Some insurance commercials are silly, while others are much more serious. While both are trying to get you to buy insurance contracts, have you ever stopped to think about why the commercials are so vastly different?
Do these insurance companies have advertising departments with differing senses of humor? Maybe…but there’s a bigger reason for the differences in tone – the companies are targeting you, as a consumer, in different ways based on the type of insurance contract they are selling. In this post, I’ll break down the differences between the two types of insurance contracts, using the help of insurance commercials. Understanding the key differences in these types of insurance contracts will help you better understand their accounting treatment.
Types of insurance contracts
Insurance contracts are generally categorized as either property and casualty (P&C) or life and health (Life).
P&C insurance contracts
Property and casualty (P&C) contracts provide protection against the following:
- Damage to (or loss of) property caused by various perils (i.e., fire, damage, or theft)
- Legal liability resulting from injuries to other persons or damage to their property
- Losses resulting from various sources of business interruption
- Losses due to accident or illness
Risk protection is provided in two areas: first-party loss coverage and third-party loss coverage. The first-party loss coverage is the “property” portion of P&C, as it is for losses related to a policyholder’s own person or property. The “casualty” portion of P&C pertains to the coverage for a policyholder’s legal obligations against losses the policyholder may cause to others.
P&C insurance commercials
When it comes to commercials for P&C contracts, these tend to be light-hearted and fun – you know, the ones with the accident-causing man or a talking lizard. We learned above that P&C insurance contracts include automobile and homeowners insurance policies. These contracts are considered a necessary commodity by most adults. Most customers do very limited research beyond rate-shopping to get the best deal, as these contracts are typically low cost, when compared to a life insurance contract. P&C insurance contracts, like an auto policy, are of short-duration, with annual or even shorter length terms. Because of the commodity mindset, most policyholders do not feel the need to “be loyal” to an insurance company; instead they can easily switch to another insurer for a better deal when it is time to renew their policy. Volume of potential sales is key for a P&C insurer. Therefore, the name of the game for a P&C insurance company is to get the viewer’s attention and make them remember the insurance company’s name! The P&C insurer wants “the guy in khakis” to be top-of-mind when a potential customer is looking for insurance.
Life and health insurance contracts
We saw that P&C contracts protect against damage to property and the policyholder’s liability associated with damages; now let’s discuss the characteristics of life and health, or Life contracts. Life insurance contract payments are contingent on the death, disability, or retirement of the insured. Common examples of life and health contracts include life insurance contracts and annuities. In the case of a life insurance contract, payments are received upon death of the insured. Annuities require payment until the death of the insured occurs. As you can see in both examples, something must occur (in this case, death) for payment to occur or cease, dependent upon the contract. Other examples of products sold by life and health insurers include long-term care and disability insurance, and other investment type products.
Life and health insurance commercials
Often featuring stunning landscapes and calm music, life insurer commercials are serious in tone – no funny business here! When you look at the characteristics of Life contracts, this opposite tone makes sense. Life insurance contracts aren’t “required” like their P&C counterparts. These contracts are often obtained with discretionary income by the policyholder. These contracts are not a commodity and have a higher cost than an auto or homeowners policy. Life policies are characterized by their long-duration. With most policies kept for decades, they serve as financial security and stability for both the insured and their loved ones in later years of life. Customers aren’t looking for an insurer that will make them laugh; they are looking for an unfaltering insurer that embodies trust and strength that will be there in the future to offer the stability and security the customer is seeking. Life insurer advertisements use heartfelt messages and images of stability in their commercials to instill these characteristics in the minds of their potential customers.
Classification of insurance contracts for accounting purposes
Now that we’ve discussed P&C and Life contracts with the help of their respective advertising strategies, you may be wondering how this translates to the accounting for these insurance contracts.
ASC 944, Financial Services – Insurance requires insurance contracts to be classified as either short-duration or long-duration contracts. The classification depends on whether or not the contract is expected to provide coverage for an extended period. The classification of an insurance contract is critical, as the accounting differs significantly between short-duration and long-duration contracts (but I’ll save the accounting treatment for another post!).
Insurance industry training offerings
Accounting for insurance companies is no easy task and we’re here to help! Curious how we make insurance training fun and engaging? Check out this video from our Insurance Industry Fundamentals: Industry Overview course to see for yourself!
We recently released our online insurance training program – Insurance Industry Fundamentals. This collection of eLearning courses begins with an overview of the industry before diving into the details and accounting for property and casualty (P&C) contracts and reinsurance contracts. Fair value, investments, derivatives, and credit losses are also included in our collection to ensure all your bases are covered!
Have questions about insurance? Let’s talk!
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