Copyright © 2017 Pearson Education, Inc. All rights reserve.docx

Copyright © 2017 Pearson Education, Inc. All rights reserved.
Chapter 5
Types of Insurers and Marketing Systems
*
5-*
AgendaOverview of Private Insurance in the Financial Services
IndustryTypes of Private InsurersAgents and BrokersTypes of
Marketing SystemsGroup Insurance Marketing
*
5-*
Overview of Private Insurance in the Financial Services
IndustryThe financial services industry consists of:Commercial
banksSavings and loan institutionsCredit unionsLife and health

insurersProperty and casualty insurersMutual FundsSecurities
brokers and dealersPrivate and state pension fundsGovernment-
related financial institutions
*
5-*
Overview of Private Insurance in the Financial Service Industry
(Continued)
In 2013, the U.S. insurance industry employed 2.4 million
people
Chart1Property and CasualtyLife and Health
Sales
Premiums Written (2013): $1 trillion
[]%
[]%
46
54
Sheet1SalesProperty and Casualty46Life and Health54
Sales
Cash and Invested Assets (2013): $5 trillion
[]%
70%
46
54

5-*
Types of Private Insurers Size of the insurance market,
2013Life and health insurers: 850 - these insurers sell life and
health insurance products, annuities, mutual funds, pension
plans, and related financial productsProperty and casualty
insurers: 2623 - these insurers sell property and casualty
insurance and related lines, including inland marine coverages
and surety and fidelity bonds
*
5-*
Exhibit 5.1 Top Ten Writers of Insurance Annuities by Direct
Premiums Written, 2013 (in thousands of $)
*
5-*
Exhibit 5.2 Top Ten Writers of Property/Casualty Insurance by
Direct Premiums Written, 2013 (in thousands of $)
*

5-*
Types of Private Insurers (Continued)Insurers can be classified
by their organizational form:Stock insurersMutual
insurersReciprocal exchangesLloyd’s of LondonBlue Cross and
Blue Shield PlansHealth maintenance organizations
(HMOs)Other types of private insurers
*
5-*
Types of Private Insurers (Continued)A stock insurer is a
corporation owned by stockholdersObjective: earn profit for
stockholders by increasing the value of stock and paying
dividendsStockholders elect board of directorsStockholders bear
all lossesInsurer cannot issue an assessable policy
*
5-*
Types of Private Insurers (Continued)A mutual insurer is a
corporation owned by the policyownersPolicyowners elect board
of directors, who have effective management Policyholders may

receive dividends or rate reductions
*
5-*
Types of Private Insurers (Continued)There are three main types
of mutual insurers:An advance premium mutual is owned by the
policyowners; there are no stockholders, and the insurer does
not issue assessable policiesAn assessment mutual has the right
to assess policyowners an additional amount if the insurer’s
financial operations are unfavorableA fraternal insurer is a
mutual insurer that provides life and health insurance to
members of a social or religious organization
5-*
Types of Private Insurers (Continued)The corporate structure of
mutual insurers is changing due to:An increase in company
mergersDemutualization, whereby a mutual company is
converted into a stock insurerThe creation of mutual holding
companiesA holding company is a company that directly or
indirectly controls an authorized insurer
*
5-*

Exhibit 5.3 Mutual Holding Company Illustration
*
5-*
Types of Private Insurers (Continued)Lloyd’s of London is not
an insurer, but a society of members who underwrite insurance
in syndicatesMembership includes corporations, individual
members (called Names), and limited partnershipsNew
individual members now have limited legal
liabilityCorporations with limited legal liability and limited
liability partnerships can also join Lloyd’s of LondonMembers
must meet stringent financial requirementsLloyd’s is licensed
only in a small number of jurisdictions in the U.S.
*
5-*
Types of Private Insurers (Continued)A reciprocal exchange can
be defined as an unincorporated organization in which insurance
is exchanged among the members (called subscribers)Insurance
is exchanged among the members; each member of the
reciprocal insures the other membersIt is managed by an
attorney-in-factMost reciprocals are relatively small and

specialize in a limited number of lines of insurance
*
5-*
Types of Private Insurers (Continued)Blue Cross and Blue
Shield Plans are generally organized as nonprofit, community
oriented plansBlue Cross plans provide coverage for hospital
servicesBlue Shield plans provide coverage for physicians’ and
surgeons’ feesMost plans have merged into one entityMany
sponsor HMOs and PPOsSome plans have converted to a for-
profit status to raise capital and become more competitive
*
5-*
Types of Private Insurers (Continued)A Health Maintenance
Organization (HMO) provides comprehensive health care
services to its membersBroad health care services are provided
for a fixed prepaid feeCost control is emphasizedChoice of
health care providers may be restrictedLess costly forms of
treatment are often provided
*

5-*
Types of Private Insurers (Continued)A captive insurer is an
insurer owned by a parent firm for the purposes of insuring the
parent firm’s loss exposuresA single parent, or pure, captive is
an insurer owned by one parentAn association captive is owned
by several parentsSavings Bank Life Insurance refers to life
insurance that is sold by mutual savings banks, over the phone
or through Web sites
*
5-*
Agents and BrokersAn agent is someone who legally represents
the principal and has the authority to act on the principal's
behalf Authority may be:ExpressedImpliedApparentThe
principal is legally responsible for all acts of an agent when the
agent is acting within the scope of authority
*
5-*
Agents and Brokers (Continued)A property and casualty agent

has the power to bind the insurerA binder provides temporary
insurance until the policy is actually writtenA life insurance
agent normally does not have the authority to bind the
insurerThe applicant for life insurance must be approved by the
insurer before the insurance becomes effective
*
5-*
Agents and Brokers (Continued)A broker is someone who
legally represents the insured, and:solicits applications and
attempts to place coverage with an appropriate insureris paid a
commission from the insurers where the business is placeddoes
not have the authority to bind the insurerA surplus lines broker
is licensed to place business with a nonadmitted insurerSurplus
lines refer to any type of insurance for which there is no
available market within the state, and coverage must be placed
with a nonadmitted insurer
*
5-*
Life Insurance MarketingThe majority of life insurance policies
and annuities sold today are through personal selling
distribution systems Commissioned agents solicit and sell life
insurance products to prospective insuredsCareer, or affiliated,

agents are full-time agents who usually represent one insurer
and are paid on a commission basis.In a multiple line exclusive
agency system, agents who sell primarily property and casualty
insurance also sell individual life and health insurance products.
*
Transparency Master 1.2
5-*
Life Insurance Marketing (Continued)Independent property and
casualty agents are independent contractors who represent
several insurers and sell primarily property and casualty
insuranceA personal-producing general agent (PPGA) is an
independent agent who places substantial amounts of business
with one insurer and has a special financial arrangement with
that insurerBrokers are independent agents who do not have an
exclusive contract with any single insurer
5-*
Life Insurance Marketing (Continued)Many insurers today use
commercial banks and other financial institutions as a
distribution systemA direct response system is a marketing
system by which insurance products are sold directly to
consumers without a face-to-face meeting with an
agentAcquisition costs can be held down, but complex products
are difficult to sell this way

5-*
Life Insurance Marketing (Continued)Other forms of life
insurance distribution include:Worksite marketingStock
brokersFinancial planners
5-*
Property and Casualty Insurance MarketingThe independent
agency is a business firm that usually represents several
unrelated insurersAgents are paid a commission based on the
amount of business produced, which vary by the line of
insuranceThe agency owns the expirations or renewal rights to
the business; it may bill the policyholders and collect
premiums, but most insurers use direct billingAgents may be
authorized to adjust small claims and may provide loss control
services to their insureds
*
5-*
Property and Casualty Insurance Marketing (Continued)Under
the exclusive agency system, the agent represents only one
insurer or group of insurers under common ownershipAgents do

not usually own the expirations or renewal rights to the
policiesAgents are generally paid a lower commission rate on
renewal business than on new businessExclusive agency
insurers provide strong support services to new agents
5-*
Marketing Systems
in Property and Liability InsuranceA direct writer is an insurer
in which the salesperson is an employee of the insurer, not an
independent contractor.Employees are usually compensated on a
“salary plus” arrangementA direct response insurer sells
directly to the consumer by television or some other mediaMany
property and casualty insurers use multiple distribution systems
*
5-*
Group Insurance MarketingMany insurers use group marketing
methods to sell individual insurance policies to:Employer
groupsLabor unionsTrade associationsProducts are sold through
group representatives, employees who receive a salary and
incentive payments based on sales.Some property and liability
insurers use mass merchandising plans to market their
insuranceEmployees typically pay for insurance by payroll
deduction

*
FIN 3610 General Insurance
Chapter 5: Types of Insurers and Marketing Systems
Lecture Overview – Comments from Professor Zietz
Let’s examine the different types of Insurers and
Marketing Systems through which Insurance is Available!
In this chapter, we will overview the use of private insurance in
the financial service industry; give examples of types of private
insurers; expand on agents and brokers; see examples of types
of marketing systems; and explaining group insurance
marketing.
There are a myriad of ways to classify insurance companies,
including the type of insurance coverage that it offers, the type
of insurance services that it offers, the ownership of the
company, and the location in which the company is domiciled.
The types of classifications of private insurers discussed in this
chapter include:
· Stock insurers
· Mutual Insurers
· Reciprocal Exchanges
· Lloyd’s associations
· Blue Cross and Blue Shield plans, and
· Health Maintenance Organizations.
These classifications may greatly influence things like how
much coverage the company can write and how much the
premiums or income is taxed. This chapter provides a great
overview of the differences between the corporate structures of
the company. Carefully peruse the information in the Exhibits
5.1-5.3 for some interesting details on these classifications.
Quick Question: What is the largest U.S. Property/Casualty
Company in Revenues?

How many of you thought it was Berkshire Hathaway? I’m sure
you were surprised by that ranking. Note that MetLife is the
largest U.S. Life and Health Insurance Company.
The second part of this chapters delves into the types of
marketing systems used in the distribution of insurance. If you
have had a marketing class, you’ll see some familiar
information. However, you will also see that the marketing
systems in insurance also use some new terms, including
Personal Selling Systems such as Career Agents, Multiple Line
Exclusive Agents, Independent agents, Personal Producing
General Agents, and Brokers. It is very important to note the
difference between these types of systems. The major
distribution systems for Property and Casualty (P/C) generally
include these types of systems:
· Independent agency system
· Exclusive agency system
· Direct Writers
· Direct response system
· Multiple distribution systems
If you find yourself in the insurance industry, perhaps wanting
to have your own business or agency, it will be important to
note the differences, including the advantages and
disadvantages of each of these.
The insurance industry offers a wide array of professional
career paths in the area of sales! We’ll talk more about other
career choices in the next chapter when we cover Insurance
Company Operations.

Chapter 5
Types of Insurers and Marketing Systems
*
5-*
AgendaOverview of Private Insurance in the Financial Services
IndustryTypes of Private InsurersAgents and BrokersTypes of
Marketing SystemsGroup Insurance Marketing
*
5-*
Overview of Private Insurance in the Financial Services
IndustryThe financial services industry consists of:Commercial
banksSavings and loan institutionsCredit unionsLife and health
insurersProperty and casualty insurersMutual FundsSecurities
brokers and dealersPrivate and state pension fundsGovernment-
related financial institutions
*

5-*
Overview of Private Insurance in the Financial Service Industry
(Continued)
In 2013, the U.S. insurance industry employed 2.4 million
people
Sales
Premiums Written (2013): $1 trillion
[]%
[]%
46
54
Sales
Cash and Invested Assets (2013): $5 trillion
[]%
70%
46
54
5-*
Types of Private Insurers Size of the insurance market,
2013Life and health insurers: 850 - these insurers sell life and
health insurance products, annuities, mutual funds, pension
plans, and related financial productsProperty and casualty
insurers: 2623 - these insurers sell property and casualty

insurance and related lines, including inland marine coverages
and surety and fidelity bonds
*
5-*
Exhibit 5.1 Top Ten Writers of Insurance Annuities by Direct
Premiums Written, 2013 (in thousands of $)
*
5-*
Exhibit 5.2 Top Ten Writers of Property/Casualty Insurance by
Direct Premiums Written, 2013 (in thousands of $)
*
5-*
Types of Private Insurers (Continued)Insurers can be classified
by their organizational form:Stock insurersMutual
insurersReciprocal exchangesLloyd’s of LondonBlue Cross and

Blue Shield PlansHealth maintenance organizations
(HMOs)Other types of private insurers
*
5-*
Types of Private Insurers (Continued)A stock insurer is a
corporation owned by stockholdersObjective: earn profit for
stockholders by increasing the value of stock and paying
dividendsStockholders elect board of directorsStockholders bear
all lossesInsurer cannot issue an assessable policy
*
5-*
Types of Private Insurers (Continued)A mutual insurer is a
corporation owned by the policyownersPolicyowners elect board
of directors, who have effective management Policyholders may
receive dividends or rate reductions
*
5-*

Types of Private Insurers (Continued)There are three main types
of mutual insurers:An advance premium mutual is owned by the
policyowners; there are no stockholders, and the insurer does
not issue assessable policiesAn assessment mutual has the right
to assess policyowners an additional amount if the insurer’s
financial operations are unfavorableA fraternal insurer is a
mutual insurer that provides life and health insurance to
members of a social or religious organization
5-*
Types of Private Insurers (Continued)The corporate structure of
mutual insurers is changing due to:An increase in company
mergersDemutualization, whereby a mutual company is
converted into a stock insurerThe creation of mutual holding
companiesA holding company is a company that directly or
indirectly controls an authorized insurer
*
5-*
Exhibit 5.3 Mutual Holding Company Illustration
*

5-*
Types of Private Insurers (Continued)Lloyd’s of London is not
an insurer, but a society of members who underwrite insurance
in syndicatesMembership includes corporations, individual
members (called Names), and limited partnershipsNew
individual members now have limited legal
liabilityCorporations with limited legal liability and limited
liability partnerships can also join Lloyd’s of LondonMembers
must meet stringent financial requirementsLloyd’s is licensed
only in a small number of jurisdictions in the U.S.
*
5-*
Types of Private Insurers (Continued)A reciprocal exchange can
be defined as an unincorporated organization in which insurance
is exchanged among the members (called subscribers)Insurance
is exchanged among the members; each member of the
reciprocal insures the other membersIt is managed by an
attorney-in-factMost reciprocals are relatively small and
specialize in a limited number of lines of insurance
*
5-*

Types of Private Insurers (Continued)Blue Cross and Blue
Shield Plans are generally organized as nonprofit, community
oriented plansBlue Cross plans provide coverage for hospital
servicesBlue Shield plans provide coverage for physicians’ and
surgeons’ feesMost plans have merged into one entityMany
sponsor HMOs and PPOsSome plans have converted to a for-
profit status to raise capital and become more competitive
*
5-*
Types of Private Insurers (Continued)A Health Maintenance
Organization (HMO) provides comprehensive health care
services to its membersBroad health care services are provided
for a fixed prepaid feeCost control is emphasizedChoice of
health care providers may be restrictedLess costly forms of
treatment are often provided
*
5-*
Types of Private Insurers (Continued)A captive insurer is an
insurer owned by a parent firm for the purposes of insuring the
parent firm’s loss exposuresA single parent, or pure, captive is

an insurer owned by one parentAn association captive is owned
by several parentsSavings Bank Life Insurance refers to life
insurance that is sold by mutual savings banks, over the phone
or through Web sites
*
5-*
Agents and BrokersAn agent is someone who legally represents
the principal and has the authority to act on the principal's
behalf Authority may be:ExpressedImpliedApparentThe
principal is legally responsible for all acts of an agent when the
agent is acting within the scope of authority
*
5-*
Agents and Brokers (Continued)A property and casualty agent
has the power to bind the insurerA binder provides temporary
insurance until the policy is actually writtenA life insurance
agent normally does not have the authority to bind the
insurerThe applicant for life insurance must be approved by the
insurer before the insurance becomes effective
*

5-*
Agents and Brokers (Continued)A broker is someone who
legally represents the insured, and:solicits applications and
attempts to place coverage with an appropriate insureris paid a
commission from the insurers where the business is placeddoes
not have the authority to bind the insurerA surplus lines broker
is licensed to place business with a nonadmitted insurerSurplus
lines refer to any type of insurance for which there is no
available market within the state, and coverage must be placed
with a nonadmitted insurer
*
5-*
Life Insurance MarketingThe majority of life insurance policies
and annuities sold today are through personal selling
distribution systems Commissioned agents solicit and sell life
insurance products to prospective insuredsCareer, or affiliated,
agents are full-time agents who usually represent one insurer
and are paid on a commission basis.In a multiple line exclusive
agency system, agents who sell primarily property and casualty
insurance also sell individual life and health insurance products.
*

5-*
Life Insurance Marketing (Continued)Independent property and
casualty agents are independent contractors who represent
several insurers and sell primarily property and casualty
insuranceA personal-producing general agent (PPGA) is an
independent agent who places substantial amounts of business
with one insurer and has a special financial arrangement with
that insurerBrokers are independent agents who do not have an
exclusive contract with any single insurer
5-*
Life Insurance Marketing (Continued)Many insurers today use
commercial banks and other financial institutions as a
distribution systemA direct response system is a marketing
system by which insurance products are sold directly to
consumers without a face-to-face meeting with an
agentAcquisition costs can be held down, but complex products
are difficult to sell this way
5-*
Life Insurance Marketing (Continued)Other forms of life
insurance distribution include:Worksite marketingStock
brokersFinancial planners

5-*
Property and Casualty Insurance MarketingThe independent
agency is a business firm that usually represents several
unrelated insurersAgents are paid a commission based on the
amount of business produced, which vary by the line of
insuranceThe agency owns the expirations or renewal rights to
the business; it may bill the policyholders and collect
premiums, but most insurers use direct billingAgents may be
authorized to adjust small claims and may provide loss control
services to their insureds
*
5-*
Property and Casualty Insurance Marketing (Continued)Under
the exclusive agency system, the agent represents only one
insurer or group of insurers under common ownershipAgents do
not usually own the expirations or renewal rights to the
policiesAgents are generally paid a lower commission rate on
renewal business than on new businessExclusive agency
insurers provide strong support services to new agents
5-*

Marketing Systems
in Property and Liability InsuranceA direct writer is an insurer
in which the salesperson is an employee of the insurer, not an
independent contractor.Employees are usually compensated on a
“salary plus” arrangementA direct response insurer sells
directly to the consumer by television or some other mediaMany
property and casualty insurers use multiple distribution systems
*
5-*
Group Insurance MarketingMany insurers use group marketing
methods to sell individual insurance policies to:Employer
groupsLabor unionsTrade associationsProducts are sold through
group representatives, employees who receive a salary and
incentive payments based on sales.Some property and liability
insurers use mass merchandising plans to market their
insuranceEmployees typically pay for insurance by payroll
deduction
*
FIN 3610 Assignment 3
Name_______________________
Chapter 5
Please remember that you must do your own work. Any

plagiarism will result in a grade of zero for all students
involved. Please use your own words even if you are using the
textbook for answers. Always provide a citation when a
reference is used.
1. Describe the basic characteristics of the following types of
insurance:
a. Stock insurers:
b. Mutual insurers:
c. Loyd’s of London:
d. Reciprocal exchange:
2. Explain the legal distinction between an agent and a broker.
3. Briefly describe and explain the key features of the following
distribution systems in the marketing of property and casualty
insurance.
a. Independent agency system:
b. Exclusive agency system:
c. Direct writer:
d. Direct response system:
e. Multiple distribution systems:
4. Who owns the policy expirations or the renewal rights to the
business under the independent agency system, and who owns
these under the exclusive system?
5. The number of life insurers has declined sharply during the
past decade because of the increase in company mergers and
acquisitions, demutualization of insurers, and formation of
mutual holding companies.
a. Why have mergers and acquisitions among insurers increased
over time?

b. What is demutualization?
c. Briefly explain the advantages of demutualization of a mutual
life insurer.
d. What is a mutual holding company?
FIN 3610 Assignment 3
Name_______________________
Chapter 5
Please remember that you must do your own work. Any
plagiarism will result in a grade of zero for all students
involved. Please use your own words even if you are using the
textbook for answers. Always provide a citation when a
reference is used.
1. Describe the basic characteristics of the following types of
insurance:
a. Stock insurers:
b. Mutual insurers:
c. Loyd’s of London:
d. Reciprocal exchange:
2. Explain the legal distinction between an agent and a broker.
3. Briefly describe and explain the key features of the following
distribution systems in the marketing of property and casualty
insurance.
a. Independent agency system:
b. Exclusive agency system:
c. Direct writer:
d. Direct response system:
e. Multiple distribution systems:

4. Who owns the policy expirations or the renewal rights to the
business under the independent agency system, and who owns
these under the exclusive system?
5. The number of life insurers has declined sharply during the
past decade because of the increase in company mergers and
acquisitions, demutualization of insurers, and formation of
mutual holding companies.
a. Why have mergers and acquisitions among insurers increased
over time?
b. What is demutualization?
c. Briefly explain the advantages of demutualization of a mutual
life insurer.
d. What is a mutual holding company?

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