Types of insurance companies
There are many types of insurance companies. It is useful to be aware of the general types, since the differences can impact the kinds of insurance that a business chooses to buy. The more common categories of insurance company include:
- Captive insurance company. This is an entity that exists to underwrite the risks of its parent owner. The concept can also be used to provide insurance for a group of participating entities. The risk of loss is confined to the captive entity.
- Domestic. This is an insurance company that is incorporated in the state within which it is domiciled. This entity is considered a domestic insurer within that specific state, and a foreign insurer within all other states (though it can still be licensed to do business in other states).
- Alien. This is an insurance company that is incorporated under the laws of another country. It is considered an alien entity from the perspective of any other country within which it does business.
- Lloyds of London. This is a business underwriting insurance under the authorization of the English Parliament. These entities are more likely to issue coverage for more unusual or high risk items, as well as the usual types of insurance.
- Mutual. The policy holders own this type of business, so earnings are distributed back as dividends. Losses are not usually charged back to policy holders, based on the terms of their insurance agreements.
- Stock company. This is an entity organized as a corporation, with shareholders. Any excess earnings of this type of business may be distributed as dividends to the shareholders.
An insurance company may also be classified by the type of insurance services that it offers. As an example, a monoline company issues only a particular type of insurance, while a multiple line company offers several types of insurance. Further, a financial services company can provide not only insurance products, but also other types of financial services.
A business can also use self-insurance rather than a third-party insurance entity. Under the self-insurance concept, an entity pays for losses from its own cash reserves. This approach can be acceptable when the administrative costs of a normal insurer are very high, or when the available cash reserves are considerable, or when the only alternative is to pay an egregiously-high premium to an insurer. If handled correctly, self-insurance can lower costs by eliminating the profits that would be incorporated into the pricing of a third-party insurance company. Self-insurance can even be used for workers’ compensation insurance, though doing so requires qualification as a self-insurer, the purchase of umbrella coverage to pay for any catastrophic claims, and the posting of a surety bond.