8. Insurance Markets

1. 8. Insurance Markets BUS 200 Introduction to Risk Management and Insurance Jin Park

2. Overview • Overview of Financial Services Industry • Organizational Forms of Insurers • Types of Insurance Marketing System

3. Financial Services Industry • Assets by Industry, Year-End 2003 ($ trillion) • Banking $10.8 25.7% • Insurance $ 4.8 11.4% • Securities $ 8.5 20.2% • Pensions $ 6.4 15.2% • Gov’t Related $ 6.3 15.0% • Other $ 5.2 12.4% • Total $42.0 100.0%

4. Organizational Forms of Insurers • Stock Insurers • Mutual Insurers • Reciprocal Exchanges • Lloyd’s Associations • Blue Cross and Blue Shield • HMOs and PPOs

5. Organizational Forms of Insurers • Stock Insurers • Closely-held stock insurers • Publicly-held stock insurers • Owned by stockholders • Insurance policies (contracts) are nonassessable • Dominant in the property and liability industry

6. Organizational Forms of Insurers • Mutual Insurers • Owned by policyholders • Dominant in the field of life insurance • Assessment Mutual • Has the right to assess policyowners for losses and expenses. • Advance Premium Mutual • Does not issue assessable policies, but charges premiums expected to be sufficient to pay all claims and expenses. • Factory Mutual • Available only to large, well-constructed & carefully maintained exposures, satisfying high underwriting standards. • Provides substantial loss prevention services. • Fraternal insurer • Provides life and health insurance to members of a social or religious organization.

7. Organizational Forms of Insurers • Reciprocal Exchanges • An unincorporated mutual. • Each member (subscriber) of the reciprocal insures the every other subscriber and, in turn, is insured by every other subscriber. • Managed by an attorney-in-fact • Examples • Farmers Insurance Exchange • NJCURE

8. Organizational Forms of Insurers • Lloyd’s Associations • Lloyd’s London • Not an insurer, but an insurance market (association) • Insurance is written by syndicates, which is managed by a managing agent. • Lloyd’s members have unlimited liability • Central guarantee fund pays for insolvent members • Corporations since 1994 have been accepted as a member with limited liability • Lloyd’s of America • Small and not the same as Lloyd’s of London

10. Organizational Forms of Insurers • Blue Cross and Blue Shield • Mostly not-for-profit • Blue Cross Plan • First created in 1929 for teachers in the Dallas school system. • Community oriented prepayment plans that provide coverage for hospital services • Blue Shield Plan • First founded in 1939 in California in 1939 created for employees of lumber and mining camps in the Pacific Northwest. • Prepayment plans for physicians’ and surgeons’ fees and services

11. Organizational Forms of Insurers • Health Maintenance Organizations (HMOs) • A health care system that assumes or shares both the financial risks and the delivery risks associated with providing comprehensive medical services, usually in return for a fixed, prepaid fee. • Preferred Provider Organizations (PPOs) • An arrangement designed to supply health care services at a discounted cost by providing incentives for members to use designated health providers, but which also provides coverage for services rendered by health care providers who are not part of the PPO network.

12. Insurance Marketing System • Agents and Brokers • Life Insurance Marketing System • Agency Building System • General agency system • Managerial system • Nonbuilding Agency System • Personal producing general agent • Direct Response System

13. Insurance Marketing System • Property/Liability Insurance Marketing System • Independent Agency System • Exclusive Agency System • Direct Writer • Direct Response System • Multiple Distribution Systems

14. Next • 9. Insurance Regulation Chapter 28 Putting a price on risk, US Banker, August 1, 2002