1.2 Types of Insurers - Insurance Companies or Carriers Flashcards
What is a Stock Insurance Company?
A stock company is owned by stockholders or shareholders. Directors and officers, which are elected by stockholders, put in place a management team to carry out the company’s mission.
Stockholders may receive taxable corporate dividends as a share of the company’s profit when and if declared by the directors. However, dividends are not guaranteed. Traditionally, stock insurers issue Non-Participating policies, meaning that the policyholder is not entitled to receive any dividends.
What is a Mutual Insurance Company?
A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors is elected by policyholders. The directors and officers put in place a management team to carry out the company’s mission. Policyholders may receive non-taxable dividends as a return of any divisible surplus when and if declared by the directors.
Traditionally, mutual insurers issue Participating policies, meaning that policyholders are entitled to receive any dividends. The dividends represent the favorable experience of the company and result from excess investment earnings, favorable mortality, and expense savings. Dividends can be paid in cash, used to reduce premiums, left to accumulate at interest, and used to purchase paid-up additional insurance. Dividends are not guaranteed.
What is a Reciprocal Insurance Company?
A reciprocal insurance company is a group-owned insurer whose main activity is risk sharing. A reciprocal insurer is unincorporated, and is formed by individuals, firms, and business corporations that exchange insurance on one another. Each member is known as a subscriber, and each subscriber assumes a part of the risk of all other subscribers.
If premiums collected are insufficient to pay losses, an assessment of additional premium can be made. The exchange of insurance is affected through an Attorney-In-Fact, who is not required to be licensed in insurance.
What is Lloyd’s of London?
Lloyd’s of London is not an insurance company, but consists of groups of underwriters called Syndicates, each of which specializes in insuring a particular type of risk. Lloyd’s provides a meeting place and clerical services for syndicate members who actually transact the business of insurance.
Members are individually liable for each risk they assume, and coverage provided is underwritten by a syndicate manager, such as an attorney-in-fact or individual proprietor.
What are Fraternal Benefit Societies?
Fraternal benefit societies are primarily social organizations that engage in charitable and benevolent activities that can provide life and health insurance to their members. Membership typically consists of members of a given faith, lodge, order, or society. They are usually organized on a non-profit basis, and fraternal insurance producers represent the fraternal insurer and sell insurance to fraternal members.
What are Risk Retention Groups (RRG)?
Risk Retention Groups are group-owned insurers that primarily assume and spread the liability-related risks of its members. They are owned by their policyholders, and are licensed in at least one state. However, they may insure members of the group in other states.
Groups must be made up of a large number of homogeneous or similar units. Membership is limited to risks with similar liability exposures such as theme parks, go-cart tracks, or water slides. They must have sufficient liquid assets to meet loss obligations. Each member assumes a portion of the risks insured.
What are Self-Insurers?
Self-insurers assume all of the financial risk faced without transferring that risk to an insurer. Rather than paying premiums to a third party the self-insurer sets aside funds in an amount equal to or greater than the expected losses. If the losses are less than what is reserved to pay claims, it is a gain, otherwise, losses in excess of the reserve will require additional funding perhaps from on-going operation revenues.
This is generally an option only for large companies who may limit their risk by only self-insuring up to a certain dollar amount of risk and then acquiring insurance for dollar amounts in excess of that amount.
