INS 3103 - Chapter 5
INS 3103 - Chapter 5 INS 3103
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This 5 page Class Notes was uploaded by Tina Ta on Thursday March 3, 2016. The Class Notes belongs to INS 3103 at Mississippi State University taught by Seth Pounds in Fall 2015. Since its upload, it has received 26 views. For similar materials see Principles of Insurance in Business at Mississippi State University.
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Date Created: 03/03/16
Chapter 5: Types of Insurers and Mkt Systems I. Overview of Private Insurance in the Financial Services Industry: (Exhibit 5.1) - The financial services industry consists of: Commercial banks Saving + loan institutions Credit unions Life and health insurers Property + casualty insurers Mutual funds Securities brokers + dealers Private + state pension funds Gov. – related financial institutions - The financial service industry is changing: - Changes in the financial services industry include: Consolidation: number of firms has declined due to mergers + acquisitions. Convergence: financial institutions now sell a wide variety of financial products that earlier were outside their core business area. This was brought on by the Financial Modernization Act of 1999. II. Types of Private Insurers - Size of insurance mkt, 2010 (Exhibit 5.2) Life + health insurers: 1061- these insurers sell life + health ins. Products, annuities, mutual funds, pension plans, related financial products. Property + casualty insurers: 2869 – these insurers sell property + casualty ins + related lines, including inland marine coverages + surety + fidelity bonds. Insurers can be classified by their organizational form: A stock insurer is corporation owned by stockholders. o Objective: earn profit for stockholders by increasing value of stock + pay dividends. o Stockholders elect board of directors. o Stockholders bear all losses. o Insurer cannot issue assessable policy. A mutual insurer is corporation owned by policyholders. o No stockholders. o Policyholders elect board of directors, who hv effective mgt. o Policyholders may receive dividends or rate reductions. 3 main types: (Exhibit 5.4) o Advance premium mutual: owned by policyowners, there’re no stockholders, + insurer doesn’t issue assessable policies. o Assessment mutual: hs right to assess policyowners additional amt if insurer’s financial operations are unfavorable. o Fraternal insurer: mutual insurer that provides life + health ins to mems of social/religious organization. (E.g: Woodmen of World) o Corporate structure of mutual insurers is changing due to: Increase in company mergers Insurers want to reduce their operating + overhead cost. Demutualization, whereby mutual company is converted into stock insurer by a pure conversion, merger, or bulk reins. Creation of mutual holding companies: Holding company: company that direct/indirect controls authorized insurer(now own or control stock ins company). Lloyd’s of London: not insurer, but society of mems who underwrite ins in syndicates. o Membership include corporations, indiv. Mems (called Names) + limited partnerships. o New indiv. Mems now hv limited legal liability. o Corporations w limited legal liability + limited liability partnerships can also join Lloyd’s of London. o Mems must meet stringent financial requirements. o Lloyd’s is licensed only in small number of jurisdictions in U.S. Reciprocal Exchange: can be defined as unincorporated organization in which ins is exchanged among mems (Called subscribers). o Ins is exchanged among membs, each mem of reciprocal insures the other mems. o It’s managed by attorney-in-fact. o Most reciprocals are relatively small + specialize in a limited number of lines of ins. Blue Cross and Blue Shield plans: are generally organized as nonprofit, community oriented plans. o Blue Cross plans provide coverage for hospital services. o Blue Shield plans provide coverage for physicians’ + surgeons’ fees. o Most plans hv merged into 1 entity. o Many sponsor HMOs + PPOs. o Some plans hv converted to for-profit status to raise capital + become more competitive. Health Maintenance Organizations (HMOs): provides comprehensive health care services to its mems. o Broad health care services are provided for a fixed prepaid fee. o Cost control is emphasized. o Choice of health care providers may be restricted. o Less costly forms of treatment are often provided. Other types of private insurers o Captive insurer: insurer owned by a parent firm for purposes of insuring parent firm’s loss exposures. Single parent, or pure, captive is insurer owned by 1 parent. Association captive is owned by several parents. o Savings bank life insurance: refer to life ins that is sold by mutual savings banks, over phone or through Web. III. Agents and Brokers A. Legal Status of an Agent Agent: someone who legally represents/bind principal to contract+ hs authority to act on principal’s behalf. Authority may be: Expressed: specific powers received fr insurer. Implied: necessary to complete express powers. Apparent: power public reasonably believes. Principal: legally responsible for all acts of agent when agent is acting within scope of authority. Includes wrongful + fraudulent acts + commissions. Difference btw P&C agents + Life Ins agents. Property + casualty agent hs power to bind insurer immediately. Binder: provides temporary ins until policy is actually written (oral/written) A life ins agent normal doesn’t hv authority to bind insurer: Applicant for life ins must be approved by insurer before ins become effective. Agent is soliciting person to apply for ins. B. Brokers 1. Represent insureds, typically business firms and large corporations 2. May provide services such as risk management, loss control, and knowledge of commercial insurance markets 3. Are important in the surplus lines market Broker: someone who legal represent the insured, and: Solicits applications + attempts to place coverage w appropriate insurer. Is paid commission fr insurers where bus is placed. Doesn’t hv authority to bind insurer unless they’re also agent for that insurer. Surplus lines broker: licensed to place bus w nonadmitted insurer. Surplus lines refer to any type of ins for which there’s no available mkt w/in nonadmitted insurer. IV. Types of Marketing Systems A. Life Insurance Marketing 1. Personal selling systems: Majority of life ins policies + annuities sold today are through personal selling distribution system: Commissioned agents solicit + sell life ins products to prospective insureds. Career/ affiliated, agents, are full-time agents who usually represent 1 insurer + are paid on commission basis. In multiple line exclusive agency system, agents who sell primarily property + casualty ins also sell individual life + health ins products. Independent property + casualty agents: independent contractors who represent several insurers + sell primarily property + casualty ins (many also sell life + health). Personal-producing genral agent (PPGA): independent agent who places substantial amts of bus w 1 insurer + hs special fin. Arrangement w that insurer. Broker: independent agents who don’t hv exclusive contract w any single insurer. 2. Financial institution distribution systems: Many insurers today use commercial banks + other fin. Ins. As distribution system. 3. Direct response system: mkt system by which ins products are sold direct to consumer w/o face-to-face meeting w agent. Solicited by TV, radio, mail, internet. Acquisition costs can be held down + u can gain access to large mkts, but complex products are difficult to sell this way. 4. Other form of life ins distribution systems: Worksite mkt: insurer go direct into bus. Firm + conduct sales interviews w employees interested in life ins products. Stock brokers: better meet both investment needs + life ins needs of their clients. Financial planners: they’re providing advice on investments, estate planning, taxation, wealth mgt n ins. Makes sense that they can sell life ins. B. Property and Liability Insurance Marketing 1. Independent agency system: is bus frim represent several unrelated insurers. Agency owns the expirations/renewal rights to policies/bus. (as opposed to who). Agents are compensated by commissions based on the amount of insurance sold. Agents are paid by commissions + renewal bus general is same as new bus. If a lower renewal rate was paid insure may lose bus. Agents may be authorized to adjust small claims +provide loss control services to their insureds. 2. Exclusive agency system—agents represent only 1 company/insurer or group of company under common ownership Agents don’t usually own expatiations/renewal rights to the policies sold. Agents are general paid lower commission rate/renewal bus than on new bus. Exclusive agency insurers provide strong support services to new agents. 3. Direct writer—insurer in which salesperson is employee of insurer, not independent contractor. Company pays selling expenses+employees are compensated on “salary plus/bonus” arrangement. “direct writer” is also used in the industry to identify insurers that use the exclusive agency system. 4. Direct response system—insurers selected market segments/sell direct to consumer by TV or some other media. 5. Multiple distribution system—many insurers are now using more than 1 marketing system to sell ins. Many property + casualty insurers use multiple distribution systems. Companies are selling their products through independent agents, direct to customers through Internet/TV, exclusive agency. V. Group Insurance Marketing Many insurers use gr mkt methods to sell individual ins policies to: Employer grs Labor unions Trade associations Product are sold through gr representative’s employee who receive salary + incentive pmts based on sales. Employees typical pay for ins by payroll deduction. Some property + liab. Insurers use mass merchandising plan to mkt their ins to gr mems. Results in rate reduction bc of lower commission fees.
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