Chapter 1 General Flashcards
Which of the following individuals represents the insurance company when selling an insurance policy?
Producer
The National Association of Insurance Commissioners (NAIC) consist of what?
State and territorial insurance commissioners or regulators. The NAIC provides resources, research, legislative and regulatory recommendations and interpretations for state insurance regulators. The association promotes uniformity among states and members may accept or reject recommendations. The NAIC has no legal authority to enact or enforce insurance laws.
The Federal Insurance Office (FIO) consist of what?
his office monitors the insurance industry and identifies issues and gaps in the state regulation of insurers. It also monitors access to affordable insurance by traditionally underserved communities and consumers, minorities, and low- and moderate-income persons. The FIO is not a regulator or supervisor. Insurance is primarily regulated by the individual States.
The Federal Insurance Office (FIO) established by who?
Dodd-Frank Wall Street Reform and Consumer Protection Act.
Insurance regulated mostly at what level?
The insurance industry is regulated primarily at the state level.
The McCarran-Ferguson Act of 1945 determined what?
Federal government can not regulate insurance in areas over which states have the authority to do so. Congress created federal agencies to provide regulatory oversight impacting insurance practices. Government insurers step in (as a last resort) when private insurers are unable to provide protection relative to the catastrophic nature or unpredictability of a risk.
Stock Insurance Company
A stock company is owned by stockholders or shareholders. Directors and officers direct the company operations and are elected by stockholders. Stockholders receive taxable corporate dividends as a return of profit when declared by the Directors.
Dividends are not guaranteed
Traditionally, stock insurers issue Non–Participating policies
Mutual Insurance Company
A mutual company is owned by policyholders (who may be referred to as members). A Board of Trustees or Directors directs the company operations and is elected by policyholders. Policyholders receive non-taxable dividends as a return of unused premium when declared by the directors.
Dividends are not guaranteed
Mutual insurers typically issue Participating policies
Self-Insurer
To self-insure means to assume the financial risk one’s self. This is generally an option only for large companies who may even reinsure for risks above certain maximum limits.
Residual Markets
A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.
Can not be obtained in ordinary market
A Joint Underwriting Association or Joint Reinsurance Pool requires insurers writing specific coverage lines in a given state to assume the profits/losses accruing their share of the total voluntary market premiums written in that state.
Risk Sharing Plan – Insurers agree to apportion among themselves those risks that are unable to obtain insurance through normal channels.
Coverage is typically written as workers’ compensation, personal auto liability or property insurance on real property.
Reinsurance Companies
An insurance company that assumes all or a portion of a risk for a primary or ceding insurance company; reinsurance transfers risk among insurance companies. The insurer originating the application is the primary or ceding company. The insurer sharing in the risk is the reinsurance company. Consumer inquiries must originate with the ceding company, which then obtains reinsurance.
Reinsurance Companies types?
Types of Reinsurance:
Treaty Agreements – Reinsurance agreement that covers all risks contained in the subject line(s) of business automatically.
Facultative Agreements – Reinsurance agreement that allows ceding and reinsurance companies the opportunity to negotiate coverage for individual risks.
Financial Rating Services
Independent financial rating services evaluate and rate the financial stability of insurance companies. These companies assign rating codes to show financial strength or weakness of each company rated. The ratings are available to the public and producers are responsible for placing business with insurers that are financially sound.
Examples of rating services include: A.M. Best Company, Standard & Poor’s, Moody’s Investment Services, Weiss Insurance Rating, and Fitch Ratings.
If an insurance company wants to transfer all or part of the risk it has accepted, it would buy which of the following types of insurance?
Reinsurance
Domicile
Domicile refers to the jurisdiction (i.e., state or country) where an insurer is formed or incorporated
There are three types of Insurer domiciles:
Domestic Insurer – An insurer organized under the laws of this state, whether or not it is admitted to do business in this state.
Foreign Insurer – An insurer not organized under the laws of this state, but in one of the other states or jurisdictions within the United States, whether or not it is admitted to do business in the state or jurisdiction.
Alien Insurer – An insurer organized under the laws of any jurisdiction outside of the United States, whether or not it is admitted to do business in this state.
Surplus (Excess) Lines Insurance
Surplus Lines insurance finds coverage when the kind or amount of insurance cannot be obtained from admitted insurers. It may not be utilized solely to receive lower cost coverage than would be available from an admitted carrier.
Each State regulates the procurement on Surplus Lines insurance in their State. Non-admitted business must be transacted through a Surplus Lines Broker.
Admitted Insurer
Transact insurance in a particular state.
Maybe be a domestic foreign, or alien certificate of authority
Non-admitted
Unauthorized to transact insurance in a particular state. No certificate of authority
Which of the following is an insurance company that is organized under the laws of a different state within the United States?
Foreign
Management
Executives – Oversee the operation of the business.
Actuarial Department – Gather and interpret statistical information used in rate making. An actuary determines the probability of loss and sets premium rates.
Underwriting Department – Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium.
Marketing/Sales Department – Responsible for advertising and selling.
Claims Department – Assists the policyholder in the event of a loss.
Which insurance company department accepts the insurance risk?
Underwriting
Exclusive or Captive Agency System
Deals with the insured through an exclusive or captive agent.
Agent represents solely one company or group of companies having common ownership.
Insurer retains ownership rights to the business written by the agent.
The agent is an employee or a commissioned independent contractor.
Insurer may or may not provide office and agency support services.
Direct Writing System
Producer or Agent is an employee of the insurer.
Insurer owns the accounts.
The agent may be paid a salary, salary plus bonus, or commission.
Independent Agency
An agent or agency that enters into agency agreements with more than one insurer. It may represent an unlimited number of insurers.
Agency retains ownership of the business written.
An independent contractor that is paid a commission and covers the cost of agency operations.
Career Agency System – Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.
Career Agency System
Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.
Personal Producing General Agent
Does not recruit career agents.
Sells insurance for carriers it is contracted with and maintains its own office and staff.
Direct Mail or Direct Response Company
Sells insurance policies directly to the public with licensed employees or contractors.
A marketing system utilizing direct mail, newspapers, magazines, radio, television, internet, web sites, call centers and vending machines.
Mass Marketing
Mass marketing is used to target a specific type of insurance to a large group of individuals, such as the American Association of Retired People (AARP).
Insurer reduces marketing and underwriting expenses.
Law of Agency
The law of agency defines the relationship between two or more parties where one party, the agent/producer, acts on behalf of the other party, known as the principal or insurer. The agent/producer binds the actions and words of the principal.
Insurer (Principal)
The insurer is the source of authority from which the producer must abide. The insurer is responsible for all acts of a producer when the producer is acting within the scope of its authority. The producer may be personally liable when their actions exceed the authority of the agency’s contract.
Express authority
is written into the producer’s agency contract. It details specific activity regarding the producer’s ability to transact business on behalf of the principal. An example would be the producer’s authority to solicit, negotiate, and sell insurance contracts on behalf of the principal. The agent may also have the express authority to bind coverage.
Implied authority
is not specifically stated in the contract, but is necessary, reasonable, and usual for the producer to perform stated duties. Since not all duties can be spelled out in the contract, incidental duties are assumed by the agent as appropriate to carry out the express authority granted by the principal. An example would be the use of the company logo on business cards or letterhead, implying the agent has authority to represent the principal when finding new clients in the process of soliciting and selling insurance. This also includes accepting applications and collecting premiums.
Producer’s Responsibilities to the Insurer:
Producer’s Responsibilities to the Insurer:
Fiduciary duty to the insurer in all respects, especially when handling premium funds
Must keep premium funds in a trust account separate from other funds and forward to insurer promptly
Must report any material facts that may affect underwriting
Responsible for soliciting, negotiating, selling, and cancelling the insurance policies with the insurer
Duty to only recommend the purchase of suitable policies
Producer’s Responsibilities to insurance Applicant or Insured:
Forward premiums to insurer on a timely basis
Seek and gain knowledge of the applicant’s insurance needs
Review and evaluate the applicant’s current insurance coverage, limits and risks
Serve the best interests of the applicant or insured, although producers represent the insurer
Recommend coverage that best protects the insured from possible loss and NOT the most profitable coverage from the perspective of the producer
Which of the following types of authority does the public assume an agent has, based on the agent’s conduct?
Apparent authority
is demonstrated when the principal’s conduct gives the general appearance that the authority exists.
Broker
A licensed individual who negotiates insurance contracts with insurers, on behalf of the applicant. A broker represents the applicant or insured’s interests, not the insurer, and thus does not have legal authority to bind the insurer. A broker’s license is not applicable in all states.
The Fair Credit Reporting Act
protects consumer privacy, while ensuring data collected is confidential, accurate, relevant and used for a proper and specific purpose. It also protects the public from overly intrusive information collection practices.
Financial Anti-Terrorism Act (The USA Patriot Act)
imposes record keeping and government reporting requirements on banks, financial institutions and non-financial businesses for specific financial transactions and customer financial records (a part of the Bank Secrecy Act).
A federal regulation called the ______________________ protects consumer privacy.
The Fair Credit Reporting Act
protects consumer privacy by ensuring that data collected by companies on a person is confidential, accurate, relevant, and used for a proper purpose.
Fraud
always involves a false statement and deceit; it can be either a criminal or civil crime. Federal laws prohibit the commission of fraud. In 2001, the NAIC adopted model legislation for the prevention and enforcement of insurance fraud. Subsequently, each of the states enacted its own Fraudulent Insurance Act.
Merchant Marine Act of 1920 (the Jones Act)
Because workers’ compensation laws do not apply to seamen, the Jones Act allows insured seamen to make claims for injuries suffered during the course of employment. It also regulates maritime commerce in U.S. waters, transportation of cargo, and the rights of seamen.
A fraudulent act
involves a misstatement of material fact by a person who knows or believes that statement to be false. The statement is made to another person who relies on its accuracy to make a decision or to act and is subsequently harmed by relying on the deliberately false statement. State fraudulent insurance acts do not modify the privacy of any individual; they protect producers, brokers, and insurers in the event fraudulent information is provided by consumers.
Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
Deregulated the trucking industry by prohibiting any entity from interfering with a motor carrier’s right to set its own rates. Motor carriers and private motor carriers that transport property are required to establish evidence of financial responsibility in the form of insurance, a bond, a guarantee, or qualification as a self-insurer.
Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
his act repealed parts of the Glass-Steagall Act of 1933 to allow the merger of banks, securities companies, and insurance companies. It also established the Financial Privacy Rule and Safeguards Rule for the protection of consumers’ privacy. The Financial Privacy rule requires “financial institutions,” which include insurers, to provide each consumer with a privacy notice at the time the consumer relationship is established and annually thereafter. The privacy notice must explain:
The information collected about the consumer
Where that information is shared
How that information is used
How that information is protected
The notice must also identify the consumer’s right to opt out of the information being shared with unaffiliated parties pursuant to the provisions of the Fair Credit Reporting Act. Should the financial institutions privacy policy change at any point in time, the consumer must be notified again for acceptance.
Each time the privacy notice is re-established, the consumer has the right to opt out again.
Terrorism Risk Insurance Act
The Terrorism Risk Insurance Act of 2002 (TRIA) was enacted in direct response to the terrorist attacks on New York City and Washington, D.C. on September 11, 2001. Congress provided temporary financial compensation to insured parties during its crisis of recovery from the terrorist attacks. TRIA was intended to respond to the chaos the 9/11 terrorist attacks caused in the insurance industry as well as to assure that commercial property and liability insurance would continue to be able to provide coverage for the peril of terrorism. It was initially a temporary program that allowed the federal government to share in terrorism losses with private insurers in the event a certified act of terrorism took place.
Insurance license applicants and producers:
Applicants who have been convicted of a felony must apply for Consent to Work in the business of insurance—prior to applying for an insurance license
Producers must apply for consent in their resident state
Officers and employees must apply for consent in the state where their home office is located
Prohibited persons (convicted felons) must apply for consent in order to discover if they are permitted or prohibited from the insurance business
Reciprocity – If consent is granted by any state, other states must allow the applicant to work in their states as well
Consent Withdrawal – If conditions of consent are not continually met, the consent may be withdrawn
iolent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
The largest crime bill in U.S. history expands funding to federal agencies such as the FBI, DEA, and INS and includes provisions that address (among other topics) domestic abuse and firearms, gang crimes, immigration, registration of sexually violent offenders, victims of crime, and fraud.
The Act made it a felony for a person to engage in the business of insurance after being convicted of a state or federal felony crime involving dishonesty or breach of trust. Violations include willfully embezzling money, knowingly making false entries in any book, report or statement of the business, threatening or impeding proper administration of the law in any proceeding involving the business of insurance.
Dishonesty – Deceit, misrepresentation, untruthfulness, falsification
Breach of Trust – Based on fiduciary relationship of parties and the wrongful acts violating the relationship
Penalties include
fines and possible prison time.
Risk
A condition where the chance, likelihood, probability or potential for a loss exists; Uncertainty concerning a loss.
Management –
The determination of what types of protection are required to meet an insured’s needs using:
A survey of the insured’s operations, health, assets and exposures that could give rise to losses
Assessment of potential loss frequency and severity
Physical inspections, applications or medical exams used for underwriting help manage a risk
Types of Risk
Speculative Risk – Situations where there is a chance or possibility for loss, no loss or gain (i.e., gambling)
Pure Risk – Situations where there is no chance for gain, only loss. Only pure risks can be insured (For instance, the possibility of damage to property caused by a fire or other natural disaster; or the possibility of financial loss as a result of premature death).
Loss – Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.
Peril – The cause of a loss.
Hazard – A specific condition that increases the probability, likelihood, or severity of a loss from a peril.
