1. Chapter 25 TYPES OF INSURERS AND MARKETING SYSTEMS

2. LECTURE OUTLINE I. Types of Private Insurers II. Agents and Brokers
III. Types of Marketing Systems
IV. Mass Merchandising of Property and Liability Insurance

3. Types of Private Insurers
A. Stock Insurers
Ownership and governance: owned by stockholders
Status of the policy owner: contracts are nonassessable
Dominant in the property and liability industry

4. Types of Private Insurers (Continued)
B. Mutual Insurers
Ownership and governance: owned by policy owners
Dominant in the field of life insurance
There are several types of mutual insurers,including the following:
assessment mutual : an insurer that the right to assess policyowners an additional amount if the experience is unfavorable.
Advance premium mutual : owned by the policyowners,but it does not issue an assessable policy.
Factory mutual :a specialized insurer that insures only superior properties.
Fraternal insurer: a mutual insurer that provides life and health insurance to members of a social or religious organization .

5. Types of Private Insurers (Continued)
B. Mutual Insurers (Continued)
Changing corporate structure of mutual insurers because of mergers, demutualization, and formation of mutual holding companies
Demutualization means that a mutual insurer is converted into a stock insurer.

6. Types of Private Insurers (Continued)
There are three principal methods by which a mutual insurer can convert to a stock insurer. (See Exhibit 25.1)
Pure conversion:a mutual insurer amends its articles of incorporation and is reorganized as a stock insurer.
Merger:a mutual insurer and stock insurer are joined together as a single company,and the stock insurer is the surviving company
Bulk reinsurance:a mutual insurer cedes all of its assets and liabilities to a stock company,and the mutual insurer is then dissolved.

7. Exhibit 25.1 Alternative Modes of Demutualization

8. Exhibit 25.2 Mutual Holding Company Illustration

9. Types of Private Insurers (Continued)
C. Reciprocal Exchange
The reciprocal is managed by an attorney-in-fact, usually a corporation that is authorized to seek new members, pay losses, collect premiums, and perform other administrative duties.
A reciprocal is an unincorporated mutual. 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. Thus, there is an exchange of insurance promises; hence the name reciprocal exchange.

10. Types of Private Insurers (Continued)
D. Lloyd's Associations
Lloyd's of London
American Lloyds
Lloyd’s technically is not an insurance company,but is an association that provides physical facilities and services to the members for selling insurance.
The insurance is actually written by the various syndicates that belong to Lloyd’s.

11. Types of Private Insurers (Continued)
Lloyd's of London (Continued)
The individual members(called Names) who belong to the various syndicates have unlimited liability with respect to insurance written as individuals.
Corporations with limited liability can join Lloyd’s of London.
Individual members must also meet stringent financial requirements
Lloyd’s is licensed only in a small number of jurisdictions in the United States.

12. Types of Private Insurers (Continued)
E. Blue Cross and Blue Shield plans
F. Health Maintenance Organizations (HMOs)

13. Agents and Brokers A. Legal Status of an Agent
An agent is someone who legally represents the insurer and has the authority to act on the insurer’s behalf.
There is an important difference between a life insurance agent and a property and liability insurance agent:
A life insurance agent usually does not have the authority to bind the company.He or she is merely a soliciting agent who induces persons to apply for life insurance.

14. Agents and Brokers (Continued)
There is an important difference between a life insurance agent and a property and liability insurance agent: (Continued)
In contract, a property and liability insurance agent typically has the power to bind the company immediately with respect to certain types of coverage.
This relationship is normally created by a binder,which is temporary evidence of insurance until the policy is actually issued.

15. Agents and Brokers (Continued)
B. Brokers
Represent insureds
May provide services such as risk management, loss control, and knowledge of commercial insurance markets
Brokers are important in the surplus lines market.
Surplus lines refer to any type of insurance for which there is no available market within the state, and the coverage must be placed within a nonadmitted insurer.
A nonadmitted insurer is an insurer not licensed to do business in the state.
A surplus lines broker is a special type of broker who is licensed to place business with a nonadmitted insurer

16. Agents and Brokers (Continued)
What is the legal distinction between an agent and a broker?
An agent is someone who legally represents the insurer and has the authority to act on the insurer's behalf. In contrast, a broker is someone who legally represents the insured.

17. Types of Marketing Systems
A. Life Insurance Marketing Systems
Agency building system: a marketing system by which an insurer builds its own agency force by recruiting, financing, training, and supervising new agents.
Nonbuilding agency system : a marketing system by which an insurer sells its products through established agents who are already engaged in selling life insurance. Under this system, an insurer enters into contracts with successful agents who agree to sell the insurer's products.

18. Types of Marketing Systems (Continued)
A. Life Insurance Marketing Systems (Continued)
Direct response system : a marketing system by which life and health insurance is sold directly to customers without the services of an agent. Insurers use web sites, television, telephones, mail, and other mass media to market the insurance.

19. Types of Marketing Systems (Continued)
B. Property and Liability Insurance Marketing Systems
Independent agency system:
the agent is an independent businessperson who represents several companies. The agent is authorized to write business on behalf of these companies and, in turn, is paid a commission based on the amount of business produced.
the agency owns the expirations or renewal rights to the business.
the independent agent is compensated solely by commissions that vary by line of insurance.

20. Types of Marketing Systems (Continued)
B. Property and Liability Insurance Marketing Systems (Continued)
Direct writer: the salesperson is an employee, company absorbs all selling expenses, and employees are compensated on a salary/bonus basis.
Exclusive agency system:the agent represents only one company, does not own expirations, gets lower commissions, and, in exchange, receives strong support from the company.

21. Types of Marketing Systems (Continued)
B. Property and Liability Insurance Marketing Systems (Continued)
Direct response system: insurers sell to selected market segments using the Internet, television, or other mass media. No agents are used to sell the insurance.
Multiple distribution system:using more than one system to sell insurance.For example, some independent insurers also sell directly to consumers over the Internet or by television.

22. Mass Merchandising of Property and Liability Insurance
A. Definition: a plan for insuring members of a group at reduced premiums
B. Basic Characteristics
Sold to individual members
Individual underwriting
Possible lower premium rates
Payment by payroll deduction
Employer usually does not contribute.