Unit 1 - Overview of Insurance Operations

Name Patricia Ramsey

:

Briefly define all of the following unit terms

Proprietary insurer
Insured formed for the purpose of earning a profit for its owners. Includes stock insurers,
Lloyds of London, & insurance exchanges. Most proprietary insurers in the United States
are stock insurers. These types of insurers are owned by their stockholders; stockholders
supply the capital that is needed to form the insurer and provides the additional capital
that they need for operating. These insurers are operating for a profit. The stockholders, in
return, receive stock dividends, increased stock value, or sometimes both. Stockholders
can elect the board of directors, which controls the activities of the insurers, as well as
creates and oversees the operations of the company. The Board of Directors also appoints
the CEO to carry out the operations of the company to keep it running smoothly and in the
best interests of the stockholders. Lloyds of London is not an insurer but a syndicate of
insurers and Lloyds has the physical and procedural facilities to write insurance. All
members of Lloyds are investors that want to earn a profit from insurance operations. The
insurance is written on behalf of individual members or syndicate corporations in Lloyds
and the liability of the member is limited to the amount of insurance they agree to be
liable for. Lloyds provides insurance for unusual loss exposures. American Lloyds is based
in Texas and is similar to Lloyds of London because its members are only liable for their
part of the insurance that is written on behalf of them. An insurance exchange acts as an
insurance marketplace where members underwrite any insurance/reinsurance purchased
on the exchange. All members have limited liability and are individuals or belong to
syndicates or corporations.

Mutual insurer A mutual insurer is one that is owned by its policyholders and formed as a corporation for
the purpose of providing insurance to them; it is a cooperative insurer. They provide low
cost insurance to their policyholders (the owners of the insurer). A traditional mutual
insurer has no common stock and no stockholders. Policyholders have rights similar to
stockholders, including voting rights and electing the Board of Directors. Profit is only
retained to increase surplus, given back to the policyholders as dividends, or used to
ensure the future financial health of the organization.

1 FINA 490 Fall 2014

Reciprocal insurance exchange
Fair access to insurance
requirements (FAIR) plans
Residual market
Surplus lines broker
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An insurer owned by its policyholders, formed as an unincorporated association for the
purpose of providing insurance coverage to its members (subscribers) and managed by an
attorney in fact. Members agree to mutually insure each other, sharing both the profits and
the losses in the proportion to the amount of insurance purchased by the member.
Reciprocal comes from the sharing of responsibility of all subscribers to each other. The
subscribers contract with an individual or organization for the operations of the reciprocal,
since most are not experts at running an insurance operation. The Manager is called an
attorney-in-fact and they are in charge of running the operation. Some of the reciprocals
are formed for tax benefits.
An insurance pool through which private insurers collectively address an unmet need for
property insurance on urban properties, especially those that have a high risk for loss from
riot or civil commotion. They are required by law in half of the United States. The pools
that are created provide insurance to qualified property owners that are unable to obtain
coverage in the standard market. There are pools in Florida that provide coverage to
homeowners that cannot get insurance for windstorm coverage in storm-prone areas.
Protection for pools like theses are underwritten by private insurers, not through the state
they are located in. Sometimes, the state or federal governments will act as an insured if
necessary.
Insurers and other organizations that make insurance available through a shared risk
mechanism to those who cannot obtain coverage in the admitted market. For example,
this makes liability insurance available to almost all licensed drivers. The cost of operating
these residual markets is spread among all private insurers selling auto insurance in a
given state. These state run plans spread the cost of operation among everyone.
A person or firm that places business with insurers not licensed in the state in which the
transaction occurs but that is permitted to write insurance because coverage is not
available thought he standard market insurers. A non admitted insurer (in this case a
surplus lines broker) has not been granted a license to operate in a given state. Segment
of insurance market that allows consumers to buy property and casualty insurance through
the state regulated insurance market, where the brokers can negotiate pricing based on
the risks secured and design the insurance coverages specific to the insured. They can
adapt quickly to the changing market conditions to those that need unique insurance
protection.
Independent agency and
brokerage marketing system
Direct writer marketing system
Exclusive agency marketing
system
Distribution channel
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An insurance marketing system where producers (agents or brokers) who are independent
contractors, sell insurance, and usually represent several unrelated insurers. They dont
work directly for a carrier, but they sell only that carriers products. They can earn
commission on their sales to the customers, which are the insured. Examples of these
would include Allstate and Nationwide agents. An independent agent represents several
insurance companies that have appointed the agent to sell specific lines of insurance on a
non-exclusive basis. Independent agents are not supported by the companies they
represent but have benefits because they can shop around on the clients behalf for the
best insurance and possibly a better commission. Independent agents also dominate in the
area of commercial property and casualty insurance, with about 80 percent of the market.
Independent agents also own their own book of business, and earn renewal commissions
as long as they maintain a contract with the issuing company.
An insurance marketing system that uses sales agents who are direct employees of the
insurer. The carrier of the insurance owns the client relationship and the sales employees
dont earn commission. They are usually at a call center at a central location and you can
reach a sales associate through a 1-800 number and it is not face to face interaction.
Companies that use the direct writer method are GEICO, USAA, and progressive.
An insurance marketing system under which agents contract to sell insurance exclusively
for one insurer (or for an associated group of insurers). The main reason an insurance
agent will work as an exclusive agent is financial. The company provides an office,
administrative staff to process paperwork, ongoing training, significant bonus and other
motivational programs, and an impressive national advertising budget. When consumers
respond to advertising, the company directs them to an exclusive sales agent in their area,
providing extensive lists of prospects to agents. Some exclusive agents earn a salary, but
most only earn a commission based on their sales. Exclusive agents usually earn
commissions on their renewals as long as they remain contracted with the issuing
company.
The channel used by the producer of a product or service to transfer that product or a
service to the ultimate customer. These are used to promote products and services, and
communicate with existing and prospective insureds. Examples of channels are call
centers, the internet, direct response, group marketing, and financial institutions.
Distribution systems are through: independent agency and brokerage marketing system,
direct writer marketing system, and exclusive agency marketing systems.
Lloyds of London
Domestic insurer
Distribution channels and
examples
Diversifying risk
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Lloyds of London is a syndicate of investing members in the insurance industry. It provides
the physical and procedural facilities for Lloyds members to write insurance. Lloyds is a
marketplace where you can find many different members (investors) who want to earn a
profit in the insurance business. Insurance is written at Lloyds on or on behalf of members
(either individuals or corporations) who financially back the insurance that is written.
Individuals are not individually liable for their obligations assumed when backing the
insurance policies, but because they are syndicate of insurers, collectively they assume
responsibility. The liability of the member is limited to the amount that the member agrees
to write. Lloyds covers risks that are difficult loss exposures and underwrites much of the
worlds aviation and marine insurance. Lloyds insurance can be purchased in the US
through excess and surplus lines brokers that are cover holders of Lloyds insurance and
write on behalf of the members in London.
Insurers regulated at the state level are domestic insurers. They are incorporated within a
specific state or they are formed under the laws of that particular state. An insurer that is
operating within its own domiciled state when it is doing business in the state which it is
incorporated or was formed. Reciprocal insurance exchanges are the only unincorporated
insurers allowed in most states; Lloyds and insurance exchanges are only permitted under
law in a few states.
The channel used by the producer of a product or service to transfer that product or a
service to the ultimate customer. These are used to promote products and services, and
communicate with existing and prospective insureds. Examples of channels are call
centers, the internet, direct response, group marketing, and financial institutions.
This is an extremely important goal for insurance companies toady. The goal is to reduce
risk by diversification, because they are in the business to make money. It is an especially
important goal for property and casualty insurers. The high concentration of losses in
certain geographical areas makes it imperative for insurance companies for insurance
companies to diversify their types of coverage and location of risks. For example, if an
insurance company was to have all of their loss exposures on the coast of Florida, if a
hurricane or wind storm hit, the company that insured those losses would be bankrupt. But
if they had some properties covered in Florida and some in Nebraska, they have different
exposures so they have diversified their risk to make it less likely that the company will go
insolvent. Meeting this goal of diversification is important for the insurers goals of earning
a profit and fulfilling their duty to society.
Duty to society
Probable maximum loss
Identify the four classifications
that may be used to distinguish
property-casualty insurers from
one another
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All corporations have an obligation to promote the well being of society. The minimum duty
that they have is to avoid causing any public harm. Many insurers contribute funds and
volunteer time to medical, educational, and other public service organizations. Many
insurance companies also have employee benefit plans that provide for the current and
future well being of their employees. Benefits include medical insurance, disability
insurance, retirement plans, employee assistance programs, and other programs that
benefit employees and retirees to help minimize the use of public resources. Insurers
participation in philanthropic organizations and employee benefit programs helps with
employee retention and attracts qualified candidates to their respective companies.
Insures maintain well-qualified, knowledgeable staff, which promotes the profit and
customer needs goals. The required use of funds for such programs also competes with the
customer needs and profit goals. The insurer must balance the use of funds to best meet
all of these goals.
The largest loss that an insured is likely to sustain. A property loss control term that
describes the max loss expected at a given location with a complete loss. It can be
expressed in dollars or a percent of the total value of the property. Most commonly referred
to as PML. It is determined through assessing the risk associated with an insureds
property, which then helps sets the premium.
1. Legal form of ownership proprietary (stock insurers, Lloyds of London & American
Lloyds, and insurance exchanges); cooperative (mutual insurers, reciprocal insurance
exchanges, fraternal organizations, captive insurers, risk retention groups, purchasing
groups); pools; government insurers
2. Place of incorporation domestic, foreign, alien
3. Licensing State admitted (standard market) v. nonadmitted (excess and surplus lines)
4. Insurance distribution systems and channels independent agency and brokerage
marketing system; direct writer marketing system; exclusive agency marketing system
Explain how stock and mutual
companies differ
Explain the role of each of these
type of insurers
Lloyds of London
Recirpicol insurance
exchanges
Describe what a domestic
insurer is
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Stock companies are owned by its stockholders and their goals are oriented on the benefit
of the stockholders. The goal of the company is to maximize shareholder value. Stock
insurance companies get capital from stockholders and capital from surplus in operations.
It is much easier to access capital to pay claims or to grow the companies than with Mutual
Companies. Mutual companies are owned by the policy holders and everything is to
benefit the policy holders. Any profits earned are given back to the stockholders in either
dividends or reduced premiums. Mutual companys policyholders share ownership in the
company and thus vote on the board of directors elections. Equity increases by retaining
net earnings.
An insurer owned by its policyholders, formed as an unincorporated association for the
purpose of providing insurance coverage to its members (subscribers) and managed by an
attorney in fact. Members agree to mutually insure each other, sharing both the profits and
the losses in the proportion to the amount of insurance purchased by the member.
Reciprocal comes from the sharing of responsibility of all subscribers to each other. The
subscribers contract with an individual or organization for the operations of the reciprocal,
since most are not experts at running an insurance operation. The Manager is called an
attorney-in-fact and they are in charge of running the operation. Some of the reciprocals
are formed for tax benefits.
Lloyds of London is a syndicate of investing members in the insurance industry. It provides
the physical and procedural facilities for Lloyds members to write insurance. Lloyds is a
marketplace where you can find many different members (investors) who want to earn a
profit in the insurance business. Insurance is written at Lloyds on or on behalf of members
(either individuals or corporations) who financially back the insurance that is written.
Individuals are not individually liable for their obligations assumed when backing the
insurance policies, but because they are syndicate of insurers, collectively they assume
responsibility. The liability of the member is limited to the amount that the member agrees
to write. Lloyds covers risks that are difficult loss exposures and underwrites much of the
worlds aviation and marine insurance. Lloyds insurance can be purchased in the US
through excess and surplus lines brokers that are cover holders of Lloyds insurance and
write on behalf of the members in London.
Insurers regulated at the state level are domestic insurers. They are incorporated within a
specific state or they are formed under the laws of that particular state. An insurer that is
operating within its own domiciled state when it is doing business in the state which it is
incorporated or was formed. Reciprocal insurance exchanges are the only unincorporated
insurers allowed in most states; Lloyds and insurance exchanges are only permitted under
law in a few states.
Explain what it means when an
insurer is licensed in a state
List some common distribution
channels that insurers use to
promote products and services
and to communicate with
existing and prospective
insureds.
Explain how insurers earn
money to meet their profit goal
Explain why the goal of meeting
customers needs can often
conflict with the profit goal
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They are incorporated within a specific state or they are formed under the laws of that
particular state. An insurer that is operating within its own domiciled state when it is doing
business in the state which it is incorporated or was formed. Insurer is incorporated in a
specific state, and if they are not incorporated then they are formed under laws of that
state, i.e. domiciled. An insurer that is licensed in a state is an admitted or domestic
insurer.
Insurance agents, trade specific agents, insurance brokers, online internet portals, and
direct marketing. These are channels that are used by the producer of the product or by
the agent to transfer the product to the ultimate customer the insured. There are many
different ways that insurers can market their products, because of the increase in
technology, the possibilities of how to communicate information to consumers are endless.
It can be anything from a classic billboard on the highway, to mass emails, to apps, or
even ads on snapchat and Facebook. Word of mouth through insurance agents is always a
way that people will learn more about insurance and what products are offered.
Insurers charge a premium firstly to meet their goal of earning a profit and to cover their
operating costs. They then invest a portion of premium not needed to pay operating
expenses, their surplus. The return they earn on their investments is then paid to
investors, paid to fund future losses, and used to expand operations. The returns that they
earn can be from interest on the investments, dividends, and also from interest gains. The
insurance companys profit is the interest earned on premiums minus the expenses and
covered losses.
There is always a trade-off between meeting the customers needs and gaining a profit.
Obviously, all businesses want to be profitable in order to be successful. Insurance
companies are in the business to help people so its important that they balance both.
Offering high quality insurance at a price that customers can afford might not always
generate the profit the insured needs to attract and retain capital for growth and
sustainability. Good customer service attracts clients, but it is also very costly but bears
long term benefits for the insured. Some costs involved include IT training, call centers and
training for employees.
Explain how compliance with
legal requirements helps an
insurer meet its goals
Explain why diversifying risk has
become an emerging goal for
P&C insurers
Describe several ways that
insurers fulfill their duty to
society
Explain how an insurers
inefficiency in information
technology can conflict with the
insurers customer needs and
profit goals
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Insurance companies must be able to be responsible corporate citizens; it is important to
have a good reputation since they are in the business of helping people. They must have a
good reputation in the community be actively involved with the schools, in the
neighborhoods, and in philanthropic organizations. Being responsible in the community
also enhances the companys ability to attract capital and customers. If the company has a
good reputation, more people will want to do business with them because they are known
to do well in the community and to be honest and respectable.
Diversifying risk is an emerging goal for Property and Casualty Insurers because of the
dramatic increase in catastrophic losses over the last decade. The high concentration of
loss highlights the need to diversify and spread the risk over multiple types of businesses
forms and different geographical areas. The goals of the insurance companies remain to
earn a profit and fulfill the duty of society.
Many insurers contribute funds and volunteer time to medical, educational, and other
public service organizations. Many insurance companies also have employee benefit plans
that provide for the current and future well being of their employees. Benefits include
medical insurance, disability insurance, retirement plans, employee assistance programs,
and other programs that benefit employees and retirees to help minimize the use of public
resources. Insurers participation in philanthropic organizations and employee benefit
programs helps with employee retention and attracts qualified candidates to their
respective companies. Insures maintain well-qualified, knowledgeable staff, which
promotes the profit and customer needs goals. They can fulfill their duty through
contributing funding and employee time to service organizations but also through
employee benefit plans.
Technology is increasingly important today and even more relevant in the insurance
industry. Technology is a high paced industry and is constantly changing and improving.
The core IT systems are needed to retain historical information in the company. Insurers
are far behind most industries when it comes to technology, but if they took more
advantage of it, then they could increase their profit margin. Conflicting goals of the
company and fulfilling customers needs is relevant in technology because they need to be
more efficient in fulfilling customers requests through using technology, but that is costly.
Describe the advantages
(representing fewer constraints)
that large insurers have over
small insurers in meeting their
goals
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Larger insurers have more financial resources to stay up to date with technology and
invest more money in marketing research and product development. The larger the better,
there is just way more capital available to invest in new growth. Although small insurers
are usually more personal, large insurers can also become personal and have relationships
with their clients through agents representing them. It is also easier for smaller companies
to go insolvent than larger companies; if a small company has a devastating loss it might
not recover, while a large company has so many financial resources that it is not
devastating to their survival as a company.