524 Chapter 13 Insurance and Risk Management
earns a profit, it may pay some of that profit to its policyholders as a dividend. Many
mutual companies seldom do this, though, instead retaining their profits to maintain
financial strength or to allow for lower premiums. A stock company, on the other hand, is
a for-profit business, operated to earn a profit for its stockholders by providing coverage to
its policyholders. State Farm and Nationwide Mutual are examples of large, well-known
mutual companies; Allstate and GEICO are examples of well-known stock companies.
In theory, a mutual company might be expected to be able to offer lower rates since
a mutual insurer does not need to try to make a profit for its stockholders. However, a
well-managed stock company may be able to offer equal or better coverage at an equal or
lower price. In most cases it makes little if any difference to the policyholder whether the
company is organized as a mutual or stock company, so long as the premium is competi-
tive and the company is financially strong. In recent years, many mutual companies, such
as MetLife and John Hancock, have decided to convert themselves into stock companies
through a process known as demutualization.
There are also some other types of insurers. A few sizable insurers are organized as
fraternal companies, in most respects the same as mutual companies except that they offer
coverage only to members of a specific organization, such as a trade union or religious
group. Thrivent Financial for Lutherans is an example of a very large fraternal insurer.
Cooperative insurers are similar to fraternals and may be set up by a group of people shar-
ing a common need or interest, though they are usually quite small in size.
Insurance policies are normally sold by an insurance agent or broker. Agents/brokers
generally must be licensed by the state in which they work. There are some distinctions
between an agent and a broker, but in practice the two terms are often loosely used inter-
changeably. Some agents represent only one company, while others offer products from
many different companies. An insurance agent may be an employee of an insurer, or may
operate as an independent business person. Some agents sell only certain types of insur-
ance, specializing in life or business insurance, for example, while others offer a full range
of insurance products. Insurance may also be offered for sale through banks or other finan-
cial institutions. However, in the United States, banks are generally not allowed to be in the
insurance business themselves; many banks market insurance products to their customers,
but these products are actually then sold by licensed agents.
To ensure that insurance companies and agents fairly represent the products they are
offering for sale, and that insurance companies have the financial resources necessary to
meet the obligations of the policies they sell, the insurance industry is subject to a consider-
able amount of governmental regulation. It may be surprising, though, that virtually none of
this regulation is done by the federal government. Insurance is regulated by the states, with
each state having its own insurance department that regulates the insurance business within
that state. Insurance regulations are reasonably consistent from state to state, but still there are
differences. Most large insurers are licensed to do business in every state, but some smaller
companies may opt to do business in only a few rather than face the burden of complying with
the requirements of 50 different insurance departments. Also, some of the specific details of
the policies offered may vary from state to state to address specific regulatory requirements.
There are an enormous number of different types of insurance policies. Some of the
most commonly seen types are listed in the table below:Policy Type What It CoversAutomobile collision Damage that you cause to your own vehicle. Not required to operate a vehicle, but may
be required by bank that fi nances the auto loan.
Automobile comprehensive Covers theft of a vehicle or its contents. Not required to operate a vehicle, but may be
required by the bank that fi nances an auto loan.
Automobile liability Injuries to other people or damages to their property that you cause while operating an
automobile. A minimum level of liability insurance is required to operate a vehicle in
most states and situations.
Business disruption Provides benefi ts to a business in the event that it is unable to function as a result of
natural disasters or other causes.