Chapter 1 summary Flashcards
The concept of insurance
insurance is a legal contract that transfers an uncertain risk from one party to another. the insured transfers the possibility of suffering large financial loss to an inserer in return for paying a relatively small, contractually defined premium.
an insurance policy restores an insured to the financial position they experienced before an insured loss. Insurance companies indemnify their insureds when covered losses occur. (agrees to compensate)
Types of insurance companies
stock companies, mutual companies, assessment mutal insurers, fraternal benefit societies, reciprocal insurers, risk retention groups (RRGs), risk purchasing groups (RPGs), reinsurers, captive insurers, surplus lines insurance carriers, Lloyd’s of London, and self insurers.
Stock companies
NON PARTICIPATING
stockholders own a stock company and share in company profits, and, if these insurers declare stock dividends, they’re taxable. they issue nonparticipating insurance policies because policy owners are not stockholders, therefore not owners.
Mutual Companies
PARTICIPATING
the policy holders own mutual insurance companies that sell “participating policies” because policy owners recieve a share of surplus revenue in the form of policy dividends. this revenue is reffered to as divisible surplus.
Assessment Mutual Insurers
to pay for claims, assessment mutual insurance companies assess premiums at the time members experience losses. pure assessment mutual companies charge no premium in advance. advance premium assessment insurers levy assessments if the premium is insufficient.
Fraternal Benefit Societies
non profit organizations that are noted for their social, charitable, amd benevolent activities. fraternal membership is based on a common bond, these organizations may form around a common religion, nationality, ethnicity, charitable cause, or other affiliation. the 3 defining characteristics of a fraternal organization are: non profit, has a lodge system including ritualistic work and a representative form of government, and was not formed simply to provide insurance.
Reciprocal Insurers
each policy owner individually assumes a share of another’s risk, which makes reciprocal insurance contracts a form of risk sharing rather than risk transfer. policy owners recieve policy dividends, and the own a share of the company surplus, which they can recieve upon terminating their membership. an attorney is appointed to handle transactions for the reciprocal insurer.
Risk Retention Groups (RRGs)
a specialized insurance company that provides liability insurance for individuals and entities with a common bond. Risk retention groups retain risks and process claims.
Risk Purchasing Groups (RPGs)
buys coverage for its members, which must have a common bond. the RPG becomes a master policy holder and its members recieve certificates of insurance.
Reinsurers
provide insurance for other insurance companies. assumes risk from a ceding insurer, also reffered to as the primary insurer.
Primary insurance companies purchase reinsurance when they underwrite large risks that could result in claims exceeding the primary carrier’s risk retention limit (the max amount of exposure that the insurer can carry when insuring a single risk)
Treaty reinsurance exists when a reinsurer enters into a contract with a primary insurance company to automatically assume its excess exposure for risks that meet contractually defined criteria. This agreement is also referred to as automatic reinsurance.
When primaru insurer seeks reisnurance for a specific exposure without an ongoing agreement, its reffered to as faculative reinsurance.
Captive insurer
established to cover the loss exposure of the parent organization that owns it
surplus lines insurance carriers
unauthorized insurers that provide coverage when authorized insurers reject buyers or authorized insurers dont offer the type of insurance sought.
Lloyd’s of London
syndicate of individuals that individually underwrite special risks.
self insurers
establish a self-funded plan to cover potential losses and often cap potential losses with a stop-loss insurance policy. “self insurance” does NOT EQUAL “no insurance”
insurers classified by authorization
an authorized or admitted insurer describes an insurer that has been issued a certificate of authority from a state’s insurance department authroizing the insurer to transact insurance in that state. Insurers must recieve a certificate of authority from each state they wish to transact insurance.
an unauthorized (non-admitted) insurance company is prohibited from conducting insurance operations in tha particular state.
Insurer Classified according to Domicile
domestic insurer- organized and incorporated in the state in which it’s writing business.
foreign insurer- organized under the laws of a different state.
Alien insurer- organized under the laws of a different nation.
departments within an insurance company
marketing or sales division- prospects for new business
sales department- meets with clients face to face and completes applications
underwriting department- reviews applications, selects risks to insure, and assigns risk classifications.
claims department- administers claims
actuarial department- calculates policy parameters, such as risks and costs relative to promised benefits.
Key people within an insurance company
Producers- the term producer describes an individual or organization that is licensed by a state to solicit, sell, or transact insurance in that state. licensed producers have a fiduciary responsibility to the companies they represent and the consumers they serve. the terms “agent” and “broker” are used throughout the insurance industry to describe the legal relationship between a producer, an insurer, and a consumer.
Agents- represent one or more insurers under the terms of an appointment contract, which gives them limited authority to make binding commitments on the insurer’s behalf.
Brokers- represent themselves and the insured. the state licneses brokers, but they are not appointed by the insurer whose product is being considered by a consumer. Brokers cannot bind the insurer.
Underwriters- identify, examine, assess and classify loss exposures. they approve or decline applications and determine the cost of insurance.
Actuaries- calculate policy rates, reserves, and dividends,
Adjusters- investigate and settle claims.
How insurance is sold
most insurance purchased in the US is sold through licensed insurance producers. Typically, these producers are agents who are appointed to represent one or more insurance companies.
agents represent the insurer during a sales transaction and can bind insurance. In other words, they can commit the insurers that they represent to cover a risk exposure temporarily.
Career Agency System
most insurers (including direct writers) often establish career agencies, which recruit and train new agents. The agency is often a branch of a significant stock or mutual insurance company. some career agencies are contracted to represent an insurer in a specific geographical area or market. a General Agent typically runs a career agency.
The managerial system features career agencies that are run by a salaried branch manager.
Personal Producing General Agency System
the PPGA system is affiliated with one or more insurers, but a PPGA doesn’t recruit, train, or supervise career agents. they instead focus on sales in its assigned market or territory. they generally maintain their own offices and staff which consists of employees of the PPGA rather than of the appointing insurer.
Independent Agency System
independent agents represent any number of insurance companoes through contractual agreements.
Other Methods of selling insurance
insurance companies also sell coverage using mass marketing methods that expose their products to large groups of consumers, with occasional follow ups by agents. they typically deal directly with consumers.
Direct sellers use vending machines, advertisements, or salaried producers.
Paul v Virginia (1868)
The US surpreme court ruled that sinruance is not interstate commerce, therby upholding the states right to regulate it.
The US v. Southeastern Underwriters Association (SEU) (1944)
the supreme court reversed paul v virginia and ruled that insurance is a form of interstate commerce and is subject to federal regulation.
The McCarran-Ferguson Act (1945)
congress responded to the SEU decision by delegating the regulation on insurance to the states while requiring compliance with federal antitrust standards- either directly ot through comparable state laws. This act also levied a max penalty of up to one year of jail and a fine of $10,000.
The Fair Credit Reporting Act (1970)
this act was established to protect privacy by requiring the fair and accurate reporting of consumer information.
Amendments to USC 1033 and 1034 regarding fraud and false statements (1994)
this sectn of the United States Code (USC) prohibits felons from participating in the insurance industry without a “letter of written consent” from their state insurance regulator. any person who engages in intentionally unfair or deceptive insurance practices is subject to a fine of up to $50,000, 15 years in prison, and license revocation.
The Financial Services Modernization Act (1999)
this act allowed banks to sell insurance and prompted states to create regulations for insurance companies to protect the privacy of consumer personal information.
the USA PATRIOT Act (2001)
This act focuses on the funding sources for terrorists and international money laundering in general.
The Do Not Call Implemation Act (2003)
allows consumers to opt out of recieving calls from telemarkets, except for those on behalf of charities, political organizations, and surveys.
2003-CAN-SPAM Act
this act outlines the right for consumers to request a business to stop sending emails, the requirements for businesses to honor such requests, and the penalties incurred for those who violate the act. The act does not apply to transactional and relationship messages.
National Association of Insurance Commissioners (NAIC)
an industry association of state insurance regulators focused on establishing model acts and regulations that provide a common framework for state officials to address industry wide issues. these regulatory models help streamline the legislative and administrative processes while encouraging uniform standards.
They list 4 objectives:
1. to encourage regulatory uniformity among the states
2. to promote efficient regulatory administration.
3. to protect policy owners and consumer interests.
4. to preserve state regulation of the insurance industry.
The NAICs Model Advertising Code labels certain words and phrases as misleading and bans their use.
NAIC Unfair Trade Practices Act (Model) Act gives a state insurance department the powe to investigate insurance companies and producers, issue cease and desist orders, impose penalties, and seek a court injunction to restrain unfair activities.
The National Confrence of Insurance Legislators (NCOIL)
an association of state legislators that serves on insurance and financial institutions committees to educate policymakers and preserve state regulation. NCOIL also writes model laws.
The National Associatioin of Insurance and Financial Advisors (NAIFA) and The National Association of Health Underwriters (NAHU) created a code of Ethics for agents.
selling to needs, suitability, full and accurate discloser, documentation, and client service after sale.
rating services
describe companies that determine an insurer’s financial strength. These services publicize the financial health of insurers after analyzing company reserves and liquidity.
