lecture seventeen: types of insurers and marketing systems
TRANSCRIPT
Lecture Seventeen:
Types of Insurers and Marketing Systems
Learning Objectives
Describe the major types of private insurersExplain why some life insurers have demutualized or formed holding companies in recent years.Explain the difference between a building agency and a nonbuilding agency as marketing systems in life insurance. Describe the direct response system for selling life insurance.Describe the different marketing systems in property and liability insurance.
Main Contents
Types of Private Insurers Agents and Brokers Types of Marketing Systems Mass Merchandising
How And Where to Buy Insurance
Case 1: Mark, age 32, is a single parent with two sons, ages 3 and 1. His wife died recently from terminal cancer. The amount of life insurance on her life was insufficient for paying the funeral costs. After reassessing his situation, Mark believes he should purchase additional life insurance. A friend recommends the purchase of insurance from a mutual insurer because policy-owners may receive dividends. Mark has no idea what a mutual insurer is and how a mutual insurer differs from other insurers. He is not alone in his confusion. Many consumers also do not understand the differences among insurers.
How And Where to Buy Insurance
Thousands of life and health and property and liability insurers are doing business in the United States today. The insurance industry has a profound impact on the American economy. Insurers sell various financial and insurance products that enable individuals and families to attain a high degree of economic security. In addition, the insurance industry provides millions of jobs for American workers and is an important source of capital for the business community.
TYPES OF PRIVATE INSURERS
In terms of legal organization and ownership, the major types of private insurers can be classified as follows:
Stock insurersMutual insurersReciprocal exchangesLlody’s AssociationsBlue Cross and Blue Shield plans Health maintenance organizations (HMOs)
Stock Insurers
A stock insurer is a corporation owned by stockholders who participate in the profits and losses of the insurer. The stockholders elect a board of directors, who in turn appoint executive officers to manage the corporation. The board of directors has the ultimate responsibility for the corporation’s financial success.
Mutual Insurers
A mutual insurer is a corporation owned by the policyowners, The policyowners elect the board of directors, who appoint the executives who manage the corporation.
There are several types of mutual insurers, including the following:
a. Assessment mutual b. Advance premium mutual c. Factory mutual d. Fraternal insurer
Assessment Mutual
An assessment mutual is an insurer that has the fight to assess policyowners an additional amount if the experience is unfavorable.
Advance Premium Mutual
An advance premium mutual is owned by the policyowners, but it does not issue an assessable policy.
Factory Mutual
A factory mutual is a special mutual insurer that provides life and health insurance to members of a social or religious organization.
Changing Corporate Structure of Mutual Insurers
The corporate structure of mutual insurers is changing dramatically. Three trends are clearly evident:
a. An increase in company mergers
b. Demutualization
c. Formation of mutual holding companies.
Alternative Models of Demutualization
Mutual Company
Mutual Company
Stock company(organized by the Mutual company
Mutual Company
Stock companyOrganized by the Mutual company
Stock company
Stock company
Amends its articles of incorporation toReorganized as a stock company
Joined together into a single company;The stock company is the survivor
Cedes all of its insurance business and transferAll of its assets and liabilities to a stock company;
The mutual company is the dissolved.
Mutual Holding Company Illustration
Mutual Insurance Company
SubsidiaryA
SubsidiaryC
SubsidiaryB
Mutual Holding Company
Reciprocal Exchanges
A reciprocal exchange is another type of private insurer. A reciprocal exchange (interinsurance exchange) can be defined as an unincorporated mutual.
A reciprocal exchange has several distinct characteristics. a. In its purest form, insurance is exchanged among the
members; each member of the reciprocal insures the other members and, in turn, is insured by them.
b. A reciprocal is managed by an attorney-in-fact. c. From a historical perspective, reciprocals can be
classified as pure or modified.
Lloyd’s Association
There are two basic types of Lloyd’s Associations:
a. Lloyd’s of London
b. American Lloyd’s
Lloyd’s of London
Lloyd’s of London is a major worldwide ocean marine insurer that writes a wide variety of risks and is extremely important as a professional reinsurer.
Characteristics of Lloyd’s of London
Lloyd’s of London has several important characteristics.
a. Lloyd’s technically is not an insurance company, but is an association that provides physical facilities and services to the members for selling insurance.
b. The insurance is actually written by the various syndicates that belongs to Lloyd’s.
Characteristics of Lloyd’s of London
c. The individual members( called Names) who belong to the various syndicates have unlimited liability with respect to insurance written as individuals.
d. Corporations with limited liability can join Lloyd’s of London.
e. Individual members must also meet stringent financial requirements.
Characteristics of Lloyd’s of London
f. Lloyd’s is licensed only in a small number of jurisdictions in the United States. In the other statements, Lloyd’s must operate as a nonadmitted insurer.
American Lloyds
Private underwriters in the United States have formed associations similar to Lloyd’s of London.
Differences between American Lloyds and Lloyd’s of London
The American Lloyds associations, however, differ from Lloyd’s of London in many respects.
a. The number of individual underwriters is smaller. b. The liability of an individual underwriter is limited. c. The personal net worth and financial strength of an
underwriter are considerably lower than that of a Lloyd’s of London member.
d. An American Lloyd’s association does not operate through a syndicate, but is managed by an attorney-in-fact.
e. The financial reputation of an American Lloyds association is not as good as that of Lloyd’s of London.
Blue Cross and Blue Shield Plans
Blue Cross plans typically are organized as nonprofit, community-oriented prepayment plans the provide coverage primarily for hospital services.
Blue Shield plans generally are nonprofit, prepayment plans provide payment for physicians’ and surgeons’ fees and other medical services.
Health Maintenance Organizations
HMOs are organized plans of health care that provide comprehensive health care services to their members.
HMOs provide broad health care services to a specified group for a fixed prepaid fee; cost control is emphasized; choice of health care providers may be restricted; and less costly forms of treatment are often provided.
Its characteristics have been discussed in Chapter 22.
AGENTS AND BROKERS
A successful sales force is the key to the company’s financial success.
Most policies today are sold by agents and brokers.
Agents
An agent is some one who legally represents the insurer and has the authority to act on the insurer’s behalf.
An agent can bind the principal by expressed powers, by implied powers, and apparent authority.
Difference: A life insurance agent usually does not have the authority to bind the company; a property and liability insurance agent typically has the power to bind the company immediately with respect to certain types of coverage.
Brokers
A broker is some one who legally represents the insured.
A broker legally does not have the authority to bind the insurer.
A broker is paid commission from the insurers where the business is placed.
Brokers
Brokers are also important in the surplus lines markets. Surplus lines refer to any types of insurance for which there is no available market within the state, and the coverage must be placed with a nonadmitted insurer.
Brokers are important in the area of employee benefits, especially for large employers.
TYPES OF MARKETING SYSTEMS
Marketing systems refer to the various methods for selling insurance. Insurers employ actuaries, claims adjusters, underwriters, and other home office personnel, but unless insurance policies are profitably sold, the insurer’s financial survival is unlikely. Thus, an efficient marketing system is essential to an insurance company’s survival.
Agency Building System
An agency building system is a system by which an insurer builds its own agency force by recruiting, financing, training, and supervising new agents.
Several types of agency building systems exist. Two basic types are the general agency system and managerial system.
General Agency System
Under the general agency system, the general agent is an independent contractor who represents only one insurer.
The general agent is in charge of a territory and is responsible for recruiting, training, and motivating new agents.
The general agent receives a commission based on the amount of business produced.
Managerial System
Under the managerial system, branch offices are established in various areas.
The branch manager is an employee of the company who has the responsibility for hiring and graining new agents.
The manager is paid a salary and commission based on the volume and quality of the insurance sold and the number of productive agents hired.
Nonbuilding Agency System
A nonbuilding agency system is a marketing system by which an insurer sells its products through established agents who are already engaged in selling life insurance.
An insurer enters into contracts with successful agents who agree to sell insurer’s products.
Direct Response System
The direct response system is a marketing system by which life and health insurance is sold directly to customers without the services of an agent.
Direct response insurers engage heavily in market research and testing.
Direct Response System
The direct response system has several advantages: a. It enables insurers to gain access to large
markets; b. Acquisition costs can be held down; c. Uncomplicated products can be sold
effectively. One disadvantage is that complex products are
often difficult to sell because an agent’s services may be required.
Property and Liability Insurance Marketing Systems
The major methods for marketing property and liability insurance include the following:
a. Independent agency system b. Exclusive agency system c. Direct writer d. Direct response system e. Multiple distribution systems
Independent Agency System
The independent agency system( sometimes called the American agency system) has several basic characteristics:
First, the independent agency is a firm that usually represents several unrelated insurers.
Second, the agency owns the expirations or renewal rights to the business.
Third, the independent agent is compensated by commissions that vary by line of insurance.
Independent Agency System
In addition to selling, independent agents perform other functions:
a. They are frequently authorized to adjust small claims. b. The larger agencies may also provide loss control
services to the insureds, such as accident prevention and fire control engineers.
c. The agency may bill the policyowners and collect the premiums sometimes.
d. Most insurers have resorted to direct billing, by which the policy owner is billed directly by the insurer and then remits the premium to the company.
Exclusive Agency System
Under the exclusive agency system, the agent represents only one insurer or group of insurers under common ownership.
Agents under the exclusive agency system do not usually own the expirations or renewal rights to the policies. Some insurers do not give their agents any ownership rights in the expirations; other insurers may grant limited ownership of expirations while the agency contract is in force.
Exclusive Agency System
Another difference is the payment of commissions: exclusive agency insurers generally pay a lower commission rate on renewal business than on new business.
Exclusive agency insurers provide strong supportive services to the new agent.
The functions performed by exclusive agents vary among insurers: some insurers limit exclusive agents to selling insurance, while others permit them to adjust small first-party claims as well.
Direct Writer
A direct writer is an insurer in which the salesperson is an employee, not an independent contractor.
The insurer pays all the selling expense, including the employee’s salary and Social Security taxes.
Employees of direct writer are usually compensated on a “salary plus” arrangement.
Multiple Distribution Systems
To increase their profits, many property and liability insurers are using more than one distribution system to sell insurance. These systems are referred to as multiple distribution systems.
Some insurers are selling insurance directly to consumers over the Internet or by television and mail advertising.
Other insurers are using independent agents as well.
Multiple Distribution Systems
Other insurers are marketing property and liability insurance through banks and to consumer groups through employers and through professional and business associations.
The lines between the traditional distribution systems will continue to blur in the future as insurers develop new systems to sell insurance.
Market Shares
Exclusive agency insurers, direct writers, and direct response insurers as a group dominate the personal lines market.
Several reasons help explain the dominance in the personal lines market:
a. This group focused on auto insurance, which is the largest market in the personal lines field. The combined effect enabled the companies to build up large agency forces with minimal delay and financial expense.
Market Shares
b. Exclusive agency companies paid relatively lower commissions, which enabled them to compete effectively based on price.
c. These companies were among the first to use direct billing, mechanization of policy writing, and other internal service functions.
MASS MERCHANDISING
Mass merchandising is a plan for insuring individuals in a group under a single program of insurance at reduced premiums.
Mass merchandising plans have several distinct characteristics:
a. Property and liability insurance is sold to individual members of group; auto and homeowners insurance are popular lines that have been used in such plans.
MASS MERCHANDISING
b. Individual underwriting is used; individuals applying for coverage must meet the insurer’s underwriting standards.
c. Rate reductions of 5 to 15 percent are typically given because of a lower commission scale for agents and savings in administrative expenses.
d. Premiums are paid by payroll deduction.
e. Employers usually do not contribute to the plans; any employer contributions result in taxable income to the
employee.
Summary
There are several basic types of insurers: Stock insurers Mutual insurers Reciprocal exchanges Lloyd’s Associations Blue Cross and Blue Shield plans Health maintenance organizations.
An agent is someone who legally represents the insurer and has the authority to act on the insurer’s behalf.Surplus lines refer to any type of insurance for which there is no available market within the state, and the coverage must be placed with a nonadmitted insurer.
Summary
In life insurance, several basic marketing methods are used: Agency building system Nonbuilding agency system Direct response system
In property and liability insurance, a number of marketing systems are used:
Independent agency system Exclusive agency system Direct writer Direct response system Multiple distribution systems.
Summary
Mass merchandising is a plan by which property and liability insurance is sold on a group basis. Individual members of a group are insured under a single program of insurance at reduce premiums. There is, however, individual underwriting.
Review questions
Identify the major characteristics of a stock insurer. Describe the major features of a mutual insurer. Identify the
basic types of mutual insurers. Describe the major features of Lloyd’s of London. Describe the basic characteristics of a reciprocal exchange.
What is a fraternal insurer? Explain your answer. What is the legal distinction between an agent and a broker?
Review questions
Explain briefly the basic characteristics of the following marketing systems in life and health insurance:
a. Agency building system
b. Nonbuilding agency system
c. Direct response system. Who owns the policy expirations or renewal rights to the
business under the independent agency system?
APPLICATION QUESTIONS
An insurance author stated that “Lloyd’s of London is an association that provides physical facilities and services to the members for selling insurance. The insurance is underwritten by the various syndicates who belong to Lloyd’s of London with respect to each of the following:
a. Nature of the operation b. Types of insurance written c. Financial safeguards to protect insureds
APPLICATION QUESTIONS
Property and liability insurance can be marketed under different marketing systems. Compare the independent agency system with the exclusive agency system with respect to each of the following:
a. Legal status of the agents
b. Number of insurers represented
c. ownership of policy expiration
Case application
Select one of the insurance companies or any type of marketing systems, and search for information on its operation and management. What are the confronted problems? Please give some suggestion.
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