Who are the major participants in the insurance industry?

Among the most important categories of insurance companies are accident and health insurers, property and accident insurers, and financial guarantors. The most common types of personal insurance policies are auto, health, home and life insurance policies. In a speech delivered during dinner to conference participants, Jay Fishman, president and CEO of The St. Paul Companies, the largest company to withdraw from the insurance market due to medical negligence, offered an important perspective on the authors' puzzling conclusion that disruptions in insurers' capital (higher payments) caused market outflows and not higher premiums.

Paul decided to leave the malpractice market after concluding that he could only break even if he increased premiums by 30 percent per year for three consecutive years. In Paul's view, such a large increase in premiums would lead to a “death spiral” of adverse selection, in which only higher-risk doctors would buy insurance, increasing future losses and requiring even higher premiums in the future. Fishman also warned that limits on compensation for pain and suffering were not the right solution to the problem of malpractice. In his view, what is needed is a more realistic definition of malpractice, which recognizes that, even when doctors take all reasonable precautions, the innovative and experimental treatments that modern medical science makes possible and that patients demand do not always produce the desired result.

The company's request for coverage is sent directly to the plan administrator, who assigns the business to one of the direct assignment insurers or insures it in the mutual fund. Commercial insurers that have been authorized or “admitted” to do business in a state by the state insurance department are generally willing to cover most business risks. Some of the most common arguments in favor of direct government intervention in the terrorist insurance market include the difficulty of predicting future losses, the magnitude of potential terrorist losses, asymmetric information between the government and the private sector, and the fact that many people rationally forego insurance because they believe that the government will rescue them after a major loss. By transferring part of the risk, major insurers reduce their liability for losses, allowing them to take out more insurance.

However, many commercial insurers focus on certain types of businesses or insurance coverages, or both. Mutual companies are an old form of insurance institution in which members or underwriters insured each other; shared profits, losses and expenses; elected a board of directors and appointed a de jure lawyer, who can be a person or a corporation, to manage the operation. Economists and insurance experts have studied the industry for many years and have developed a number of theoretical concepts to explain how insurance markets work. Independent agent fees can be calculated based on the business received, and the percentages may differ between insurers and for different types of coverage.

Just as the demand for insurance seems to differ from the theoretical and rational paradigm, the supply of insurance also seems to depart from the standard model. In several states, surplus line companies are also monitored by surplus line organizations, known as “sealing offices,” which, among their many functions, help their state's insurance department regulate and supervise surplus-line insurers. Rating agencies (private firms) that assess the financial soundness of insurance companies play an important role in the insurance market. Wholesale brokers can also be managing general agents, whom insurers authorize to underwrite and “link” insurance, that is, to provide temporary coverage until an insurance policy can be issued.

For businesses in urban areas with high crime rates, there are FAIR (fair access to insurance requirements) plans, sets of properties created by Congress after the urban unrest of the 1960s to ensure the availability of property insurance. A conference participant summarized the prevailing view on insurance demand and pointed out that an economically rational consumer would understand that, in addition to certain tax benefits, when buying insurance, a bet is made with an insurance company, which the insurance company earns on average because it must cover administrative costs and obtain competitive returns for its shareholders. One consequence is that insurance is usually taken out when the theory suggests that they should not be (life insurance for the elderly), while many major risks that should be insured (terrorism) are not. They report that, while “disruptions” in insurers' capital or high payments have not contributed to the increase in premiums, they have induced some insurers to leave the market.


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