Ch. 5: Types of Insurers and Marketing Systems

Question 1

How big is the Private Insurance Industry

Answer 1

The Private Insurance Industry employed 2.6 million people and insurers paid $20.5 billion in premium taxes
* Premiums written worth over $1.13 Trillion:
* 55% Life and Health | 45% Property and Casualty

Statistics are from 2016

Question 2

What are the major types of private insurers?

Answer 2

• Stock Insurers
• Mutual Insurers
• Lloyd’s of London

Question 3

What is a stock insurer?

Answer 3

A stock insurer is a corporation owned by stockholders

Ex. Allstate, Progressive, MetLife, Travellers,

Question 4

What is the objective of a stock insurer?

Answer 4

A stock insurer’s objective is to earn profits for the stockholders by increasing stock value and paying dividends

Question 5

What is a mutual insurer?

Answer 5

A mutual insurer is a corporation owned by the policyholders

Ex. State Farm, Nationwide, New York Life, Northwestern Mutual

Question 6

How are profits distributed in a mutual insurer?

Answer 6

In a mutual insurer, profits are distributed by dividends or rate reductions

Question 7

What are the types of mutual insurers?

Answer 7

• Assessment Mutual
• Advance Premium Mutual
• Fraternal Mutual

Question 8

What is an Assessment Mutual?

Answer 8

An assessment mutual is where the insurer has the right to assess policyholders an additional amount if the insurer’s financial operations are unfavorable

Question 9

What is an Advanced Premium Mutual?

Answer 9

An advanced premium mutual is where the insurer does not issue assessible policies

Question 10

What is a Fraternal Mutual?

Answer 10

A fraternal mutual provides life and health insurance to members of a social or religious organization

Question 11

What is Lloyd’s of London?

Answer 11

Lloyd’s of London is the world’s leading market that provides services and physical facilities for its members to write specialized lines of insurance

NOT an Insurer

Question 12

What does Lloyd’s structure look like?

Answer 12

Lloyd has brokers that represent policyholders to arrange coverage with syndicates, and these syndicates offer insurance contracts in the market

Question 13

Lloyd’s Syndicates

Answer 13

• Members join together and provide capital to form syndicates, receiving profits or bearing losses
• Most members are corporations or limited partnerships
• “Names” are high net worth individuals

The Syndicates must meet Lloyd’s strict capital requirements

Question 14

Lloyd’s managing agents and underwriters?

Answer 14

• Managing Agents manage the syndicates, who typically specialize in certain lines
• Underwriters work for the syndicates to assess risks and determine premiums

Question 15

What is an Insurance Agent?

Answer 15

An Insurance Agent legally represents the principal (insurance company) and has the authority to act on the principal’s behalf
* The principal is legally responsible for all acts of an agent when the agent is acting within the scope of authority

Typically has the authority to bind coverage

Question 16

What is an Insurance Binder?

Answer 16

An insurance binder provides temporary coverage until the policy is actually written
* can typically be provided by Property and Casualty (P&C) agents
* Life Insurance agent susually have no authority to issue a binder

Question 17

Why can’t Life Insurance Agents issue a binder?

Answer 17

A binder is most commonly used in P&C insurance, which has a lot shorter underwriting period than Life Insurance.

Question 18

What are the two types of Insurance Agents?

Answer 18

Independent and Exclusive/Captive

Question 19

What is an Independent Agent?

Answer 19

Independent Agents usually represent several unrelated insurers

Question 20

What is an Exclusive/Captive Insurer?

Answer 20

An Exclusive/Captive Insurer only represent on insurer or group of insurers under a common ownership

Question 21

What is an Exclusive Agency System?

Answer 21

It is an insurance distribution system through which agents represent only one insurer or group of insurers under common ownership

(Captive Agents)

Question 22

Do Agents own the expirations or renewal rights to the policies in an Exclusive Agency System?

Answer 22

No. Agents do not own the expirations or renewal rights to the policies in an exclusive agency system.

Question 23

Where are Exclusive Agency Systems frequently used?

Answer 23

Exclusive Agency Systems are frequently used in perosnal line and with very small businesses.

Question 24

What are carriers is an Exclusive Agency System?

Answer 24

Carriers provide resources and training since agents only sell products for the insurance company/principal

Question 25

What is an Independent Agency Distribution System?

Answer 25

An Independent Agency System is where agents sell insurance through severl unrelated insurers

Question 26

Does the agency own the expirations or renewal rights to the business in an Independent Agency?

Answer 26

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

Question 27

What is the advantage of an Independent Agency?

Answer 27

The advantage of an Independent Agency is that the agent may find coverage better suited to the client since it is not limited to only one insurer

Question 28

What may agents be authorized to do in an Independent Agency?

Answer 28

Agents may be authorized to adjust small claims and provide loss control services to their insureds

Question 29

What is an Insurance Broker?

Answer 29

An Insurance Broker is someone who legally represents the insured and:
* solicits applications and places coverage with the appropriate insurer
* typically works with several unrelated insurers
* is paid a commission from the insurer
* in general, does not have the authority to bind

Question 30

What is a Large Brokerage Firm?

Answer 30

Large Brokerage Firms do what Brokers do on a big scale and may provide risk management and loss control services, and may have knowledge of highly specialized insurance markets

AON, Lockton, Marsh

very important in Commercial P&C Coverage

Question 31

Similarities between brokers and independent agents?

Answer 31

• Both solicit applications and attempt to place coverage with an appropriate insurer
• both can work with a number of insurance companies
• both are typically paid on a commission structure (% of premium)

Differences on graph in notes

Question 32

What is a Surplus Lines Broker

Answer 32

A surplus lines broker is one who is licensed to place business with a nonadmitted insurer

Question 33

What are surplus lines?

Answer 33

Surplus lines refer to any type of insurance for which there is no available market in the state

Question 34

What is a nonadmitted insurer?

Answer 34

A nonadmitted insurer is an insurer that isn’t licensed to do business in the state

Question 35

What are some other distribution systems?

Answer 35

Two more are: Direct Writer and Direct Response

Question 36

What is a direct writer?

Answer 36

A direct writer is insurer where the saleperson is an employee of the company and not an independent contractor
* they are usually compensated on a “salary plus” arrangement

Question 37

What is a direct response?

Answer 37

A direct response is where an insurer sells directly to the consumer via TV or another form of media

Question 38

What is group insurance marketing?

Answer 38

Group insurance marketing refers to methods to sell individual insurance policies to employer groups, labor unions, and trade associations
* products are sold through group representatives -> employees who receive salary and incentive payments based on salary
* employees typically pay for coverage through payroll deduction