TOPIC 3.

TYPES OF INSURERS AND MARKETING SYSTEMS

1. What is an insurer?
2. Classification of insurers
3. Insurance marketing systems

WHAT IS AN INSURER?
The insurer is a financial institution. The key product of the insurer is the
promise to make financial compensation at some moment in the future, depending
on the type of product. The fact that the products of financial institutions are not
tangible (they do not “manufacture” anything) has resulted in their becoming the
subject of academic discussion.
Why do insurers actually exist? The reason why an individual needs insurance
is obvious: they obtain security and are covered for certain risks – such as their house
burning down. Even if there is only a small probability, an individual might not have
the financial means to reconstruct the house all over again; therefore, they need to
cover that risk.
Insurers pool those risks together in a portfolio. They can do this much more
efficiently than individuals because they have the specific expertise and the size
required to do so. This is called economics of scope and scale. Pooling risks results
in diversification over geographical locations, sectors, types of objects and so on.
The phenomena of adverse selection and moral hazard play an important part in
insurance and for insurers. Adverse selection means that those most in need of risk
coverage will be those who to turn to an insurer. A perfectly healthy person has less
need for medical insurance than someone with bad health. For the insurer, this
involves fewer possibilities for risk spreading. Moral hazard is where people tend to
be less careful once they have taken out insurance because they know damage will
be compensated for. Both adverse selection and moral hazard involve costs for the
group of those insured due to the screening of new and existing clients.
An insurer obtains economies of scale for these costs. A problem occurs for
insurers because the individual premium amounts are collected in advance of the
coverage period. Whether the individual premiums were sufficient to cover for the
claims is still uncertain. That makes an insurance product fundamentally different
from a manufactured good: the actual costs of the service are only known at the end
of the period, while the premium is collected at the beginning. We call this the
“inverse exploitation cycle”, and it involves a risk for the insurer. For example, if
there are more damages than expected, then the premium has not been sufficient and
the insurer will have to bear the costs involved. Typically, it cannot subsequently
require a supplementary payment from the client.

CLASSIFICATION OF INSURERS
 Insurers may be classified according to the type of insurance they sell, their
legal form of ownership, or the marketing system they employ.
Classification by Type of Product
We can distinguish among three types of insurers based on their product. Life
insurance companies sell life contracts and annuities and, in addition, write health
insurance. Property and liability insurance companies market all forms of property
and liability insurance (including health insurance) but do not write life insurance.
Health insurers are a class of specialty insurers, concentrating on their one area of
risk. Although there are other specialty insurers that write only a single line of
property or liability insurance, these may be classed as property and liability
companies.
Insurers Classification by Legal Form of Ownership
Broadly speaking, insurers can be classified into six categories based on their
form of ownership.
■ Capital stock insurance companies
■ Mutual insurance companies
■ Lloyd’s of London
■ Captive Insurers
■ Government insurers
Capital Stock Insurance Companies
Capital stock insurance companies are organized as profitmaking ventures,
with the stockholders assuming the risk that is transferred by the individual insureds.
If the actuarial predictions prove accurate, the premiums collected are sufficient to
pay losses and operating expenses while returning a profit to the stockholders. The
capital invested by the stockholders provides funds to run the company until
premium income is sufficient to pay losses and operating expense. In addition, it
provides a cushion to guarantee that obligations to policyholders will be met.
The stockholders elect a board of directors who, in turn, appoint executive
officers to manage the corporation. The board of directors has ultimate responsibility
for the corporation’s financial success. If the business is profitable, dividends can be
declared and paid to the stockholders; the value of the stock may also increase.
Likewise, the value of the stock may decline if the business is unprofitable.
The distinguishing characteristics of a capital stock company are (1) the
premium charged by the company is final—there is no form of contingent liability
for policyholders; (2) the board of directors is elected by the stockholders; and (3)
earnings are distributed to shareholders as dividends on their stock.
Mutual Insurers
A mutual insurer is a corporation owned by the policyholders. There are no
stockholders. The policyholders elect a board of directors who appoint executives to
manage the corporation. Because relatively few policyholders bother to vote, the
board of directors has effective management control of the company. A mutual
insurer may pay dividends to the policyholders or give a rate reduction in advance.
In life insurance, a dividend is largely a refund of a redundant premium that can be
paid if the insurer’s mortality, investment, and operating experience are favorable.
However, because the mortality and investment experience cannot be guaranteed,
dividends legally cannot be guaranteed.
There are several types of mutual insurers, including the following:
■ Advance premium mutual. Most mutual insurers are advance premium
mutuals. An advance premium mutual is owned by the policyholders; there are no
stockholders, and the insurer does not issue assessable policies. Once the insurer’s
surplus (the difference between assets and liabilities) exceeds a certain amount, the
states will not permit a mutual insurer to issue an assessable policy. The premiums
charged are expected to be sufficient to pay all claims and expenses.
Any additional costs because of poor experience are paid out of the company’s
surplus. In life insurance, mutual insurers typically pay annual dividends to the
policyholders. In property and casualty insurance, dividends to policyholders
generally are not paid on a regular basis. Instead, such insurers may charge lower
initial or renewal premiums that are closer to the actual amount needed for claims
and expenses.
■ Assessment mutual. An assessment mutual has the right to assess
policyholders an additional amount if the insurer’s financial operations are
unfavorable. Relatively few assessment mutual insurers exist today, partly because
of the practical problem of collecting the assessment. Those insurers that still market
assessable policies are smaller insurers that operate in limited geographical areas,
such as a state or county, and the coverages offered are limited.
■ Fraternal insurer. A fraternal insurer is a mutual insurer that provides life
and health insurance to members of a social or religious organization. This type of
insurer is also called a fraternal benefit society. To qualify as a fraternal benefit
society under the state’s insurance code, the insurer must have some type of social
or religious organization in existence. In addition, it must be a nonprofit entity that
does not issue common stock; it must operate solely for the benefit of its members
or beneficiaries; and it must have a representative form of government with a
ritualistic form of work.
Fraternal insurers sell only life and health insurance products to their
members. The assessment principle was used originally to pay death claims. Today,
most fraternal insurers operate on the basis of the level premium method and legal
reserve system that commercial life insurers use. Fraternal insurers also sell term life
insurance and annuities. Because fraternal insurers are nonprofit or charitable
organizations, they receive favorable tax treatment. In terms of the total number of
life insurers, fraternal insurers are relatively unimportant. A recent research study
concluded that fraternal insurers are not as efficient as stock and mutual insurers,
especially in the area of technology, and that stock insurers have higher profit levels
than fraternal insurers.
Lloyd’s of London
Technically, Lloyd’s of London is not an insurer, but is the world’s leading
insurance market that provides services and physical facilities for its members to
write specialized lines of insurance. It is a market where members join together to
form syndicates to insure and pool risks. Members include some of the world’s major
insurance groups and companies listed on the London Stock Exchange, as well as
individuals (called Names) and limited partnerships. Lloyd’s underwrites seven lines
of insurance: casualty, property, marine, energy, motor, aviation, and reinsurance. It
is also famous for insuring unusual exposure units, such as a prize for a hole-in-one
at a golf tournament, or injury to a Kentucky Derby horserace winner. These unusual
exposures, however, account for only a small part of the total business. Lloyd’s of
London has several important characteristics.
First, as stated earlier, Lloyd’s technically is not an insurance company; rather,
it is a group of members (corporations, individuals, and limited partnerships) who
underwrite insurance in syndicates. Lloyd’s by itself does not write insurance; the
insurance is actually written by syndicates that belong to Lloyd’s. In this respect,
Lloyd’s conceptually is similar to the New York Stock Exchange, which does not
buy or sell securities, but provides a marketplace and other services to its members
who buy and sell securities.
Second, as stated earlier, the insurance is written by the various syndicates
that belong to Lloyd’s. At the time of this writing, Lloyd’s has 57 managing agents
and 94 syndicates. Each syndicate is headed by a managing agent who manages the
syndicate on behalf of the members who receive profits or bear losses in proportion
to their share in the syndicate. The syndicates tend to specialize in marine, aviation,
catastrophe, professional indemnity, and auto insurance coverages. Also, Lloyd’s is
a major player in the international reinsurance markets. As noted earlier, the unusual
exposure units that have made Lloyd’s famous account for only a small fraction of
the total business. Likewise, life insurance accounts only for a small fraction of the
total business and is limited to short-term contracts.
Third, new individual members, or Names, who belong to the various
syndicates now have limited legal liability. Earlier, Names had unlimited legal
liability and pledged their personal fortune to pay their agreed-upon share of the
insurance written as individuals. However, because of catastrophic asbestosis
liability losses in the early 1990s, many Names could not pay their share of losses
and declared bankruptcy. As a result, no new Names with unlimited legal liability
are admitted today.
Fourth, corporations with limited legal liability and limited liability
partnerships are also members of Lloyd’s of London. Corporations and partnerships
were permitted to join Lloyd’s in order to raise new capital, which has substantially
increased the ability of Lloyd’s to write new business.
 Fifth, members must also meet stringent financial requirements. Individual
members are high–networth individuals. Each member, whether individual or
corporate, must supply capital to support its underwriting at Lloyd’s. All premiums
go into a premium trust fund, and withdrawals are allowed only for claims and
expenses. Members must also deposit additional funds if premiums do not cover the
claims, and the venture is a loss. A central guarantee fund is also available to pay
claims if the members backing a policy go bankrupt and cannot meet their
obligations. Subordinate securities can also be issued to pay losses.
Finally, Lloyd’s is licensed only in a small number of jurisdictions in the
United States. In the other states, Lloyd’s must operate as a nonadmitted insurer.
This means that a surplus lines broker or agent can place business with Lloyd’s, but
only if the insurance cannot be obtained from an admitted insurer in the state.
Despite the lack of licensing, Lloyd’s does a considerable amount of business in the
United States. In particular, Lloyd’s of London reinsures a large number of
American insurers and is an important professional reinsurer.
Captive Insurers
A captive insurer is an insurer owned by a parent firm for the purposes of
insuring the parent firm’s loss exposures. There are different types of captive
insurers. A single-parent captive (also called a pure captive) is an insurer owned by
one parent, such as a corporation. The captive can be an association captive, which
is owned by several parents. For example, business firms that belong to a trade
association may own a captive insurer. Captive insurers are becoming more
important in commercial property and casualty insurance, and thousands of captive
insurers exist today.
Captive insurers are formed for several reasons, including the following:
■ Difficulty in obtaining insurance. The parent firm may have difficulty
obtaining certain types of insurance from commercial insurers, so it forms a captive
insurer to obtain the coverage. This pattern is especially true for global firms that
often cannot purchase certain coverages at reasonable rates from commercial
insurers.
■ Favorable regulatory environment. Some captives are formed offshore to
take advantage of a favorable regulatory environment and to avoid undesirable
financial solvency regulations. However, captives are regulated under the insurance
laws of the domicile, and in many domiciles, the regulation of captive insurers is
rigorous.
■ Lower costs. Forming a captive may reduce insurance costs because of
lower operating expenses, avoidance of an agent’s or broker’s commission, and
retention of interest earned on invested premiums and reserves that commercial
insurers would otherwise receive. Also, the problem of wide fluctuations in
commercial insurance premiums is avoided.
■ Easier access to a reinsurer. A captive insurer has easier access to
reinsurance because reinsurers generally deal only with insurance companies, not
with insureds. A parent company can place its coverage with the captive, and the
captive can pass the risk to a reinsurer.
■ Formation of a profit center. A captive insurer can become a source of profit
if it insures other parties as well as the parent firm and its subsidiaries. It should be
noted that there are costs involved in forming a captive insurance company and that
this option is not feasible for many organizations. A firm is putting its capital at risk
when it insures through its captive.
Government Insurers
In addition to the social insurance programs they operate, governments also
offer some forms of private (voluntary) insurance. The private insurance programs
of government have developed for diverse reasons. In some cases, the risks they
cover do not lend themselves to private insurance, because either the hazards were
too great or the private insurers were subject to adverse selection. In other instances,
they originated because of the inability or reluctance of private insurers to meet
society’s needs for some form of private insurance. In some cases, government
private insurance programs were established as tools of social change designed to
provide a subsidy to particular segments of society or to help solve social ills
afflicting individual classes of citizens. Finally, government insurance programs
have sometimes been founded on the mistaken notion that such programs could
somehow repeal the law of averages and provide insurance at a lower cost than
would be charged by private insurers. Over the years, the governments have engaged
in a number of private insurance fields. In some programs, the government
cooperates with private insurers, providing reinsurance or other forms of subsidy in
meeting risks that the private insurance industry could not meet alone.

Insurance marketing systems

Marketing systems refer to the various methods for selling and marketing
insurance products. These methods of selling are also called distribution systems. A
successful sales force is the key to success in the financial services industry. Most
insurance policies sold today are sold by agents and brokers.
Agents
When you buy insurance, you will probably purchase the insurance from an
agent. An agent is someone who legally represents the principal and has the authority
to act on the principal’s behalf. The principal represented is the insurance company.
An agent has the authority to represent the insurer based on express authority,
implied authority, and apparent authority. Express authority refers to the specific
powers that the agent receives from the insurer. Implied authority means the agent
has the authority to perform all incidental acts necessary to exercise the powers that
are expressly given. Apparent authority is the authority the public reasonably
believes the agent possesses based on the actions of the principal. The principal is
legally responsible for the acts of an agent whenever the agent is acting within the
scope of express, implied, or apparent authority. This includes wrongful and
fraudulent acts, omissions, and misrepresentations so long as the agent is acting
within the scope of his or her authority granted or implied by the principal.
There is an important difference between a property and casualty insurance
agent and a life insurance agent. A property and casualty agent has the power to bind
the insurer immediately with respect to certain types of coverage. This relationship
can be created by a binder, which is temporary insurance until the policy is actually
written. Binders can be oral or written. For example, if you telephone an agent and
request insurance on your motorcycle, the agent can make the insurance effective
immediately. In contrast, a life insurance agent normally does not have the authority
to bind the insurer. The agent is merely a soliciting agent who induces persons to
apply for life insurance. The applicant for life insurance must be approved by the
insurer before the insurance becomes effective.
Finally, college students often have an interest in insurance sales as a career.
The earnings of successful insurance agents can be impressive. When compared with
other occupations, the earnings of successful insurance agents are relatively high.
Brokers
In contrast to an agent who represents the insurer, a broker is someone who
legally represents the insured even though he or she receives a commission from the
insurer. A broker legally does not have the authority to bind the insurer. Instead, he
or she can solicit or accept applications for insurance and then attempt to place the
coverage with an appropriate insurer. But the insurance is not in force until the
insurer accepts the business.
As stated earlier, a broker is paid a commission by insurers where the business
is placed. Many brokers are also licensed as agents, so that they have the authority
to bind their companies when acting as agents.
Brokers are extremely important in commercial property and casualty
insurance. Large brokerage firms have knowledge of highly specialized insurance
markets, provide risk management and loss-control services, and handle the
accounts of large corporate insurance buyers.
Also, brokers are important in the surplus lines markets. Surplus lines refer to
any type of insurance for which there is no available market within the state, and the
coverage must be placed with a nonadmitted insurer. A nonadmitted insurer is an
insurer not licensed to do business in the state. A surplus lines broker is a special
type of broker who is licensed to place business with a nonadmitted insurer. An
individual may be unable to obtain the coverage from an admitted insurer because
the loss exposure is too great, or the required amount of insurance is too large. A
surplus lines broker has the authority to place the business with a surplus lines
insurer if the coverage cannot be obtained in the state from an admitted company.
Finally, brokers are important in the area of employee benefits, especially for
larger employers. Large employers often obtain their group life and medical expense
coverages through brokers. As indicated earlier, brokers also play a major role in the
marketing of property and casualty insurance to large national accounts.
Types of Marketing Systems
Life Insurance
Marketing Distribution systems for the sale of life insurance have changed
dramatically over time. Traditional methods for selling life insurance have been
substantially modified, and new marketing models have emerged. It is beyond the
scope of the text to discuss all distribution methods in detail. However, the major
life insurance distribution systems used today can be classified as follows:
■ Personal selling systems
■ Financial institution distribution systems
■ Direct response system
■ Other distribution systems
Personal Selling Systems
The majority of life insurance policies and annuities sold today are through
personal selling distribution systems, which are systems in which commissioned
agents solicit and sell life insurance products to prospective insureds. Life insurance
and annuities are complex products, and knowledgeable agents are needed to explain
and sell the various products.
Personal selling distribution systems include the following:
■ Career agents. Career agents are full-time agents who usually represent one
insurer and are paid on a commission basis. These agents are also called affiliated
agents because they sell primarily the life insurance products of a single insurer.
Under this system, insurers recruit new agents and provide financing, training,
supervision, and office facilities. Commissions on the sale of life insurance typically
range from 40 to 90 percent of the first-year’s premium. Renewal commissions for
policies in force are much lower, such as 2 to 5 percent, and are paid for a limited
number of years. Despite aptitude tests, the attrition rate for new life insurance
agents is high. The five-year retention rate is typically less than 15 percent for many
insurers.
■ Multiple Line Exclusive Agency System. Under the multiple line exclusive
agency system, agents who sell primarily property and casualty insurance also sell
individual life and health insurance products. These agents are also called captive
agents. Under this system, agents represent only one insurer or group of insurers that
are financially interrelated or under common ownership. For example, an agent may
sell an auto or homeowners policy to a client. Depending on the client’s needs and
insurance products available, the agent can also sell life insurance, health insurance,
annuities, mutual funds, individual retirement accounts, and other products as well.
State Farm Mutual and Allstate are examples of this system.
 ■ Independent Property and Casualty Agents. Independent property and
casualty agents are independent contractors who represent several insurers and sell
primarily property and casualty insurance. In addition to property and casualty
insurance, many independent agents also sell life and health insurance to their
clients.
■ Personal-Producing General Agent (PPGA). Some independent agents
place substantial amounts of business with one insurer and enter into a special
financial arrangement with that insurer. A personal-producing general agent (PPGA)
is an independent agent who receives special financial consideration for meeting
minimum sales requirements. These agents often have the option of recruiting and
training sub-agents. In such cases, the PPGA receives an overriding commission
based on the amount of insurance sold by the sub-agents.
■ Brokers. Life insurance and annuities are also sold by brokers. Brokers are
independent agents who do not have an exclusive contract with any single insurer or
an obligation to sell the insurance products of a single insurer. Although brokers may
place a substantial amount of business with a particular insurer, they have no
obligation to sell a certain amount of insurance for that insurer. Brokers usually enter
into separate agency contracts with each insurer in which business is placed.
Financial Institution Distribution Systems
Many insurers today use commercial banks and other financial institutions as
a distribution system to market life insurance and annuity products. Commercial
banks are becoming increasingly more important in the marketing of fixed and
variable annuities, and to a lesser degree, life insurance. In addition, other financial
institutions and investment firms, such as Charles Schwab, Fidelity Investments, and
the Vanguard Group, also make life insurance products and annuities available to
their clients.
Direct Response System
The direct response system is a marketing system by which life and health
insurance products are sold directly to consumers without a face-to-face meeting
with an agent. Potential customers are solicited by television, radio, mail,
newspapers, and the Internet. Some insurers use telemarketing to sell their products;
others advertise extensively on television. Many insurers have websites through
which life and health insurance can be sold directly to the consumer.
The direct response system has several advantages to insurers. Insurers gain
access to large markets; acquisition costs can be held down; and uncomplicated
products, such as term insurance, can be sold effectively. One disadvantage,
however, is that complex products are often difficult to sell because an agent’s
services may be required.
Other Distribution Systems
Life insurers also use a variety of additional distribution systems to sell their
products.
 They include the following:
■ Worksite Marketing. Under this system, individual producers go into a
business firm, and, with the approval of management, conduct sales interviews on
site with employees interested in purchasing life insurance products or annuities.
There are few direct costs or fees to employers, and this method is especially
appropriate for low-income and middle-income markets.
■ Stock Brokers. Many stock brokers are also licensed to sell life insurance
products and fixed and variable annuities. As a result, stock brokers can better meet
both the investment needs and life insurance needs of clients.
■ Financial Planners. Financial planners provide advice to clients on
investments, estate planning, taxation, wealth management, and insurance. Some
financial planners are licensed to sell life insurance, and many career life insurance
agents are also financial planners who offer financial planning in their analysis of
needs.
Property and Casualty Insurance Marketing
The major distribution systems for marketing property and casualty insurance
include the following:
■ Independent agency system
■ Exclusive agency system
■ Direct writer
■ Direct response system
■ Multiple distribution systems
Independent Agency System
The independent agency system has several basic characteristics.
First, the independent agency is a business firm that usually represents several
unrelated insurers. Agents are authorized to write business on behalf of these
insurers and, in turn, are paid a commission based on the amount of business
produced.
Second, the agency owns the expirations or renewal rights to the business. If
a policy comes up for renewal, the agency can place the business with another
insurer if it chooses to do so. Likewise, if the contract with an insurer is terminated,
the agency can place the business with other insurers that the agency represents.
Third, the independent agent is compensated by commissions that vary by line
of insurance. The commission rate on renewal business generally is the same as that
paid on new business. If a lower renewal rate were paid, the insurer may lose
business, because the agent would have a financial incentive to place the insurance
with another insurer at the time of renewal.
In addition to selling, independent agents perform other functions. They are
frequently authorized to adjust small claims. Larger agencies may also provide loss
control services to their insureds, such as accident prevention and loss control
engineers. Also, for some lines, the agency may bill the policyholders and collect
the premiums. However, most insurers use direct billing, by which the policyholder
is billed directly by the insurer. This is particularly true of personal lines of
insurance, such as auto and homeowners.
Exclusive Agency System
Under the exclusive agency system, the agent represents only one insurer or a
group of insurers under common ownership. Exclusive agents may be prohibited by
contract from representing other insurers. However, some contracts may permit the
agent to sell an insurance product of a competitor if the company she or he represents
has no similar product.
Exclusive agents in the property and casualty industry are also called captive
agents who represent a single insurer or a group of insurers under common
management. Most exclusive (captive) agents are independent contractors who are
paid commissions based on their sales. However, some agents are employees who
are paid a salary and commissions based on new business and renewal business.
Renewal commissions are paid if the agent has current contractual relationship with
the insurer issuing the policy. In addition to commissions, exclusive agents typically
receive bonuses based on their performance, which may be 20 percent or more of
their income.
Agents under the exclusive agency system do not usually own the expirations
or renewal rights to the policies. There is some variation, however, in this regard.
Some insurers do not give their agents any ownership rights in the expirations. Other
insurers may grant limited ownership of expirations while the agency contract is in
force. In addition, the contract usually permits the insurer to buy the expiration list
from the exclusive agent to establish its value if the agency contract is terminated.
In contrast, under the independent agency system, the agency has complete
ownership of the expirations.
Exclusive agency insurers provide strong support services to entry-level
agents, such as a desk in an office, access to a computer and other office equipment,
and a receptionist. In addition, exclusive agency insurers have marketing budgets
that generate sale leads for their agents, especially for the agents with a small book
of business. In addition, new agents have access to the wealth of experience from
other agents in the same office. Finally, some insurers may hire new agents as
employees during a training period to learn the business. After the training period,
the agent becomes an independent contractor who is paid on a commission bases.
Direct Writer
In property and casualty insurance sales, the term “direct writer” generally
applies to insurers that use certain marketing methods. Two examples are often cited
in the trade press and professional literature.
First, the term “direct writer” is an insurer in which sales representatives are
employees and not independent contractors, such as salaried representatives. The
insurer pays the employee’s salary and sales expenses. In addition, sales
representatives usually represents only one insurer or fleet.
Second, a “direct writer” is a term to identify insurers that use the exclusive
agency system for selling insurance products; as stated earlier, agents represent only
one usurer or group of companies under common ownership or management.
Employees of direct writers are usually compensated on a “salary plus” arrangement.
Some companies pay a basic salary plus a commission directly related to the amount
of insurance sold. Others pay a salary and a bonus that represent both selling and
service activities of the employee.
Direct Response System
Property and casualty insurers also use the direct response system to sell
insurance. A direct response insurer sells directly to the public by television,
telephone, mail, newspapers, and other media. Property and casualty insurers also
operate websites that provide considerable consumer information and premium
quotes. The direct response system is used primarily to sell personal lines of
insurance, such as auto and homeowners insurance. It is not as useful in the
marketing of commercial property and casualty coverages because of complexity of
contracts and rating considerations.
Multiple Distribution Systems
The distinctions between the traditional marketing systems are breaking down
as insurers search for new ways to sell insurance. To increase their profits, many
property and casualty insurers use more than one distribution system to sell
insurance. These systems are referred to as multiple distribution systems. For
example, some insurers that have traditionally used the independent agency system
now sell insurance directly to consumers over the Internet or by television and mail
advertising. Other insurers that have used only exclusive agents (also called captive
agents) in the past to sell insurance are now using independent agents as well. Other
insurers are marketing property and casualty insurance through banks and to
consumer groups through employers and through professional and business
associations. The lines between the traditional distribution systems will continue to
blur in the future as insurers develop new systems to sell insurance.
Group Insurance Marketing
In addition to the preceding, many insurers use group marketing methods to
sell individual insurance policies to members of a group. These groups include
employers, labor unions, trade associations, and other groups. In particular,
substantial amounts of new individual life insurance, annuities, long-term care
insurance, and other financial products are sold to employees in employer–employee
groups. Employees pay for the insurance by payroll deduction. Workers no longer
employed can keep their insurance in force by paying premiums directly to the
insurer.
 Life insurers typically sell and service group life insurance products through
group representatives who are employees who receive a salary and incentive
payments based on group sales, persistency, and profitability of the business.
Some property and casualty insurers use mass merchandising plans to market
their insurance. Mass merchandising is a plan for selling individually underwritten
property and casualty coverages to group members; auto and homeowners insurance
are popular lines that are frequently used in such plans. Individual underwriting is
used, and applicants must meet the insurer’s underwriting standards. Rate discounts
may be given because of a lower commission scale for agents and savings in
administrative expenses. In addition, employees typically pay for the insurance by
payroll deduction. Finally, employers do not usually contribute to the plans; any
employer contributions result in taxable income to the employees.

Summary
■ There are several basic types of insurers:
– Stock insurers
– Mutual insurers
– Lloyd’s of London
– Captive insurers
– Government Insurers
■ An agent is someone who legally represents the insurer and has the authority
to act on the insurer’s behalf. In contrast, a broker is someone who legally represents
the insured.
■ Several distribution systems are used to market life insurance. They include:
– Personal selling systems
– Financial institution distribution systems
– Direct response system
– Other distribution system
■ Several distribution systems are used to market property and casualty
insurance. They include:
– Independent agency system
– Exclusive agency system
– Direct writer
– Direct response system
– Multiple distribution systems
 ■ Many insurers use group insurance marketing methods to sell individual
insurance policies to members of a group. Employees typically pay for the insurance
by payroll deduction. Workers no longer employed can keep their insurance in force
by paying premiums directly to the insurer.
■ Mass merchandising is a plan for selling individually underwritten property
and casualty coverages to group members; individual underwriting is used; rate
discounts may be given; employees typically pay for the insurance by payroll
deduction; and employers do not usually contribute to the plans.