Rejda Rmi Ppt05 PB

Principles of Risk Management and
Insurance
Fourteenth Edition
Chapter 5
Types of Insurers and

Marketing Systems
Copyright © 2020, 2017, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives (1 of 2)
5.1 Describe the major types of private insurers, including the following:
– Stock insurers – Blue Cross and Blue Shield

– Mutual insurers plans
– Reciprocal exchanges – Managed care plans
– Lloyd’s of London – Captive insurers
5.2 Describe the different types of agents and brokers, including the
following features:
– Compare the powers of life insurance agents with property and
liability insurance agents
– Explain the role of a surplus lines broker
– Describe the role and powers of a managing general agent
Learning Objectives (2 of 2)
5.3 Describe the major distribution systems for selling life insurance,
including
– Personal selling systems – Direct response system

– Financial institution – Worksite marketing
distribution systems – Other distribution systems
5.4 Describe the major distribution systems in property and casualty

insurance, including the following:
– Independent agency – Direct writer

system – Direct response system
– Exclusive agency system – Mixed systems
Overview of Private Insurance in the
Financial Services Industry (1 of 2)
• The financial services industry consists of:
– Commercial banks
– Savings and loan institutions
– Credit unions
– Life and health insurers
– Property and casualty insurers
– Mutual Funds
– Securities brokers and dealers
– Private and state pension funds
– Government-related financial institutions
– Finance companies and other financial firms
Overview of Private Insurance in the
Financial Services Industry (2 of 2)
• In 2016, premiums written by the insurance industry
totaled $1.13 trillion
– Life and health insurers accounted for 53 percent
– Property and casualty insurers accounted for 47
percent
• The U.S. insurance industry employed 2.6 million people
• The industry paid $20.5 billion in premium taxes
Types of Private Insurers (1 of 11)
• Size of the insurance market, 2016
– Life and health insurers: 797 - these insurers sell life
and health insurance products, annuities, mutual funds,
pension plans, and related financial products
– Property and casualty insurers: 2,538 - these insurers
sell property and casualty insurance and related lines,
including inland marine coverages and surety and
fidelity bonds
Exhibit 5.1 Top Ten Writers of Life & Health
Insurance by Direct Premiums Written, 2016 (In
Thousands of $)
Rank Group/Company Direct Premiums Written1 Market Share2
1 MetLife Inc. $95,110,802 15.2%
2 Prudential Financial Inc. 45,902,327 7.3
3 New York Life Insurance Group 30,922,462 4.9
4 Principal Financial Group Inc. 28,186,098 4.5
5 Mass Mutual Life Insurance Co., Inc. 23,458,883 3.8
6 American International Group 22,463,202 3.6
7 Jackson National Life Group 22,132,278 3.5
8 AXA 21,920,627 3.5
9 AEGON 21,068,180 3.4
10 Lincoln National Corp. 19,441,555 3.1
1
Includes life insurance, annuity considerations, deposit-type contract funds and other considerations,
excludes accident and health insurance. Before reinsurance transactions.
2
Based on U.S. total, includes territories.
Source: NAIC data, sourced from S&P Global Market Intelligence. Reported in The Insurance Fact
Book, 2018, p.22, Insurance Information Institute. Reprinted with permission.
Exhibit 5.2 Top Ten Writers of Property/Casualty
Insurance by Direct Premiums Written, 2016 (In
Thousands of $)
Rank Group/Company Direct Premiums Written1 Market Share2
1 State Farm Mutual Automobile Insurance $55,994,246 10.2%
2 Berkshire Hathaway Inc. 33,300,439 5.4
3 Liberty Mutual 32,217,215 5.3
4 Allstate Corp. 30,875,771 5.0
5 Progressive Corp. 23,951,690 3.9
6 Travelers Companies Inc. 23,918,048 3.9
7 Chubb Ltd. 20,786,847 3.4
8 Nationwide Mutual Group 19,756,093 3.2
9 Farmers Insurance Group of Companies 3 19,677,601 3.2
10 USAA Insurance Group 18,273,675 3.0
1
Below reinsurance transactions, includes state funds.
2
Based on U.S. total; includes territories.
3
SNL Financial reports data for Farmers Insurance Group of Companies and Zurich Financial Group
(which owns Farmers’ management company) separately.
Source: NAIC data, sourced from S&P Global Market Intelligence. Reported in The Insurance Fact
Book, 2018, p. 22. Insurance Information Institute.
• Insurers can be classified by their organizational form:
– Stock insurers
– Mutual insurers
– Lloyd’s
– Reciprocal exchanges
– Blue Cross and Blue Shield Plans
– Managed care plans
– Captive insurance companies
– Other types of private insurers
• A stock insurer is a corporation owned by stockholders
– Objective: earn profit for stockholders by increasing
the value of stock and paying dividends
– Stockholders elect board of directors
– Stockholders bear all losses
– Insurer cannot issue an assessable policy
• A mutual insurer is a corporation owned by the policy
owners
– Policy owners elect board of directors, who have
effective management
– Policyholders may receive dividends or rate reductions
– There are three main types of mutual insurers:
▪ An advance premium mutual is owned by the
policyowners; there are no stockholders, and the
insurer does not issue assessable policies
▪ An assessment mutual has the right to assess
policyowners an additional amount if the insurer’s
financial operations are unfavorable
▪ A fraternal insurer is a mutual insurer that provides
life and health insurance to members of a social or
religious organization
• The corporate structure of mutual insurers is changing
due to:
– An increase in company mergers
– Demutualization, whereby a mutual company is
converted into a stock insurer
– The creation of mutual holding companies
– A holding company is a company that directly or
indirectly controls an authorized insurer
Exhibit 5.3 Mutual Holding Company
Illustration
• Lloyd’s (formerly Lloyd’s of London) is not an insurer,
but is the world’s leading insurance market that provides
services and physical facilities for its members to write
specialized lines of insurance
– Members join together to form underwriting syndicates
– New individual members now have limited legal liability
– Corporations with limited legal liability and limited
liability partnerships can also join Lloyd’s of London
– Members must meet stringent financial requirements
– Lloyd’s is licensed only in a small number of
jurisdictions in the U.S.
• A reciprocal exchange is an unincorporated organization
in which insurance is exchanged among the members
(called subscribers)
– Insurance is exchanged among the members; each
member of the reciprocal insures the other members
– It is managed by an attorney-in-fact
– Most reciprocals are relatively small and specialize in a
limited number of lines of insurance
• Blue Cross and Blue Shield Plans are generally
organized as nonprofit, community oriented plans
– Blue Cross plans were initially organized to cover
hospital services
– Blue Shield plans were initially organized to cover
physicians’ and surgeons’ fees, and other medical
services
– Most plans have merged into one entity
– Some plans have converted to a for-profit status to
raise capital and become more competitive
• Managed care plans typically have the following features:
– In addition to financing healthcare, the plan is involved
in making healthcare decisions
– There is a focus on controlling costs
– It facilitates case management
• Types of managed care plans include:
– Health maintenance organization (HMO)
– Point of service plan (POS)
– Preferred provider organization (PPO)
• A captive insurer is an insurer owned by a parent firm
for the purposes of insuring the parent firm’s loss
exposures
– A single parent, or pure, captive is an insurer owned
by one parent
– An association captive is owned by several parents
• Savings Bank Life Insurance refers to life insurance
that is sold by mutual savings banks, over the phone or
through Web sites
Agents and Brokers (1 of 4)
• An agent is someone who legally represents the principal
and has the authority to act on the principal's behalf
• Authority may be:
– Expressed
– Implied
– Apparent
• The principal is legally responsible for all acts of an agent
when the agent is acting within the scope of authority
• A property and casualty agent has the power to bind the
insurer
– A binder provides temporary insurance until the policy
is actually written
• A life insurance agent normally does not have the
authority to bind the insurer
– The applicant for life insurance must be approved by
the insurer before the insurance becomes effective
• A broker is someone who legally represents the insured, and:
– solicits applications and attempts to place coverage
with an appropriate insurer
– is paid a commission from the insurers where the
business is placed
– does not have the authority to bind the insurer
• A surplus lines broker is licensed to place business with a
nonadmitted insurer
– Surplus lines refer to any type of insurance for which
there is no available market within the state, and
coverage must be placed with a nonadmitted insurer
• A managing general agent (MGA) is a specialized type of
“wholesale” producer that, unlike “retail” producers, is
vested with underwriting authority from an insurer
– MGAs are involved with unusual lines of coverage
– MGAs benefit insurers because they possess expertise
that is not always available within the insurer’s home
office
• The functions of MGAs and surplus lines have become
intertwined
Types of Marketing Systems (1 of 7)
• Marketing systems refers to the various methods for selling and
marketing insurance products
• The majority of life insurance policies and annuities sold today
are through personal selling distribution systems
– Commissioned agents solicit and sell life insurance
products to prospective insureds
– Career, or affiliated, agents are full-time agents who
usually represent one insurer and are paid on a
commission basis.
– In a multiple line exclusive agency system, agents who
sell primarily property and casualty insurance also sell
individual life and health insurance products.
– Independent property and casualty agents are
independent contractors who represent several
insurers and sell primarily property and casualty
insurance
– A personal-producing general agent (PPGA) is an
independent agent who places substantial amounts of
business with one insurer and has a special financial
arrangement with that insurer
– Brokers are independent agents who do not have an
exclusive contract with any single insurer
• Many insurers today use commercial banks and other
financial institutions as a distribution system
• A direct response system is a marketing system by
which insurance products are sold directly to consumers
without a face-to-face meeting with an agent
– Acquisition costs can be held down, but complex
products are difficult to sell this way
• Other forms of life insurance distribution include:
– Worksite marketing
– Stock brokers
– Financial planners
• The independent agency is a major distribution form for
property and casualty insurance
– The agency is a business firm that usually represents
several unrelated insurers
– Agents are paid a commission based on the amount of
business produced, which vary by the line of insurance
– The agency owns the expirations or renewal rights to
the business; it may bill the policyholders and collect
premiums, but most insurers use direct billing
– Agents may be authorized to adjust small claims and
may provide loss control services to their insurers
• Under the exclusive agency system, the agent
represents only one insurer or group of insurers under
common ownership
– Agents do not usually own the expirations or renewal
rights to the policies
– Agents are generally paid a lower commission rate on
renewal business than on new business
– Exclusive agency insurers provide strong support
services to new agents
• A direct writer is an insurer in which the salesperson is
an employee of the insurer, not an independent
contractor.
– Employees are usually compensated on a “salary
plus” arrangement
• A direct response insurer sells directly to the consumer
by television or some other media
• Some property and casualty insurers employ mass
merchandizing plans
• Many property and casualty insurers use multiple
distribution systems
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Principles of Risk Management and

Types of Insurers and

– Stock insurers – Blue Cross and Blue Shield

– Personal selling systems – Direct response system

5.4 Describe the major distribution systems in property and casualty

– Independent agency – Direct writer

This work is protected by United States copyright laws and is

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