Brainscape's Knowledge GenomeTM

Browse over 1 million classes created by top students, professors, publishers, and experts.


See full index

RMI 640 > Chapter 2 > Flashcards

Chapter 2 Flashcards

1
Q

3 reasons insurance industry is regulated

A
  • to protect consumers
  • to maintain insurer solvency
  • to protect against destructive competition
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
2
Q

why is protecting insurer solvency important?

A

-protects insureds against the risk that they will be unable to meet their financial obligations

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
3
Q

reasons for maintaining a sound financial condition

A
  • Insurance provides future protection
  • Regulation is needed to protect the public interest
  • Insurers have a responsibility to insureds
  • Insurers have become insolvent despite regulatory reviews
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
4
Q

why is it important to protect consumers?

A
  • Hard for consumers to inspect legal documents
  • Regulators protect consumers by reviewing insurance policies
  • States can also set consumer protection laws (coverage standards and specify policy language
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
5
Q

what is destructive competition?

A

Basically to stop people from pricing their coverage with super low premiums

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
6
Q

why is protecting against destructive competition important?

A
  • When this happens others do it and some end up under-pricing and become insolvent
  • Then an insurance shortage can develop and no one can obtain the coverage they need
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
7
Q

National Association of Insurance Commissioners (NAIC)

A
  • a nonprofit corp. that has no regulatory authority of its own, but plays an important coordinating role
  • Commissioners from all 50 US states, DC, and 5 US territories
  • Purpose is to coordinate insurance regulation activities among the various state insurance departments
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
8
Q

what is the major source of funding for state regulation?

A

premium taxes (audit, filing, and licensing also contribute)

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
9
Q

state insurance departments:

A
  • Fall in the executive branch of gov.

- Enforce insurance laws enacted by legislatures

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
10
Q

the insurance commissioner

A
  • Issuing an annual report on the status of the state’s insurance market and insurance department
  • Doesn’t personally handle most duties but delegates
  • Some are appointed by the governor, some are elected
  • decides whether applicants are approved
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
11
Q

Model law

A
  • a document drafted by the NAIC in a style similar to a state statute that reflects the NAIC’s proposed solution to a given problem or issue and provides a common basis to the states for drafting laws that affect the insurance industry. Any state may choose to adopt the model bill or adopt it with modifications
  • Helps with uniformity in laws across the states
  • State legislatures consider these when writing new laws
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
12
Q

Model regulation

A

a draft regulation that may be implemented by a state insurance department if the model law is passed

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
13
Q

Federal Regulation

A
  • As employers, insurers are subject to federal employment laws
  • As businesses that sell their stock to the public to raise capital, stock insurers are subject to regulations like any other such business
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
14
Q

Insurance Fraud Protection Act (1994)

A
  • Protects consumes and insurers aginst insolvencies resulting from insurance fraud
  • Prohibits anyone with a felony conviction involving trustworthiness from working in the insurance business unless he or she secures the written consent of an insurance regulator
  • Makes it illegal for insurers, reinsurers, producers, and others to employ a person who has a felony conviction involving breach of trust or dishonesty
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
15
Q

Domestic insurer

A
  • an insurer doing business in the jurisdiction in which it is corporated
  • License generally has no expiration date
  • Generally must meet the conditions imposed on corps. Engaged in noninsurance as well as some special conditions
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
16
Q

Foreign insurer

A
  • an insurer licensed to operate in a state but incorporated in another state
  • License generally must be renewed annually
  • Must first show that it has satisfied the requirements of its home state
  • Then it must satisfy the minimum capital, surplus, and other requirements imposed on the state’s domestic insurers
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
17
Q

Alien insurer

A
  • an insurer domiciled in a country other than the US
  • License generally must be renewed annually
  • Must satisfy the requirements imposed on domestic insurers by the state in which they want to be licensed
  • They also must usually establish a branch office in any state and have funds on deposit in the US equal to the minimum capital and surplus required
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
18
Q

Applicants for licenses must

A

o Apply for a charter
o Provided the names/addresses of the incorporators
o Name of the proposed corp.
o Territories and types of insurance it plans to market
o The total authorized capital stock (if any)
o Its surplus

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
19
Q

An insurer must be financially sound

A
  • State laws require that insurers satisfy certain minimum capital and surplus requirements before a license is granted (capital stock and paid-in-surplus)
  • Vary a lot between states (as little as $100,000 or as much as $15 mil)
How well did you know this?
1
Not at all
2
3
4
5
Perfectly
20
Q

Capital stock

A

a balance sheet value that reps the amount of funds that a corp.’s stockholders have contributed through the purchase of stock

How well did you know this?
1
Not at all
2
3
4
5
Perfectly
21
Q

Paid-in surplus

A

the amount stockholders paid in excess of the par value of the stock

22
Q

Reciprocal (mutual) insurer

A

an insurer owned by its policyholders, formed as an unincorporated association for the purpose of providing insurance coverage to its members and managed by an attorney-in-fact. Members agree to mutually insure each other, and they share profits and losses in the same proportion as the amount of insurance purchased from the exchange by that member

23
Q

requirements for mutual insurers

A

-Minimum financial requirement applies only to surplus because a mutual insurer does not have capital derived from the sale of stock
-Initial surplus can come from premium deposits made by prospective policyholders or a portion of the initial surplus may be borrowed
-Many states require a minimum number of applications with deposit premiums for a minimum number of separate loss exposures and aggregate premium exceeding a specific amt. (guarantees some stability before it begins operations)
Proposed name must include “mutual

24
Q

Non-admitted insurer

A
  • Not licensed in its home state
  • May be an admitted insurer in other states or even an alien insurer
  • Typically a surplus lines insurer
  • Basically consumers who are denied by admitted insurers (for being to risky) can purchase insurance from non-admitted insurers
25
Q

typical non-admitted insurer consumers

A
  • Distressed risks: have underwriting problems
  • Unique risks: difficult to evaluate
  • High capacity risks: require very high coverage limits
26
Q

Might be able to transact business through a specially licensed surplus lines producer if

A
  • The insurance is not readily available from admitted insurers
  • The non-admitted insurer is acceptable
  • The producer has a special license authorizing him or her to place such insurance
  • (surplus lines producer must generally be a resident of the state)
27
Q

+/- of non-admitted insurers

A

perks: less regulation
bummers: not usually protected by the state’s guarantee fund

28
Q

Risk Retention Group

A
  • special type of assessable mutual insurer
  • often formed under state captive laws (lower capital and surplus requirements)
  • once licensed as a commercial liability insurer under the laws of at least one state, a risk retention group can write insurance in other states without a license by filing the appropriate notice and registration forms with the nonchartering state
  • can only write commercial liability insurance for its members
  • might be subject to unfair claim settlement practice laws and premium taxes in nonchartering state
  • may also be required to join a joint underwriting association with which insureers share losses in such areas as assigned-risk auto insurance
  • licensing state can request and if necessary mandate an examination of a group’s financial condition
29
Q

Producers

A
  • Must be licensed in each state where they do business
  • Must pass a written exam
  • Subject to civil and criminal penalties if operating without a license
  • Producers have concerns about lack of uniformity between states for licensing requirements
30
Q

Claim Reps

A

-Some states require these guys to be licensed so that those who make claim decisions for insurers are aware of prohibited claim practices, have a minimum level of technical knowledge and skill, and understand how to handle insureds’ claims fairly
-Licensing requires
o An exam
o Background check
o Ethics requirements

31
Q

Insurance consultants

A
  • Give advice, counsel, or opinions about insurance policies
  • Some states require them to be licensed
  • Generally separate exams for life-health insurance and property-casualty insurance
32
Q

Methods to maintain solvency

A
  • Regulatory system framework relies on an extensive system of peer review to provide the necessary checks and balances
  • Insurance regulators must have appropriate regulatory authority and be able to operate independent of undue influence from insurers or other groups
  • Uniformity of approach to financial regulator has been facilitated by the NAIC accreditation program
33
Q

Insolvency:

A
  • a situation in which an entity’s current liabilities (as opposed to its total liabilities) exceed its current assets
  • If an insurer falls into insolvency the insurance commissioner places it in receivership
34
Q

state guarantee fund

A
  • a state-established fund that provides a system for the payment of some of the unpaid claims of insolvent insurers licensed in that state, generally funded by assessments collected from all insurers licensed in the state
  • Do not prevent insurer solvency, but mitigate its effects
  • All states have property-casualty guaranty funds
35
Q

Common characteristics of guarantee funds:

A
  • Assessments are made only when an insurer fails (Except in NY)
  • Policies usually terminate within thirty days after the failure date
  • Claim coverage varies by state
  • Claims are subject to maximum limits
  • Most states provide for a refund of unearned premiums
  • Most states apply a $100 deductible to unpaid claims
  • Most states divide their guaranty funds into separate accounts (usually auto, workers comp., etc)
  • Assessment recovery varies by state
36
Q

why do co.s commonly go insolvent

A

usually its from poor management and adverse effects

37
Q

goals for rating agencies

A
  • adequate
  • not excessive
  • not unfairly discriminatory
38
Q

adequate

A

Rates for a specific type of insurance should be high enough to pay all claims and expenses for that type of insurance

39
Q

Factors to consider when determining if its excessive

A
  • Number of insurers selling a specific coverage in the rating territory
  • Relative market share of competing insurers
  • Degree of rate variation among the competing insurers
  • Past and prospective loss experience for a given type of insurance
  • Possibility of catastrophe losses
  • Margin for underwriting profit and contingencies
  • Marketing expenses for a given type of insurance
  • Special judgment factors that might apply to a given type of insurance
40
Q

not unfairly discriminatory

A
  • Insured with loss exposures that are roughly similar regarding expected losses and expenses should be charged substantially similar rates
  • Computers complicates this
  • Fair discrimination is still fine
41
Q

file and use laws:

A

allow the insurer to use the new rates immediately after filing with the state insurance department

42
Q

flex rating laws:

A

require prior approval only if the new rates exceed a certain percentage above (and sometimes below) the rates filed previously

43
Q

use and file laws

A

variation of file and use laws) allow insurers to use the new rates and later submit filing info that is subject to regulatory review

44
Q

Courts

A

-Influence insurers by determining whether insurance laws are constitutional and whether administrative rulings/regulations are consistent with the state law
-Interpret confusing policy provisions
-Determine whether certain losses are covered by the policy
Resolve disputes btw insurers and insureds

45
Q

who decide unfair trade practice law cases?

A

the state commissioner

46
Q

outcomes for breaking unfair trade practice law cases

A
  • fine per violation

- suspension or revocation of license

47
Q

good-faith claims handling

A

the manner of handling claims that requires an insurer to give consideration to the insured’s interests that is at least equal to the consideration it gives its own interests

48
Q

bad faith (outrage)

A

a breach of the duty of good faith and fair dealing

49
Q

Insurance advisory orgs

A
  • Independent orgs that work with and on behalf of insurers that purchase or subscribe to its services
  • Provide data on prospective loss costs (loss data that are modified by loss development, trending, and credibility processes, but w/o considerations for profit and expenses)
  • Basically they provide a lot of research and data and monitor issues of concern to their members
50
Q

Insurance industry professional and trade associations

A
  • Share a common profession
  • Main goal is to advance success of members and uphold ethical standards
  • Basically a business frat for your profession (think NACMA)
51
Q

Consumer groups

A
  • Work for change in the insurance industry or monitor insurers and their actions
  • Consumer Federation of America

RMI 640 (7 decks)

Brainscape helps you reach your goals faster, through stronger study habits.
© 2024 Bold Learning Solutions. Terms and Conditions