Government and Social Insurance Programs

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Key Takeaways

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Alongside the private market, federal and state governments act as insurers in their own right, offering what is commonly called social insurance.

Why Government Acts as an Insurer

Government insurance programs generally serve one of two purposes: covering catastrophic perils that commercial insurers are unwilling to underwrite on their own — such as war, flood, or nuclear-related losses — or writing coverage on ordinary insurable risks in direct competition with, or in place of, the private market, as seen with many state workers' compensation funds.

Major Social Insurance Programs

Old-Age, Survivors, and Disability Insurance (OASDI) — better known as Social Security.
Original Medicare (Parts A and B) — federal health coverage primarily for those 65 and older.
Medicaid — joint federal-state health coverage for qualifying low-income individuals and families.
Servicemen's Group Life Insurance (SGLI) and Veteran's Group Life Insurance (VGLI) — life coverage for military members and veterans; SGLI provides up to $500,000 of coverage for full-time armed services members, issued in $50,000 increments.
National Flood Insurance Program (NFIP) — federal flood coverage in participating communities.
Federal Crop Insurance Corporation (FCIC) — coverage protecting farmers against crop losses.

Collectively, these programs pay out billions of dollars in benefits every year and touch the financial lives of millions of Americans, making government one of the largest insurers in the country by any measure.

Comparing the Major Insurer Types

The table below summarizes how each of the insurer types covered in this chapter is owned, whether it issues participating or nonparticipating coverage, and what makes it distinct.

Insurer Type	Owned By	Policy Type	Distinctive Trait
Stock company	Shareholders	Nonparticipating	Operated to profit its shareholders
Mutual company	Policyowners	Participating	Policyowners may receive dividends from the divisible surplus
Fraternal benefit society	Members	Participating	Non-profit, lodge system, social/charitable mission
Reciprocal insurer	Subscribers	Participating	Members insure each other; run by an attorney-in-fact
Captive insurer	Parent company	Varies	Formed solely to insure its own parent's risk
Risk retention group (RRG)	Members	Participating	Pools liability risk among members with a common bond
Risk purchasing group (RPG)	Depends on underlying policy	Depends on underlying policy	Buys coverage from an insurer; does not act as the insurer
Reinsurer	N/A	Insurance for insurers	Assumes risk ceded by a primary insurer
Surplus lines carrier	N/A	Coverage for unusual/high risks	Non-admitted; fewer consumer protections
Lloyd's of London	N/A	Coverage placed by independent underwriters	A marketplace, not an insurance company
Industrial insurer	N/A	Small face-amount life insurance	Traditionally collects premium weekly, in person

Key Takeaways

Government insurers cover catastrophic perils the private market avoids, or compete with/replace private coverage in areas like workers' compensation.
Major social insurance programs include Social Security (OASDI), Medicare, Medicaid, SGLI/VGLI, the NFIP, and the FCIC.
SGLI provides up to $500,000 of coverage to full-time service members, issued in $50,000 increments.
Each insurer type differs mainly in who owns it, whether its policies are participating, and the specific problem it was created to solve.