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Frequently Asked Questions
General Insurance
What are the differences among the
major types of insurers in the United States?
The insurance industry is typified by
insurers with a number of different organizational forms. Stock
insurers are corporations owned by the shareholders of the firm.
The shareholders hire managers to run the company and the insurance
product is sold to customers who may or may not be shareholders
in the firm. Mutual insurers are companies which are owned
by their customers. Any policyowner of the company also owns a portion
of the company. Reciprocal insurers or reciprocal exchanges
are insurance companies where the policyowners of the exchange agree
to insure one another. They are very similar to mutual companies.
Lloyd's associations are insurance companies where the manager
who makes the decisions for the firm also has his/her own personal
wealth at stake in the firm. Blue Cross/Blue Shield insurers
are typically non-profit (some may now be for profit), community
oriented health insurance providers. Blue Cross/Blue Shield companies
typically offer traditional indemnity health insurance. HMO's
or Health Maintenance Organizations are companies which provide
comprehensive health care coverage to their customers. HMO's, in
their simplest form, provide prepaid health care coverage. Once
you pay your premium you can use the services of the HMO at little
or no further cost to you.
Should I care which type of insurer
I purchase insurance from?
From the customer's point of view, the
company which offers you the product and service you want, at the
quality you desire, for the lowest cost should be the company you
purchase insurance from regardless of their organizational form.
Economists have tried in numerous studies to identify which one
of its organizational forms can provide the insurance product at
the lowest cost and the answers are mixed. Therefore, potential
customers should probably base their purchasing decisions on other
factors such as the financial quality of the firm.
Some insurance agents I talk to
say they are paid employees of the insurance company while other
agents says they are independent business people -- why the difference?
Should I care which one I purchase insurance from?
Insurers deliver their insurance products
to policyowners primarily through independent agents or through
exclusive agents. Historically, almost all insurance agents were
independent business people paid on commission. More recently, many
insurance companies have adopted a system where the agent is a paid
employee of the firm rather than an independent business person.
These agents are referred to as exclusive agents. Economists who
have studied the differences between these two types of distribution
systems have long argued that the independent agency system is a
less efficient method of getting the insurance product to the customer
as measured by statistics such as the ratio of expenses incurred
to premiums written. However, the most recent studies suggest that
the reason for the higher expenses by independent agents is that
they offer better quality service to policyowners through more personalized
service, more advice on policy limits, more help when a claim is
filed with the company, etc.
What do I give up by not using an
agent to purchase insurance?
Many life insurance and property-casualty
insurance products can be purchased without the use of an agent.
Typically potential policyholders will either be contacted through
the mail or they can call a 1-800 number to apply for the insurance
product. The advantage of this type of distribution system is that
the expenses of selling the product are usually lower because their
are no agent commissions to be paid. These savings may then be passed
onto the consumer through lower premiums. The main disadvantage
is that the policyholder does not receive as much, or sometimes
any, personal service either purchasing the product or in filing
a claim.
I understand there are organizations
that assign financial ratings to insurance companies. Who are they
and what do they do?
Insurance is a product where the insurance
company promises to make future loss payments in return for a premium
you pay today. It is therefore important that you know the financial
health of the insurer when you are deciding how much you are willing
to pay for the product. For example, holding all other things equal,
people should pay slightly more for a life insurance policy from
an insurance company with a higher financial rating, or should pay
slightly less for the same policy from a company which is not as
financially strong. In order to make this kind of informed purchasing
decision, a number of private organizations, called rating agencies,
rate the financial stability of insurance companies. Major insurance
rating agencies include the A.M. Best Company, Standard & Poor's,
Weiss Research, Duff and Phelps, and Moody's. Each of these companies
uses data obtained from various sources to rate the financial strength
of insurance companies. It should be noted, however, that each organization
has its own rating standards and therefore the financial grades
from two different rating agencies may be different. The best advice
usually given to insureds is to check the financial rating of the
insurer from as many rating agencies as possible to determine the
range of opinions of the financial health of the company.
Where can information be found on
the largest insurance companies in the United States?
The monthly publication Best's Review
(Life and Health Edition) periodically contains information
on assets, premium income and products sold by most of the largest
life insurance companies operating in the U.S. The sister publication,
Best's Review (Property and Casualty Edition) provides certain
statistical information on large property-casualty companies. Both
magazines are published by the A.M. Best Company in Oldewick, N.J.
Public libraries in cities of medium to large size frequently subscribe
to one or both of these magazines.
What kinds of questions should I
be expected to answer when I am applying for an insurance policy?
Why do insurers ask all of these questions?
When you apply for an insurance policy,
you will be asked a number of questions. For example, the agent
will ask you a number of demographic questions such as your name,
age, sex, address, etc. In addition to these demographic questions,
you will be asked a number of other questions which will be used
to determine what type of risk you are. For example, when an insurance
company is deciding whether or not to offer automobile insurance
to a potential policyowner, it will want to know about the person's
previous driving record, whether there have any recent accidents
or tickets, what type of car is to be insured and various other
types of information. All of this information will be used for two
purposes. First, based upon the responses to these questions, the
insurance company will decide whether the profile of the applicant
is consistent with the type of risks the insurer is trying to attract.
Some insurers specialize in offering insurance to only very safe
drivers and therefore will only accept applications from people
who fit the profile of a safe driver. Once the insurer has decided
that your risk profile is consistent with the types of risks it
accepts, the answers to the questions will be used to determine
which rate to charge you. For example, the insurance company will
decide whether you should be offered insurance at the high risk
driver rate or the low risk driver rate. Collectively, this entire
process is known as the underwriting process. The primary function
of the underwriting department in an insurance company is to decide
whether or not to offer insurance to a person who has completed
an application. If the answer is yes, then the underwriting department
seeks to determine the "quality" of that risk so that
the proper premium can be charged. That is, high risk people should
pay more than low risk people.
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