Chapter 1: Basics Flashcards
Define Reserves
Accounting measurements of an insurer’s future obligations to its policyholders (what is paid to a policyholder when they need it)
Define liquidity
The insurance company’s ability to make unpredictable payments to the policyholder
Describe Private Insurance Companies - Commercial
- Commercial insurers offer many types of insurance.
- Multi-line insurers sell more than one type
Define Stock Companies - nonparticipating
- Private organization
- Organized under state law to make profit for stockholders
Define Mutual Companies - Participating
- Also organized under state laws
- No stockholders (policyholders are owners)
- Both costumer and an owner
- Can participate in aspects of company and receive dividends (this is the participating part)
Define Strong Assessment Mutual/Insurers
- Charges a premium at the beginning of the policy period
- This results in a policyholder either receiving money (dividend) or owing money
Define Reciprocal Insurers
- Organized by ownership of policyholders
- Policyholders insure the risk of other policyholders
Define Lloyds of London
Acts as an arena for settling claims and disputes, provide coverage that may not be available in certain areas and put together underwriting information
Define Reinsurers
- Insuring of insurance companies
- Transfers a portion of risk to another company
- Ceding company transfers risk to reinsurer (another company)
Define Captive Insurer
An insurance company owned by a parent firm for the purpose of insuring that parent firms losses
Define Risk Retention Group (RRG)
Mutual insurance company formed to insure people in the same occupation
Define Fraternal Benefit Societies
- Membership based on religious, national or ethnic lines
- Originally to help poorer members
- Must be nonprofit, have a lodge system with ritualistic work and must have elected officers
Define Industrial Insurers
- Specializes in a particular type of insurance
- Small accounts ($1,000 to $2,000)
- Premiums paid weekly
Define Service Providers
- They sell medical and hospital care services not insurance
- Pay a premium for services provided at a hospital or physician participating in the plan
- Health maintenance organization (HMO) is also a service provider (they stress preventative health care)
- Preferred Provider Organization (PPO) is the third type. Discounts or special services when going to a certain health care provider
Define Government as Insurer
- Both federal and state governments
- Ranges from crop insurance to savings and loans
- includes social security and Medicare/Medicaid
Define Self-Insurers
- Self-funded insurance
- Often used by large companies for pension plans and some health insurance plans
- Company will only use insurance company when they suffer a maximum loss
How is insurance sold?
- Mostly agents who present products and services for an insurance company
- Agents represent the insurers and brokers represent the buyers
- Captive career agents work for a company
- Independent agents sells products from many companies and works for themselves
Define Career Agency System
- Branches of major stock and mutual insurance companies that represent a specific area
- Employees are recruited, trained and supervised by members of the agency or a general agent
Define Personal Producing General Agency System
Similar to career agency system but they Do Not recruit, train and supervise
- Employees only work for the system not the insurance company
Define Independent Agency System
- Independent agents represent any number of insurance companies through contracts
- Receives commission for bussiness they produce
Define direct selling method
- Type of insurance sold through mass marketing or direct sale to the consumer
1868 - Paul v. Virginia
Upheld the right of states to regulate insurance (insurance is not interstate regulated)
Example: New York cannot regulate an insurance company in Ohio
1944 - United States v. Southeastern Underwriters Association
Changed Paul v. Virginia slightly
- Nullified state regulations that were in conflict with federal legislation
- Shifted power to federal government though
1945 - The McCarran-Ferguson Act
- Regulation by state is in the peoples best interest
- However the federal government has a right to interfere if the insurance company is not being run effectively
- Must have a legitimate reason to obtain personal information about a client
- Penalty: $10,000 minimum for violation
1958 - Intervention by the Federal Trade Commission (FTC)
FTC lost this case
They wanted to control advertising and sales of the health insurance companies
1959 - Intervention by the Securities and Exchange Commission (SEC)
- Variable Annuities
- Required insurance companies to conform to both SEC and state regulations
1970 - Fair Credit Reporting Act
- Rights to privacy
- requires fair and accurate reporting information about consumers. This includes informing an applicant about any investigations being made
- Protects consumer when denied coverage or charged higher rates
- Penalty: $5,000 for violation
1999 - Financial Services Modernization Act
- This overturned The Glass-Steagall Act of 1933
- Financial Services Modernization Act allows commercial banks, investment banks, retail buyers and insurance companies to enter each other’s lines of business
Marketing and Sales Practices
The ethics and professionalism that requires an agent to protect consumers
- Determine a clients needs and provide coverage to best suit these needs
- Inform clients of all aspects of products provided
- Full documentation
- Ongoing relationship with client
What should be provided when meeting with potential clients?
- Buyers Guide (details on products offered)
- Policy Summary
What are the goals of the National Association of a Insurance Commissioners?
- To encourage uniformity in state insurance laws and regulations
- Assist in administration of those laws
- Protect interests of policyowners
- Preserve state regulation of the insurance business
What is the State Guaranty Associations job?
To protect consumers when an insurance company is unable to pay claims
What is the Advertising Code
- Put in place by the NAIC
- Prohibits misleading information when dealing with insurance sales and marketing
Claim settlement practices
These are regulated by State Insurance departments
What is the job of an insurance company?
To transfer risk from an individual or business to an insurance company
What are annuities?
They provide a stream of income by making a series of payments over a certain amount of time
Define Demutualization
The process of a mutual company being converted to a stock company
What are Independent Rating Services?
Credit agency rate financial strength of an insurance company based on claims, reserves and company profits.
Companies are:
- AM Best
- Standard and Poor’s
- Moody’s
- Fitch
