Basic Principles Cont’d Flashcards
The Role of Insurance
- To transfer the risk of financial loss from one party( an individual) to another (insurance company) through a legal contract.
– Also transfer of risk through the pooling or accumulation of funds.
– Insurance spreads the cost of the unexpected financial loss to many individuals.
Premium
Amount to be paid for an insurance policy.
Indemnified
The policy of the insured restores them to the financial position they enjoyed before they’re insured loss.
Most insurance contracts pay off financial losses and reimburse the insured.
Annuity
A series of payments made at equal intervals parentheses (e.g., savings account, monthly mortgage payments, insurance payments, and pension payments).
I knew what he’s provided stream of income by making a series of payments over the certain period of time.
Types of Insurance Companies
classified in broad terms
- Private/commercial
- Government
Private (commercial) Insurance Companies
Commercial insurers are private companies offering many lines of insurance. They are funded through premiums and sell insurance for profit.
Multi-Line Insurers
Companies that sell more than one line of insurance.
Monoline Insurer
The company that only sells one light of insurance.
Government Funded Insurance
Grant programs are funded with taxes and serve national and state social purposes.
Stock Insurance Companies
- Organized and incorporated understate law.
- Nonparticipating, meaning policyholders do NOT participate in the companies profits NOR in electing the companies Board of Directors.
- Owned by the stockholders, who get paid a share of the company’s profit through dividends.
Mutual Insurers
- Also organized and incorporated under state laws.
- Participating, meaning these companies have no stockholders, instead the policyholders on the company. The insured are both customers and owners, having the right to vote for board members and get paid a share of the companiy’s profits through dividends.
Mutualization
The process of a stock company being converted into a mutual company.
Demutualization
The process of a mutual company being converted into a stock company.
Strong Assessment Mutual Insurers
Classified by the way they charge premiums. (Assessment of loss method)
Pure assessment mutual companies operate on the basis of loss-sharing by group members.
 Risk Retention and Risk Purchasing Groups (RRG)
A mutual insurance company formed to insure people in the same business, occupation, or profession.
Group owned liability: assumes and spreads product liability and commercial risks among members.
Primary purpose is to retain or pool risks
Licensed in state of domicile
Owned by policyholders (business owners who are also shareholders).
Reciprocal Insurers
Similar to mutual insurers
Organized on the basis of ownership by their policyholders
It is the policyholders themselves who ensure other policyholders’ risks.
An attorney-in-fact manages reciprocal insurers.
Reinsurers and Retention Limits
Reinsurers are a specialized branch of the insurance industry because they insure insurers.
Reinsurance is an arrangement by which an insurance company transfers a portion of an assumed risk to another insurer.
Ceding company
Company transferring the risk.
Reinsurer
The company assuming the risk.
Net Retention
Also known as net line, the portion of the risk the ceding insurer retains.
Primary Insurer
Reinsurance
The company that transfers it’s less exposure to another insure
Treaty Reinsurance
A typical reinsurance contract between two insurance companies, which involves an automatic sharing of the risks assumed.
Service providers
Sell medical hospital services to their subscribers, NOT insurance, in return for premium payment.
- HMOs
- PPOs
Fraternal Benefit Societies
Noted primarily for their social/charitable/benevolent activities, have memberships based on religious, national, or ethnic lines.
Must be nonprofit, have a large system that includes ritualistic work, and maintain a representative form of government with elected officers.
Lloyd’s of London
Not an insurer, but rather a syndicate of individuals that underwrite insurance.
They gather and disseminate underwriting information that helps their associates settle claims and disputes through member underwriters.
Provides coverage that might otherwise be unavailable in certain areas.
Self-Insurers
Not a method of transferring-risk
Defined as a self-funded plan to cover potential losses
Types of Insurance Companies
Captive Insurer
Surplus Lines Insurance
Industrial Insurer
Private Versus Government as Insurer
Private or commercial insurance companies may be proprietary or cooperative (like a profit motivated stock company), and they offer individual, group, or blanket insurance policies.
Also commonly called social insurance programs, owned and operated by federal/state entities and may either:
1. Write insurance to cover perils not insurable by commercial insurance (i.e., war, flood, nuclear reactions).
2. Write insurance on risks that are insurable and does compete with the commercial marketplace.
Generally Ray insurance to cover catastrophic pearls or a segment of society against catastrophic medical costs.
Social Insurance Programs
Generally cover catastrophic perils (i.e., flood) or protect a segment of society (elderly, veterans, etc.) against catastrophic medical costs.
OASDI Medicare Medicaid SGLI & VGLI National Flood Insurance Program Federal Crop Insurance Program
(Government Insured) Social Insurance Programs
Insurer Classification According to Authorization
And the insurar that is admitted or authorized to transact insurance business in a particular state is referred to as an authorized ensure in that stated.
Also known as admitted insurer‘s, an authorized company is issued a certificate of authority.
Insurer Classification According to Domicile
A domestic insurer has its principal or home office and the state where it is authorized.
Departments within an Insurance Company
Marketing/sales Sales Underwriting Claims Actuarial
Producers
Agents (rep the insurer)
Brokers (rep the insured)
Solicitors (rep/solicit on behalf of agent)
Service reps (do not engage in sales)
Underwriter
The person who identifies, assesses, examines, and classifies the amount of risk represented by an applicant to determine if coverage should be provided (determining premium), and approve/denies applications.
How Insurance is Sold
- Mostly purchased through licensed producers
- Producers may be agents who rep a particular company, or brokers who aren’t tied to any particular company.
- An agent or broker’s contract and appointment with the insurance company are what grant them authority to bind an insurer to an insurance contract.
Career Agency System
Managerial System
Personal Producing General Agency System
Independent Agency System
Other Methods of Selling Insurance
Carrier Agencies
Personal Producing General agencies
(PPGs)
Captive Insurer
And insurer established and owned by a parent firm for the purpose of ensuring the parent firm’s loss exposure is known as a captive ensurer.
Surplus Lines Insurance
Not available through private or commercial carriers.
Refers to the non-traditional insurance market.
Personal will seek coverage through a surplus lines broker in order to secure coverage for high, substandard, or unusual biks. Next
In order to qualify for surplus lines coverage, an effort has to be made to secure coverage in the authorized market. An individual may not attempt to secure coverage just because it may be less expensive.
Industrial Insurer
Characterized by relatively small face amounts (usually $1000-$2000) with premiums paid weekly.
Actuary
Calculates policy rates, reserves, and dividends and makes other applicable statistical studies and reports. An actuary is concerned about the cost of insurance as a hole for a specific class of risk.
Adjuster
Engages in investigative work to obtain information for adjusting, settling, or denying insurance claims.
