Chapter 1 Flashcards
Insurance
Spreads the risk of loss from one person to a large number of persons through the pooling of premiums. The transfer of risk from one party to another through a legal contract; or the transfer of risk through pooling funds.
Insurer
Receives the policyowners transfer of risk. Assumes this risk since they receive a premium.
Premium
When the transfer of risk is accomplished by purchasing an insurance policy, this is the small fee that the policy owner pays in return for a large quantity of coverage.
Reducing premium costs
Premium cost can be reduced when the insured implements loss control measures (i.e. smoke alarms or sprinkler system) to lower the chance of a loss occurring in the first place.
Private (Commercial) Insurance Companies
Anything not owned by the federal or state government is typically considered commercial or private insurance companies
Monoline insurer
A company that only sells one line of insurance (ex. health insurance).
Multi-line insurer
Companies that sell more than one line of insurance.
Stock companies
A private organization, organized and incorporated under state laws for the purpose of making a profit for its stockholders (shareholders). Nonparticipating company because policyholders do not participate in dividends. Look to grow their earned surplus or post-tax earnings not paid in dividends. Earnings retained by a company are considered equity and are owned by the shareholders.
Mutual Companies
organized and incorporated under state laws, but they have no stock holders. The owners are policyholders. Anyone purchasing from a mutual insurer is both a customer and an owner.
Divisible surplus
The amount of earnings paid to policy owners as dividends after the insurance company sets aside funds required to cover reserves, operating expenses, and general business purposes.
Mutualization
Stock company converted into a mutual company
Demutualization
Mutual companies converted into stock companies
Mixed plan
stock insurance company issuing both participating and nonparticipating policies
Strong assessment mutual insurers
assessment mutual companies are classified by the way in which they charge premiums
Lloyd’s of London
A syndicate of individuals and companies that individual underwrite insurance. Their function is to gather and disseminate underwriting information, help its associate settle claims and disputes, and through its member underwriters, provide coverage that might otherwise be unavailable in certain areas.
Reinsurance
An arrangement by which an insurance company transfers a portion of an assumed risk to another insurer. Takes place to limit the loss any one insurer would face should a very large claim become payable.
Ceding company
The company transferring the risk to another company.
Reinsurer
The company assuming the risk transferred by a ceding company.
Net retention (or net line)
The portion of the risk that the ceding insurer retains
Treaty reinsurance
an automatic sharing of the risks assumed.
Captive insurer
An insurer that is established and owned by a parent firm for the purpose of insuring the parent firm’s loss
Self-insurers
rather than transfer risk to an insurance company, a self-insurer establishes a self-funded plan to cover potential losses.
domestic insurer
an insurer with its principal or home office in the state where it is authorized
foreign insurer
an insurer who is authorized in one state but its charter or principal office is in another state
alien insurer
insurers authorized in any state within the US whose principal office is located outside of this country
Producer agents
represent a particular company. present insurers’ products and services to the public via active sales and marketing methods. a captive agent would only sell for one company. in a sales transaction, agents represent the insurer and brokers represent the buyer.
1945 The McCarran-Ferguson Act
Enacted by Congress, Public Law 15. Made it clear that the states’ continued regulation of insurance was in the public’s best interest. Made possible the application of federal antitrust laws to the extent that the insurance business is not regulated by state law. States then conformed to federal law.
1970 Fair Credit Reporting Act
Enacted by the federal government. Attempt to protect an individual’s right to privacy. Requires fair an accurate reporting of information about consumers, including applications for insurance. Insurers must inform applicants about any investigations that are being made upon completion of the application.
