Chapter 3: Types of Insurers and Their Marketing Systems

Question 1

A monoline specialty insurer?

Answer 1

Specializing in one line of coverage, such as medical

professional liability insurance.

Question 2

A domestic insurer

Answer 2

One doing business in the state where it is incorporated.
For example, New York Life Insurance Company is classified as a domestic insurer
when it does business in New York.

Question 3

A foreign insurer

Answer 3

One doing business in a state other than its state of incorporation.

Question 4

An alien insurer

Answer 4

An insurance company incorporated in another country but doing business in the
United States. An insurance company domiciled in Germany is an alien insurance
company when it does business in New York.

Question 5

Non-admitted insurer vs Admitted insurer

Answer 5

Admitted - is one that is licensed by a state insurance department to do business in a policyowner’s home state.
Non-admitted - is one that is not licensed or authorized
in the policyowner’s home state.

Question 6

Non-admitted insurers

Answer 6

Consumers are permitted to buy property and liability insurance from nonadmitted insurers when they
cannot purchase some needed coverage from an admitted insurer. Nonadmitted insurers generally provide insurance for policyowners that present underwriting challenges, have unique risks that are hard to evaluate, or require unusually high limits of insurance.

Question 7

Ways to Classify Private Insurers

Answer 7

1) By lines of insurance written
2) By domicile
3) Admitted vs Non-admitted
4) By legal form of organization (stock, mutual or other)
5) By marketing system

Question 8

stock insurance company

Answer 8

A stock insurance company is a corporation owned by stockholders. Shares of stock companies are usually traded on an organized stock exchange. Stockholders expect to earn a profit from their investment in insurance company stock. The stockholders elect the
members of the company’s board of directors and vote on other major issues facing the company, such as mergers or acquisitions.

Question 9

Mutual insurance companies

Answer 9

is a not for profit insurance company owned by its members. A mutual insurance company is organized primarily to provide insurance for its policyowners, rather than to seek a profit. Every policyowner is an owner of the company.

Question 10

Advance-Premium Mutuals

Answer 10

Advance-premium mutuals write all but a small percentage of total mutual insurance. Advance-premium mutuals issue nonassessable contracts in which the cost of the insurance is set when the policy begins.

Question 11

Assessment Mutuals

Answer 11

Some small mutual companies are called assessment mutuals. Policyowners may or may not pay an advance premium, but they can be assessed for a portion of the company’s losses and expenses at the end of the policy period. The policyowner’s liability for the assessment may be limited or unlimited with an assessment mutual.

Question 12

Demutualization

Answer 12

On balance, the number of mutual insurers in the United States is decreasing due to mergers, insolvencies, and intentional shifting of mutual companies to the stock form of organization—a process called demutualization.
Reasons why companies demutualize:

1) Raise new capital - Probably the most important reason for demutualization is to enable the insurer to raise capital quickly. A stock company, of course, can raise new capital by issuing stock, bonds, warrants, and other types of debt.
2) Insurer diversification - To be able to merge or Acquire new insurance companies.
3) non-cash executive compensation - To be able to facilitate the payment of certain noncash compensation to the insurance key executives.

Question 13

Mutual Holding Company

Answer 13

to overcome some of the disadvantages of either remaining a mutual or demutualizing. The mutual holding company directly or indirectly controls a stock
insurer. To be more specific, the mutual insurer creates a holding company controlled by the policyowners. The holding company then acquires at least 51 percent of the stock of a newly created stock insurance company that takes over the business of the former mutual insurer. The remaining stock can be sold to outsiders to raise additional capital for the new
insurance company.

Question 14

Fraternal insurer

Answer 14

A fraternal insurer is a special type of insurer providing insurancebenefits, particularly life insurance, for its members. The operations of the fraternal insurer
are closely related to and controlled by the bylaws of a lodge or a nonprofit social organization. Many fraternals are church oriented.2

Question 15

Reciprocal Exchanges

Answer 15

A reciprocal exchange is an unincorporated pool of funds owned by the policyholders and managed by an attorney-in-fact.

Question 16

Blue Cross and Blue Shield plans

Answer 16

Blue Cross and Blue Shield plans are organizations formed for the purpose of prepaying subscribers’ medical care benefits.

Blue cross plans - provide coverage primarily for hospital expenses.

Blue shield plans - provide coverage primarily for physicians’ services.

Question 17

HMO

Answer 17

health maintenance organizations

Question 18

Lloyd’s Associations

Answer 18

In contrast to stock and mutual insurers, which are corporations, Lloyd’s associations are groups of individual insurers. Insurance written by Lloyd’s associations accounts for only a small percentage of the total insurance sales in the United States.
However, Lloyd’s organizations are significant from a historical standpoint, and in the world market, they are very important for reinsurance and for insuring unusual and difficult risks.

Question 19

Binding Authority

Answer 19

When coverage is bound, it is immediately put into effect. Written evidence that coverage is bound usually exists in the form of a written binder, but an oral
binder is also valid. A binder is temporary evidence of insurance, and it is superseded when a written policy is issued.

Question 20

Brokers

Answer 20

• A broker is an independent contractor.
• A broker may be paid by the client, the insurer, or both.
• Brokers legally represent the policyowner rather than the insurer.
• Like agents, brokers can offer significant advice and counsel to their clients.

Question 21

surplus lines broker

Answer 21

places coverage with non-admitted insurers, who can often provide insurance when no other market is available in the state.

Question 22

Insurance Agent

Answer 22

An insurance agent is often referred to as a producer because he or she produces business for the insurance company or companies that he or she represents. Legally, any agent represents a principal; an insurance agent’s principal is an insurance company.

Question 23

direct-response marketing

Answer 23

Direct-response marketing provides the exception to the general rule that insurance is sold through agents. Under a direct-response marketing system, the insurer deals directly with the applicant, without agents, through employees of the insurer.

Question 24

General Agency System

Answer 24

Some life insurance companies use a general agency system. Historically, a general insurance agent was an individual entrepreneur granted a franchise by an insurer to market the insurer’s products in a specified geographic area. The general agent was compensated solely by commissions on business the agency produced.

Question 25

personal producing general agent (PPGA)

Answer 25

the insurer hires an experienced agent with a proven record of sales success as its general agent in a given territory. Unlike a traditional general agent, however, the personal producing general agent’s main responsibility is his or her personal production. The PPGA may be expected to meet certain sales quotas for the company but may also be allowed to represent other insurers.

Question 26

Who do the following represent:
Broker
Agent

Answer 26

Broker represents the policyholder

Agents represent the insurance company

Question 27

Exclusive Agency System

Answer 27

In the exclusive agency system, the agent usually represents only one company or group of affiliated companies. Compensation comes mainly from commissions on the sale of new business, with lower commission rates on renewals.

Question 28

Independent Agency System

Answer 28

In the independent agency system, the insurance agency is an independent business organization that usually represents several insurance companies or
groups of companies. The head of the agency pays all his or her own operating expenses and is compensated mainly through commissions on the business the agency writes.

Question 29

Foreign insurers vs Alien insurers

Answer 29

Foreign insurers are organized in another state. Alien insurers are domiciled in another country.

Question 30

Authority of an insurance agent

Answer 30

An insurance agent has implied authority and may act with apparent authority, as well as having the express authority spelled out in the agency contract.