1.2 Types of Insurers - Insurance Companies or Carriers
Stock Insurance Company
A stock insurance company is owned by its stockholders, also known as shareholders. The shareholders elect a board of directors, who appoint officers and a management team to oversee the company's operations and carry out its objectives.
When declared by the board of directors, stockholders may receive taxable corporate dividends as a distribution of company profits; however, dividends are not guaranteed.
Traditionally, stock insurers issue nonparticipating policies, meaning policyholders are not entitled to receive dividends from the company's earnings.
Mutual Insurance Company
A mutual insurance company is owned by its policyholders, who are often referred to as members. Policyholders elect a board of directors or trustees, who appoint officers and a management team to oversee operations and carry out the company's mission.
When declared by the board, policyholders may receive dividends, which are generally treated as a return of divisible surplus rather than taxable corporate profits. These dividends are not guaranteed.
Traditionally, mutual insurers issue participating policies, meaning policyholders are eligible to receive dividends. Dividends reflect the company's favorable operating experience and may result from excess investment earnings, lower-than-expected mortality, or reduced operating expenses.
Reciprocal Insurance Company
A reciprocal insurance company is a member-owned, unincorporated insurer formed for the primary purpose of risk sharing. It is created when individuals, partnerships, and corporations agree to exchange insurance coverage with one another. Each member, known as a subscriber, assumes a proportionate share of the risks of all other subscribers.
If collected premiums are insufficient to cover losses and expenses, subscribers may be subject to an additional premium assessment.
The reciprocal exchange operates through an Attorney-in-Fact, who manages the administrative affairs of the organization. The Attorney-in-Fact is not required to hold an insurance producer license.
Lloyd's of London
Lloyd's of London is not an insurance company. Instead, it is an insurance marketplace composed of groups of underwriters known as syndicates, each specializing in specific types of risks. Lloyd's provides the physical and administrative infrastructure that enables syndicate members to conduct insurance business.
Coverage is underwritten by individual syndicates, which are managed by designated syndicate managers. Members of a syndicate are responsible for the risks they assume and are individually liable for their share of those risks.
Fraternal Benefit Societies
Fraternal benefit societies are nonprofit membership organizations that are organized for social, charitable, and benevolent purposes. In addition to their fraternal activities, they may provide life and health insurance coverage to their members.
Membership is typically based on affiliation with a particular faith, lodge, order, or society. Insurance products are offered exclusively to members and are marketed by licensed producers who represent the fraternal insurer.
Risk Retention Groups (RRGs)
Risk Retention Groups (RRGs) are group-owned insurers formed to assume and distribute liability-related risks among their members. These entities are owned by their policyholders and must be licensed in at least one state, although they may provide coverage to members in other states in accordance with federal law.
RRGs are composed of members engaged in similar or related businesses with comparable liability exposures. Examples may include theme parks, go-kart facilities, or water parks. Membership is limited to insureds with homogeneous risk profiles.
RRGs must maintain adequate financial resources and sufficient liquid assets to meet their loss obligations. Each member assumes a proportionate share of the group's insured risks.
Self-Insurers
Self-insurers retain their own risk rather than transferring it to an insurance company. Instead of paying premiums to a third-party insurer, the self-insured entity sets aside funds to cover anticipated losses, typically in an amount equal to or greater than expected claims.
If actual losses are lower than the reserved amount, the difference represents a financial gain. However, if losses exceed the funds set aside, the organization must cover the shortfall, often using operating revenues or other available resources.
Self-insurance is generally feasible only for large organizations with sufficient financial capacity. Many self-insured entities limit their exposure by retaining risk up to a specified dollar amount and purchasing excess insurance coverage for losses above that threshold.
Quiz
1. Which statement best describes a stock insurance company?
A. It is owned by its policyholders, who may receive non-taxable dividends.
B. It is owned by shareholders, who may receive taxable dividends when declared by the board.
C. It is owned by subscribers who exchange insurance contracts.
D. It is a nonprofit membership organization formed for charitable purposes.
Correct Answer: B
Rationale: Stock insurers are owned by shareholders, and any dividends paid are corporate dividends that are taxable and not guaranteed.
2. Dividends paid by a mutual insurance company are generally considered:
A. Taxable corporate profit distributions
B. Guaranteed annual interest payments
C. A return of divisible surplus
D. Compensation for underwriting losses
Correct Answer: C
Rationale: Mutual insurer dividends are typically treated as a return of divisible surplus and are not guaranteed.
3. In a reciprocal insurance exchange, the individual or entity responsible for managing administrative affairs is known as the:
A. Managing underwriter
B. Syndicate manager
C. Attorney-in-Fact
D. Board trustee
Correct Answer: C
Rationale: A reciprocal operates through an Attorney-in-Fact, who manages administrative functions on behalf of the subscribers.
4. Which statement is TRUE regarding Lloyd's of London?
A. It is a mutual insurance company owned by policyholders.
B. It is a stock insurance company owned by shareholders.
C. It is an insurance marketplace composed of underwriting syndicates.
D. It is a federal liability risk pool formed under the Liability Risk Retention Act.
Correct Answer: C
Rationale: Lloyd's of London is not an insurer itself but a marketplace where syndicates underwrite specialized risks.
5. Which type of insurer is limited primarily to providing liability coverage for members engaged in similar or related businesses?
A. Fraternal benefit society
B. Risk Retention Group (RRG)
C. Mutual insurance company
D. Self-insurer
Correct Answer: B
Rationale: Risk Retention Groups are group-owned insurers formed to assume liability-related risks among members with homogeneous exposures.