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Insurance is available from both private companies and the government. The major difference between government and private insurance is that government programs are funded with taxes and serve national and state social purposes, while private policies are funded by premiums.
Private insurance companies can be classified in a variety of ways:
As you read about different classifications of insurers, keep in mind that these categories are not mutually exclusive — the same company can be described based on where it is located and allowed to transact the business of insurance, who owns it, and what type of agents it appoints.
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.
Insurers must obtain a Certificate of Authority prior to transacting business in this state.
Transaction of insurance business in this state without a certificate of authority is considered a public offense, punishable by:
The Insurance Code provisions limit the insurance that may be placed with nonadmitted insurers to the following:
These types of insurance may be placed with a nonadmitted insurer only through a special lines surplus lines broker. Placing insurance in violation of these regulations is considered a misdemeanor.
Except when performed by a surplus line broker, the following acts are considered misdemeanors in California:
In addition to any penalty provided for commission of misdemeanors, a person violating any provision of this section of the Insurance Code will be fined $500, along with $100 for each month or fraction thereof during which the person continues the violation. These rules do not apply to advertising authorized for surplus line 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 domicile refers to the location where an insurer is incorporated, not necessarily where the insurer conducts business.
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, the District of Columbia, or a territorial possession. The United States has 5 major U.S. territories: American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. For example, a company chartered in California would be a foreign insurer within the state of New York. A company chartered in Puerto Rico will be foreign in any U.S. state.
An alien insurer is an insurance company that is incorporated outside the United States.
The following are the most common types of ownership.
Stock companies are owned by the stockholders who provide the capital necessary to establish and operate the insurance company and who share in any profits or losses. Officers are elected by the stockholders and manage stock insurance companies. Traditionally, stock companies issue nonparticipating policies, in which policyowners do not share in profits or losses. A nonparticipating (stock) policy does not pay dividends to policyowners; however, taxable dividends are paid to stockholders. The dividends are not guaranteed, as they are based on company profit.
Mutual companies are owned by the policyowners and issue participating policies. With participating policies, policyowners are entitled to dividends, which, in the case of mutual companies, are a return of excess premiums and are, therefore, nontaxable. Dividends are generated when the premiums and the earnings combined exceed the actual costs of providing coverage, creating a surplus. Dividends are not guaranteed.
De-mutualization is the process in which a mutual insurer becomes a stock company.
A fraternal benefit society is an organization formed to provide insurance benefits for members of an affiliated lodge, religious organization, or fraternal organization with a representative form of government. Fraternals sell only to their members and are considered charitable institutions, and not insurers. They are not subject to all of the regulations that apply to the insurers that offer coverage to the public at large. In most states, fraternal benefit societies are permitted to issue life insurance (including endowments), health insurance (including medical and disability), and annuities. They do not issue property or liability policies.
As defined by California Insurance Code 1152, "Earned surplus is unassigned funds, as required to be reported on the insurer's annual statement." A stock insurance company's dividends are paid from its earned surplus; however, the dividends cannot be declared out of earned surplus derived merely from the net appreciation in the value of assets not yet realized. It can only be returned to the stockholders once it has been earned and is not needed for expenses, reserves, liabilities, etc.
Policy dividends are the underwriting income of mutual insurance companies. They are not income or profit; they are refunds. Dividends are paid to the company's policyholders. They are also not guaranteed, since a company's expenses can never be fully anticipated. Some dividend options allow the purchase of additional insurance.