General Insurance Information?
The insurance industry is typified by insurers with a number of different organizational forms. Stock insurers are corporations owned by the shareholders of the firm. The shareholders hire managers to run the company and the insurance product is sold to customers who may or may not be shareholders in the firm. Mutual insurers are companies which are owned by their customers. Any policyowner of the company also owns a portion of the company. Reciprocal insurers or reciprocal exchanges are insurance companies where the policyowners of the exchange agree to insure one another. They are very similar to mutual companies. Lloyd's associations are insurance companies where the manager who makes the decisions for the firm also has his/her own personal wealth at stake in the firm. Blue Cross/Blue Shield insurers are typically nonprofit (some may now be for profit), community oriented health insurance providers. Blue Cross/Blue Shield companies typically offer traditional indemnity health insurance. HMO's or Health Maintenance Organizations are companies which provide comprehensive health care coverage to their customers. HMO's, in their simplest form, provide prepaid health care coverage. Once you pay your premium you can use the services of the HMO at little or no further cost to you.
Some insurance agents I talk to say they are paid employees of the insurance company while other agents says they are independent business people -- why the difference? Should I care which one I purchase insurance from?
Insurers deliver their insurance products to policyowners primarily through independent agents or through exclusive agents. Historically, almost all insurance agents were independent business people paid on commission. More recently, many insurance companies have adopted a system where the agent is a paid employee of the firm rather than an independent business person. These agents are referred to as exclusive agents. Economists who have studied the differences between these two types of distribution systems have long argued that the independent agency system is a less efficient method of getting the insurance product to the customer as measured by statistics such as the ratio of expenses incurred to premiums written. However, the most recent studies suggest that the reason for the higher expenses by independent agents is that they offer better quality service to policyowners through more personalized service, more advice on policy limits, more help when a claim is filed with the company, etc.
Many life insurance and property-casualty insurance products can be purchased without the use of an agent. Typically potential policyholders will either be contacted through the mail or they can call a 1-800 number to apply for the insurance product. The advantage of this type of distribution system is that the expenses of selling the product are usually much lower because their are no agent commissions to be paid. These savings may then be passed onto the consumer through lower premiums. The main disadvantage is that the policyholder does not receive as much, or sometimes any, personal service either purchasing the product or in filing a claim.
The monthly publication Best's Review (Life and Health Edition) periodically contains information on assets, premium income and products sold by most of the largest life insurance companies operating in the U.S. The sister publication, Best's Review (Property and Casualty Edition) provides certain statistical information on large property-casualty companies. Both magazines are published by the A.M. Best Company in Oldewick, N.J. Public libraries in cities of medium to large size frequently subscribe to one or both of these magazines.
When you apply for an insurance policy, you will be asked a number of questions. For example, the agent will ask you a number of demographic questions such as your name, age, sex, address, etc. In addition to these demographic questions, you will be asked a number of other questions which will be used to determine what type of risk you are. For example, when an insurance company is deciding whether or not to offer automobile insurance to a potential policyowner, it will want to know about the person's previous driving record, whether there have any recent accidents or tickets, what type of car is to be insured and various other types of information. All of this information will be used for two purposes. First, based upon the responses to these questions, the insurance company will decide whether the profile of the applicant is consistent with the type of risks the insurer is trying to attract. Some insurers specialize in offering insurance to only very safe drivers and therefore will only accept applications from people who fit the profile of a safe driver. Once the insurer has decided that your risk profile is consistent with the types of risks it accepts, the answers to the questions will be used to determine which rate to charge you. For example, the insurance company will decide whether you should be offered insurance at the high risk driver rate or the low risk driver rate. Collectively, this entire process is known as the underwriting process. The primary function of the underwriting department in an insurance company is to decide whether or not to offer insurance to a person who has completed an application. If the answer is yes, then the underwriting department seeks to determine the "quality" of that risk so that the proper premium can be charged. That is, high risk people should pay more than low risk people.