or renewal rights to the business. rights to the business.

the independent agent is compensated the independent agent is compensated solely by commissions that vary by line of solely by commissions that vary by line of insurance. insurance.

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Types of Marketing Types of Marketing Systems (Continued)Systems (Continued)

B. Property and Liability Insurance B. Property and Liability Insurance Marketing Systems (Continued)Marketing Systems (Continued) Direct writerDirect writer: the salesperson is an : the salesperson is an

employee, company absorbs all employee, company absorbs all selling expenses, and employees are selling expenses, and employees are compensated on a salary/bonus basis.compensated on a salary/bonus basis.

Exclusive agency systemExclusive agency system:the agent :the agent represents only one company, does represents only one company, does not own expirations, gets lower not own expirations, gets lower commissions, and, in exchange, commissions, and, in exchange, receives strong support from the receives strong support from the company. company.

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Types of Marketing Types of Marketing Systems (Continued)Systems (Continued)

B. Property and Liability Insurance B. Property and Liability Insurance Marketing Systems (Continued)Marketing Systems (Continued) Direct response systemDirect response system: insurers sell to : insurers sell to

selected market segments using the selected market segments using the Internet, television, or other mass Internet, television, or other mass media. media. No agents are used to sell the No agents are used to sell the insurance. insurance.

Multiple distribution systemMultiple distribution system:using more :using more than one system to sell insurance.than one system to sell insurance.For For example, some independent insurers example, some independent insurers also sell directly to consumers over the also sell directly to consumers over the Internet or by television.Internet or by television.

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Mass Merchandising of Mass Merchandising of Property and Liability Property and Liability

Insurance Insurance A. A. Definition: a plan for insuring Definition: a plan for insuring

members of a group at reduced members of a group at reduced premiums premiums

B. B. Basic Characteristics Basic Characteristics Sold to individual members Sold to individual members Individual underwriting Individual underwriting Possible lower premium rates Possible lower premium rates Payment by payroll deduction Payment by payroll deduction Employer usually does not contribute. Employer usually does not contribute.