Insurers

2.Private vs. Government Insurers

Federal and state governments provide insurance in the areas where private insurance is not available, called social insurance programs. Government insurance programs include Social Security, Medicare, Medicaid, Federal Crop insurance and National Flood insurance.

The major difference between government programs and private insurance programs is that the government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.

3. Admitted vs. Nonadmitted Insurers

Before insurers may transact business in a specific state, they must apply for and be granted a license or Certificate of Authority from the state department of insurance and meet any financial (capital and surplus) requirements set by the state. Insurers who meet the state's financial requirements and are approved to transact business in the state are considered authorized or admitted into the state as a legal insurer. Those insurers who have not been approved to do business in the state are considered unauthorized or nonadmitted. Most states have laws that prohibit unauthorized insurers from conducting business in the state, except through licensed excess and surplus lines brokers.

4. Domestic, Foreign and Alien Insurers

Insurance companies are classified according to the location of incorporation (domicile). Regardless of where an insurance company is incorporated, it must obtain a Certificate of Authority before transacting insurance within the state.

A domestic insurer is an insurance company that is incorporated in this state. In most cases, the company's home office is in the state in which it was formed — the company's domicile. For instance, a company chartered in Pennsylvania would be considered a Pennsylvania domestic company.

A foreign insurer is an insurance company that is incorporated in another state or territorial possession (such as Puerto Rico, Guam or American Samoa). For example, a company chartered in California would be a foreign company within the state of New York.

An alien insurer is an insurance company that is incorporated outside the United States.

5. Financial Status (Independent Rating Services)

The financial strength and stability of an insurance company are two vitally important factors to potential insureds. The financial strength of an insurance company is based on prior claims experience, investment earnings, level of reserves (amount of money kept in a separate account to cover debts to policyholders), and management, to name a few. Guides to insurance companies' financial integrity are published regularly by the following various independent rating services:

• AM Best
• Fitch
• Standard and Poor's
• Moody's
• Weiss

6. Marketing (Distribution) Systems

Insurance companies market their products in different ways: through agents or direct solicitation to the customers.

TYPE OF MARKETING ARRANGEMENTS	CHARACTERISTICS
Independent Agency System/ American Agency System	1 independent agent represents several companies Nonexclusive Commissions on personal sales Business renewal with any company
Exclusive Agency System/ Captive Agents	1 agent represents 1 company Exclusive Commissions on personal sales Renewals can only be placed with the appointing insurer
General Agency System	General agent-entrepreneur represents 1 company Exclusive Compensation and commissions Appoints subagents
Managerial System	Branch manager (supervises agents) Salaried Agents can be insurer’s employees or independent contractors
Direct Response Marketing System	No agents Company advertises directly to consumers (through mail, Internet, television, other mass marketing) Consumers apply directly to the company