Basic Principles of Life and Health Insurance and Annuities Flashcards
Commercial Insurers
(also known as private insurance companies) are in the business of selling insurance for a profit. Commercial insurers offer many lines of insurance. Some sell primarily life insurance and annuities, while other sell accident and health insurance, or property and casualty insurance. An insurance company selling more than one line of insurance is known as a Multi-line insurer. Commercial insurance is divided into two main groups:
stock and mutual insurers.
Stock Companies
are organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). Traditionally, stock insurers are called nonparticipating insurers because policyholders do not participate in receiving dividends or electing the board of directors, unless they are also a stockholder of the company. When declared, stock dividends are paid to stockholders. In a stock company, the directors and officers are responsible to the stockholders. Transformation of a stock insurer into a mutual insurer is termed mutualization, and the reverse is termed demutualization. Dividends from a stock insurer subject to taxation because they are considered profit.
Mutual Companies
are owned by their policyholders. Mutual insurers are known as Participating Insurers
because policyholders PARTICIPATE in receiving dividends and electing the board of directors. When declared,
mutual company dividends are paid to the policyholders. Dividends from a mutual insurer are not subject to
taxation because the dividends are considered to be a return of premium. The only exception is if the policyowner
chooses to let the dividends sit and collect interest. In this case, only the accumulated interest would be taxable.
Mixed Insurer
If a company operates as both a PARTICIPATING and NONPARTICIPATING insurer. DIVIDENDS can NEVER be guaranteed regardless of the type of company offering them.
Strong Assessment Mutual Companies
Are classified by the way the charge premium
1. A pure assessment mutual company, operates based on loss-sharing by group members. No premium is
payable in advance. Instead, each member is assessed an individual portion of losses that occur.
2. An advance premium assessment mutual, charges a premium at the beginning of the policy period. If the
original premiums exceed the operating expenses and losses, the surplus is returned to the policyholders as
dividends. However, if total premiums are not enough to meet losses, additional assessments are levied
against the members. Normally, the amount of assessment that may be levied is limited either by state law or
simply as a provision in the insurer’s by-laws.
Fraternal benefit societies
are special types of mutual companies, nonprofit religious, ethnic or charitable
organizations that provide insurance solely to their members. Fraternal must be formed for reasons other than
obtaining insurance. An example of fraternal societies is Knights of Columbus.
Risk retention groups
are mutual companies formed by a group of people in the same industry or profession.
Examples would be pharmacists, dentists, and engineers.
Service Providers
offer benefits to subscribers in return for the payment of a premium. These services are
packaged into various plans, and those who purchase the plans are known as subscribers. Examples of service
providers are Health Maintenance Organizations (HMO) and Preferred Provider Organizations (PPO).
Reciprocal insurers
are unincorporated groups of individual members that provide insurance for other members
through indemnity contracts. Each member acts as both insurer and insured and are managed by Attorney in
Fact.
Reinsurers
make arrangements with other insurance companies to transfer a portion of their risk to the reinsurer.
The company transferring the risk is called the Ceding Company and the company assuming the risk is the
Reinsurer.
• In a reinsurance agreement, the insurance company that transfers its loss exposure to another insurer is called
the primary insurer
Captive Insurer
is an insurer established and owned by the parent company to insure the parent company’s loss
exposure.
Home Service Insurers (also known as industrial insurance)
is sold by home service or debit life insurance
companies. Face amounts are small; usually $1,000 to $2,000 and premiums are paid weekly.
Government Insurance:
Federal and state government are also insurers. They provide social insurance programs,
to protect against universal risks by redistributing income to help people who cannot afford the cost of incurring
such losses themselves. These programs have far reaching effects and millions of people depend on them. Types
of Government Insurance include:
• Social Security (Old Age Survivor Disability Insurance OASDI - Provides income benefits for the elderly
(retirement), survivors of those who died young (young child of a deceased parent), and those qualifying for
federal disability.
• Medicare - Health insurance to CARE for the elderly
• Medicaid - Health insurance to AID the financially needy.
• S.G.L.I. and V.G.L.I (Serviceman’s or Veteran’s Group Life Insurance: life insurance for active and retired
members of the military)
• Tri-Care (health insurance for members ofthe military and theirfamily)
Self-Insurers
Insurers retain risks and must have a large number of similar risks and enough capital to pay claims. However,
they may save money if the loss experience is lower than the expected costs. Self-insurers are not a method of
transferring risk, rather self-insurers establish their own self-funded plan to cover potential losses. A Self-funded
plan is a plan in which an employer pays insurance benefits from a fund derived from the employer’s current
revenues
Lloyd’s of London
is not an insurance company. Members of the association form syndicates to underwrite and
issue insurance- like coverage. This is a group of investors who share in unusual risk.
