CH5

Question 1

Classification of Insurers

Answer 1

The type of insurance they sell
Place of incorporation and licensing
Their legal form of ownership
The marketing system they employ

Question 2

Types of Insurance Companies by Product

Answer 2

Life insurers
write life contracts, annuities, and health insurance

Property and Liability insurers
Write all forms of property & liability (or casualty) insurance (including health)

Health and Accident insurers
Specialty insurers concentrating on their one area of risk.

Question 3

Insurers Classified by Place of Incorporating and Licensing

Answer 3

Place of incorporation
Domestic
Foreign
Alien

Licensing Status
Admitted
Nonadmitted

Question 4

Types of Insurers by Form of Ownership

Answer 4

Capital stock companies

Mutual companies

Reciprocals (interinsurance exchanges)

Lloyd’s associations

Health expense associations

Government Insurers

Question 5

Explain Capital Stock Insurance Companies

Answer 5

Organized as profit-making ventures with stockholders who assume the risk that is transferred by insureds.

Premium charged by insurer is final–there is no form of contingent liability for policyholders.

If the actuarial predictions prove accurate, the premiums collected are sufficient to pay the losses and operating expenses, providing a cushion to guarantee the obligations of policy holders while distributing profits to shareholders.

Board of directors is elected by stockholders.

Earnings are distributed to stockholders as dividends on their stock.

Question 6

Explain mutual insurance companies

Answer 6

Owned by its policyholders (the insureds)

Distinguishing characteristic is its lack of capital stock and the distribution of earnings.

Money left after paying costs is returned to policyholders as a dividend.

Question 7

Broadly speaking, mutuals are divided into three classes:

Answer 7

pure assessment mutual:
no premium is paid until the loss occurs

advance premium with assessable policies:
-an advance premium is charged at the beginning of the policy period.
-the insured has a contingent liability and is subject to assessment if losses exceed the
advance premium

advance premium nonassessable mutuals:
the advanced premium collected is intended to be enough to pay the losses. If not, it is paid out of the accumulated surplus.

Question 8

Practical difference between advance premium nonassessable mutuals and the capital stock insurance company:

Answer 8

Policyholders of a mutual are owners in theory, but they do not have vested rights of ownership except in the case of liquidation.

Policyholders acquire their ownership interest when they purchase a policy from the mutual insurer.
They abandon their ownership when their policy is not renewed or is cancelled.

Question 9

disadvantages of mutual form of organization became more apparent:

Answer 9

limited mechanisms for accessing capital

structure of mutuals not particularly flexible

mutuals cannot use stock for acquisitions

federal legislation to allow banks and insurers to affiliate requires a holding-company structure

Question 10

demutualized

Answer 10

converted from mutual to capital stock insurers (or in some cases to a modified capital stock form).
When demutualizing, a mutual insurer issues stock to policyholders, but also sells new stock.

Policyholders have a choice between stock in the new company or cash.
Some take stock and some take cash.