How the Insurance Business Works

In some lines of insurance, one additional type of service is important: engineering and loss prevention. The quality of engineering service varies from company to company.

A well qualified corps of inspectors may weigh the balance in favor of a given company for a boiler and machinery line. And an imaginative engineering department may be the deciding factor which swings a workman's compensation line from one company to another.

Wherever insurance is concerned, there is no one best life insurance policy. Many arguments have been and will continue to be advanced by the proponents of each of the several types of companies. Each group rightfully can claim some advantages; each has some disadvantages.

Variations are present among carriers of the same type. These are more important than variations among types of companies. Factors that should be considered in selecting a carrier are its financial condition, its services, and its rates. Competition tends to reduce the points of distinction among carriers.

Here are some questions that outline life insurance basics and may help you to better understand how insurance companies work:

• Many people who accuse the mutual insurance companies of doing business contrary to the traditional American way often exclude mutual life insurance companies from their attack. How do you account for this lack of consistency?

• Mutual companies are not automatically stronger than stock companies, nor are stock companies automatically stronger than mutuals. By making use of financial data reported in either the Spectator Insurance Year Book or Best's Insurance Reports, demonstrate the authenticity of this conclusion.

• It is generally said about any product that you get just about what you pay for. It would not be too difficult to disprove this comfortable axiom in so far as the insurance business is concerned. How would you go about it?

• Since mutual insurance companies generally write insurance at lower net rates, how do you account for the fact that they have not driven the stock companies out of business?

• Why have the mutual carriers been so much more successful in the medical insurance business than in the life insurance business?

• If participating life insurance policies are held long enough, the dividends paid on it may more than offset its higher initial cost. How long will a participating policy have to be held before it becomes cheaper than a nonparticipating policy? Under what circumstances may it never become cheaper?

• By far the larger percentage of new life insurance is written by mutual companies, whereas the overwhelming majority of fire insurance is written by capital stock companies. Does this prove the superiority of either type of company in its field?

• If Best's Insurance Reports rate a company as "good" or even "very good," does this mean that an insurance buyer can purchase low cost life insurance from this company with complete confidence as to its financial stability?

• What are the factors that should be considered in appraising the financial standing of an insurance carrier? Select your favorite carrier and appraise its financial condition in so far as you can ascertain it from published reports.

• You are the general manager of the Big Value Corporation and have asked your insurance manager to write a report justifying his selection of insurance carriers for presentation to the board of directors. What type of information would you expect to find in this report?

• A large university has established an insurance buying policy which prohibits the purchase of more than 25 % of its insurance in mutual companies. Is this a sound policy?

• A university calls for bids on its insurance and generally divides its purchases among a number of different agents. Are there any disadvantages to this type of buying policy?

• Is it possible for a city or county to do business entirely with one agency without antagonizing the rest of the agencies in the community?

• You are a member of your state legislature and a bill is before you to establish a state fund for life insurance without medical. How would you vote? How would you explain your position to your constituents if called upon to do so in your campaign for re-election?