The Business Structure of Insurance Company


According to the National Association of Insurance Commissioners, there were 5,977 insurance companies in 2016 in the United States. The U.S. Bureau of Economic Analysis found that insurance carriers and related activities contributed $507.7 billion, or 2.7 percent, of the U.S. gross domestic product in the same year. This robust and competitive industry attracts a multitude of entrepreneurs looking to start their own independent insurance agencies. However, it is essential to understand the business structure of an insurance company if you hope to compete with those organizations already in the fray.

The Business Structure of Insurance Company

Business Structure of Insurance Company
Business Structure of Insurance Company

Sole proprietorship, partnership, and corporation are the most commonly chosen business structures with each option having specific legal and tax implications. Growing an Insurance Company from scratch means you learn from the mistakes other brands made starting out. Doing the research upfront gives you the opportunity to be first out of the starting gates. Obviously, it is necessary to speak over these options with your accountant or lawyer to find the right fit for your particular business plan.

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When talking about sole proprietorship we are referring to a single person who not only owns but also operates the business. In this instance, the business has not been registered as another business entity i.e. it is part of the individual and is not separate from them. This business structure is the easiest to set up with all profits and losses being reported on one’s personal tax return. The drawback is that along with the profits you also take all of the losses. In the event there are any lawsuits issued against your business, it will negatively affect the individual and their family as creditors can go after your personal assets. Another drawback is that banks do not easily lend to sole proprietors and you may find it difficult to get investors for your business if you are unable to sell the stock in your agency.

Partnership Business

If you choose the partnership option, you are looking at the situation where there are two or more owners of the business. You share the benefits and risks and you are generally all involved in the day-to-day running of the business. The debts and actions of the company in this structure will be shared amongst partners. It is also possible with this business structure to have limited partners who are not part of the daily operations of the business and they do not share in the liability of the organization. There are three types of partnership options – general, limited and limited liability. Your choice will depend on the requirements of your particular state.

The third option is forming a corporation (C corp). It is essentially an individual entity that can make a profit, pay taxes as it’s own entity separate from the owners. Liability is held by the entity, not the individuals who own it. In order to create a corporation, you will need to register it with your state and it is a more complicated process. More information about the process can be found at your state’s office of the Secretary of State. You are able to raise capital for your corporation by selling shares of stock in your company. One of the biggest advantages of this option is substantially more protection from personal liability. With regard to taxes, a corporation pays corporate income tax with the shareholders paying personal income tax on their dividend or compensation.

You also get an S corporation structure where it functions as both a corporation and a partnership business structure. It is a corporation on that it protects the owners on the legal and liability front but operates as a partnership for tax purposes in order to avoid double taxation, as is the case with a corporation. Lastly, there is the limited liability company (LCC) option which is also a hybrid version of the partnership and corporation business structures. An LLC is not as complex to set as a corporation as a corporate charter is not required and there are no by-laws governing it.

The most important thing to remember is that it is can be costly to change your business structure after you have been in business for a few years so you really want to make the right choice at the get-go.

Once you have established your business structure you need to get to grips with the organizational structure of an insurance company. The three core areas include underwriting, operations, and claims. Before you launch your business, you need to determine the risks your business is willing to accept and this will determine the pricing of your product. Underwriting is often an automated process in 2018 but if your business is focused on specialty insurance offerings like fine art you will require a small team of experts in that particular field that can review these complex submissions.

One of the largest areas of the business is the operations department as it offers support to all other divisions in the business. They are focused on producing the physical insurance policy and ensuring it makes its way to the customer. Finally, the claims department deals with any losses that are reported by the customer. They investigate each claim and assist the customer through each step of the process. This department pays for the losses and reverts the client back to the state they were in before they made the claim.

There are many other areas which will need attention such as reinsurance, investments, new business processing, policyholder services, payments and commissions, agency operations, agent recruiting and sales.

The Insurance Information Institute (iii) reported that the U.S. insurance industry employed 2.6 million people in 2016. This was according to the U.S. Department of Labor. It’s a burgeoning industry that is hungry for new insurance business entrepreneurs. Before jumping headlong into the abundant pool of opportunities, ensure that your business structure matches your business plan and that you have procured top talent to execute the multitude of functions involved in a successful insurance operation.