There are several types of insurance companies. Each one may serve a company’s insurance needs very well, but there are significant differences between them that a company should be aware of before purchasing an insurance contract. The types of insurance companies include:
- Captive insurance company. This is a stock insurance company that is formed to underwrite the risks of its parent company or in some cases a sponsoring group or association.
- Lloyds of London. This is an underwriter operating under the special authority of the English Parliament. It may write insurance coverage of a nature that other insurance companies will not underwrite, usually because of high risks or special needs not covered by a standard insurance form. It also provides the usual types of insurance coverage.
- Mutual. This is a company in which each policy holder is an owner, and where earnings are distributed as dividends. If a net loss results, policyholders may be subject to extra assessments. In most cases, however, non-assessable policies are issued.
- Reciprocal organization. This is an association of insured companies that is independently operated by a manager. Advance deposits are made, against which are charged the proportionate costs of operations.
- Stock company. This is an insurance company that behaves like a normal corporation – earnings not retained in the business are distributed to shareholders as dividends and not to policyholders.
Another way to categorize insurance companies is by the type of service offered. For example, a monoline company provides only one type of insurance coverage, while a multiple line company provides more than one kind of insurance. A financial services company provides not only insurance but also financial services to customers.
A company can also use self-insurance when it deliberately plans to cover losses from its own resources rather than through those of an insurer. It can be appropriate in any of the following cases:
- When the administrative loss of using an insurer exceeds the amount of the loss.
- When a company has sufficient excess resources available to cover even the largest claim.
- When excessive premium payments are the only alternative.
- When insurance is not available at any price.
A form of partial self-insurance is to use large deductibles on insurance policies, so that a company pays for all but the very largest claims. Finally, a company can create a captive insurer that provides insurance to the parent company. Captive insurers can provide coverage that is tailored to the parent organization, and can provide less dependence on the vagaries of the commercial insurance market. A variation on the captive insurer concept is a fronting program, in which a parent company buys insurance from an independent insurance company, which then reinsures the exposure with a captive of the parent company. This technique is used to avoid licensing the captive insurer in every state where the parent company does business, though the captive insurer must still be authorized to accept reinsurance. Fronting also allows the parent company to obtain local service from the independent insurance company while shifting the exposure to the captive company. In whatever form the self-insurance may take, the risk manager should work with the controller to determine the amount of loss reserves to set aside to pay for claims as they arise.
In some states, a company can become a self-insurer for workers’ compensation. To do this, a company must qualify under state law as a self-insurer, purchase umbrella coverage to guard against catastrophic claims, post a surety bond, and create a claims administration department to handle claims. The advantages of doing this are lower costs (by eliminating the insurer’s profit) and better cash flow (because there are no up-front insurance payments). The disadvantages of this approach are extra administrative costs as well as the cost of qualifying the company in each state in which the company operates.
These are some of the variations that a company can consider when purchasing insurance, either through a third party, a controlled subsidiary, or by providing its own coverage.