How is Insurance Marketed?

There are various types of insurance companies as well as several
methods of marketing their products. The companies are generally
classified by the type of corporate structure under which theyoperate. There are also several types of government insurance operations.

Private insurance companies. The major forms of property and
liability insurance companies are stock companies, mutual
companies and reciprocal insurance exchanges. These companies
have a home office in a single state but often operate in other states
as authorized by those states.

Stock insurance companies.

— These are corporations chartered
by a state to conduct an insurance business. To start the business,
individuals buy shares and these funds are used to form the
corporation. The invested capital is used to fund the insurance
company’s operations until the organization generates enough
business to pay operating costs out of current income. The paid-in
capital also serves as the surplus fund guaranteeing the fulfillment of
policy obligations during the early days of the organization.
The characteristics of a stock insurance company are: paid-in
capital appears in its financial statement, the board of directors is
elected by the stockholders and some portion of earnings may be
paid to stockholders as dividends on their stock.

Mutual insurance companies.

— Such organizations are owned by their policyholders. Before they can receive authority to operate they must meet a statutory requirement on the amount of premium and
number of policies that it can immediately issue upon authorization.
This requirement makes it difficult to start a mutual insurance
company today.
A mutual insurance company may be identified as different from a
stock insurance company by the following factors: there is no capital
stock outstanding, the members of the board of directors are elected
by the policyholders as there are no stockholders and the funds
remaining after paying all costs of operations (including additions to
all surplus and contingency funds) are distributed to the
policyholders as policy dividends.

Reciprocal insurance exchange.

— These firms are sometimes
called an inter-insurance exchange. They are similar to a mutual
insurance company as they are owned by their members. The
policyholders, called subscribers, establish an exchange and insureone another. They also contract with an attorney-in-fact to operate
the exchange under the control of an advisory board.
Each policyholder is both an insured and an insurer since the
contracts are exchanged on a reciprocal basis. A premium called a
deposit is paid in advance. Dividends may be paid to the subscribers
based on operating results.
Public insurance companies. There are insurance programs that
are underwritten by both the federal government as well as state
governments. Some of these programs are voluntary while others
are compulsory.
Voluntary programs include federal programs for the military,
crops, financial institution deposits, security dealer transactions,
crime and mortgage insurance. State government programs include
life, title, automobile, medical malpractice and workers compensation
Compulsory insurance programs include federal Social Security
plans for retirement, survivors, disability and health coverage. In six
states, workers compensation insurance is only available from a
state fund. Unemployment benefits are provided through state
programs, although funding comes from employers and the federal
government. Non-occupational health insurance is mandatory in
several states and Puerto Rico.

Who are the Insurance Producers?

The marketing arm of the insurance company is the insurance
producer. Yet the approach to marketing by insurance companies
varies. Some may use more than one approach while others use
only one. To review these various methods consider the following as
the “A, B, C, D, E, S” of insurance marketing. While many states now
issue a single “Producer” license, which encompasses both agents
and brokers, all the methods of marketing mentioned above are
discussed here.Agents. — This is the traditional way of marketing all types of
insurance. Under the American Agency System which developed in
the early years of the insurance industry the agent is an independent
business owner. As an agent the producer represents the insurance
company in the sales transactions and must live up to the terms an
agency contract with the insurance company. An agent generally will
represent several insurance companies and “owns” the renewal right
to the policies written for clients.


— The technical difference between a broker and an agent is that the broker represents the client (insured) while the agent represents the insurance company at the time the transaction
is made. It is the broker’s function to search among the various
insurance companies to find the best possible combination of
coverages at the most reasonable price for the client. A broker must
place the insurance contract through an authorized agent of the
insurance company selected. The broker is also an independent
contractor who controls the renewals of the contracts obtained for

Commercial producers.

— This is the large multi-office organization which operates throughout the United States and in some cases is multi-national in scope. Often they are large organizations whose stock is sold publicly. Their clients are generally large businesses and organizations. The commercial producer provides expertise in all major insurance related operations (loss control, claims, underwriting) and may serve as a consulting risk manager.

Direct writers.

— This system of marketing insurance involves employees who are the sales force for an insurance organization.
The method of compensation may be salary, commission or both.
They can only sell their company’s product. Another form of direct
selling is “mass merchandising” which involves the solicitation of
certain lines of insurance by mail, telephone or various media. Under
this approach the prospect submits the application and receives the
policy without ever meeting with the producer.
Exclusive representatives. — This is a system similar to the direct
writer. The difference is that they must first offer the business to theirinsurance company but if it is rejected, they may place it with another
Surplus and Excess Lines producers. — When a producer cannot
find a market for a client’s insurance with an insurance company
admitted to do business in the state, a non-admitted insurance
company may be used. However, this requires a specific license and
the producer must meet other state regulatory requirements such as
paying premium taxes in order to use a non-admitted insurance