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Organization of the insurance business

Organization of the insurance business image

Insurance contracts are concluded between the insured (who is at risk) and the insurer (who assumes the financial obligation to provide compensation in case the risk occurs). In many cases, an intermediary (who can act as a broker, consultant, agent or person offering "bankassurance") negotiates with the insurer the terms of the contract in favor of the client.

Sole proprietorships

Many small businesses are owned by one person who is both owner and manager. It provides the capital, is entitled to all profits (after tax) and can make all decisions. The fact that the owner can make all the decisions means that there is no need for cumbersome bureaucracy, which is sometimes a hallmark of larger organizations. This type of control is suitable for independent representation and mediation.

Not only the profit but also the losses are at the expense of the owner and if the assets of the enterprise are not sufficient to meet the claims, the creditors can also take the personal assets of the owner. Such owners are said to be exposed to "unlimited liability". Another disadvantage of a sole proprietorship is that its ability to raise capital is very limited, in fact - to the personal condition of the owner plus the funds he can borrow. Then, because the owner is often the only manager, he has to deal with all aspects of enterprise management, whether or not he is equally good in all areas.

From the employee's point of view, working in a sole proprietorship has both advantages and disadvantages. Whether you like it or not depends mainly on individual job expectations. There is a more personal connection with the owner than in larger organizations and there is no cumbersome bureaucracy. On the other hand, a sole proprietorship usually offers very limited career opportunities.

It is less and less possible for a sole proprietorship to be licensed to work as an insurer, because no single individual would have the skills base to perform the necessary functions, even if his personal wealth is large enough to finance the creation of an insurance company. .

Gathering companies

As a sole proprietorship grows, at some point the owner may no longer be able to provide the necessary capital and / or management competence. In this case, the logical step may be to form a general partnership. In such a company, each partner contributes a certain amount of capital and has a certain impact on the way the business is run. If desired, the partners can specialize in various aspects of management. Profits and losses are shared between the partners. Associations are common among accounting and law firms, insurance brokers, stockbrokers and financial advisors.

A general partnership is unlikely to ever obtain the status of a licensed insurer, even if the joint efforts and capital assets of the members of the company meet regulatory requirements. In this case, the reason for the refusal would be that the partners could die or lose their mental abilities, and unlike the company, the general partnership is not structured or regulated in a way that ensures stable and respectable continuity. between directors and officials.

Limited Liability Companies (Private Companies)

Large companies often need to raise capital from a large number of people who are reluctant to participate in the management of the company. People who want to invest in such companies do so by buying shares. The shareholders are the owners of the company. They elect a board of directors whose purpose is to manage the company and whose members report to the shareholders. The company is an independent legal entity and the shareholders cannot be sued for the obligations of the corporation. If things get worse, the company may go bankrupt and the shares may lose their value, but this is the maximum loss that shareholders will suffer. They have "limited liability". Most of the larger companies in the private sector of the UK economy are limited liability companies and this form of organization is particularly suitable for the insurance business due to the long-term unchanging nature of the company's structures. Mergers and acquisitions of insurance companies do not adversely affect this, because the new owner company takes over the assets and liabilities of the company that has acquired.

With the unusual exception of Lloyd's, regulatory authorities and governments usually expect insurance companies to be limited liability companies or mutual insurance companies.

Mutual insurance companies, including cooperatives

Some organizations, from small cooperatives to giant life insurance corporations, are mutual organizations. The main idea of ​​such a company is that the people who use its services are its members and owners. For example, a mutual life insurance office is owned by policyholders (insured). Members elect a board of directors that is responsible for running the organization. It is not always possible to determine by the name of a company whether it is private or mutual insurance. Some companies, which were originally listed as mutual insurance companies, have now registered as private companies, although they have retained the word "mutual" in their company names. Others registered without the word "mutual" in their company names are in fact owned by policyholders.

Members of mutual insurance companies or policyholders sometimes receive significant benefits in the form of lower premiums or higher bonuses, but this is by no means certain. Large private companies can successfully compete with cooperatives in terms of bonuses or benefits and still be able to pay dividends to their shareholders. The large volume of operations carried out by some private groups allows them to make significant savings in administrative costs per policy, and the higher investment income generated by larger reserves allows some of these benefits to be transferred to policyholders. For this reason, there has been a massive "process of transformation from mutual insurance to joint stock companies" in recent years, although some large insurers, especially in the life insurance sector, remain mutually owned. In some cases, the transformed companies survive as limited liability companies, but many of them move to mergers or acquisitions from larger insurance companies or banks.

Source: David E. Bland "Insurance: Principles and Practice"