C HAPTER 4 I NSURANCE C OMPANIES

Scope of This Chapter - The importance of Gramm-Leach- Bliley Act(GLB) - Describe the most characteristic of the stock insurance company - Describe the most important characteristic of the mutual insurance company - Reasons that many mutual companies transformed themselves into stock companies - LIoyd s of London

G RAMM - L EACH B LILEY (GLB) A CT Also known as Financial services Reform Act of This law allows the creation of financial services holding companies. GLB allows banks, security dealers, and insurance companies to combine to form financial services holding companies. GLB also allows banks to acquire insurance companies, insurance companies to acquire banks, banks to open their own insurance companies, and insurance companies open banks. The law requires most of these combinations to be in the form of holding companies.

T YPES OF P RIVATE I NSURANCE C OMPANIES In terms of legal ownership and structure, the major types of private insurers can be classified as follows: - Stock insurers - Mutual insurers - Reciprocal exchange - LIoyds of London - Blue Cross and Blue Shield plans - Health maintenance organization (HMOs) - Other types of private insurers

M OST I MPORTANT T YPES OF I NSURANCE C OMPANIES Mutual insurance company and the stock insurance company are the most important types of insurance companies. A single insurance company cannot sell both life and non-life insurance. Mutual and stock insurance companies write either life or non-life (property and liability) insurance coverage. Insurance holding companies, however, can combine both life and non-life insurance companies in one organization but must keep their operations separate.

Property insurers that provide more than one type of coverage, such as a company selling fire, inland marine, liability, workers compensation and automobile insurance, are called multiple-line insurers. M ULTIPLE - LINE I NSURER

S TOCK I NSURANCE C OMPANIES In a stock insurance company similar to all other corporations the stockholder-owners provide the capital to establish and operate the corporations. These owners are entitled to the financial results, whether favorable or unfavorable. The rights of owners : -Right to vote and elect the management of the corporation -Right to sell their shares(Ownership Interest) Both buyers and sellers of ownership interest of a publicly owned stock insurance company would contact a representative of security brokerage firms.

M UTUAL I NSURANCE C OMPANIES They are non-profit organizations but this dose not mean that they run inefficiently. Owner of a mutual insurance company are the policyholders insured by the corporation. Rights of owners : -Owners of mutual insurance companies have similar rights to owners of for-profit corporations. - Vote to elect the directors of the corporations. - Vote for important business matters such as corporation bylaw or changing to stock insurance company.

S IGNIFICANT D IFFERENCE BETWEEN STOCK AND MUTUAL INSURANCE COMPANIES In stock insurance companies you can own an interest in a stock company and not purchase insurance from it or you can be insured by a stock insurer and not have an ownership interest in the company. In a mutual insurer neither of these positions is possible.

M AJOR S UBCATEGORIES OF M UTUAL I NSURANCE C OMPANIES Advance Premium Mutual The most frequently types of mutual insurance company in terms of insurance written Policyholders pay their premiums when their insurance begins and become eligible for a dividend when the insurance period ends. When mutual insurance companies pay dividend? If the mutual insurer experiences fewer losses or lower expenses than it predicted or greater investment earnings than projected, it has favorable operating results to pay dividends.

When individuals or businesses purchase insurance from a mutual insurance company, they become owners and share in the financial outcome of ownership, whether favorable or unfavorable (ownership interest of insured)

Assessment Mutual Usually do less business than do advance premium mutual. Under the assessment system, insured members may or may not pay a premium when the insurance period begins, but they become liable to pay their fair share of the insurance companys losses and expenses when the period ends. Limitation in the amount of liability may or may not imposed to purchasers of assessment mutual. This type of mutual insurer primarily provide fire and windstorm insurance for small towns and farmers.

Factory Mutual Important distinction with other types of mutual: It provides substantial loss prevention services including regular inspection of the insured premises. Those exposures meeting rigid safety and construction qualifications can qualify for coverage (e.g. those with fire sprinkler systems). Only a limited number of exposure units are eligible for insurance by the factory mutual Large, well-constructed, carefully maintained exposures Risk managers call this type of exposure highly protected risk

A mutual insurer changes its legal form to a stock insurer company. - First reason for demutualization: Overcome a section of the Deficit Reduction Act of Second reason for conversion : Financial weakness that some life insurers experienced in the early 1990s. - Recent encouraging reason for demutualization is GLB. Stock insurers can be acquired and can make acquisitions more easily than can mutual insurance companies. D EMUTUALIZATION

L IOYD S OF L ONDON One of the worlds most important markets for marine, aviation, and other lines of insurance. A recent estimate suggests that about 3% of global non-life insurance premiums and perhaps 10% of the market for large industrial insurance still trades at LIoyd s of London. LIoyds of London in not an insurance company. It is a large marketplace that buyers and sellers meet and negotiate sales, broker meets broker to arrange the purchase of or sale of a clients stock. Sellers Buyers A meeting place LIoyds of London Underwriters Organizations with Loss Exposures