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
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
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.
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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