Types of Insurers
Insurers can be grouped into two main types: private and government. Private insurers offer insurance to people through the individual market, while government insurance redistributes incomes to help people afford costs associated with fundamental risks.
Private Insurers
Private insurers offer insurance to people through the individual market. In most cases, private insurance is sold on a voluntary basis; however, some forms of insurance offered through private insurers are compulsory.
There are several types of private insurers, including stock insurers, mutual insurers, noncommercial organizations, and fraternal benefit societies.
Stock Insurers
Stock insurers, also referred to as capital stock insurers, are incorporated companies owned by their stockholders. Stock insurers have a capital fund, surplus and reserves which are financially supported by their stockholders. Each stockholder owns a portion of the insurer, and is a source of capital for the insurer. Stockholders assume the risk of the individuals insured by the stock insurer. Because stockholders are essentially co-owners of the stock insurer, they take part in the profits and losses that the insurer experiences. Stock insurers' shares are traded on stock exchanges.
Stock insurers, also referred to as capital stock insurers, are incorporated companies owned by their stockholders.
Stock insurers are managed by a board of directors chosen by the stockholders. When stock insurers experience profits, the board of directors will pay out earnings to stockholders in the form of dividends. Traditionally, stock insurers have been called nonparticipating insurers because policyholders do not participate in the profits of the insurer, and thus do not receive dividends. Recently, stock insurers are increasingly offering participating policies where policyholders participate in the insurer's profits.
Mutual Insurers
Mutual insurers are owned by their policyholders. There are no stockholders. Mutual insurers are distinct from stock insurers in two primary ways: they lack capital stock, and profits are distributed among their members - the policyholders.
Because mutual insurers do not have capital stock, the funds required to start the company must be obtained from an individual or group of people. It is fairly common for mutual insurers to start out as stock insurers to gain the necessary funds before becoming a mutual insurer. Transformation of a stock insurer into a mutual insurer is termed mutualization, and the reverse is termed demutualization.
One thing that mutual insurers share in common with stock insurers is a board of directors. Policyholders vote on who will serve on the board of directors. After all operating expenses and claims have been paid, any profits are distributed to the policyholders in the form of dividends. Dividends paid out from mutual insurers are considered a non-taxable return of overcharged premium, whereas dividends paid out from stock insurers are simply the profits experienced by the company. Since mutual insurers issue dividends to their policyholders, they are referred to as participating insurers. Mutual insurers are required to be incorporated in most states.
Noncommercial Organizations
Service providers, or noncommercial organizations,are not technically “insurers” and do not sell insurance. They are better described as service organizations that provide prepaid health plans for medical, surgical, and hospital expenses. Service providers sell medical services to members, who are termed subscribers. The insured is not reimbursed for the medical services received. Instead, the service organization pays benefits directly to the health care providers the subscribers use.
Two common types of service providers are health maintenance organizations (HMOs) and preferred provider organizations (PPOs). HMOs provide the medical care and finances required to fund health care services. Subscribers obtain medical care through hospitals and physicians that have contracted with the HMO. PPOs provide discounted medical services to members. A PPO is formed by a group wishing to provide health care services to its members. The PPO receives a special discounted rate by using certain medical practitioners, hospitals and clinics. In exchange, the PPO will refer members to these medical professionals. An insurance company may contract with a PPO to provide medical services to insureds.
The most familiar of the service insurers are Blue Cross and Blue Shield. Unlike stock or mutual insurers, noncommercial organizations are nonprofit entities offering strictly health insurance coverage. Blue Cross health plans are intended for hospital costs, and Blue Shield health plans are for medical and surgical costs.
Fraternal Benefit Societies
Fraternal benefit societies, also known as fraternal insurers or simply fraternals, are special types of mutual insurers/ nonprofit religious, ethnic or charitable organizations that provide insurance solely to their members. People who are members of a fraternal benefit society tend to be the members of a fraternal organization or lodge. The lodge system has a representative form of government. Fraternal benefit societies are exempt from federal income tax and state premium tax because they are categorized as charitable organizations. Fraternal benefit societies are mostly involved in life and health insurance. An example of a fraternal benefit society is the Modern Woodmen of America.
Government Insurers
After private insurers, the second main group of insurers is government insurers.
Government insurance is also known as social insurance. The purpose of social insurance is to provide protection against fundamental risks by redistributing income to help people who cannot afford to pay the cost of incurring such losses themselves. Government insurance also provides insurance protection for catastrophic risks that private insurers will not cover.
There are several types of government insurance. In terms of life and health insurance, most people are familiar with Social Security and Medicare. Social Security is also known as OSADI, or Old Age, Survivors' and Disability Insurance, which provides disability income, survivor benefits and retirement benefits. Medicare is part of the Social Security program, and provides medical benefits to qualifying people age 65 and older. Another medical insurance program subsidized by both the federal and state governments is Medicaid, which provides health care to impoverished people.
The government has also provided military, federal and state employees with a variety of life and health insurance programs including Servicemen's Group Life Insurance, CHAMPUS, and TRICARE. Railroad employees are eligible for federal insurance through the Railroad Retirement Act.
Federal government insurance for catastrophic risks includes National Flood Insurance, War Risk Insurance, and Federal Crop Insurance. State government insurance includes unemployment insurance, workman's compensation and SCHIP, or State Children Health Insurance Programs.
Authorized Versus Unauthorized Insurers
In order to sell insurance in a state, insurers must receive a license from that state's department of insurance. The license, called a certificate of authority, authorizes an insurer to sell insurance for particular lines (i.e. life, health, property, casualty, etc.).
Authorized insurers, also referred to as admitted or licensed insurers, are insurers who have received a certificate of authority authorizing them to transact insurance in a particular state for a particular line or lines of insurance.
Unauthorized insurers, also referred to as non-licensed or nonadmitted insurers, are not allowed to transact insurance business in a particular state, with the exception of excess and surplus lines insurers. Unauthorized insurers do not have licensure because they have not yet applied, have applied and been denied licensure, or are excess and surplus lines insurers. Even though excess and surplus lines insurers are considered unauthorized insurers in a state, they are permitted to conduct insurance business in that state.
The license, called a certificate of authority, authorizes an insurer to sell insurance for particular lines (i.e. life, health, property, casualty, etc.)
Domestic, Foreign and Alien Insurers
Insurers are categorized as domestic, foreign or alien based on where their business is transacted with respect to the location of incorporation. An insurer's domicile of incorporation is the state or district in which it became an incorporated company.
Domestic Insurer: An insurer that conducts business in the state it was incorporated is a domestic insurer.
Foreign Insurer: A foreign insurer is any insurer that conducts business in a state or district in which it wasn't incorporated.
Alien Insurer: An alien insurer is any insurer that conducts business in a country in which it wasn't incorporated.
As an example: an insurer that is incorporated in Texas is a domestic insurer in Texas, a foreign insurer in New Mexico and an alien insurer in Italy.
No comments:
Post a Comment