Before venturing into insurance companies and what they do, there's a need to understand what insurance means. Basically, insurance is a contract signed by an individual or body known as the insured, as well as the insurance company often known as the insurer, to cover them in the event of a loss as specified in their policy.
How Insurance Companies work
The insurance company sells policies guiding against losses, theft, damages and injury to oneself or a third-party. These policies could be on property, as with auto insurance, homeowner’s insurance, and travel insurance, or on the person e.g. life insurance, and health insurance. There are also special policies to cover businesses.
Insurance Companies: what do they do?
Compared to other sectors, the insurance sector is generally a slow growing one for investors. An insurance company e.g. Lemonade insurance is paid what is known as a premium for their policy. This premium can be paid monthly or annually based on agreements by both parties involved.
Types of Insurance Companies
1) Depending on what is insured, insurance companies can be grouped into:
- Property and casualty insurers: the most common types are auto insurance, homeowner's insurance, and pet insurance companies.
- Accident and health insurers: the most common types are life insurance, health insurance and travel insurance companies.
- Financial guarantors.
2) Insurance companies can also be classified into the following:
Standard Lines v Excess Lines
Standard lines are also known as admitted carriers and work under the jurisdiction of the state. It’s such that they are licensed by the state to operate, and guided by the laws of that state.
Excess lines on the other hand are for special situations. They are also known as non-admitted carriers, and are reserved for people or companies who would otherwise not be covered by standard lines based on their rules, e.g. an individual with one too many violations.
Domestic v Alien
Just like its name, domestic refers to companies operating and licensed where they are located, whereas Alien is for companies operating in another state or country different from where they were originally licensed.
This category focuses on specific industries or risk-type e.g. a retail company that feels they can't get affordable coverage from the insurance marketplace could go on to form a company that would provide the specific insurance they need. In this situation, that company formed is known as a captive of the original enterprise.
These ones sell directly to buyers without involving insurance agents, and so whatever dealings that may arise are done directly with the sellers.
- Based on insurance types sold, Insurance companies may be classified into the following:
Mutual versus Proprietary
This is based on ownership. Mutual insurance companies are owned by policyholders, while proprietary or stock insurance companies are owned by shareholders for the purpose of turning a profit.
The insurance company insures a policyholder, but ever wondered who insures the insurance company? Simply put, this is what a reinsurance company does.
These aren’t insurance companies, however they work on a fee from a client to find them the best insurance policy among those offered by insurance companies. This shouldn’t be mixed up with insurance brokers who do the same work, but on commission from the selected insurer.
Insurance Agents to choose from
Agent Versus Broker
While both are licensed to aid in obtaining proper coverage at a reasonable cost, the insurance agent represents the company, while the insurance broker represents the insured.
The roles of an agent and broker are thus similar. They work to review coverages, assess risks of going with one insurer against the other, and work to choose a policy with affordable coverage that keeps potential policyholders coming, and driving their own business.
Depending on how many insurers are represented, insurance agents may be independent or captive. They are independent when they represent more than one insurer, and captive when they represent just one.
These agents are permitted to sell policies based on what is known as an appointment, and is where the products to be sold, the commission for each, and the binding authority granted is indicated.
Frequently asked questions about Insurance Companies
What are the worst Insurance companies?
The worst insurance companies are typically judged off their inability to pay claims, or ability to wiggle out of paying one using sly tactics. The most notorious of all is Allstate, with other examples being Farmers, Conseco, AIG, etc.
How do Insurance Companies make money?
Insurance Float is a term that represents the right of insurance companies to invest the insured's money since the money wouldn’t be expected until an adverse event presents. This makes investment less risky for them and so, the insurer gambles that they wouldn’t need to use that money anytime soon, and so invests all the premiums collected, turning them into profit before they are required.