Types of Private Insurers

Educational Objective

Describe the various types of private insurers that provide property-casualty insurance:

• Stock insurers
• Mutual insurers
• Reciprocal insurance exchanges L
• Lloyd's
• American Lloyd's
• Captive insurers
• Reinsurance companies 

Introduction
Insurance is a risk management technique, a transfer system, a business, and a contract, and it is provided by several types of insurers. Private (nongovernment) insurers provide most of the property-casualty insurance in the United States. Private insurers also provide some insurance through government-sponsored insurance 

Overview
All insurers provide a means to indemnify insureds if a covered loss occurs, and to spread the cost of losses among insureds. Although all insurers perform these basic functions, the underlying motives of the parties forming different types of insurers are not the same.

Some types of insurers are formed in the expectation that the insurer’s operations will make a profit or provide some other direct financial benefit for its owners. Other insurers are formed by or on behalf of groups of insureds with the motive of making insurance more readily available or making insurance available at a cost lower than if it were purchased through the general insurance market.
Types of private insurers include:

• - Stock insurers
• - Mutual insurers
• - Reciprocal insurance exchanges
• - Lloyd's
• - American Lloyd's
• - Captive insurers
• - Reinsurance companies 

Private Insurers
Numerous kinds of private insurers provide property and liability coverage for individuals, families, and businesses. Private insurers differ from one another in several ways, primarily in terms of: 

• The purpose for which they were formed 
• Their legal form of organization 
• Their ownership
• Their method of operation 

Some of these differences developed through historical circumstances; others resulted from legislative action or the interests of the parties that formed the insurer.

The exhibit outlines the major differences among private insurers. Insurers may also differ according to their licensing status, the marketing systems they use, and the types of insurance coverage they provide. 

Stock Insurers
A stock insurer is owned by its stockholders and formed as a corporation for the purpose of earning a profit for the stockholders.
Other characteristics of stock insurers include: 

• Purpose

By purchasing stock in a for-profit insurer, stockholders supply the capital the insurer needs when it is formed or the additional capital needed to expand the insurer's operations. These stockholders expect to receive a return on their investment in the form of stock dividends, increased stock value, or both.
Therefore, one of the primary objectives of a stock insurer is returning a profit to its stockholders. Many of the largest property-casualty insurers in the US. are stock insurers. These companies have been able to attract and retain stockholders by the expectation of investment returns. 

• Legal form

Insurers formed for the purpose of making a profit for their owners are typically organized as stock corporations. 

• Ownership

The stock form of ownership also provides financial flexibility for the insurer. For example, the management of a stock insurer may
decide to expand its operations by purchasing another insurance company, by expanding into new territories, developing new product lines, or by purchasing a noninsurance company to diversify its operations.
One way that a stock insurer can finance such expansion is by selling additional shares of common stock. The ability to raise additional funds by selling common stock is an important aspect of the stock form of organization. 

• Method of Operation  

Stockholders have the right to elect the board of directors, which has the authority to control the insurer's activities. The board of directors creates and oversees corporate goals and objectives and appoints a chief executive (CEO) to carry out the insurer's operations.
The CEO and a team of senior management personnel are given authority by the board of directors to implement the programs necessary to operate the company.

Mutual Insurers
A mutual insurer is owned by its policyholders and formed as a corporation for the purpose of providing insurance to them. From the perspective of the insured, differences between stock and mutual insurance companies are becoming less significant. Some mutual companies have converted to stock companies through a process called demutualization.
Other characteristics of mutual insurers include: 

• Purpose

Although initially formed to provide insurance for their owners, mutual insurers today generally seek to eam profits in their ongoing operations as do stock companies. A mutual insurer needs profits to ensure the future financial health of the organization‘ A stock company may choose to share profits with its stockholders by the payment of dividends, which are a return on the stockholders’ investment.

Mutual insurers also may opt to share profits, but pay dividends instead to policyholders as a retum of a portion of premiums paid, Some mutual insurers have the right to charge insureds an assessment, or additional premium, after the policy has gone into effect. Such an assessment might be made after the insurer has endured a series of losses from a catastrophic event, such as a hurricane.

These insurers are known as assessment mutual insurance companies, and they are less common than in the past. 

• Legal Form

Mutual insurance companies are formed as corporations. 

• Ownership

A mutual insurance company is owned by its policyholders. The corporation of a traditional mutual insurer issues no common stock. so it has no stockholders. 

• Method of Operation

The policyholders of a mutual company have voting rights similar to those of the stockholders of a stock company. They elect a board of directors that performs the same functions as the board of directors of a stock company. Mutual companies include some very large national insurers and many more regional ones.
From the perspective of the insured. differences between stock and mutual insurance companies are becoming less significant. Such things as potential assessments, which were a disadvantage, and dividends. which could be a competitive advantage, are less common features of mutual insurers today. In fact, the structure of mutual companies is gradually changing, making them more similar to stock companies.
Some state laws now allow mutual insurers to sell stock to the public by creating a mutual holding company, and other states are considering the adoption of similar regulations. Some mutual companies have made these structural changes because they wanted to raise additional capital through the sale of stock to better compete with stock companies, which can benefit from favorable stock market conditions. 

Reciprocal Insurance Exchanges
A reciprocal insurance exchange, or an interinsurance exchange, (also simply called a reciprocal) is an insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members (called subscribers), and managed by an attorney-in-fact. The term “reciprocal" comes from the reciprocity of responsibility of all subscribers, who agree to insure each other. The attorney -in-fact is the contractually authorized manager of the reciprocal who administers its affairs and carries out its insurance transactions.

Lloyd's 

Although not technically an insurer, Lloyd's (formerly Lloyd's of London) is an association that provides the
physical and procedural facilities for its members to write insurance. In other words, it is a marketplace, similar to a stock exchange.

Other characteristics of Lloyd's include: 

• Members of Lloyd's do not take an active pan in the day-to-day operation of Lloyd's. They are investors (companies, individuals, and Scottish Limited Partnerships) that hope to earn a profit from the insurance operations that occur at Lloyd's. 
• Lloyd's is an unincorporated association. 
• Each individual investor, called a “Name," of Lloyd's belongs to one or more groups called syndicates. 

A syndicate's underwriter or group of underwriters conducts its insurance operations and analyzes applications for insurance coverage. Depending on the nature and amount of insurance requested, the underwriters for a particular syndicate might accept only a portion of the total amount of insurance. The application is then taken to other syndicates for their evaluations.
The insurance written by each Name is backed by his or her entire personal fortune. However, each Name is liable only for the insurance he or she agrees to write, not for the obligations assumed by any other Name.
Each individual investor, called a “Name," of Lloyd's belongs to one or more groups called syndicates. In 1994, Lloyd's began admitting corporations as members. Unlike its individual members, corporate members of Lloyd's have limited liability. Corporate members today make up the dominant share of Lloyd's members. 11)
more about Lloyd's. 

(Lloyd's has earned a reputation for accepting applications for very unusual types of insurance, such as insuring the legs of a famous football player against injury. These applications may be the subject of newspaper articles, but the bulk of Lloyd's business does not involve such unusual coverages.

In fact, most ofthe insurance written through Lloyd's is commercial property-casualty insurance, such as marine, aviation, catastrophe, professional liability, and automobile insurance.(1)
Lloyd's has operated continuously for more than 300 years, and Lloyd's underwriters are considered to be among the world's leaders in their fields. Over the years, despite serious natural disasters and occasional mistakes in underwriting judgment, Lloyd's members have had the financial resources to survive catastrophes, pay claims, and move forward to more profitable times. For most of its history, many members have received an excellent return on their investments, and Lloyd's has had little trouble attracting new members. More recently, large losses over several years have created a strain on some of Lloyd's syndicate members. Nevertheless, Lloyd's remains one of the world's most important sources of insurance.

1: Lloyd's, www.lloyds.com (accessed January 11, 2005).)

American Lloyds
American Lloyds associations are much smaller than Lloyd's, and most are domiciled in Texas, with a few in other states. Most of the Texas Lloyds associations were formed or have been acquired by insurance companies. 

Captive Insurers 

When a company, an organization, or a group of affiliated organizations forms a subsidiary for the purpose of
having the subsidiary provide all or part of the insurance on the parent company or companies. the subsidiary is known as a captive insurer, or simply a captive.

Although captive insurers have been in existence since the early part of the twentieth century, the widespread use of captives is more recent, with the major growth occurring since the late 1970s.

Three factors have contributed to the growth of captives in recent years: 

• Low Insurance Cost 

Captives might be able to provide insurance coverage at a lower cost than other private insurers because acquisition costs are eliminated. For example, captives might not have to pay producers’ commissions or advertising expenses because they provide insurance primarily to the parent company. 

• Insurance Availability

A captive helps to eliminate the problems some corporations might face because necessary or desired insurance coverage is unavailable or costs more than the corporation is willing or able to pay. Forming a captive insurer eases the problems of availability and affordability for a parent company that has loss exposures that may be difficult to insure. 

• Improved Cash Flow

The third and most important factor is improved cash flow. A premium paid to a captive remains within the corporate structure until it is used to pay claims. Instead of paying premiums to an unrelated insurer, the corporation is able to invest its funds until the time they are needed for claims.
The corporation can receive a significant cash flow advantage by creating a captive‘ This advantage becomes even greater when interest rates are high, as was the case during the late 1970s and early 1980s, when the number of captives increased dramatically.
Captive insurers have become an important altemative in the insurance-buying decisions of corporations. The relative importance of the factors affecting the growth of captives changes overtime, but it appears that captives will remain an important source of insurance. 

Reinsurance Companies
Some private insurers provide reinsurance, which is a contractual agreement that transfers some or all of the potential costs of insured loss exposures from policies written by one insurer to another insurer.
The insurer that transfers some or all of the potential costs of insured loss exposures is the primary insurer (also called the reinsured). The insurer that assumes some or all of the potential costs of insured loss exposures of the primary insurer is the reinsurer.
Some reinsurers are companies or organizations that specialize in the reinsurance business. Other reinsurers are also primary insurers that enter into reinsurance arrangements with other insurers. A primary insurer might buy reinsurance for a varietv of reasons (One of the most important reasons is that reinsurance permits the primary insurer to transfer some of its loss exposures to the reinsurer.

For example, an insurerthat writes a large amount of properiy insurance in an area where tornadoes commonly occur can use reinsurance to reduce its exposure to windstorm losses.) . 

Reinsurance also enables a small insurer to provide insurance for large accounts (such as large national or multinational corporations) whose insurance needs would otherwise exceed the insurer's capacity.
Click to learn more about the benefits to small insurers

(For example, consider a primary insurerthat writes a commercial liability policy for a large

company that manufactures sports helmeis.
Because the potential for heavy liability losses resulting from injuries caused by defective helmets is great, the primary insurer might contract with a reinsurer to cover all of its liability losses for this insured over a certain amount, such as $1 million.

Therefore, the primary insurer and the reinsurer are sharing the liability loss exposures for this insured.). 

Summary
In the U.S., private insurers provide most property-casualty insurance, but both federal and state governments also provide some types of insurance. Most private insurers are either stock or mutual companies.
Other types of private companies or groups that provide insurance include reciprocal insurance exchanges, Lloyd's, American Lloyds, captive insurers, and reinsurance companies.