Most people tend to lump all insurance carriers together within the "alphabet soup" of insurance types, but there are differences. Consider the areas of Life and Health (L&H) and Property and Casualty (P&C) insurance. Some larger carriers offer both, but most specialize in one form or the other. All of these carriers have the common thread of risk assessment, but here are some of the basic differences:
- Risk Assessment Methods – In L&H, you are dealing with people; in P&C, you are dealing with things. Therefore, the risk assessments are a bit different between the two.
L&H risks are going to be related more to the people themselves – their genetic factors, age, and habits that set the background risks. Of course, this is being turned on its head somewhat with the Affordable Care Act, and actuarial risk factors such as age and pre-existing conditions cannot be treated in the same light. Even so, the factors are still assessed the same way – they just cannot all be used to set premiums in the way they were before.
Since P&C risks are related to things, most often the risk is associated with the inherent value of these items and where they are located. The same house has a much higher risk if it sits in a flood plain than it does if it is located on a nearby hill.
- Background Knowledge and Licensing Requirements - Since L&H carriers offer financial vehicles such as annuities, L&H sales requires a greater knowledge of financial planning skills. It also requires more actuarial knowledge (and in-depth medical knowledge doesn't hurt). P&C requires more understanding of environmental risks and statistical likelihood of damages. As a result, there are different licensing requirements and tests to be certified in either L&H or P&C. Some agents are licensed for both. Some states are further splitting the licensing requirements for Life and Health into two separate licenses and tests.
- Complexity – A review of insurance forums suggests that underwriting P&C is typically more complex than underwriting L&H policies. P&C focuses much more on the risk assessments for a given situation, and there are a wider variety of valuations and more possible avenues for P&C damages than there are with L&H risks. (This is a highly arguable point from an outside perspective, but does seem to be a typical theme in insurance forums.)
- Investment strategy – Since insurance companies are required to have significant amounts of reserves and suitable liquidity to pay out claims, investing is generally cautious in both the L&H and P&C fields. P&C groups tend to invest heavily in highly rated fixed-income debt securities. L&H companies may be a little more diverse but are still heavily invested in bonds (public and corporate) and mortgages. In both cases, maturities are managed to provide the most stable cash flow possible.
- Capital and Surplus Requirements – The amount of resources required by state insurance agencies may be different for P&C and L&H carriers, but the differences are not uniform – it has to do with whatever the risks are in your particular state for that category. For example, in Florida, P&C carries higher capital and surplus requirements than L&H, due in part to regional hurricane risk and associated higher chances of massive payouts.
In the end, while there are substantive differences between P&C and L&H carriers, they have more similarities than differences from the viewpoint of the consumer. Which brings us to the key set of letters in this bowl of alphabet soup: RISK&U. Whether you’re shopping for insurance from a P&C or L&H carrier, make sure to obtain the coverages you need – at the fairest available price – to manage your risk appropriately.