General Insurance Flashcards
What Does an Insurer Do? (Or Carrier)
manufactures and sells insurance coverage by way of insurance policies or contracts.
What is an Insurance Agency?
Independent organizations that recruit, contract with, and support sales agents and producers.
Who Are Insurance Agents or Producers
licensed individuals representing an insurance company when transacting insurance.
Who is the Insured?
person or entity that buys insurance for protection from loss of life, health, property or liability.
What/Who is the NAIC?
The National Association of Insurance Commissioners: they consist of regulators who provide resources and recommendations in order to promote uniformity amongst states…but no legal authority to enforce laws.
Who Is the FIO?
The Federal Insurance Office: 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.
True or False: The FIO is essentially a regulator/supervisor for insurance
False: Insurance is primarily regulated by the individual States.
What does the legislative branch of the state do for insurance regulation?
The legislative branch writes and passes state insurance laws, or statutes, to protect the insuring public.
What does the judicial branch do for the state’s insurance regulations?
The judicial branch is responsible for interpreting and determining the constitutionality of the statutes.
What role does the state’s executive branch play in regulating insurance?
The role of a state’s executive branch is to enforce the existing statutes that have been put in place.
What was the purpose of the McCarran-Ferguson Act of 1945?
determined that the federal government can not regulate insurance in areas over which states have the authority to do so
What is a 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.
What is a mutual insurance company?
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.
Stock Insurance Companies issue ________ policies
Non-participating policies
Mutual Insurance Companies Issue _______ policies
Participating policies
- group owned insurer whose main activity is risk sharing.
- unincorporated, formed by individuals, firms, and business corporations
- exchange insurance on one another
- members known as subscribers
Reciprocal Insurance Company
In a reciprocal insurance company, the exchange of insurance is affected through an….
attorney in fact
Consists of a group of underwriters called syndicates who each specialize in insuring a particular type of risk.
Lloyds of London
Usually organized on a non-profit basis, _________are primarily social organizations that engage in charitable and benevolent activities that provide life and health insurance to their members.
Fraternal Benefits Society
This group must be made up of a large number of homogeneous or similar units and membership is limited to risks with exposure to similar liability needs, such as theme parks, go cart tracks, or waterslides
Risk Retention Groups
What is a residual market?
A private coverage source of last resort for businesses and individuals who have been rejected by voluntary market insurers.
This source is usually a last resort and involves: joint underwriting associations, risk sharing plans, and coverage is typically written as workers compensation, personal auto liability, or property insurance on real property
Residual markets
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?
A. Residual
B. Reciprocal
C. Reinsurance
D. Insurer
C. Reinsurance
Jurisdiction where insurer is formed or incorporated:
Domicile
What are the 3 types of insurer domiciles? Describe each.
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.
What is an admitted/authorized insurer?
authorized by this State’s Commissioner of Insurance to do business in this State. It has received a Certificate of Authority to do business in this State.
What is a non-admitted/unauthorized insurer?
has either applied for authorization to do business in this state and was declined or they have not applied. They are not authorized to transact insurance in this state.
Non-admitted business must be transacted through a:
Surplus Lines Broker
Oversee the operation of the business
Executives
Gather and interpret statistical information used in rate making. determines the probability of loss and sets premium rates.
actuarial department
Responsible for the selection of risks (persons and property to insure) and rating that determines actual policy premium.
Underwriting Department
Responsible for advertising and selling
Marketing/Sales Department
Assists the policyholder in the event of a loss.
Claims Department
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.
ex. Allstate, Farmers, and State Farm
Exclusive or Captive Agency 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.
ex. Geico
Direct Writing System
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.
ex. A Plus Insurance
Independent Agency
Agents are recruited, trained and supervised by either a managing employee or General Agent who is contracted with the insurance company.
Career Agency System
Does not recruit career agents.
Sells insurance for carriers it is contracted with and maintains its own office and staff.
Personal Producing General Agent
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.
Direct Mail or Direct Response Company
_____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.
Mass Marketing
Describe: 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.
Describe the: Insurer/Principal
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.
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
Express Authority
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.
Implied authority
when the producer exceeds the authority expressed in the agency contract. It is authority the public (or a third-party) is falsely led to believe the agent has and the principal does nothing to counter the public impression that such authority exists.
Apparent Authority
Describe a 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
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. Reason why one must inform applicant of credit report being run
Fair Credit Reporting 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).
Financial Anti-Terrorism Act (The USA Patriot Act)
Due to the ____________ Insurance applications and claim forms must contain a disclosure about how false statements and fraud will be treated by the insurer.
Fraud and False Statements (Fraudulent Insurance 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.
Merchant Marine Act of 1920 (the Jones Act)
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.
Motor Carrier Regulatory and Modernization Act (the Motor Carrier Act of 1980)
Established The Financial Privacy rule which 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
Gramm-Leach-Bliley Act (GLBA, a.k.a. the Financial Services Modernization Act of 1999)
Resulted from he 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
Terrorism Risk Insurance Act
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.
Violent Crime Control and Law Enforcement Act of 1994 (18 USC 1033, 1034)
What is a risk?
A condition where the chance, likelihood, probability or potential for a loss exists; Uncertainty concerning a loss.
What is 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
What 2 types of risk are there?
Speculative Risk and Pure Risk
Situations where there is a chance or possibility for loss, no loss or gain (i.e., gambling)
Speculative Risk
Situations where there is no chance for gain, only loss.
Pure Risk
Describe a loss
Reduction, decrease, or disappearance of value. The basis of a claim for damages under the terms of an insurance policy.
The cause of a loss.
Peril
A specific condition that increases the probability, likelihood, or severity of a loss from a peril.
Hazard
Describe which type of hazard: Flammable material stored near a furnace.
Physical Hazard
what type of hazard? Example: An insured burns down his/her own house to collect the insurance payout.
Moral Hazard
What type of hazard? Example: Indifference or carelessness of leaving one’s house or vehicle unlocked.
Morale Hazard
The condition of being at risk for a loss. Purely by existing, property and people are at risk for loss.
Loss Exposure
An imbalance created when risks that are more prone to losses than the average (standard) risk are the only risks seeking insurance within a specific marketplace. For example, only those living in earthquake-prone areas seek to buy earthquake insurance. High-risk exposures tend to seek or continue insurance at a higher participation rate than the average risk exposures do.
adverse selection
what is managing risk?
the practice of analyzing exposures that create risk and designing programs to minimize the possibility of a loss
Investments of a large number of people may be pooled by use of a corporation or partnership
sharing
Transferring the risk from one party to another, such as from a consumer to an insurance company
Transfer the uncertainty of loss via a contract
Transfer
Elimination of the risk
Avoid the activity that gives rise to the chance of loss
Avoidance
Minimizing the chance of loss, but not preventing the risk. For example, sprinkler systems, burglar alarms, pollution controls and safety guards on machinery.
Reduction
Pooling or spreading the risk among a large number of persons or entities
Reduction
Assume the responsibility for loss
Self insure the entire loss or a portion of the loss. Choosing deductibles is a method. insure only those risks that threaten financial stability security
Retention
As the number of units in a group increases, the more likely it is to predict a particular outcome
Law of Large Numbers
Describe insurable risks:
- Large number of homogenous units or groups with the same perils
- The chance of loss must be calculable
- The loss must be measurable
- premiums must be affordable.
- the loss must be accidental
True or False: war, nuclear hazard and illegal operations ARE covered/insurable risks
FALSE: Catastrophic perils are not covered
to indemnify the insured against a loss, damage, or liability arising from an unexpected event. exchange of a relatively small and definite expense for the risk of loss, designed to transfer risk from the insured to the insurer
Insurance contract
Insured is restored to the same financial or economic condition that existed prior to the loss, and should not profit from an insurance transaction.
Principle of Indemnity
Describe insurability:
ability of an applicant to meet an insurer’s underwriting requirements
The process of selecting, classifying, and rating a risk for the purpose of issuing insurance coverage.
Underwriting
Any event, past or present, that may cause loss, or damage, or create legal liability on the part of an insured.
Insurable Events
Insurable interest must exist at the time of application, but NOT at the time of loss. based on the possibility of an economic or financial loss due to an accident, sickness, or death of the insured, amount of insurance that may be purchased varies based on the type of coverage. In some cases, no coverage limit apply
Life & Health Policies
Insurable interest must exist at the time of the loss.
or mortgage or lien is evidence of insurable interest.
Property
Insurable interest must exist at the time of the loss.
Insurable interest usually results from property or contract rights and potential legal liability.
Casualty
civil wrongs that result in injuries or harm that constitute basis of claim by a third party
Tort Law
two parties rely upon the statements and promises of the other and assume no attempt to conceal or deceive has been made.
Contract of Utmost Good Faith
Prevents the denial of a fact, if the fact was admitted to be true previously
Estoppel
transfers the liability of one party to another party; it is used by landlords, contractors, and others as a way to avoid or reduce risk.
Holds harmless Agreement
A written contract may not be altered without the written consent of both parties
Parol Evidence Rule
Voluntary surrender of a known right, claim or privilege.
Waiver
