1.2 Insurers
Private vs. Government Insurers
Private insurance carriers are non-governmental insurance organizations that generally operate on a for-profit basis. These insurers may be organized as either incorporated or unincorporated entities. Most private insurers participate in the voluntary market, meaning they choose to operate in a competitive marketplace and have the authority to decide which risks they will accept or reject for coverage.
Individuals or businesses with higher-risk exposures that are declined by insurers in the voluntary market may still be able to obtain coverage through residual markets. Residual markets are insurance programs designed to serve as coverage sources of last resort for risks that are considered difficult to insure. These markets commonly provide access to essential types of coverage, such as basic property insurance for real property, state-mandated automobile liability insurance, and Workers' Compensation insurance.
Example
A state may establish a joint underwriting association or joint reinsurance pool to provide insurance coverage for applicants who are unable to obtain coverage through the voluntary market. Under these arrangements, private insurers that write certain lines of insurance within the state are required to share in the profits and losses generated by the residual market. For instance, if an insurer writes 2% of the state's personal automobile insurance business, it may also be required to assume responsibility for 2% of the high-risk automobile applicants who were rejected by insurers in the voluntary market. Similarly, under a risk-sharing plan, insurers collectively agree to divide among themselves the risks that cannot obtain insurance through normal underwriting channels.
Although private insurers provide coverage for most types of risks, there are situations in which private insurance companies are unable or unwilling to offer protection, even through residual market programs. This often occurs when a risk is considered highly catastrophic, involves the potential for extremely large losses, or is viewed as unprofitable for private insurers to insure. In these situations, government insurance programs may be established to provide coverage alternatives and help ensure that protection remains available to the public. Examples of government insurance programs include Social Security Administration Social Security, Centers for Medicare & Medicaid Services Medicare, the National Flood Insurance Program National Flood Insurance Program (NFIP), Federal Crop Insurance programs, and terrorism risk insurance programs.
Types of Insurers
Stock Insurance Company
A stock insurance company is an insurer owned by its stockholders, also known as shareholders. The stockholders elect a board of directors, which is responsible for overseeing the company's operations and strategic direction. The board of directors then appoints corporate officers to manage the company's daily business activities. Stockholders share in the financial success of the company and may receive corporate dividends if declared by the board of directors. However, dividends are not guaranteed and are generally taxable to the shareholders. Traditionally, stock insurance companies issue nonparticipating policies, meaning policyholders do not share in the company's profits and are not entitled to receive policy dividends.
Mutual Insurance Company
A mutual insurance company is owned by its policyholders, who are often referred to as members. The members elect a board of directors to oversee the company's operations, and the board appoints officers to manage the company's day-to-day activities. When declared by the board of directors, policyholders may receive dividends that represent a return of excess premium, also known as divisible surplus. These dividends are not guaranteed and are typically paid only after the insurer has met its financial obligations, including claim payments and operating expenses. Because these dividends are considered a return of premium rather than investment income, they are generally non-taxable to the policyholder. Mutual insurance companies commonly issue participating policies, which allow policyholders to share in the insurer's favorable financial results through the payment of policy dividends.
Fraternal Insurers (Fraternal Benefit Societies)
Fraternal benefit societies are nonprofit organizations that combine social, charitable, and benevolent purposes with the provision of insurance benefits, primarily life insurance, to their members. These organizations are typically formed around a common bond, such as a religious affiliation, lodge, order, or fraternal society. Membership in the organization is generally required in order to obtain insurance coverage or other benefits offered by the society. In addition to providing insurance protection, fraternal benefit societies often promote community involvement, charitable activities, and mutual support among members.
Reciprocal Insurance Company
A reciprocal insurance company is an unincorporated insurance organization formed for the purpose of sharing risks among its members. It consists of individuals, businesses, and corporations that agree to insure one another's exposures by exchanging insurance contracts. Members of the reciprocal are known as subscribers, and each subscriber shares in the risks of the other members within the organization. The operation of the reciprocal is managed by an attorney-in-fact, who is authorized to handle the administration, underwriting, and exchange of insurance on behalf of the subscribers. If the premiums collected are not sufficient to cover claims and operating expenses, the subscribers may be required to pay an additional premium assessment to help cover the deficit.
Risk Retention Groups (RRGs)
A risk retention group (RRG) is a corporation formed primarily to assume and spread the liability risks of its members. Membership in a risk retention group is restricted to individuals or businesses that share similar liability exposures arising from a common business activity, trade, product, service, premises, or operation. Risk retention groups are licensed as liability insurance companies under the laws of one state, but they are permitted to provide liability coverage to members located in other states as well. Each member of the group shares in a portion of the overall risk assumed by the organization. The operations of the group are typically managed by an attorney-in-fact, who oversees the administration and management of the risk retention group.
Examples of industries and professions that may form or participate in risk retention groups include amusement and theme park operators, go-kart and waterslide businesses, as well as professional groups such as medical providers, dentists, engineers, and accountants.
Risk Purchasing Groups
A risk purchasing group is an organization formed to purchase liability insurance on behalf of its members, who share similar or related liability exposures. Unlike a risk retention group, a purchasing group does not assume or retain the insurance risk itself. Instead, the purchasing group obtains coverage from an insurance company or a risk retention group, which assumes responsibility for the covered risks. By purchasing insurance as a group, members may benefit from broader access to coverage and potentially more favorable insurance terms or pricing.
Lloyd's Associations
Lloyd's associations are unincorporated insurance organizations modeled after Lloyd's of London, one of the earliest and most well-known international marketplaces for specialty insurance coverage. Although commonly associated with insurance, Lloyd's associations are not insurance companies themselves. Instead, they consist of groups of underwriters and brokers who join together to form syndicates. Each syndicate specializes in underwriting particular types of risks, often involving unusual, complex, or higher-than-average exposures that may be difficult to insure through traditional insurers. Individual participants within the syndicate are responsible only for the specific risks they choose to assume.
The association serves as a central marketplace by providing meeting facilities, administrative support, and clerical services for syndicate members engaged in the business of insurance. Members of a syndicate appoint a lead underwriter to oversee underwriting activities and manage the day-to-day operations of the syndicate. Similar to reciprocal insurers and risk retention groups, insurance transactions within a Lloyd's association may also be conducted through an attorney-in-fact.
Self-Insurers
Certain groups and organizations with specialized underwriting needs may determine that self-insuring their risks is more economical than purchasing traditional insurance coverage. Instead of paying premiums to an insurance company, these organizations set aside their own funds to pay potential losses directly. Large employers with consistent and stable financial resources may choose to self-fund portions of their employee benefit programs, such as group health insurance, or provide for Workers' Compensation obligations through self-insurance arrangements.
Captive Insurance Company
A captive insurance company, commonly referred to as a captive, is a specialized form of self-insurance in which a large corporation establishes its own insurance company to insure the risks of the parent organization and its related entities. In this arrangement, the insurance company is owned and controlled by the insured organization rather than by outside shareholders or policyholders. Captive insurers are often used by large corporations to better manage risk, control insurance costs, and customize coverage for their specific exposures. Many major corporations, including a large number of Fortune 500 companies, utilize captive insurance arrangements as part of their overall risk management strategy.
Captive insurance companies may provide several financial advantages, including potential tax benefits and greater control over insurance costs and risk management. However, operating a captive insurer also involves additional expenses, such as administrative costs, overhead, regulatory compliance obligations, and the need for specialized personnel to manage the company's operations.
State laws dictate how captives may be formed. Captives are commonly allowed to be incorporated as a stock insurer, mutual insurer, reciprocal insurer, nonprofit corporation, or limited liability company (LLC).
Insurer Domicile
Domicile refers to the jurisdiction in which an insurance company is organized, formed, or incorporated. This jurisdiction may be a state, district, territory, or country. Insurers are generally classified into one of three categories based on their domicile: domestic insurers, foreign insurers, and alien insurers.
| Domestic Insurer | Foreign Insurer | Alien Insurer |
|---|---|---|
| A domestic insurer is an insurance company that is organized or incorporated under the laws of the state in which it is being referenced, regardless of whether the insurer is currently authorized to conduct business in that state. | A foreign insurer is an insurance company that is organized under the laws of another state or jurisdiction within the United States rather than the state in which it is being referenced. This classification applies regardless of whether the insurer is authorized to conduct business in that state or jurisdiction. | An alien insurer is an insurance company that is organized under the laws of a country or jurisdiction outside of the United States, regardless of whether the insurer is authorized to conduct business within the state being referenced. |
Example
In the state of Kansas, an insurance company organized under Kansas law would be classified as a domestic insurer. An insurer organized under the laws of Missouri would be considered a foreign insurer, while an insurer organized under the laws of Canada would be classified as an alien insurer.
Insurer Admittance
Admitted (Authorized) Insurers
An admitted insurer, also known as an authorized insurer, is an insurance company that has received approval from a state's department of insurance to conduct insurance business within that state. Once approved, the insurer is issued a certificate of authority authorizing it to transact insurance. Admitted insurers may be classified as domestic, foreign, or alien insurers depending on the jurisdiction in which they are organized.
Non-admitted (Unauthorized) Insurers
A non-admitted insurer is an insurance company that has not been authorized by a state's department of insurance to transact insurance business within that state. This may occur because the insurer has either failed to meet the state's regulatory requirements or has chosen not to apply for authorization. In general, non-admitted insurers are prohibited from writing insurance on risks located within the state unless permitted under specific surplus lines or other special insurance laws.
One example of a non-admitted insurer is a surplus lines insurer. Surplus lines insurers are permitted to provide coverage for risks that admitted insurers are unwilling or unable to insure, often because the exposure is considered unusually hazardous, unique, or difficult to underwrite. Surplus lines insurance is arranged through licensed surplus lines brokers, who help place coverage with eligible non-admitted insurers when coverage is not available in the admitted market. Each state establishes laws and regulations governing the placement and procurement of surplus lines insurance.
Note
Surplus lines insurance is separate from both the standard voluntary market and the residual market. It exists within a specialized insurance market designed to provide coverage for unusual, high-risk, or difficult-to-place exposures that are not typically available through admitted insurers. For example, if admitted insurers in a state do not offer aircraft insurance, the state's residual market is also unlikely to provide that coverage through a state insurance pool or fund. In such cases, coverage may be obtained through a non-admitted surplus lines insurer that specializes in underwriting unique or hard-to-insure risks.
Insurer Management
Insurance companies are organized into several key departments, each responsible for specific business functions. Company executives manage and oversee the overall operations and strategic direction of the insurer. The Marketing and Sales Department focuses on promoting, advertising, and selling insurance products to consumers and businesses. When a covered loss occurs, the Claims Department works with policyholders to investigate claims, evaluate damages, and coordinate the payment of benefits according to the terms of the policy.
The Actuarial Department collects, analyzes, and interprets statistical data to estimate the probability and potential cost of future losses. This information is used to help the insurer develop appropriate premium rates for its insurance products. A rate is the amount charged for a specific unit of insurance coverage, such as a certain dollar amount per $1,000 of coverage. The rates calculated by actuaries are compiled and maintained in the insurer's rating manuals, which are used to determine premiums for various types of risks and policies.
The Underwriting Department is responsible for evaluating and selecting insurance risks and determining the appropriate rate classification for each applicant. Based on the level of risk presented, underwriters decide whether coverage should be issued and calculate the premium that will be charged for the policy. The premium is the total amount paid by the insured in exchange for the insurance coverage provided under the policy.