Understand the Types of Insurance Companies
Learning Objectives
After completing this unit, you’ll be able to:
- Identify the types of insurance companies.
- Explain the major business units within an insurance company.
- Describe how insurance companies are regulated.
Types of Insurance Companies
Some insurance companies offer more than one type of insurance. And some coverages span more than one kind of insurance. But in general, an insurance company is one of four basic types:
| Property & Casualty |
Life & Annuities |
Employee Benefits |
Reinsurance |
|---|---|---|---|
|
Personal lines include coverage for the home, autos, and big-ticket items such as boats. Commercial lines for business owners include worker’s compensation and general liability. |
Life insurance can cover a specified period (term) or the entire life (whole). Annuities provide retirement income. |
Group insurance offered through the workplace may include medical, dental, vision, and disability coverage. Sometimes life insurance is an employee benefit. |
This is essentially insurance for insurance companies. Contracts grant an insurance company compensation against loss and liability due to the cost of covering policies. |
Insurance carriers provide insurance to individuals and groups. For individual insurance, the carrier offers the insurance directly to the policyholder. For group insurance, the policyholder is a group member, such as an employee.
Employee benefits companies always provide group insurance. Property & Casualty and Life & Annuities companies usually offer individual insurance, but not always. For example, a Property & Casualty company might provide auto insurance for a taxi company’s fleet.
Another way that insurance companies differ has to do with ownership. Stock companies are much like other publicly traded companies, owned by shareholders. Mutual companies are more like credit unions, owned by the policyholders.
As we follow Anna as she buys insurance, we also learn about a company, Cumulus, that sells various types of insurance. It offers a wide variety of insurance plans, including medical and auto coverage. In subsequent modules, you follow Cumulus as it confronts the challenges of the insurance industry.
Business Units Within an Insurance Company
All types of insurance companies have similar business processes, which are handled by similar business units. Some of these business units, such as sales and claims, talk directly to customers. Others, such as accounting and IT, are less visible to customers but just as important.
| Department |
Business Processes |
|---|---|
|
Products |
Insurance companies develop new types of insurance products to offer. |
|
Sales and marketing |
Insurance companies look for new ways to market products. |
|
Underwriting |
Insurance companies assess the risk of each new customer to determine the optimal premium price. |
|
Claims |
When a customer experiences an event covered by their policy, they file a claim, which is a request for payment to cover the loss. A claims adjuster investigates the claim and approves the compensation. |
|
Customer service |
Not all interactions with customers result from claims. Customers often change their policies due to life events such as marriage, childbirth, and teenagers learning to drive. |
|
Accounting and finance |
This department is responsible for monitoring the claims ratio and investing premium funds. |
|
Information technology (IT) |
IT guides the company through digital transformation, oversees technology upgrades, and supports innovation. |
How Insurance Companies Are Regulated
Insurance companies are heavily regulated to ensure that their business practices are fair. In the US, most regulation occurs at the state level, although some regulations are national, such as the Affordable Care Act, which regulates health insurance. Europe has some country-specific regulations and others that apply to the entire European Union.
Here are examples of regulations.
- Licensing of insurance companies, agents, and brokers: Those who sell insurance must be knowledgeable about the industry and the products they sell.
- Ensuring financial solvency of insurance companies: Insurance companies are contractually obligated to pay claims within the scope of the coverages in their policies. This is true even if an event such as a natural disaster causes more claims to be filed than usual.
- Standardizing insurance policies and products: Before the Affordable Care Act, companies could sell health insurance policies that didn’t provide meaningful coverage. Now there are minimum standards for everything from doctor visits to hospital stays.
- Protecting policyholders: An insurance advisor must act in the best interests of the client, not the insurance company. Insurance companies must protect policyholder privacy by keeping medical records and other personal information secure.
- Preventing unfair trade practices: Practices such as price fixing are illegal because they undermine competition and deprive customers of relevant choices.
Now you know more about how insurance companies are organized and regulated. In the next unit we take a closer look at their inner workings.