How Insurance Works in Pennsylvania
Public and private institutions in the Commonwealth of Pennsylvania provide insurance to assist state’s residents in managing the different risks they could encounter in their lives and businesses. Government-funded insurance programs include Pennsylvania Medical Assistance and Children’s Health Insurance Program (CHIP), jointly funded by the state and federal governments. Medicare is a federal health plan for persons with disabilities or over 65 years. Insurance provided by public agencies are paid for through payroll taxes, revenue earned on the trust fund investments, and subsidized premiums.
In Pennsylvania, private insurance companies also sell health coverage and other insurance products like life, auto, and residential insurance. Insured's premium payments are the main source of funding for private insurers. Insurance providers charge premiums for coverage plans selected by policyholders. Pennsylvania policyholders can pay premiums annually, bi-annually, monthly, or quarterly according to the terms in the policy document. Generally, the premium cost can be high or low depending on factors like the coverage type, amount, limits, and deductibles. The Pennsylvania Insurance Department (PID) is the state department in charge of granting licenses to persons and businesses in the insurance industry. The PID also oversees insurance policy, pricing regulation, and financial audits of insurance businesses.
HEALTH INSURANCE
Health insurance is a type of insurance that covers medical expenses and other health-related costs for nearly 13 million residents of Pennsylvania. Around 1 million of adults in the state are without proper health coverage.
| Health Insurance Market and Common Types of Coverage in Pennsylvania | |
| Major Health Insurance | - Affordable Care Act (ACA) Marketplace,
- Short Term health insurance, - Medicare, - Group health (ACA-compliant) coverage, - etc. |
| Supplemental Health Insurance | - Medigap (Medicare Supplement),
- Hospital Indemnity insurance, - Critical Illness insurance, - Disability Income insurance, - Dental insurance, - Vision insurance, - Long Term Care (LTC), - etc. |
Residents without health coverage from group plans can obtain health coverage through Pennie, Pennsylvania's authorized healthcare insurance exchange. Pennie aligns with the Affordable Care Act (ACA), which allows qualified individuals to receive subsidized healthcare coverage. The marketplace is the primary place where individuals can get financial aid, which lowers the cost of out-of-pocket hospital bills and health care premiums. Self-employed persons, employees of small companies without health benefits, and fresh retirees who have not attained Medicare eligibility can get healthcare coverage via Pennie. Information on cost, eligibility, and the application process is available through the Pennsylvania Department of Human Services. Private health insurance is available for individual customers or on a sharing basis (for example, by a company to cover its employees).
As an alternative to the ACA marketplace, qualifying Pennsylvania residents can purchase short-term health coverage and/or supplemental health plans. Supplemental health insurance can be used in addition to a major health plan (example: Medigap supplementing Medicare), or as a stand-alone feature, like Dental insurance or Vision insurance.
If you are looking for health insurance coverage, make sure to discuss your health insurance needs with a PA-licensed health insurance expert who has access to multiple insurers on and off the Pennie ACA marketplace.
AUTO INSURANCE
Auto insurance offers financial security against property loss, bodily injury, and the resulting legal fees, caused by accidents or thefts. Pennsylvania, which has over 12 million registered vehicles, applies the no-fault rule. This means that irrespective of who was at fault for a vehicle collision, every motorist should file a claim with their respective insurance provider. Nevertheless, Title 75, Chapter 17 of Pennsylvania Statutes mandates all private and commercial motorists applying for vehicle registration to buy a minimum level of property damage coverage, bodily injury liability coverage, and personal injury protection.
| Auto Insurance Market in Pennsylvania | |
| Private Auto Insurance | Insures drivers of their own privately owned/leased vehicles:
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| Commercial Auto Insurance | Insures the business in its entirety, including all owners and employees. Covers commercially-owned or leased vehicles:
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Commonly purchased auto policies in Pennsylvania include collision, liability coverage, personal injury, and comprehensive insurance. With nearly 900 thousand uninsured and underinsured vehicles in the state (around 7% of all), uninsured/underinsured motorist coverage (UM/UIM) remains a popular choice too.
Auto insurance companies in Pennsylvania employ a variety of price variables to assess insureds’ risks or how likely they are to file claims. Motor vehicle owners with lower perceived risk may not pay high insurance premiums. Other factors that may affect premiums include the vehicle type, its use, the insured's driving habits, and demographic factors (age, location, and car features).
Commercial auto insurance coverage is applied to all vehicles that are owned and/or operated for business purposes. One policy typically covers the whole fleet and is usually more expensive than private auto coverage. Don’t forget that the vehicle you have leased to write off as a business use will need commercial coverage. Farm equipment will also require commercial auto insurance.
To discuss private auto insurance in Pennsylvania - speak with an auto insurance agent. To get commercial auto insurance - speak with a commercial property insurance agent.
RESIDENTIAL PROPERTY INSURANCE
Residential property insurance covers homeowners and renters against financial losses caused by certain events such as vandalism or disaster. Nearly 5.8 million housing units in Pennsylvania need insurance. 3 million dwellings have live-in homeowners, while around 2.8 million homes across the state are rental units. With residential property coverage, the insured can get financial protection for their building, personal property coverage, and liability claims. In Pennsylvania, having residential property insurance coverage is not mandatory by law, but it is required for individuals who obtain house loans from mortgage lenders. Homeowners who bought their homes without a mortgage also need residential dwelling coverage to prevent paying out of their pockets for insurable damages or losses. More and more Pennsylvania landlords are starting to require tenants to purchase Renters insurance as an extra coverage for a rental home, as part of the lease. Renters insurance will cover the tenant’s personal possessions.
| Common Residential Property Insurance Types in Pennsylvania | |
| Residential Property Owner Insurance | Homeowners Insurance |
| Condo Insurance | |
| Landlord's Insurance | |
| Tenant Insurance | Renters Insurance |
To get residential insurance coverage in Pennsylvania - speak with a residential property insurance agent licensed in PA. Landlords who choose to rent out their homes should also speak with the residential property professionals. If you need coverage for multiple housing units and/or apartment complexes - speak with a commercial property insurance agent.
COMMERCIAL INSURANCE
Commercial insurance, commonly known as business insurance, protects a company financially against risks, including customer disputes, employee or customer accidents, property destruction and theft, and other unforeseen occurrences.
Unlike personal (private) insurance, commercial policy covers the entire insured business. Over 1 million businesses in Pennsylvania are small businesses, representing all but half of 1 percent of all employers. These large and small businesses employ over 5 million residents and all have different insurance coverage needs based on the type of business, owned property, number of employees, payroll amount, and a lot of other factors. PA businesses can purchase different commercial insurance plans like general liability insurance, business owner policy (BOP), business auto insurance, cyber liability insurance, workers' compensation insurance, and fidelity bonds.
| Common Commercial Insurance Coverages in Pennsylvania | |
| Commercial Property | Real Estate (Landlord or Tenant) |
| Products and Inventory | |
| Commercial Vehicles | |
| Commercial Liability | General Liability (property damage + bodily injury) |
| Product Liability | |
| Professional Liability | |
| Cyber Liability | |
| Commercial Health | Employer-provided group health plans |
| Disability income | |
| Workers Comp | |
| Commercial Life | Employer-provided life insurance coverage |
| Buy-Sell Partnership Agreements | |
| Key Man coverage | |
To get commercial insurance quotes speak with a state-licensed commercial insurance professional who can assess your business insurance coverage needs. Health insurance is purchased through health-licensed agents or brokers, while life insurance sales require a life-specific license.
LIFE INSURANCE
Life insurance is usually thought of as the means to provide financial protection for their family after they die, to pay for the funeral and other family expenses, but that is only a small part of it. Besides the death benefit, some life insurance allows the insured to use its benefits while they are still alive - as the “Living Benefits”. In most cases, however much you use up on the living benefits (plus some associated fees) are subtracted from the death benefit payout after you die.
| Life Insurance Benefits in Pennsylvania | |
| Living Benefits of Life Insurance | Accelerated Death Benefit - pays to cover terminal illness costs |
| Return of Premium - gets you back the money you paid in, if you do not pass away during the term of the policy | |
| Disability Waiver of Premium - allows you to skip the premium payments of term life policy in case of a long-term disability | |
| Long Term Care (LTC) - gives access to the death benefit to cover costs that health insurance may not | |
| Policy Loan - allows borrowing against the policy's cash value, with tax benefits during the retirement years. | |
| Cash Value Withdrawal - gives you access to cash value accounts | |
| Policy Surrender - gives you the refund of the cash value (minus cancellation fees) if you cancel a permanent policy | |
| Death Benefit of Life Insurance | Death Benefit Face Amount - paid out to the beneficiaries after the insured's death |
Some life insurance policies may be structured as an alternative retirement investment vehicle, where the cash values follow a stock market index with a zero-loss guarantee. Unlike the 401K and other similar retirement accounts where both gains and losses are both possible based on the market fluctuations, some life insurance products available in Pennsylvania let you keep the gains during the good years and not lose anything if the market suddenly starts falling. In the worst case scenario, your cash value balance will remain unchanged.
In Pennsylvania, a person or an organization can choose to buy short-term life insurance plans (Term or annually renewable life insurance) or long-term (permanent) plans (whole life, universal life insurance, final expense, etc.). While most permanent insurance coverage will provide coverage throughout the insured’s lifespan, a specified-term policy will expire after the policy term selected by the insured.
Other types of life insurance policies include group life insurance, variable life insurance, indexed universal life insurance, and simplified issue life insurance.
| Common Uses of Life Insurance in Pennsylvania | |
| INDIVIDUAL LIFE INSURANCE
Protects the lives of the insured individuals. |
DEATH BENEFIT - paid to the insured's chosen beneficiaries upon the insured's death. Death Benefit is not taxed.
Typically used to: - Cover the Funeral Costs after we die, so the family does not need to scramble, figuring out who will be paying, - Cover Final Medical and Tax Bills - that are frequently left behind after the deceased - Cover any other planned expenses that were identified during the “evaluation of needs” The ultimate use of the death benefit funds is left to the discretion of the beneficiary |
| LIVING BENEFITS are typically used for:
- To get tax-free retirement income which does not count against the Social Security eligibility, - To cover terminal and/or Long Term Care, to minimize the unpaid bills after the death, \ - To get the paid in premium (minus some fees) back as a refund, if the insured does not die during the term of the policy. |
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| COMMERCIAL LIFE INSURANCE
Protects the lives of the company's employees and management. |
GROUP RATE life insurance offered through an employer or an organization. All who choose to get the coverage get the same (group) discounted rate and guaranteed acceptance.
Death benefit is usually under $500,000 |
| COVERAGE OF KEY PERSONNEL in the company, whose death can result in extra expenses for the business (Beneficiary of the death benefit is the Employer) (Keyman or Key Person Insurance) | |
| BUSINESS CONTINUITY COVERAGE insures business partners, providing the predetermined sum of funds as a death benefit - to buy out the portion of the business from the family of the deceased partners. (Buy-Sell Agreements) | |
To get life insurance in Pennsylvania, speak with a state-licensed life insurance agent who can assess your needs and help you decide on the type of coverage to fit those needs. If your employer offers life insurance coverage - speak to your Human Resources department.
DISASTER INSURANCE
Disaster insurance is available for individuals and business owners who want protection from unforeseeable natural disasters that can damage their homes and business assets. Examples of Pennsylvania disaster insurance include flood insurance, hurricane insurance, and earthquake insurance. Most residential and commercial insurance policies do not provide coverage for certain disasters. As such, it is important to buy a separate flood insurance policy or earthquake coverage if you live in the area prone to such damage. While the frequency of the disastrous events may not have increased over the years, the amount of damages these events cause in Pennsylvania has drastically gone up, due to the amount of property and infrastructure that was built up across the state in that time.
Flooding is the number 1 natural disaster in Pennsylvania, with 24 PA counties experiencing annual flash flood events. Tornadoes have also been observed in all counties of our state, while the seismic events tend to concentrate in central PA. With less than 100 miles to the Atlantic ocean front, Pennsylvania is no stranger to hurricane-caused damage too.
| Most Common Natural Disasters in Pennsylvania | |
| FLOOD
Most regular property insurance does not cover flooding. The National Flood Insurance Program (NFIP) provides additional protection from damage caused by flooding. |
River Flooding - results from an intake of water volume larger than the capacity of the river from:
- Heavy rains, and - Extensive snowstorms and blizzards, where the snow drifts of up to 40 inches deep start melting in the spring, flooding the area |
| Flash Flooding - fast concentration of water in the areas that are normally dry and may not have good immediate drainage | |
| Hurricane and Storm-caused Flooding in PA
- Hurricane Diane, 1955 - Hurricane Agnes, 1972 (>$2 billion in damages, 128 dead) - Hurricane Eloise, 1975 - Tropical Storm Allison, 2001 (>$215 million in damages, water level rose up to 20 feet, 4 dead) - Hurricane Isabel, 2003 - Hurricane Ivan, 2004 - Hurricane Irene, 2011 - Tropical Storm Lee, 2011 (>$1.5 billion in damages) - Hurricane Sandy, 2012 (> $71 billion in damages, 159 dead) |
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| TORNADOES
Tornado damage is covered by standard property insurance as Wind Damage |
Tornadoes are known to happen in every county in Pennsylvania.
The most common damage from a tornado is: - Damaged Roof - Broken and Shattered Windows - Broken Garage Doors - Damaged Siding |
To get disaster insurance in Pennsylvania, speak with the appropriate state-licensed property insurance agent: residential property insurance agent or commercial property insurance agent..
How Does Pennsylvania Insurance Work?
Insurance in Pennsylvania provides a financial safety net for individuals and businesses through risk-sharing. Insureds pay premiums to insurance providers to shoulder the expenses of unanticipated damages or losses in the event of covered perils. Premium payments pooled from several policyholders allow the insurer to generate revenues for paying claims. Typically, the number of insureds filing claims is relatively small compared to those contributing to the pool (via premium payments) from which insurers pay out claims.
What is an Insurance Claim?
An insurance claim in Pennsylvania is a formal request by an insured to an insurer based on the agreement in the insurance policy document. The purpose of buying insurance coverage is to transfer risks to an insurer and get compensated whenever a covered event leads to financial loss. As such, individuals or business owners are expected to file claims when events covered by their policies occur. An insurance claim should contain details of the damages and evidence of the events leading to such damages. Pennsylvania insurers are expected to pay claims after conducting a thorough investigation of the details of the claims. Note that insurance companies may modify or even deny a claim for different reasons like violation of policy terms or liability disputes. Policyholders can streamline the process of claims payment by speaking to a knowledgeable insurance agent in Pennsylvania.
What is the Cost of Insurance?
The cost of insurance is the premium amount paid by an individual to secure an insurance policy. Insurance premium is determined by the insurance provider, and it differs according to individuals' or businesses’ needs. While the main cost of coverage is regulated by the state, each insurer can use variables like the coverage type, amount, and deductible to arrive at the insurance cost for each individual case. Different insurers in Pennsylvania use varying criteria to determine the cost of insurance. This is why you may find varying insurance quotes from different insurance providers for similar insurance plans. Generally, a state-licensed insurance agent can ease the burden for you by providing answers to all insurance questions you have. While an independent agent can help you with different insurance quotes from competing companies, a captive agent will offer detailed information only about different insurance products that are offered by their employer.
How Can Insurance Companies Afford to Pay Out Claims?
Insurance companies in Pennsylvania will continue to exist as long as they can pay claims to insureds. These companies can afford claims payment in four ways, namely:
Investment Income: The premiums that insurance firms charge their clients create a sizable pool of funds. These funds are not placed in savings accounts with little or no interest. Instead, insurers invest in financial or non-financial assets to generate more money while waiting for insureds’ claims. Depending on the insurance company's financial performance, these investments may be longer-term than usual
Underwriting: Pennsylvania insurance firms can also profit by underwriting revenue. This revenue is the difference between the total premiums paid by insureds and the total amount of claims paid by the insurer. It involves risk-sharing by taking in more funds from premiums than they have to pay out for claims. With this approach, an insurance firm that receives $100 million in premiums each year but only pays out 75% in claims can keep the extra $25 million as revenue
Cash Value Cancellation: Insurers make money in life insurance when an insured proactively cancels their insurance policy prior to the expiration date stated in their policy contract. After terminating the policy, the insurance company will pay the cash value and keep the money earned from investing the initial premium. Additionally, some insurance providers may impose a surrender fee that is deducted from the total payable to the insured
Coverage Lapses: It is common for some insureds to neglect to maintain their insurance coverage. This is often profitable for insurance providers. A policy lapse occurs when the actual policy ends without settling claims. In such cases, insurance firms get to keep all previously paid premiums from the consumer without a claim being reimbursed.
Reinsurance is another means by which insurance firms in Pennsylvania can afford to pay claims. This happens when an insurance business buys a policy to shield it from scenarios where large claims might lead to a sizable loss or from unreasonably huge claims. Additionally, some insurance providers offer supplemental financial services, such as investment management, retirement savings, and financial planning to enhance revenue and increase the amount of money available to cover claims.
What Happens if an Insurance Company in Pennsylvania Goes Bankrupt?
Typically, it is impossible for bankrupt Pennsylvanian insurers to pay out claims or debts. When an insurance company goes bankrupt in the Commonwealth, the Office of Liquidations and Rehabilitations, a section of the state insurance department, will step in to rehabilitate or liquidate the company. Either way, policyholders do not need to panic as claims will be paid thanks to Guaranty Associations set up by the law. Every licensed insurance company in Pennsylvania is a member of a guaranty association. If an insurance provider dissolves or declares bankruptcy, guaranty associations will pay policy claims. A guaranty association is financed by levies charged on its participating members. Similarly to how all banks in PA must be FDIC-insured, all insurance companies in Pennsylvania are mandated by law to be part of a Guaranty Association. The following are the major Guaranty Associations protecting the right of Pennsylvania’s residents:
The Pennsylvania Property and Casualty Insurance Guaranty Association (PPCIGA): The association was created by Section 991.1801, Title 40 of the Pennsylvania Statutes. It handles insolvency claims for casualty and property insurance companies. The PPCIGA usually is required to settle claims as soon as the District Court orders the insolvency of any insurance company that declares bankruptcy. Typically, claims payment starts 60 to 90 days following the court ruling. Nevertheless, the waiting time may change depending on when and how many claims are made
The Pennsylvania Life and Health Insurance Guaranty Association (PALIFEGA): The association was established by Section 991.1702, Title 40 of the Pennsylvania Statutes. It handles payments for insolvent life, accident, and health insurance companies
The Pennsylvania Workers' Compensation Security Fund (WCSF): Also known as the Security Fund, it was created by the Workers' Compensation Security Fund Act to provide claim payments in specific situations where the insurance provider of the original policy is ordered by a district court to go out of business
What are the Insurance Company Ratings in Pennsylvania?
In Pennsylvania, insurance firms are rated by independent credit organizations to determine their financial stability and capacity to fulfill insureds’ claims. Before purchasing a policy from any insurance provider, it is advisable that you verify their financial capacity from independent rating organizations. Insurance companies are rated by five separate organizations, each with its own rating criteria and scale. Even though the ratings seem to be comparable, each agency has its own rating system that may or may not be identical to another company's rating system. The five major insurance companies’ rating agencies are:
Companies with strong financial standing and a reputation for managing and satisfying their financial responsibilities typically receive high ratings. Although the rating agency's view is often well-considered, it is an opinion rather than a declaration of fact. As a result, different rating organizations may assign disparate ratings to the same insurance firm. Therefore, it is recommended that individuals and businesses verify insurance companies' ratings with at least two rating organizations before purchasing insurance policies in Pennsylvania. To get more info about a particular state-licensed insurer or agent, reach out to the Consumer Services Bureau of the PA Insurance Department (1-877-881-6388), who can’t make recommendations but can advise if there are any existing issues with the company. Alternatively, individuals can contact a knowledgeable insurance agent to help with rating verification, professional advice and to purchase a policy.
How Do Pennsylvania Insurance Companies Make Money?
Pennsylvania insurers earn income through underwriting, investment income, coverage lapses, reinsurance, and cash value cancellations. Underwriting income is made from premium payments. To earn through premium payment, an insurer employs an insurance actuary who uses statistical data to analyze financial risks associated with various situations. The outcome of this assessment will help the insurer determine the right premium cost that will adequately pay future claims together with a remaining income.
Insurance providers in Pennsylvania also make money by investing the funds from pooling premium payments. However, the money made via investment income is often less than underwriting income since insurers are mostly cautious with investments due to the need to maintain cash reserves capable of paying out the claims. This is why insurers prefer safer investments, usually buying bonds or reliable blue-chip stocks.
Coverage lapses and cash value cancellations are additional revenue streams for insurance firms in the Commonwealth of Pennsylvania. Coverage lapses occur once the insurance contract expires or when an insured fails to pay insurance premium within the grace period as stated on the policy contract. When this happens, the insurer is not obligated to make any payments for covered risk that occurs in the future while retaining all the collected premiums.
Permanent life coverage also permits the insurance provider to earn through cash value cancellations. A life insurance policyholder may choose to stop the coverage and withdraw the accumulated funds in their cash value account. While all of the money paid in premiums goes to the insurance business as profits, the insured will be compensated for the money earned from the insurer’s investments.
Insurance companies also use reinsurance to maximize profit by reducing the risk of paying excessive claims. Reinsurance is the coverage plan that insurance firms purchase from high-profile insurers to safeguard themselves against disproportionate losses resulting from significant exposure. Reinsurance is essential to insurance firms' attempts to maintain their financial stability and prevent payout-related default, and regulators require it for businesses of a specific size and kind.
If you have any questions about insurance in Pennsylvania, discuss your needs with state-licensed insurance professionals, who are the only ones who are legally allowed to assess your insurance needs and provide the resulting insurance advice.
