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IM_4.pdf - Dr Mariusz Dybał Institute of Economic Sciences...

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Unformatted text preview: Dr Mariusz Dybał Institute of Economic Sciences [email protected] Insurance market Types of insurers and marketing systems (Based upon: George E. Rejda, PRINCIPLES OF RISK MANAGEMENT AND INSURANCE (10TH EDITION), Addison Wesley, 2007) 1 Mariusz Dybał – Types of insurers and marketing systems Scheme of the Lecture 1. 2. 3. 4. 5. 6. Overview of Private Insurance in the Financial Services Industry Types of Private Insurers Agents and Brokers Types of Marketing Systems Group Insurance Marketing Case application no. 4 2 Mariusz Dybał – Types of insurers and marketing systems 1. Overview of Private Insurance in the Financial Services Industry  The financial services industry consists of financial institutions that provide financial products and services to the public:          Commercial banks; banks; Savings and loan institutions; institutions; Credit unions; unions; Life and health insurers; insurers; Property and casualty insurers; insurers; Mutual Funds; Funds; Securities brokers and dealers; dealers; Private and state pension funds; funds; Government--related financial institions. Government institions. 3 1 Mariusz Dybał – Types of insurers and marketing systems 1. Overview of Private Insurance in the Financial Services Industry   There There are various ways of measuring the relative importance of private insurance in the financial services industry; One common method is to determine the percentage of industry assets held by each financial sector. 4 Mariusz Dybał – Types of insurers and marketing systems  1. Overview of Private Insurance in the Financial Services Industry year): Exhibit 1 Assets of Financial Services Sectors by Industry, 2005 ($billions, end of year): 5 Mariusz Dybał – Types of insurers and marketing systems 1. Overview of Private Insurance in the Financial Services Industry   The financial services industry is changing rapidly; Changes in the financial services industry include:  Consolidations:: Consolidations   The number of firms has declined due to mergers and acquisitions;; acquisitions Convergence:: Convergence  Existing financial institutions now sell a wide variety of financial products that earlier were outside their core business area 6 2 Mariusz Dybał – Types of insurers and marketing systems  1. Overview of Private Insurance in the Financial Services Industry Exhibit 2 Insurance Companies That Own OTSOTS-Regulated Thrifts, by Assets, 2005 $000) : a 7 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers   A large number of private insurers are currently doing business in the United States; Size of the insurance market, 2004: 2004:  Life and health insurers: 1179: 1179:   These insurers sell life and health insurance products, annuities, mutual funds, pension plans, and related financial products;; products Property and casualty insurers: 3300+: 3300+:  These insurers sell property and casualty insurance and related lines, including marine coverages and surety and fidelity bonds. bonds. 8 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Exhibit 3 Top Twenty U.S. Life/Health Insurance Groups and Companies by Revenues, 2005 ($ millions):: millions) 9 3 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Exhibit 4 Top 20 U.S. Property/Casualty Companies by Revenues, 2005 ($millions) : 10 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers   There are various ways of classifying insurance companies; In terms of legal ownership and structure, the major types of private insurers can be classified as follows: follows:        Stock insurers; insurers; Mutual insurers; insurers; Reciprocal exchanges; exchanges; Lloyd’s of London; London; Blue Cross and Blue Shield Plans; Plans; Health maintenance organizations (HMOs); (HMOs); Other types of private insurers. insurers. 11 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  A stock insurer is a corporation owned by stockholders:: stockholders  Objective: earn profit for stockholders: stockholders:      Increase value of stock; stock; Pay dividends; dividends; Stockholders elect board of directors; directors; Stockholders bear all losses; losses; Insurer cannot issue an assessable policy: policy:  An assessable policy permits the insurer to charge the policyowners additional premiums if losses are excessive. 12 4 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  A mutual insurer is a corporation owned by the policyowners,, there are no stockholders: policyowners    Policyowners elect board of directors, who have effective management control; control; May pay dividends to policyowners, or give a rate reduction in advance;; advance 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 policies; policies; An assessment mutual has the right to assess policyowners an additional amount if the insurer’s financial operations are unfavorable; unfavorable; A fraternal insurer is a mutual insurer that provides life and health insurance to members of a social or religious organization. organization. 13 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  The corporate structure of mutual insurers is changing due to:   An increase in company mergers; mergers; Demutualization,, in which a mutual company is Demutualization converted into a stock insurer by:     Pure conversion, conversion, Merger,, Merger Bulk reinsurance; reinsurance; The creation of mutual holding companies: companies:  A holding company is a company that directly or indirectly controls an authorized insurer. insurer. 14 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Exhibit 5 Alternative Modes of Demutualization: Demutualization: 15 5 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Exhibit 6 Mutual Holding Company Illustration: Illustration: 16 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Lloyd’s of London is not an insurer, but a society of members who underwrite insurance in syndicates:: syndicates     Membership includes corporations, individual members (Names), and Scottish limited partnerships; partnerships; New individual members, or Names, who belong to the various syndicates now have limited legal liability; liability; Corporations with limited legal liability can join Lloyd’s of London;; London Lloyd’s is licensed only in a small number of jurisdictions in the U.S. 17 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  A reciprocal exchange is an unincorporated mutual:: mutual   The reciprocal is managed by an attorneyattorney-inin-fact; fact; In a pure reciprocal exchange, insurance is exchanged among the members; each member of the reciprocal insures the other members: members:   A separate account is kept for each member; member; A modified reciprocal exchange is similar to an advance premium mutual: mutual:  No individual accounts. 18 6 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Blue Cross and Blue Shield Plans are generally organized as nonprofit, community oriented plans:: plans     Blue Cross plans provide coverage for hospital services;; services Blue Shield plans provide coverage for physicians’ and surgeons’ fees; fees; Most plans have merged into one entity; entity; Some plans have converted to a forfor-profit status to raise capital and become more competitive. competitive. 19 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  A Health Maintenance Organization (HMO) provides comprehensive health care services to its members:: members     Broad health care services are provided for a fixed prepaid fee; fee; Cost control is emphasized; emphasized; Choice of health care providers may be restricted; restricted; Less costly forms of treatment are often provided. provided. 20 Mariusz Dybał – Types of insurers and marketing systems 2. Types of Private Insurers  Other private insurers: insurers:   A captive insurer is an insurer owned by a parent firm for the purposes of insuring the parent firm’s loss exposures;; exposures Savings Bank Life Insurance refers to life insurance that is sold by mutual savings banks, over the phone or through Web sites. sites. 21 7 Mariusz Dybał – Types of insurers and marketing systems 3. Agents and Brokers   A successful sales force is the key to success in the financial service industry; Most insurance policies sold today are sold by:   Agents, Brokers. 22 Mariusz Dybał – Types of insurers and marketing systems 3. Agents and Brokers    An agent is someone who legally represents the principal and has the authority to act on the principal's behalf;; behalf The principal is responsible for all acts of an agent when the agent is acting within the scope of authority; authority; A property and casualty agent has the power to bind the insurer:: insurer   A binder provides temporary insurance until the policy is actually written; written; A life insurance agent normally does not have the authority to bind the insurer: insurer:  The applicant for life insurance must be approved by the insurer before the insurance becomes effective. effective. 23 Mariusz Dybał – Types of insurers and marketing systems 3. Agents and Brokers  A broker is someone who legally represents the insured, and:     solicits applications and attempts to place coverage with an appropriate insurer, insurer, is paid a commission from the insurers where the business is placed, placed, does not have the authority to bind the insurer; insurer; A surplus lines broker is licensed to place business with a nonadmitted insurer: insurer:  Surplus 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 insurer.. 24 8 Mariusz Dybał – Types of insurers and marketing systems 4. Types of marketing systems  Marketing systems refer to the various methods for selling insurance:  Life insurance marketing systems:     Agency building system system,, Nonbuilding agency system, system, Direct response system; system; Property and casualty insurance marketing systems:      Independent agency system, Exclusive agency system, system, Direct writer, writer, Direct response system, Multiple distribution systems systems.. 25 Mariusz Dybał – Types of insurers and marketing systems 4. Types of marketing systems  Life insurance marketing systems:  An agency building system is a system by which an insurer builds its own agency force by recruiting, financing, training, and supervising new agents: agents:  General agency system: system:    The general agent is an independent contractor who represents only one insurer, and receives a commission based on the amount of business produced; produced; Insurer provides some financial assistance, but the general agent is responsible for recruiting, training, and motivating new agents; agents; Managerial system: system:    Branch offices are established in various areas; areas; The branch manager is responsible for hiring and training new agents, and receives a commission from the insurer; insurer; Insurer pays expenses of the branch office. office. 26 Mariusz Dybał – Types of insurers and marketing systems 4. Types of marketing systems  Life insurance marketing systems:  A nonbuilding agency system is a marketing system by which an insurer sells its products through established agents:: agents   A personal personal--producing general agent is a successful agent who is hired primarily to sell insurance under a contract; contract; Under a direct response system system,, insurance is sold directly to customers without the services of an agent: agent:  Potential customers are solicitied by television, radio, mail, newspapers, and other media. 27 9 Mariusz Dybał – Types of insurers and marketing systems 4. Types of marketing systems  Property and casualty insurance marketing systems:  The independent agency is a business firm that usually represents several unrelated insurers: insurers: Agents are paid a commission based on the amount of business produced, which vary by the line of insurance; insurance; Agency owns the expirations or renewal rights to the business; business;    Under the exclusive agency system, system, the agent represents only one insurer or group of insurers under common ownership: ownership: Agents do not usually own the expirations or renewal rights to the policies;; policies Agents are generally paid a lower commission rate on renewal business than on new business. business.   28 Mariusz Dybał – Types of insurers and marketing systems 4. Types of marketing systems  Property and casualty insurance marketing systems:  A direct writer is an insurer in which the salesperson is an employee of the insurer, not an independent contractor:: contractor   A direct response insurer sells directly to the consumer by television or some other media: media:   Employees are usually compensated on a “salary plus” arrangement;; arrangement Used primarily to sell personal lines of insurance; insurance; Many property and casualty insurers use multiple distribution systems. systems. 29 Mariusz Dybał – Types of insurers and marketing systems 5. Group insurance marketing  Many insurers use group marketing methods to sell individual insurance policies to:     Employer groups, groups, Labor unions, unions, Trade associations; associations; Employees pay for insurance by payroll deduction.. deduction 30 10 Mariusz Dybał – Types of insurers and marketing systems 6. Case application no. 4  A group of investors are discussing the formation of a new property and casualty insurer. insurer. The proposed company would market a new homeowners policy that combines traditional homeowner coverages with unemployment benefits if the policyowner becomes involuntarily unemplyed. unemplyed. Each investor would contribute at least $100000 and would recive a proportionate interest in the company. In addition, addition, the company would raise additional capital by selling ownership rights to other investors.. Management wants to avoid the expense of hiring and investors training agents to sell the new policy and wants to sell the insurance directly to the public by selective advertising in personal finance magazines: magazines: 1. Identify the type of insurance company that best fits the above description.. Comment your choice description choice.. 2. Identify the marketing system that management is considering adopting.. Comment your choice adopting choice.. 31 Mariusz Dybał – Types of insurers and marketing systems Thank You ;) 32 11 ...
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