Get to Know the Commercial Insurance Industry

Learning Objectives

After completing this unit, you’ll be able to:

Describe the purpose of the commercial insurance industry.
Explain how insurance companies make money.
Explain how people purchase insurance.
Define common insurance terms.

The Purpose of Insurance

You’re probably an insurance customer. If you own a car, you usually need to have some level of insurance in case you’re in an accident. Most likely you also have health insurance, either through your employer or through a government exchange. You might also have renter’s insurance, home insurance, or insurance on a big-ticket item such as a boat.

Chances are you take it for granted that you need insurance, but you haven’t really thought about how it works. Insurance basically does two things.

Insurance lets you share the risk of bad things happening before they happen.
It provides compensation for losses that occur due to covered events.

Because you share the risk with many other insurance customers, you don’t have to depend only on your own financial resources to cover your expenses if something bad happens.

Meet Anna Murphy, a professional in her early 40s who lives in San Francisco. In subsequent modules, you follow Anna as she buys various types of personal insurance and files claims.

Anna, an insurance customer

Ways to Buy Insurance

Thanks to the internet, customers have more options for buying insurance than ever before. The most common ways to buy insurance are from these sources.

Source	Description
Brokers	Brokers, also called independent agents, represent multiple carriers and work for the customer. They look at the insurance landscape, advise on what coverage might be needed, and compare rates.
Managing general agents (MGAs)	MGAs are like brokers but have underwriting and binding authority from the insurance companies they represent.
Captive agents	Captive agents work for a specific insurance company and sell policies to its customers.
Direct-to-consumer websites	Insurance companies sell directly to customers through their websites.
Online marketplaces	Online marketplaces list multiple carriers. They’re like brokers or MGAs, but they exist only online.
Banks and retail outlets	Insurance companies can have online business-to-business relationships with other companies, permitting them to act as insurance agents.
Employer plans	Employer plans usually include medical and dental coverage. They can also include life, disability, long-term care, and other types of insurance.

Insurance Terminology

The better you understand the language of insurance, the more effectively you can communicate with everyone in the industry, from insurance executives to brokers to customers. This list includes some of the most common insurance terms. For a more complete list, see Insurance Terminology in the Resources section.

Binding: The process of converting an insurance quote into an insurance policy.
Book of business: A database or “book” that lists all policies an insurance company has issued. A broker also keeps a book of business with client details.
Broker: An insurance professional and intermediary who sells, solicits, or negotiates with multiple insurance companies on behalf of a client for compensation. Also called an independent agent.
Broker of record (BOR): The broker who oversees the sale of a specific policy or the management of a specific claim.
Captive agent: An agent who works for one insurance company.
Carrier: A company that sells insurance. Also called a provider or payer.
Claim: A request for compensation for a covered event.
Claims adjudicator: An insurance professional who investigates claims, manages the reserves to pay claims, and negotiates claim settlements. Also called an adjuster or investigator.
Coverage: The scope of protection provided under an insurance policy, including the risk insured against and the properties, locations, and individuals insured.
Coverage limit: A limit on how much compensation a coverage provides.
Deductible: An amount that a policyholder must spend out-of-pocket before they are entitled to compensation.
Endorsement: An addition to an insurance policy that provides more coverage.
First notice of loss (FNOL): The initial communication from a client regarding a specific covered event. This may be an intent to file a claim or the claim itself.
Gross written premiums: The total amount of premiums an insurance company has underwritten in a given period.
Managing general agent (MGA): An insurance professional who is like a broker but has underwriting and binding authority from the insurance companies they represent.
Policy: An agreement between an insurance company and a client that defines coverages and beneficiaries.
Premium: The payment from the policyholder to the insurance company for insurance coverage. Payment can be monthly, quarterly, or annually.
Producer: An insurance professional who has the proper licensing to sell insurance within a particular state, province, or region and is responsible for selling insurance products on behalf of insurance companies. Sometimes, producers are referred to as brokers, but they’re different.
Quote: A proposal from an insurance company to a client for a policy at a price.
Rating: The process of determining the price of an insurance policy based on relevant factors. For example, the price of auto insurance might depend on the car model, postal code, miles driven for commuting, and driving record.
Underwriter: An insurance professional who reviews and evaluates a submitted insurance application to determine the coverage and premium to offer a customer.
Wholesaler: An insurance professional who drives business in the field with third-party distribution channels such as brokers and managing general agents.

Now you know the language of the insurance industry. Head to the next unit to take a closer look at insurance companies.