An Introduction to Insurance
Types of Insurance and Insurers - Part 1
In this section you will learn the following:
The types of insurance
The types of insurance company corporate structures
Governmental insurance organizations
Many types of insurance policies are available to families and organizations that do not wish to retain their own risks. The following questions may be raised about an insurance policy:
Is it personal, group, or commercial?
Is it life/health or property/casualty?
Is it issued by a private insurer or a government agency?
Is it purchased voluntarily or involuntarily?
Group insurance is insurance provided by the employer for the benefit of employees. Group insurance coverage includes life, disability, health, and pension plans.
Personal insurance is insurance that is purchased by individuals and families for their risk needs. Such insurance includes life, health, disability, auto, homeowner, and long-term care.
Commercial insurance is property/casualty insurance for businesses and other organizations.
Personal, Group, or Commercial Insurance (Continued)
An insurance company is likely to have separate divisions within its underwriting department for personal lines, group lines, and commercial business.
The criterion to assign insureds into their appropriate risk pool for rating purposes is different for each type of insurance.
The commercial division has underwriting experts on risks faced by organizations. Personnel in other functional areas such as claims adjustment may also specialize in personal, group, or commercial lines.
Staff in the personal lines division are trained to look for risk factors (e.g., driving records and types of home construction) that influence the frequency and severity of claims among individuals and families.
Staff in the group division look at the characteristics and demographics, including prior experience, of the employee group.
Life/Health or Property/Casualty Insurance
Life/health insurance covers exposures to the perils of death, medical expenses, disability, and old age. Private life insurance companies provide insurance for these perils, and individuals voluntarily decide whether or not to buy their products.
Health insurance is provided primarily by life/health insurers but is also sold by some property/casualty insurers. All of these are available on an individual and a group basis. The Social Security program provides substantial amounts of life/health insurance on an involuntary basis.
Property/casualty insurance covers property exposures such as direct and indirect losses of property caused by perils like fire, windstorm, and theft. It also includes insurance to cover the possibility of being held legally liable to pay damages to another person.
Before the passage of multiple-line underwriting laws in the late 1940s and early 1950s, property/casualty insurance had to be written by different insurers. Now they frequently are written in the same contract (e.g., homeowner’s and commercial package policies, which will be discussed in later chapters).
Life/Health or Property/Casualty Insurance (Continued)
A private insurer can be classified as either a life/health or a property/casualty insurer. Health insurance may be sold by either.
Some insurers specialize in a particular type of insurance, such as property insurance. Others are affiliated insurers, in which several insurers (and sometimes noninsurance businesses) are controlled by a holding company; all or almost all types of insurance are offered by some company in the group.
Private or Government Insurance
Insurance is provided both by privately owned organizations and by state and federal agencies.
Largely because of the magnitude of the Social Security program, however, government provides about one-third more personal insurance than the private sector.
Our society has elected to provide certain levels of death, health, retirement, and unemployment insurance on an involuntary basis through governmental (federal and state) agencies. If we desire to supplement the benefit levels of social insurance or to buy property/casualty insurance, some of which is required, private insurers provide the protection.
The bulk of property/casualty insurance is provided by private insurers.
Voluntary or Involuntary Insurance
Most private insurance is purchased voluntarily, although some types, such as automobile insurance or insurance on mortgages and car loans, are required by law.
In many states, the purchase of automobile liability insurance is mandatory, and if the car is financed, the lender requires property damage coverage.
Government insurance is involuntary under certain conditions for certain people. Most people are required by law to participate in the Social Security program, which provides life, health, disability, and retirement coverage. Unemployment and workers’ compensation insurance are also forms of involuntary social insurance provided by the government. Some government insurance, such as flood insurance, is available to those who want it, but no one is required to buy it.
Insurers’ Corporate Structure
Stock insurers are organized in the same way as other privately owned corporations created for the purpose of making a profit and maximizing the value of the organization for the benefit of the owners.
Individuals provide the operating capital for the company. Stock companies can be publicly traded in the stock markets or privately held. Stockholders receive dividends when the company is profitable.
Mutual insurers are owned and controlled, in theory if not in practice, by their policyowners. They have no stockholders and issue no capital stock. People become owners by purchasing an insurance policy from the mutual insurer.
Profits are shared with owners as policyowners’ dividends. Company officers are
appointed by a board of directors that is, at least theoretically, elected by policyowners. The stated purpose of the organization is to provide low-cost insurance rather than to make a profit for stockholders.
Insurers’ Corporate Structure (Continued)
Research shows that mutual and stock insurers are highly competitive in the sense that neither seems to outperform the other. There are high-quality, low-cost insurers of both types. A wise consumer should analyze both before buying insurance.
Many mutual insurers in both the life/health and property/casualty fields are large and operate over large areas of the country. These large mutuals do a general business in the life/health and property/casualty insurance fields, rather than confining their efforts to a small geographic area or a particular type of insured.
The largest property/casualty mutual insurer in the United States is State Farm, which was established in 1922 by George J. Mecherle, an Illinois farmer who turned to insurance sales.
State Farm grew to be the leading auto and homeowner’s insurer in the United States, with twenty-five regional offices, more than 79,000 employees, and nearly 70 million policies in force. Because of its mutual status, State Farm is overcapitalized (holding relatively more surplus than its peer group or stock companies).
When top managers of a mutual company decide they need to raise capital, they may go through a process called demutualization.
In the last decade, there was an increase in the number of companies that decided to demutualize and become stock companies.
Policyholders, who were owners of the mutual company, received shares in the stock company. Part of the motive was to provide top management with an additional avenue of income in the form of stock options in the company. The demutualization wave in the life insurance industry reached its peak in December 2001, when the large mutual insurer, Prudential, converted to a stock company.
The decade between the mid-1990s and mid-2000s saw the demutualization of twenty-two life insurance companies .
Case Study 04- Lloyd’s of London: A Global Insurance Exchange
Please download the PDF containing the case studies for this module. This is available from the module resources section for this module.
The next case study we will examine is “Case Study 04- Lloyd’s of London: A Global Insurance Exchange”.
The case study describes the internal insurance operations of Lloyd’s of London.
US Banks and Insurance
For decades, savings banks in Massachusetts, New York, and Connecticut have sold life insurance in one of two ways: by establishing life insurance departments or by acting as agents for other savings banks with insurance departments.
Savings banks sell the usual types of individual life insurance policies and annuities, as well as group life insurance. Business is transacted on an over-the-counter basis or by mail. No agents are employed to sell the insurance; however, advertising is used extensively for marketing. Insurance is provided at a relatively low cost.
Savings and loan associations have been selling personal property/casualty insurance (and some life insurance) through nonbanking subsidiaries. Commercial banks have lobbied hard for permission to both underwrite (issue contracts and accept risks as an insurer) and sell all types of insurance. Approximately two-thirds of the states have granted state-chartered banks this permission. At this time, national banks have not been granted such power. 
In November 1999, State Farm Mutual Automobile Insurance Company opened State Farm Bank. At the time of this writing, State Farm has banking services in eleven states-Alabama, Arizona, Colorado, Illinois, Indiana, Mississippi, Missouri, New Mexico, Nevada, Utah, and Wyoming-and plans to expand
to all fifty states. The banking division benefits from State Farm’s 16,000 agents, who can market a full range of banking products. 
The U.S. Supreme Court approved (with a 9-0 vote) the sale of fixed-dollar and variable annuities by national banks, reasoning that annuities are investments rather than insurance. Banks are strong in annuities sales.
END of Part 1 of UNIT
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