Chapter 5 Private Insurance Companies Principles of Risk Management & Insurance

Chapter 5 - Private Insurance Companies n Types of Private Insurers u Mutuals u Stock u Lloyd’s of London Members u Blue Cross & Blue Shield u Health Maintenance Organizations (HMOs) u Preferred Provider Organizations (PPOs)

Types of Private Insurers n Mutual Insurance Companies u Defined: a corporation owned by the policyowners u Ownership: by policyowners u Status of Policyowner: can be assessed unless nonassessable policies

Types of Mutual Insurance Companies n Assessment Mutual - insureds pay their fair share of the company’s losses at the end of the policy period. n Advance Premium Mutual - largest mutuals, policyowners pay premiums & receive dividends where there are favorable - no assessments n Factory Mutual - available only to large, well- constructed & carefully maintained exposures. F provide substantial loss prevention services F selective underwriting means lower losses & lower premiums n Perpetual Mutual - each policyowner contributes a substantial initial premium with no further premiums required

Stock Insurance Companies n Defined: a corporation owned by stockholders who participate in the profits and losses of the company. n Status of Policyowner: contracts nonassessable n Dominant in the property and liability industry

Demutualization n Defined: changing a mutual to a stock company n Advantages: F improved ability to raise venture capital F mutuals required to use more conservative methods for financial statements F reduction federal tax burden F stock incentives to employees F corporate expansion through stock sale n Disadvantages: F cost of demutualization F federal security laws F creates takeover target

Lloyd’s of London n Defined: an organization for marketing the insurance services of individuals and syndicates who underwrite insurance on a cooperative basis. n Not an insurer, but an insurance market where individual underwriters accept risks for their own account. n Insurance written by syndicates n Members have unlimited liability n central guarantee fund pays for insolvent members n members meet stringent financial requirements

Reciprocal Exchange n Defined: each insured insures every other insured and is in turn insured by every other member n Managed by an attorney-in-fact n Farmers Insurance Exchange of California (3rd largest in nation)

Blue Cross & Blue Shield n Defined: nonprofit organizations set up to allow their subscribers (insureds) to prepay hospital expenses (Blue Cross) and physician expenses (Blue Shield). n Legally very different from insurers, but very similar to the consumer.

Health Maintenance Organizations n Defined: provides members with comprehensive health services within a well-defined geographical area for a fixed periodic payment (premium). n Basic Characteristics: u broad, comprehensive health services u emphasize preventive health care u subscribers (insureds) receive services

Advantages & Disadvantages of HMOs n Advantages: u comprehensive care provided u strong emphasis on wellness u saving of time for members u no claim forms to complete u greater access to health care (nights & weekends) n Disadvantages: u many plans have financial problems u restricted choice of physician & hospitals

Preferred Provider Organizations n Defined: a group of health care providers that contract with employers, insurers, or other third-party payers to provide health care services to the group members at a reduced fee. n Differ from HMOs: u PPO is fee-for-service u employees not required to use PPO (just financial incentive such as reduced deductible.

CONCLUSION: Regardless of the form of legal organization, the function of any insurance system is to redistribute the cost of the losses from the few insureds who experience them to all who are exposed to them.