Insurers and Organization

Insurers in the U.S. may be "admitted," meaning that they have been formally admitted to a state's insurance market by the state insurance commissioner, and are subject to various state laws governing organization, capitalization, and claims handling. Or they may be "surplus," meaning that they are nonadmitted in a particular state but are willing to write coverage there. Surplus insurers are supposed to underwrite only very unusual risks. Although insurance brokers are well aware of what risks an admitted insurer will not accept, they must go through a ritual of shopping around a risk to admitted insurers (who will reject it, of course) before applying for coverage with a surplus insurer. Only the smallest insurers exist as a single corporation. Most major insurance companies actually exist as insurance groups. That is, they consist of holding companies which own several admitted and surplus insurers (and sometimes a few excess insurers and reinsurers as well). There are dramatic variations from one insurance group to the next in terms of how its various business functions are divided up among its subsidiaries or outsourced to third party corporations altogether. All major insurance groups in the U.S. that transact insurance in California maintain a publicly accessible list on their Web sites of the actual insurer entities within the group, as required by California Insurance Code Section 702. An example of how insurance groups work is that when people call GEICO and ask for a rate quote, they are actually speaking to GEICO Insurance Agency, which may then write a policy from any one of GEICO's seven insurance companies. When the customer writes their check for the premium to "GEICO," the premium is actually deposited with one of those seven insurance companies (the one that actually wrote their policy). Similarly, any claims against the policy are charged to the issuing company. But as far as most layperson customers know, they are simply dealing with GEICO. Obviously, it is more difficult to operate an insurance group than a single insurance company, since employees must be painstakingly trained to observe corporate formalities so that courts will not treat the entities in the group as alter egos of each other. For example, all insurance policies and all claim-related documents must consistently reference the relevant company within the group, and the flows of premiums and claim payments must be carefully recorded against the books of the correct company. The advantage to the insurance group system is that a group has increased survivability over the long run than a single insurance company. If any one company in the group is hit with too many claims and fails, the company can be quietly placed in runoff but the rest of the group continues to operate. By way of contrast, when small insurers fail, they tend to do so in a rather wild and spectacular fashion. Sometimes the result may be a state-supervised takeover by which a state agency may have to assume part of their residual liabilities.