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CLU 323 > Chapter 18-Types of Life Insurance Carriers > Flashcards

Chapter 18-Types of Life Insurance Carriers Flashcards

1
Q

What are some characteristics of the nature and operation of life companies?

A
  • A stock company is owned by shareholders and mutual company is owned by policy owners
  • State insurance laws mandate that only a corporation may engage in the life insurance business because corporations are more permanent than partnerships

(mutual companies are not profit oriented but policy owners share on surplus with dividends)
(policy owners and the state watch management of mutual companies but stock companies also have stockholders watching)

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2
Q

What are some characteristics of a stock life insurance company?

A
  • Stock companies can issue both participating and non participating policies in most states
  • State regulation has the same level of severity for stock and mutual companies
  • It is usually easier to organize a new stock life company than a mutual since states require 1,000 applicants for policies and payment before the business can begin operations
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3
Q

What are some characteristics of the operation of life companies?

A
  • Stockholders of life companies are limited by corporate charter or state law as to the extent they can profit on participating business
  • Stockholders elect the board of directors
  • Policy owners of a mutual company are both customers and owners of the company

(mutual companies may borrow funds from external sources)

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4
Q

What are some characteristics of the organization of a new life company?

A
  • The general procedure for organizing a new company is the same for both stock and mutual companies
  • The company may not issue a policy until its charter has been approved and a license issued
  • The owners may vote at annual meetings with both stock and mutual companies
  • The mutual companies management knows that it is mainly unaffected by the policy owners right to vote

(no stockholders in a mutual company)

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5
Q

What are valid reasons for a mutual life company to demutualize?

A
  • Increase ability to raise capital
  • Permit more rapid growth in premium writing and develop new insurance products (common/preferred stock, convertible debt, warrants, etc)
  • Strengthen a weak financial statement
  • Allow company diversification in the financial services area

(the are hardly advantages to mutualizing a stock company into a mutual company but it can be done)

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6
Q

What are some of the advantages of demutualization?

A
  • The availability of non cash incentives for attracting key personnel (like stock)
  • Possible tax savings (Deficit Reduction Act of 1984 limited the deductibility of dividends that mutual companies pay policy owners)

(demutualizing means allocating surplus to policy owners, which depletes it and does not free it)

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7
Q

What are the current attitudes and state laws regarding demutualization?

A
  • Some states have created laws that protect mutual company policyholders during demutualization
  • Many states acknowledge that demutualization is to survival
  • Now there is increased confidence in the states ability to provide regulatory framework for the demutualization process

(some states have repealed prohibitions of demutualization and have opted to protect the interest of policy owners during the process)

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8
Q

What are the basic steps in the demutualization?

A
  • A minimum number of board members must adopt and submit a plan to the Insurance Commissioner in the insurer’s state of domicile (approval of the Insurance Commissioner is needed under all circumstances)
  • Must be shown to be fair to policy owners
  • If securities are issued to the public, registration with the SEC is required
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9
Q

What are some characteristics of the pure conversion approach to demutualization?

A
  • Permitted by majority of the 50 states
  • State law mandates distribution of existing surplus to policy owners
  • The common law approach is achieved by amending the insurance company’s articles of incorporation (the common law approach is highly suspect and may be challenged by the Insurance Commissioner)
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10
Q

What are some characteristics of mutual company conversion by merger or bulk reinsurance?

A
  • Under the bulk reinsurance approach, the mutual company transfers all of its insurance business to a stock company
  • Under the merger approach, a mutual company purchases a stock company
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11
Q

What are some characteristics of nongovernmental, noncommercial life insurance companies?

A
  • Fraternal benefit societies provide life contracts that contain most of the provisions found in commercial insurer contracts
  • Few states allow savings banks to market life insurance and those 3 states limit the amount of savings bank life insurance an applicant may buy

(premiums are not actuarial based)

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12
Q

What are some characteristics of the boat of directors?

A
  • The board selects the company’s president and senior officers
  • The board checks on the effectiveness of the company’s officers
  • Performs the same duties for stock and mutual companies

(standing committees are active during the year, outside of board of directors meetings)

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13
Q

What are some characteristics of the levels of authority for life companies?

A
  • 4 levels of authority
  • Board of directors and several board committees create the top level of authority
  • Executive officers are the second level of authority
  • Managerial level is the third level of authority
  • Supervisory level is the fourth level and is in charge of subdivisions of departments
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14
Q

What committee’s purpose is determining the coverage the company will market and the territories?

A

Executive Committee

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15
Q

What are some characteristics of important committees of life companies?

A
  • Investment committee oversees all investment practices (investment department handles daily activities)
  • Tax committee analyzes and evaluates tax implications of company practices
  • Claims committee exercises general control over the payment of claims
  • The audit committee supervises internal and external audits (does not conduct audits)

(investment committee ensures assets are maximizing cash flow)

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16
Q

What are some characteristics of the managers span of control?

A
  • The larger the number of people reporting to the manager, the wider their span of control (fewer levels needed)
  • The simpler/more repetitive the tasks performed by those being supervised, the broader a manager’s span of control may be
  • The higher the turnover rate of the supervised, the more narrow a manager’s span of control should be
  • The fewer the levels of organizational structure, the fewer expenses
17
Q

How are life company operations departmentalized?

A
  • Functional
  • Geographical
  • Product
18
Q

What are some characteristics of a life company’s actuarial department?

A
  • Determine Reserve and non forfeiture values
  • Develop data for determining policy owner dividends
  • Handle mathematical operations
19
Q

What are some characteristics of acquisitions?

A
  • Mutual companies can acquire insurers but cannot be acquired
  • Stock companies can acquire insurers and be acquired
  • In friendly acquisitions, the company being purchased accepts the offering price for its outstanding stock
  • Out of state acquisitions must be approved by both stockholders and the Insurance Commissioner in each state
  • The acquiring company can do anything it wishes with the assets of the acquired company after the acquisition is complete, including repaying debts used to make the purchase
20
Q

What are some characteristics of a merger?

A
  • A company in a weak financial condition may obtain financial strength with a merger
  • Expansion into a new geographical area may be more economical with a merger than launcher its own marketing in that area
  • Mergers may require large expenditures to cover legal and accounting costs
  • Stockholders who refuse to approve an exchange of stock must be paid a fair market value for their stock
21
Q

What are some characteristics of a holding company that brings two or more companies together?

A
  • May bring together companies that market different products or services
  • A mutual insurer can be a holding company
  • A stock insurer can organize an upstream non insurance holding company and the parent company would be outside the scope of the state’s insurance regulatory authority
22
Q

What was the NAIC’s Holding Company System Regulatory Act designed to achieve?

A
  • Facilitate insurer diversification
  • Disclosure of relevant information about each insurer’s control
  • Maintenance of adequate insurer surplus, relative to liabilities and financial needs
  • Maintenance of each insurer’s operating identity

(most insurer insolvency of the 80’s involved property and liability companies)

23
Q

What are some characteristics of antitrust law treatment of insurance acquisitions and mergers?

A
  • Prior to the 60’s, the federal government showed little interest in challenging insurance acquisitions and mergers
  • Today, applying federal antitrust laws to insurance companies has become a fact of life
  • If Congress does not change the current balance between state and federal authority, dual assertion of anti trust law and state regulation authority can expect to continue
24
Q

What are some characteristics of the William Act?

A
  • After a tender offer, the offer must provide the SEC and target company shareholders with pertinent information
  • All shares of the target company must be purchased at the same price
  • State government protection of policy owners from adverse acquisitions depend on the scope of the McCarran Act
  • The Supreme Court held in SEC vs National Securities Inc, that a state Insurance Commissioner’s approval of a acquisition was the regulation of securities and not the business of insurance

(state holding company laws are concerned with the protection of policy owners and the competitiveness of the insurance marketplace)

25
Q

What are the approaches to demutualization?

A
  • Pure conversion
  • Merger conversion
  • Bulk reinsurance
26
Q

What are some other form of insurers outside of commercial insurers?

A
  • Fraternal benefit societies
  • Assessment associations
  • Savings Banks

(also the VA, SSA, and WI are insurers)

CLU 323 (24 decks)

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