Types of Insurance Providers

Insurance is provided to the public by three major sources: private commercial insurers; private noncommercial (nonprofit service organization) insurers; and the federal government, which is a special type of nonprofit provider. Private life and health insurers are in the business of making money and are therefore known as commercial insurers. Stock and mutual insurers are private insurers. Other types of insurers that fall into this category include reciprocals, fraternals, Lloyd's, and reinsurers. Private noncommercial service organizations, such as Blue Cross and Blue Shield, operate on a nonprofit basis, returning profits to their subscribers in the form of reduced premiums or expanded benefits.

A stock insurance company, like other stock companies, consists of stockholders who own shares in the company. The individual stockholders provide capital for the insurer. In return, they share in any profits and losses. Capital stock companies control roughly two-thirds of the premiums in the property- and liability insurance fields and nearly one-half of the premiums of all life insurance. If the company's board of directors declares a dividend, it is paid to the stockholders. Often a stock company may be referred to as a non-participating company because its policyholders do not participate in dividends.

Conversely, there are no stockholders in a mutual company. Company ownership rests with the policy owners. They vote for a board of directors that in turn elects or appoints the officers to operate the company. Funds that are not used for paying claims or for other operating costs are returned to the policy owners in the form of policy dividends. As such, mutual companies are sometimes referred to as participating companies because the policy owners participate in the dividends. In theory, policy owners should share in company losses as well as profits, but in actuality losses are generally realized simply in the discontinuation of dividends. Mutual companies write nearly one-third of the property and liability insurance in the U.S. and the other half of the life insurance business.

Reciprocal insurers are unincorporated groups of people providing insurance for one another through individual indemnity agreements. Each member individual is known as a subscriber. Every subscriber is allocated a separate account into which his or her premiums are paid and interest earned is tracked. If any subscriber suffers a loss provided for by the reciprocal insurance, each subscriber account would then be assessed an equal amount to pay the claim. Administration, underwriting, sales promotion, and claims handling for the reciprocal insurance are handled by an attorney-in-fact, who is in turn overseen by an advisory committee of subscribers.

Fraternal benefit societies are primarily life insurance carriers that exist as social organizations and usually engage in charitable and benevolent activities. Fraternals are distinguished by the fact that their membership is usually drawn from those who are also members of a lodge or fraternal organization. They operate under a special section of the state insurance code and receive a number of income tax advantages.

Lloyd's of London is not an actual insurance company; it can be more closely compared to a stock exchange. Just as an exchange provides facilities for its members but does not actually buy or sell securities itself, Lloyd's provides a meeting place and clerical services to its members who actually transact the business of insurance. Members – which may be individuals or corporations – are grouped into syndicates, but they remain individually liable and responsible for the insurance contracts that they enter into. Their individual fortunes and resources are pledged as the capital behind their assumption of risk. A syndicate is represented in a Lloyd's Organization by an underwriter. Lloyd's of London assures full and adequate performance by its members through a governing committee and rules of eligibility. Character, experience, business integrity, and amount of capital (funds held in trust at Lloyd's along with personal wealth) are among the factors that are considered for any new member.

Reinsurance is a type of insurance between insurers. It occurs when an insurer (the reinsurer) agrees to accept all or a portion of a risk covered by another insurer (known as the ceding company). In many cases, the original insured individual or entity has no knowledge of the transaction. In the event of loss, the insured has no claim against the reinsurer. The ceding company is responsible for the coverage it has written, but it will have a legitimate claim against the reinsurer for any portion of its own loss that is reinsured.

Companies often use reinsurance to reduce the risk of a catastrophic loss. Insurance against disastrous losses by earthquakes, floods, or aviation accidents might not be available if a single carrier had to assume all of the risk. Large life insurance cases are also often reinsured. For example, a $1 million life insurance policy on an insured may be shared through reinsurance with one or more additional insurers. Reinsurance makes it possible for a carrier to issue a policy and then share the risk with another insurer or group of insurers. Additionally, reinsurance also helps carriers avoid capacity problems. Insurers must keep unearned premium reserves and certain levels of surplus in relation to premiums that they've written. A shortage of capacity occurs when the ratio of premiums to surplus and reserves becomes unbalanced. By reinsuring a risk, many insurers are able to avoid – or greatly reduce – capacity shortages.

Service organizations are unique to the health insurance field, and are technically not insurers at all. They are operations that provide prepaid plans for hospital, medical, and surgical expenses. They don't pay cash benefits (except under certain limited conditions) to their plan subscribers (the insureds), but instead pay the medical services provider used by the subscriber to the extent the services are covered in the contract. The most well known insurers of this category are the various Blue Cross and Blue Shield companies. Blue Cross plans cover hospital expenses and Blue Shield plans pay for medical and surgical costs.

The "Blues", as they are known in the industry, are a cooperative group of separate insuring organizations loosely coordinated by a national association – the Blue Cross and Blue Shield Association – that sets standards and attempts to enforce them by the authorization or denial of use of the Blue Cross or Blue Shield designation. Originally, Blue Cross and Blue Shield were completely separate entities, but with the merger of the national associations in the early 1980s, many local Blue Cross and Blue Shield organizations followed suit, combining into one Blue Cross and Blue Shield association. BC/BS associations are, with very few exceptions, incorporated under special legislation in most states.

The United States Government provides life and health insurance through various sources. The federal government has offered a variety of military life insurance plans including United States Government Life Insurance (to veterans of World War I), National Service Life Insurance (in 1940) and Servicemen's Group Life Insurance. Other occupations are also eligible for federal government insurance provided through the Railroad Retirement Act, the Civil Service Retirement Act, and the Federal Employees' Compensation Act.

Because private insurance policies invariably exclude catastrophic risks, the federal government provides War Risk Insurance, Nuclear Energy Liability Insurance, National Flood Insurance, Federal Crop Insurance, and insurance on mortgage loans. Additionally, federal, state and local governments provide social insurance to a segment of the population that would otherwise be without disability income, retirement income, or medical care.

Social Security provides retirement benefits to covered workers when they reach the age of 65 (or earlier if elected by the individual). It also provides survivor benefits in the event of the death of a covered worker, as well as disability benefits if a covered worker becomes totally disabled. The Medicare program – also part of Social Security – provides medical expense benefits for covered workers beginning at age 65. Medicaid is primarily a state governmental program that provides health care benefits for the financially needy. It's financed by the individual states with some federal subsidies.