Have you ever wanted to know how insurance works, or why it always seems so complicated? Let’s plow through an insider’s perspective of the insurance industry and how it all works.
Stock insurance companies. The "superpowers" of the insurance market, these normally global companies are associated with established brand names like Travelers, Chubb, Zurich and Hartford. These very "steady" markets are known for longevity, logos, catchphrases, advertising and being everywhere.
This means that the weather globally impacts your pricing regionally, and decisions are guided by stock tickers and boards of directors, who are loyal to profit sharing and profitable practices. Quick quarterly decisions and large overheads can cause problems for even the smallest of companies looking to these behemoths for coverage.
However, these companies are our trend setters and pricing staples in the marketplace; everyone looks to them to be the benchmarks we need for overall industry data. They are also the easiest with which to partner and grow.
Mutual insurance companies. These are regional powerhouses that will compete locally for your business and go toe-to-toe with stock companies. With their smaller overall size, overheads and operating costs, they tend to compete on pricing in a few states.
These companies are owned by the policyholders and run by an elected board of directors, which adds some red tape to the decision-making process, but also makes them nimbler than the stock companies. They are loyal to customer retention and believe in helping their policyholders with lower premiums, better dividends and quick local service.
However, with their smaller size and resources, these partners will tend to have less automation, along with fewer online options and safety resources, and may have a limited ability to grow with you since they are not in every state and only compete in certain regions of the United States.
Specialized insurance companies. These companies feature "No Rules" types of contracts and allow customers to completely tailor their coverages to specifically fit their exposures and industries. With this high level of expertise comes a higher price point and a very basic benchmark for all other scenarios you may have happen to you.
These unique markets operate outside state and federal insurance guidelines and will not always be able to match what you need if you operate across state lines — unless you pay for the increases. These specialty driven markets tend to always be a higher price point and will limit their exposure contractually to you because they operate outside of government regulations.
These companies are not all bad, but they usually are a last resort option for many industries and clients with a poor profitability or claims record. They also bring a highly specialized and professional expertise to each insurance contract and will help agents and brokers place harder risks within the industries they work in.
Captive insurance companies. These companies, such as State Farm, American Family and Rural Mutual, serve select industries and particular lines of coverage. These providers work by modeling your business to fit into their product offerings so it may not always be a good match.
With this specialization and overall "pickiness," they tend to pick one or two industries and stick with their models. Most captives will then build out a product array to help consolidate your coverage with them and partner with specialty carriers to add a la carte options that allow them to compete with the stock and mutual companies within their territory.
To overly complicate the industry, we have three ways to buy coverage. The primary pathway uses a licensed insurance representative that can compare and bind coverage with more than one company and/or agent. A broker can place insurance coverage on your behalf if you have given them the verbal agreement to do so. Here are some common people you may cross paths with:
Independent insurance brokers. These agents and brokers work with many product lines and all types of insurance companies to "custom build" packages for their clients. They are the most common because they have the ability to adapt to any industry and offer solutions based on individual account needs. They act as an intermediary for the client and insurance company to build and broker contracts and pricing. Every agent can be different and contract with many companies to help them earn and service their clients.
Specialty brokers. These insurance experts specialize in one product line and can only wholesale to another agent or broker. These are the representatives for many of the industry’s specialty insurance companies; but like an independent broker, they will contract with different companies to help their clients place coverage when it is harder to find. The good news for the client is that these specialty brokers require a split of the commission with your independent broker and not an increase or "double dip." However, most have additional filing fees and taxes because they operate outside the current regulations.
Captive agents. These are salespeople for captive insurance companies. They normally offer a few product lines for specific lines of coverage from one main insurance company. What they lack internally, they will partner with specialty companies to round out a full package for their clients.
I hope you found this article helpful and informative as you take on your renewals for the next term and can help your broker clearly identify what is important to you when insuring your business. This should help give you a better way forward and increase your chances of the insurance company meeting your expectations while also working to mitigate surprises and unexpected bills.
Which pathway to take
With a general knowledge of where you can buy insurance and who to purchase from, you can better understand the complex industry and which pathways will work to align with your business’ core values and overall vision.
For instance, we wouldn’t want to put a price-sensitive buyer with a specialty broker; nor would we want someone who needs risk management, additional trainings and extra services to help their company expand into more states and locations to buy from a local mutual company for a cheap price. These examples can work for short periods of time; but as an independent broker I can tell you that frustrations set in over time and usually become huge problems later.
Starter questions
Here are some simple insurance questions to help qualify what you are looking for before you interview or shop insurance companies or brokers:
With all of these in mind, you should be able to generate a good understanding of what you hope to accomplish and clearly articulate to any agent or broker what it is you want out of the insurance partnership.
Jack Demski is a licensed commercial insurance advisor with Ansay & Associates, specializing in risk management for snow and land contracting. Contact him at Jack.Demski@ansay.com or 414-491-5918.