Stock and Mutual Companies
Now that we've usually spoken about the insurance policy, we want to look more closely at the companies that grant these contracts. Several types of insurance firms represent various ways companies raise capital to start a company and enroll their insurance prospects.
The first form is the stock business. When a stock company first forms, it sells stock to stockholders to raise capital. The company does not ensure that stockholders do not own stock in the company. The firm is offering insurance to the insured. Profits attributable to the company's service are returned to stockholders as dividends, not insureds.
The second form, the mutual insurance company, operates differently than a stock company. Insureds are also business owners in a joint business. As owners, they will elect the company's management. Profits are returned to the insured by dividends or reductions in future premiums.
Many cooperative firms are advanced premium firms offering non-assessable premiums. As a result, they are forced to reserve money if their claims experience is higher than expected. A limited number are appraisal agencies, mainly offering fire and windstorm protection for small towns and farmers. Assessment mutuals charge members a pro-rata share at the end of each policy era.
Reciprocals and Lloyd's Associations
While not as common as stock or mutual, its third type is known as the reciprocal company. A reciprocal member agrees to share the insurance obligations with all other members of the unincorporated community. Both members insure each other and share the losses. A reciprocal is handled by an attorney-in-fact approved to handle all reciprocal business.
Lloyd's Association is another insurance company. Maybe you heard of London's Lloyd's. Knowing that Lloyd's London isn't an insurance company can surprise you. It is a mutual group of people who choose to exchange insurance contracts. Each entity, or "syndicate," is responsible for the insurance sums they write. There's even a small range of U.S. Lloyd's Partnerships.
Fraternal Benefit Societies
Another insuring association is a fraternal society. A fraternal benefit society is an organized society or order working on the lodge basis without capital stock and operated solely to benefit its members and beneficiaries and not for profit. Fraternals sell protection only to their members. Most write just life insurance.
Risk Retention Groups and Purchasing Groups
Congress passed the Liability Risk Retention Act in 1981 to allow pharmaceutical makers more choice when insuring against product liability. To encourage this process, the act allowed product manufacturers to create group self-insurance plans or group captive insurance firms, called risk retention groups (RRGs), shield them from exposure to product liability, and buy group-based liability insurance by purchasing groups (PGs). This was achieved by restricting the power of states to administer product liability insurance. Risk-retention groups and buying groups are limited in the states where they are domiciled, although they can operate in all other states. This exempts them from state benefits and guarantee funds. The 1986 Liability Risk Retention Act modified the 1981 Act by entitling almost all companies to type RRGs and PGs. Writing workers ' compensation and personal lines insurance is forbidden.
Self-Insurance
Some businesses and individuals prefer self-insurance. With this option, part or all of the risk of loss is borne without insurance coverage to fall back on when a loss occurs. Many big corporations are self-insured because they can absorb accidents, and their knowledge with lawsuits shows that self-insurance is cheaper than insurance coverage.
Governmental Insurers
Insurance companies may own or operate by state or federal government.
The government often steps in to offer insurance not usually available from private insurers. Such insurance is also called residual market insurance. The government provides:
- War risk insurance;
- Nuclear-energy insurance;
- Flood insurance;
- Crop insurance.
At the state level, the government is interested in providing unemployment insurance and can offer employees compensation payments through state funds.
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