A licensing class reviews the ways an insurer can be organized. Which description correctly identifies a FRATERNAL BENEFIT SOCIETY?
- A.An insurer owned by its policyowners, who share in divisible surplus through policy dividends.That describes a MUTUAL insurer. Mutuals have no membership or lodge requirement and sell to the public at large.
- B.An unincorporated group of subscribers who insure one another through a common attorney-in-fact.That describes a RECIPROCAL insurance exchange, an entirely different structure built on mutual exchange of contracts rather than membership in a society.
- C.A nonprofit membership organization with a lodge system and a representative form of government that issues life certificates to its members.Correct. Nonprofit, lodge-based, member-only certificates - the defining features of a fraternal benefit society.
- D.An insurer owned by shareholders, whose policies are typically nonparticipating.That is a STOCK insurer. Its owners are investors seeking a return, not insureds seeking coverage.
Why: A fraternal benefit society is a nonprofit membership organization operating through a lodge system with a representative form of government, existing for social, charitable or benevolent purposes, and issuing life insurance CERTIFICATES to its members rather than policies to the general public. Membership in the society is a precondition of coverage, which is what most sharply separates it from every other organizational form.
Bellamy Cross reads about an insurer that is not a corporation at all. It is an unincorporated association whose members, called subscribers, each contract to insure one another, and its affairs are managed on the members behalf by a manager holding a written appointment from each of them. What form of insurer is this, and what is the manager called?
- A.A mutual insurer, managed by a board of directors elected by policyholders.Wrong. A mutual is an incorporated company governed by a board. The described entity is unincorporated and has no such board.
- B.A fraternal benefit society, managed by a supreme governing body under the lodge system.Wrong. A fraternal operates through a lodge system and a representative form of government for a defined membership, and it issues certificates to members.
- C.A reciprocal insurance exchange, managed by an attorney-in-fact appointed by each subscriber.Correct. Unincorporated, subscribers insuring one another, and management by an attorney-in-fact are the three defining features.
- D.A risk retention group, managed by a captive manager under federal liability risk legislation.Wrong. Risk retention groups are creatures of federal liability risk legislation and are ordinarily incorporated. They do not use the subscriber and attorney-in-fact structure.
Why: This is a RECIPROCAL, sometimes called a reciprocal insurance exchange. Its distinguishing feature is horizontal: the subscribers insure EACH OTHER through an exchange of contracts, so every member is simultaneously an insurer of the others and an insured of the others. Because the exchange is unincorporated and has no board of directors in the corporate sense, day-to-day management is carried out by an ATTORNEY-IN-FACT appointed in writing by each subscriber, who binds coverage, collects premiums, handles claims, and is compensated out of a stated share of premium. Contrast this with a mutual, which IS a corporation owned by its policyholders and run by a board of directors, and with a stock insurer, which is a corporation owned by shareholders who need not be policyholders.