Types of Insurance Companies
Two major types of insurance
- Life insurance companies, which sell life insurance, annuities and pensions products.
- Property/Casualty insurance companies, which sell other types of insurance.
In North America pets are legally considered property, so although pet insurance is a form of health insurance, it would fall under the regulatory rules of 'Property/Casualty' insurance.
Insurance companies can further be broken down into two groups: standard line companies and excess and surplus line companies.
In the United States, standard line insurance companies are your "main stream" insurers. These are the companies that typically insure your auto, home or business, commonly referred to as admitted carriers. They use pattern or "cookie-cutter" policies without variation from one person to the next. They usually have lower premiums than excess lines and can sell directly to individuals. They are regulated by state laws that can restrict the amount they can charge for insurance policies.
Most providers of pet health insurance in North America are underwritten by admitted property and casualty insurance companies. In the case of Trupanion they are directly under the same ownership as their property and casualty company across the United States. Veterinary Pet Insurance (VPI) owns and operates their own admitted property and casualty company in the state of California only.
Insurers are licensed on a state by state basis in the United States. Generally, an insurer must get a license in any state where it wants to write policies. Each state has a Division of Insurance (or similar regulatory body) that regulates these insurers. The regulation takes many forms and varies from state to state, but it can basically be divided into two general areas. First, the regulators monitor the finances and market conduct of the insurers to see that they are financially sound and using fair and honest business practices. Second, they regulate or approve the insurer's policy forms (the actual content of the policies) or the insurer's rates, or both. These insurers contribute to a state fund, called a guaranty fund, that is used to pay claims if any of these licensed insurers were to fail (go bankrupt).
The next player is the agent or broker (we'll collectively refer to them as producers). If you are an individual or company that needs insurance, the producer acts as the middleman between you and the insurer. The producer is also licensed and regulated by the state. When you tell the producer you need insurance, the producer must try to find you a policy from one of the insurers that is licensed to operate in your state. There are some cases, however, (generally less than 10% of policies nationwide) where the licensed insurers will not accept a risk because it does not meet their internally established guidelines. The risk may be too big, too unusual or substandard. In these cases, a specially licensed producer called a surplus line producer gets involved. Their special surplus line license allows them to procure a policy for you from an insurer that is not licensed in your state.
Since this insurer is not licensed in your state, they are not regulated by your state's Division of Insurance in the same way licensed insurers are regulated (they are, however, regulated in the state or country where they are domiciled or located). Since they are not strictly regulated by your state, they are generally free from the form or rate regulations imposed on licensed insurers. This gives them the freedom to maintain broader internal guidelines for accepting risks. They have more flexibility to design and price their policies and can, therefore, accept risks that licensed insurers will not.
In many states, including Illinois, the licensed surplus line producer is required to ascertain that the insurer meets certain financial standards before buying a policy from them. In many other states the Division of Insurance, or some other authority, monitors the financial condition of surplus line insurers and maintains a list of insurers that surplus line producers are allowed to use. Whether done by the surplus line producer, the state Division of Insurance, or some other entity, this financial monitoring is an important function because if the insurer were to fail (go bankrupt), there is no guaranty fund protection for you.
It is important to note that these insurers are generally not unable to obtain a license in your state, rather they choose to operate on an unlicensed, surplus line basis.
Non-admitted insurance company: Non-admitted Insurance Company: An insurance company not licensed to do business in a particular state; such a company, however, may sell excess and surplus insurance in that state if admitted insurers lack the capacity or expertise.
Another important branch of insurance is reinsurance. Reinsurance companies are insurance companies that sell policies to other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. A reinsurer may also be a direct writer of insurance risks as well.
The use of reinsurance for non-catastrophic coverage such as pet health insurance would only add an additional layer of infrastructure. Typically a pet health insurance plan that has reinsurance is only used for surplus relief and would indicate an undercapitalized insurance company.
Captive insurance companies may be defined as limited-purpose insurance companies established with the specific objective of financing risks emanating from their parent group or groups. This definition can sometimes be extended to include some of the risks of the parent company's customers. In short, it is an in-house self-insurance vehicle. Captives may take the form of a "pure" entity (which is a 100 percent subsidiary of the self-insured parent company); of a "mutual" captive (which insures the collective risks of members of an industry); and of an "association" captive (which self-insures individual risks of the members of a professional, commercial or industrial association). Captives represent commercial, economic and tax advantages to their sponsors because of the reductions in costs they help create and for the ease of insurance risk management and the flexibility for cash flows they generate. Additionally, they may provide coverage of risks which is neither available nor offered in the traditional insurance market at reasonable prices.
The types of risk that a captive can underwrite for their parents include property damage, public and products liability, professional indemnity, employee benefits, employers liability, motor and medical aid expenses. The captive's exposure to such risks may be limited by the use of reinsurance.
The use of a captive for pet health insurance adds an additional layer of infrastructure, similar to reinsurance.
There are also companies known as 'insurance consultants'. Like a mortgage broker, these companies are paid a fee by the customer to shop around for the best insurance policy amongst many companies. Similar to an insurance consultant, an 'insurance broker' also shops around for the best insurance policy amongst many companies. However, with insurance brokers, the fee is usually paid in the form of commission from the insurer that is selected rather than directly from the client.
Insurance brokers typically do not offer pet medical insurance as the small premiums do not allow for the standard commission fee structure that brokers are accustomed to. Pet health insurance is most efficient when it uses a direct to consumer business model such as Geico and Progressive have done for auto insurance.
