Insurance Providers Flashcards
STOCK INSURANCE COMPANIES
- Stock insurance companies are owned by stockholders, just like many other major public companies.
- The stock of these companies may be publicly traded on stock exchanges or privately held by small groups of investors or even families.
- These companies pay stock dividends, when declared, to their stockholders. Stocks dividends are generally taxable to the stockholder.
Stock insurers have minimum capital requirements and are governed by a board of directors elected by their stockholders.
MUTUAL INSURANCE COMPANIES
Mutual insurance companies are owned by their policyowners; they have no stockholders.
Similar to stock insurers, mutual insurance companies have minimum capital requirements and are governed by a board of directors.
Policy dividends, which cannot be guaranteed, are typically not taxable since they are viewed as a return of excess premiums.
In recent decades a number of mutual insurance companies have transformed themselves into stock companies through a complex and lengthy process known as demutualization. Though much rarer, a stock company may convert to a mutual company through a process called mutualization.
OTHER PRIVATE INSURANCE PROVIDERS
- medical care service providers
- fraternal benefit societies
- industrial (home service) insurers
- reciprocals (high net-worth entities insure eachother)
- Lloyd’s associations
- self-insurers
- risk retention groups
- risk purchasing groups
- surplus lines insurers
- reinsurance companies
MEDICAL CARE SERVICE PROVIDERS
List one example of a medical care service provider.
Which blends characteristics of ______________ and _____________.
While many stock and mutual insurance companies sell health insurance, an increasingly large share of medical coverage today is provided through entities called medical care service providers.
Popular examples include HMOs and PPOs. These organizations blend characteristics of commercial insurance companies and medical care providers.
FRATERNAL BENEFIT SOCIETIES
A fraternal benefit society is an organization of people who share a common ethnic, religious, or vocational affiliation.
Fraternal benefit societies are entities that
- have no capital stock;
- have a representative form of government;
- exist not for profit but solely for the benefit of their members and their beneficiaries; and
- operate on a lodge system with a ritualistic form of work.
Fraternal societies may provide insurance to their members. Fraternal insurers are nonprofit organizations that operate under a special section of the insurance laws of the state in which they are approved. They specialize primarily in life insurance and annuity products that are usually available only to the society’s members.
INDUSTRIAL LIFE (also called … )
Traditionally offered as “burial insurance,” industrial life insurance offers individual coverage in small face amounts, usually less than $10,000 (and frequently between $1,000 and $2,500).
These policies generally require no medical exam to qualify. Typically, an insurance agent meets with the policyowner at home, weekly or monthly, to collect the premium. FOR REAL?
For this reason, industrial insurers are commonly called “home service” companies today.
ORDINARY LIFE
Provided by so-called “ordinary” companies, ordinary life insurance generally includes life insurance issued in face amounts greater than $25,000 (in some cases, $1 million or more).
Premiums are payable monthly, quarterly, semiannually, or annually.
Ordinary insurance includes virtually every type of life insurance and annuity product. It is especially popular with consumers looking for larger face amounts and flexible policy options.
RECIPROCAL INSURANCE EXCHANGE is a form of …
A reciprocal insurance exchange is an unincorporated group of individuals (called subscribers), working together through an attorney-in-fact, who each agree to pay a pro rata share of any loss suffered by any other member.
It is essentially a formal risk-sharing arrangement.
LLOYDS
Lloyd’s of London is not an insurance company nor does it sell insurance.
It is an association of individuals and companies that band together to underwrite unique insurance risks on their own accounts.
In many ways, Lloyd’s is like a stock exchange. It offers a forum for large companies and brokers to find insurers. Much of the business that is brought to Lloyd’s represents complex, unique, and very large risks.
A member can be either a person or a company. Members are organized into syndicates, with each syndicate specializing in a particular risk.
However, each member is held personally liable for the insurance business that it underwrites.
SELF-INSURERS is an example of …
Self-insurance is not a type of provider but rather an approach to risk management.
Either individuals or businesses can self-insure by creating a reserve fund with their own money. In most cases, self-insurer refers to a large company that is willing and financially able to retain certain risks and to pay for losses that arise from those risks.
It uses its own funds to pay claims as well as the administrative costs of running an internal insurance program. Self-insurance is an example of the retention form of risk management.
RISK RETENTION GROUPS
A risk retention group (RRG) is an insurance company that provides self-insurance services to owner-members.
These members all have a business, occupation, or professional relationship with one another. RRGs give companies the basic infrastructure needed to successfully band together for self-insurance purposes.
RRGs are a relatively new type of insurer, born out of the federal Risk Retention Act of 1986. The act requires that an RRG follow the insurance laws of at least one state.
RISK PURCHASING GROUPS
List one example of a risk purchasing group.
A risk purchasing group is a group of persons or entities with similar risks who form an organization for the purpose of buying insurance on a group basis.
These persons are usually members of a similar business or trade. Purchasing groups do not engage in self-insurance (as do risk retention groups).
Instead, groups such as tax preparers or real estate appraisers might form purchasing groups to buy and provide liability or errors and omissions insurance for their members.
SURPLUS (EXCESS) LINE INSURANCE
Also called excess lines insurance, surplus lines insurance is not a type of insurance company or product. It is a market for insurance not available from any admitted company within a state. Applicants seeking insurance for a unique risk may turn to a surplus lines broker in their state to find an insurer outside of the state that will provide the desired coverage. It is more common with property and casualty insurance than life and health insurance. For example, an Illinois resident who inherits a Florida orange grove may find it impossible to locate an insurer domiciled in Illinois that offers citrus crop insurance. A surplus lines broker in Illinois, however, may procure that specialized coverage through a Florida-based company that provides citrus crop insurance but is not admitted to do business in Illinois.
REINSURANCE
When insurers underwrite especially large policies, they typically try and spread the risk with other insurers to minimize the risk they face should a loss occur.
The insurer seeking to transfer some of its risk is the primary insurer (also known as the ceding company). The insurer accepting some of the risk being transferred is known as the reinsurance company.
The ceding company pays a premium to the reinsurer for its coverage. When a reinsured loss occurs, the reinsurer indemnifies the ceding company for its share of the claim. The policyowner may never be aware of this arrangement; when a claim is paid, it is paid entirely by the ceding company that issued the policy.
In what 3 ways are government insurance programs different?
Federal and state governments provide social insurance programs that differ from private insurance in several ways:
- Coverage extends to all eligible citizens. Citizen-participants receive benefits as a social right under law and not through a policy.
- Changes can only happen through changes in the law.
- Funding is through taxation, not through payment of premiums. (Medicare Parts B and C are an exception since beneficiaries do pay premiums.)
Government insurance serves a social purpose. For example, it provides a minimum level of protection or medical care for a population that would otherwise not have it.
