General Insurance
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What are the differences among the major types of insurers in the United States?
Should I care which type of insurer I buy insurance from?
Some insurance agents I talk to say they're paid employees of the insurance company, while others says they're independent business people - what's the difference? Should I care whom I purchase insurance from?
What do I give up by not using an agent to buy insurance?
I understand there are organizations that assign financial ratings to insurance companies. Who are they and what do they do?
Where can I find information on the largest insurance companies in the United States?
What kinds of questions should I be expected to answer when I apply for an insurance policy? Why do insurers ask all of these questions?

What are the differences among the major types of insurers in the United States?

Stock insurers are corporations owned by shareholders of the firm. The shareholders hire managers to run the company and the insurance product is sold to customers who may or may not be shareholders in the firm. Mutual insurers are companies owned by their customers. Any policyowner of the company also owns a portion of the company. Reciprocal insurers or reciprocal exchanges are insurance companies in which policyowners agree to insure one another. They are very similar to mutual companies. Lloyd's associations are insurance companies where the manager also has his/her own personal wealth at stake in the firm. Blue Cross/Blue Shield insurers are typically non-profit (some may now be for-profit), community-oriented health insurance providers. Blue Cross/Blue Shield companies typically offer traditional indemnity health insurance. Health Maintenance Organizations (HMOs) are companies that provide comprehensive health care coverage to customers. HMOs essentially provide prepaid health care coverage. Once you pay your premium you can use the services of the HMO at little or no further cost to you.

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Should I care which type of insurer I buy insurance from?

The company that offers you the product and service you want, the quality you desire, and the lowest cost should be the company you buy from regardless of its organizational form. Economists have long tried to identify which organizational form provides the insurance product at the lowest cost - and answers are mixed. Therefore, you might consider making your decision on other factors - such as the financial quality of a firm.

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Some insurance agents I talk to say they're paid employees of the insurance company, while others says they're independent business people - what's the difference? Should I care whom I purchase insurance from?

Insurers deliver their insurance products to policyowners primarily through independent or exclusive agents. Historically, almost all insurance agents were independent business people paid on commission. More recently, many insurance companies have adopted a system where the agent is a paid employee of the firm. These agents are referred to as exclusive agents. Economists studying the differences between these two distribution systems have long argued that the independent agency system is a less efficient method of getting the product to the customer as measured by the ratio of expenses incurred to premiums written and other statistics. But recent studies suggest the reason for the higher expenses with independent agents is that they offer higher quality to policyowners through more personalized service, more advice on policy limits, more help when a claim is filed with the company, etc. So one thing you could consider is how much guidance and service you want.

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What do I give up by not using an agent to buy insurance?

You can buy many life insurance and property-casualty insurance products without help from an agent. Typically potential policyholders will be contacted by mail, or they can call a toll-free number to apply for a product. The advantage of this type of distribution system is that expenses are usually much lower because there are no agent commissions to be paid. These savings can be passed onto the consumer through lower premiums. The main disadvantage is that the policyholder does not receive as much, or sometimes any, personal service either when buying a product or filing a claim.

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I understand there are organizations that assign financial ratings to insurance companies. Who are they and what do they do?

Since insurance companies are promising to make future loss payments in return for your premium payments, it's important to know an insurer's financial health when deciding how much you're willing to pay for a product. For example, if all other things are equal, you should pay slightly more for a life insurance policy from an insurance company with a higher financial rating, or slightly less for a policy from a company that is not as financially strong. To help you make your decision, private organizations called rating agencies rate the financial stability of insurance companies. Major insurance rating agencies include the A.M. Best Company, Standard & Poor's, Weiss Research, Duff and Phelps, and Moody's. However, each organization has its own rating standards, so the financial grades from two different rating agencies may be different. Check the financial rating of insurers from as many rating agencies as possible to determine the range of opinions of a company's financial health.

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Where can I find information on the largest insurance companies in the United States?

The monthly publication Best's Review (Life and Health Edition) periodically contains information on assets, premium income and products sold by most of the largest life insurance companies in the U.S. The sister publication Best's Review (Property and Casualty Edition) provides some statistical information on large property-casualty companies. Both are published by A.M. Best. Public libraries in medium-size or large cities often subscribe to these magazines.

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What kinds of questions should I be expected to answer when I apply for an insurance policy? Why do insurers ask all of these questions?

When you apply for an insurance policy, you will be asked all sorts of questions. For example, the agent will ask you demographic questions such as your age, gender, address, etc. You'll also be asked questions which will be used to determine what type of risk you are. For example, when a company is deciding whether or not to offer you automobile insurance, it will want to know about your driving record, whether you have any recent accidents or tickets, and what type of car you drive. This information will help them decide whether your profile is consistent with the type of risks they are trying to attract. Some insurers specialize in offering insurance to only very safe drivers and will only accept applications from people who fit the profile of a safe driver. Once the insurer has decided your profile is consistent with the types of risks it accepts, your information will be used to determine which rate to charge you. For example, the company will decide whether you should be offered insurance at the high-risk driver rate or the low-risk driver rate. Collectively, this entire process is known as the underwriting process. Once a company's underwriting department has decided to offer you insurance, it next determines the "quality" of the risk so the proper premium can be charged. That is, high-risk people should pay more than low-risk people.

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