Types of Private Insurers
A lot of types of private insurance companies do business in the United States right now. In 2020, there were more than 3000 health and life insurance companies in the United States.
These insurance companies sell different kinds of life and health insurance, annuities, mutual funds, pension plans, and other financial products.
There are different ways to put insurance companies into groups. In terms of who owns them legally and how they are set up, the main types of private insurers can be divided into the following groups:
- Stock insurers
- Mutual insurers
- The Lloyd’s of London
- Reciprocal exchanges
- Plans for Blue Cross and Blue Shield
- Health care maintenance groups (HMOs)
- Other Private Insurance Companies
Stock Insurers
A company owned by stockholders is called a stock insurer. The goal is to make money for the people who own shares. If the business is making money, the stockholders can get dividends, and the value of their stock may go up as well. In the same way, if the business isn’t doing well, the price of the stock could go down.
Mutual Insurers
Mutual insurers are businesses that are owned by their policyholders. Policyholders choose a board of directors, which then hires executives to run the business. Since not many policyholders bother to vote, the board has effective control over the company’s management. The policyholders of a mutual insurer may get dividends or a rate cut ahead of time.
In life insurance, a dividend is mostly a refund of a redundant premium that can be paid if the insurer’s mortality, investment, and operating experience are good. But because of the death rate and
The experience of investing can’t be guaranteed, and dividends can’t be guaranteed by law. There are many different kinds of mutual insurers, such as:
- Advance premium mutual
- Assessment mutual
- Fraternal Insurer
Advance Premium Mutual
Most mutual insurers are advance premium mutuals. The policyholders own an advance premium mutual. There are no stockholders, and the insurer doesn’t sell policies that can be paid off.
Once the insurer’s surplus (the difference between assets and liabilities) goes over a certain amount, the states will not let a mutual insurer sell an assessable policy. The premiums charged should be enough to pay for all claims and costs. The company pays for any extra costs caused by bad experience with the money it has left over.
Mutual insurers usually give dividends to their policyholders once a year. In property and casualty insurance, policyholders don’t usually get dividends every month. Instead, these insurers may charge lower initial or renewal premiums that are closer to the actual amount needed for claims and expenses.
Assessment Mutual
An assessment mutual has the right to charge policyholders more if the insurance company’s finances aren’t doing well. There aren’t that many assessment mutual insurers around today, in part because it’s hard to collect the assessment.
The only insurers that still sell assessable policies are smaller ones that only work in a small area, like a state or county, and only offer limited coverage.
Fraternal Insurer
A fraternal insurer is a mutual insurer that gives life and health insurance to members of a social or religious group. This kind of insurance company is also called a “fraternal benefit society.” Under the state’s insurance code, a fraternal benefit society must have some kind of social or religious group in place. Also, it must be a nonprofit organization that doesn’t sell common stock.
It must only work for the benefit of its members or beneficiaries, and it must have a representative form of government and a ritualised way of working. The Knights of Columbus, Woodmen of the World Life, and Thrivent Financial are just a few examples.
The only kinds of insurance that fraternal insurers sell are health and life insurance. The assessment method was first used to pay out death claims. Today,
Most fraternal insurers use the same legal reserve system and level premium method as commercial life insurers. Annuities and term life insurance are also sold by fraternal insurers. Fraternal insurers get a good tax deal because they are not-for-profit or charitable organizations.
Changes in the Structure of Mutual Insurance Companies Over time, the structure of mutual insurance companies, especially life insurance companies, has changed a lot. There are three clear trends:
- Company mergers are on the rise. We already said that the number of people with active life insurance has gone down a lot in recent years. Most of the drop is due to companies merging and being bought by other companies. A merger is when an insurance company is taken over by another insurance company or when two or more insurance companies join together to form a new company. When insurers join forces, it’s because they want to cut their operating and general overhead costs. They also happen when an insurance company wants to buy a new type of insurance, get into a new business area, or grow bigger to take advantage of economies of scale.
- Demutualization. When a mutual insurer is turned into a stock insurer, this is called “demutualization.” Some mutual insurers have turned into stock insurers because:
- The ability to get more money is improved.
- Stock insurers have more freedom to grow by buying new companies or changing their business.
- Stock options can be used to get and keep key employees and executives.
- Changing to a stock insurer could help you save money on taxes.
- Mutual holding firm.
Demutualization is hard, expensive, and slow, and regulatory authorities have to agree to it. As an alternative, many states have passed laws that let a mutual insurer form a holding company. A holding company is a business that controls an authorized insurer in some way.
Proponents say the following are some of the benefits:
- Insurance companies now have a faster and cheaper way to get more money so they can grow or stay competitive.
- Insurance companies can get into new fields more easily. For example, a life insurance company could buy a property and a casualty insurance company.
- Key executives and employees can be hired or kept on by giving them stock options.
Critics of mutual holding companies, on the other hand, say the following:
- Policyholders could lose money because of the change. Because of the mutual holding structure, dividends and other financial benefits to policyholders could go down.
- Critics also say that there could be a conflict of interest between the policyholders and the people in charge.
The Lloyd’s of London
Lloyd’s of London is not an insurance company, but it is the largest insurance market in the world. It offers its members services and places to write specialized lines of insurance. It is a market where people get together to form groups called syndicates to share risks and get insurance.
Some of the biggest insurance groups and companies in the world that are listed on the London Stock Exchange, as well as individuals (called “Names”) and limited partnerships, are members. Lloyd’s is also known for insuring odd things like the prize for a hole-in-one at a golf tournament or an injury to the winner of the Kentucky Derby. But these unusual risks only make up a small part of the business as a whole. Lloyd’s of London has a few important features.
First, as we’ve already said, Lloyd’s isn’t really an insurance company. Instead, it’s a group of members (corporations, individuals, and limited partnerships) that write insurance together in syndicates. Lloyd’s does not write insurance on its own. Instead, insurance is written by groups that are part of Lloyd’s. In this way, Lloyd’s is like the New York Stock Exchange, which doesn’t buy or sell securities but gives its members a market and other services so they can buy and sell securities.
Second, as was already said, the insurance is written by the different Lloyd’s syndicates. Also, Lloyd’s is a very important player in the international markets for reinsurance. As was already said, the unusual exposure units that have made Lloyd’s famous are only a small part of the company’s business as a whole. In the same way, life insurance only makes up a small part of the business as a whole and is limited to short-term contracts.
Third, people who join new syndicates or use new names now have limited legal responsibility. Individual Names had unlimited legal liability in the past and put their own fortunes on the line.
Lloyd’s of London is also made up of corporations with limited liability and partnerships with limited liability. In order to get more money, corporations and partnerships were allowed to join Lloyd’s. This has made it much easier for Lloyd’s to take on new business. Members also have to meet strict financial standards. Individual members are people with a lot of money.
Only claims and expenses can be taken out of the premium trust fund. Members must also put down more money if the premiums aren’t enough to cover the claims and the business fails. A central
A guarantee fund is also available to pay claims if a policy’s members go bankrupt and can’t pay their bills. Lastly, Lloyd’s is only allowed to do business in a few places in the United States. Lloyd’s has to work as a non-admitted insurer in the other states.
This means that a surplus lines broker or agent can place business with Lloyd’s, but only if the insurance can’t be gotten from an admitted insurer in the state. Even though it doesn’t have any licenses, Lloyd’s does a lot of business in the United States.
In particular, Lloyd’s of London is an important professional reinsurer that covers a lot of American insurance companies.
Reciprocal Exchange
A “reciprocal exchange” is a group of people who don’t have to be in business together but share insurance. Most reciprocals are small and only make up a small part of the total premiums paid for property and casualty insurance. But a few large reciprocals cover more than one type of insurance.
Blue Cross and Blue Shield Plans
Most Blue Cross plans in most states are set up as nonprofit, community-focused prepayment plans that cover mostly hospital services. Blue Shield plans are usually non-profit, prepayments plans that pay for doctors’ and surgeons’ fees and other medical services. Most members are covered by group plans, but there are also plans for individuals and families.
Health maintenance organisations (HMOs) and preferred provider organisations are also backed by Blue Cross and Blue Shield plans (PPOs).
Health Maintenance Organizations
HMOs are organised health care plans that give their members a full range of health care services. HMOs offer a wide range of health care services to a certain group of people for a fixed, pre-paid fee.
Many HMOs have cost-sharing rules, like deductibles and copayments, and they put a lot of emphasis on keeping costs down. Also, the choice of health care providers may be limited, and there may be less of them. Treatments that are expensive are often given.
Other Private Insurance Companies
- In addition to the above, there are a few other types of private insurers that are worth talking about briefly.
- There are also captive insurers and life insurance from savings banks.
- A captive insurer is an insurance company that is owned by a parent company to cover the risks of loss for the parent company.
- In commercial property and casualty insurance, captive insurers are becoming more important, and there are thousands of captive insurers today.
- Savings Bank Life Insurance (SBLI) is life insurance that was first sold by mutual savings banks in Massachusetts, New York, and Connecticut.
- The goal of SBLI is to help people get low-cost life insurance by keeping operating costs low and not giving agents a lot of money for making sales.
