Insurance Company Organization And Regulation Flashcards
What is a mutual insurance company?
Insureds are also owners of the company and are able to vote to elect management. Profits are returned to insureds in forms of dividends or future premium reduction
What is a stock company
When a stock company first forms it sells stock go stockholders to raise the money necessary to operate the business
What is an advance premium company?
They charge non assessable premiums and are required to set aside money in a reserve In case claims amounts are higher than expected
What are assessment companies?
They provide primarily fire and windstorm insurance to farmers and small towns and they charge a pro rata share of losses at the end of each policy period
What is a reciprocal company?
Members agree to share insurance responsibility with all other members f the unincorporated group
What is a lloyds association?
A voluntary association of individuals or group of individuals who agree to share in insurance contracts
What are fraternal benefit societies?
Incorporated societies or orders without capital stock that is operated on the lodge system and conducted solely for the benefit of its members and their benefactors and not for profit
What is the Liability Risk Retention Act (1981)
Created to give product manufacturers more options when insuring against product liability it allows product manufacturers to establish group self insurance programs or group captive insurance companies, called risk retention groups to protect them against product liability exposures and to purchase liability insurance on a group basis through purchasing groups.
Liability Risk Retention Act (1986)
Amends the 1981 act by giving right to form risk retention groups and purchasing groups to nearly all businesses
What is risidual market insurance?
The government steps in and provides
Insurance that is not ordinarily available from private insurers.
War risk insurance, nuclear energy liability insurance, flood insurance, and federal crop insurance
What are the four lines of insurance?
Property, casualty, life, and health
What is life insurance?
It is designed to handle the risk of premature death or the risk that an individual may outlive his or her financial resources
What is health and disability insurance?
Designed to handle the risk of medical bills and loss of income resulting from injury or sickness
What is property insurance?
Includes many types of insurance designed to handle property risks- risks that we will suffer financial loss because something we own is damaged or destroyed
Types: dwelling, homeowners, commercial property, inland marine, ocean marine, and crime
What is casualty insurance?
One of the most important risks covered by the casualty line is the liability risk- the risk that we will suffer financial loss as a result of our actions towards others
Types: aviation, auto, workers compensation, and surety bonds
What are personal lines?
Property and casualty insurance coverages that protect an individual or family.
What are commercial lines?
Coverages designed for businesses
What is an insurance agent?
Represents the insurance company- is the direct link between the company and its insureds
Insurance agent responsibilities?
Selling insurance, issuing and counter signing policies, collecting premiums, and providing a link between the insured and the insurance company
What is countersigning?
Countersigning means the agent signs each new policy prepared by the commonly before delivering it to the insured.
What does “field underwriting each risk” mean?
Using preestablished criteria to seek out the type of business that is likely to be acceptable to the company
What is a quotation?
Used to show the prospect the premium for proposed coverage
What is errors and omissions insurance?
Errors and omissions insurance should be purchased by agents to protect themselves against legal liability arising from inadvertent errors or omissions
What is an agency relationship?
Exists when one party (an agent) is authorized to act on behalf of another (a principal)
What is express authority?
Authority specifically given to an agent either orally or in writing by the principal
What is implied authority?
Authority given by the insurance company to the agent that is not formally expressed or communicated
What is apparent authority?
A doctrine that holds that an agent may have whatever authority a reasonable person would assume the agent has
What are the four basic distribution systems to market insurance?
Exclusive agency system, direct writer system, direct response system, independent agency system
What is an exclusive/captive agency system?
The insurance company contracts with agents which are an independent business to represent and sell insurance only for that insurance agency.
What is the direct writer system?
Insurance company’s agents are actually employees: may receive a salary or be paid by commission or both
What is a direct response system?
There are no agents, companies sell directly through mail/phone
What is an independent agency system?
Agencies that are independent contractors contract with several different companies to represent and sell insurance for these companies
What is an independent or non exclusive agent?
And agent who represents more than one company
What is a solicitor?
Like an agent, sells insurance and may be authorized to collect premiums but is not able to issue or countersign policies
What is a broker?
Represents the insured, although a broker may sometimes act as an agent of the insurer in certain activities such as policy delivery, a broker does not have the authority to bind an insurer to an insurance contract.
What are excess/surplus lines?
Highly specialized instance coverages such as auto racing liability and tuition refund insurance that are often not available from any commonly/ admitted to do business in a state.
What is an excess/surplus line agent?
Licensed by the state to handle the placement of such coverages with nonadmitted companies
What is a producer?
General term to describe someone who sells insurance such as an agent solicitor or broker
What is a consultant?
Someone who for a fee offers advice on the benefits advantages and disadvantages or various insurance policies.
What is a loss ratio?
Used to compare the companies operations from year to year. Shows the percentage of losses the company incurred for every dollar earned premium. It is calculated by dividing the amount of incurred losses but the amount of earned premiums.
Loss ratio= losses
———
Earned
What is earned premium?
The premium the company actually earned by providing insurance protection for the designated period
What are incurred losses?
Includes amounts paid on claims for covered losses and various expenses related to handling claims
What is the expense ratio?
Indicates cost of doing business
Cost ratio= underwriting expenses
——-———————–
Written premium
What are underwriting expenses?
Costs required to acquire and maintain a book of business. Includes expenses for advertising, commissions, salaries, and other administrative and regulatory costs such as taxes and licensing fees
What is a written premium?
The gross amount of premium income on the company’s books. Includes earned and unearned premium, made up of premiums for new business, renewals, and policy endorsements
What is a combined ratio?
Sum of loss and expense ratio
Ratio of 100% is breaking even
Ratio of 100%+ is a loss
Ratio of 100%- is a profit
What is underwriting?
The process of selecting certain types of risks and rejecting others so the insurance company will have a book of business that will produce the company’s desired results
What does an underwriter do?
Decides whether to accept or deny an application sent in by an agent on the basis of the company’s standards and their own judgement
What does a policy analyst/screener do?
After the underwriter has approved a new application or a change to a current policy, the application is checked by a policy analyst/screener to make sure all info is complete
What is a rater?
Compiles the premium to be charged
What is the claims department?
Sees that the company’s insureds are adequately indemnified for their losses
What is a claims adjuster/rep?
Used to inspect a loss, determine whether there is coverage for the loss, estimate indemnification and in some cases pay for the loss immediately
What does the actuarial and statistical department do?
Using data generated by the computer with statistics available from other companies, actuaries determine the rates to be charged for various types of insurance
What does the investment department so?
Oversees the funds the company needs to invest to make sure adequate funds will be on hand to pay claims
What does the legal department do?
Interprets the various state insurance laws and helps the company keep its policies and practices in compliance.
What does the audit department do?
For certain insurance coverages, a premium is determined after or during the policy term. The audit department checks the records of these insureds at the required intervals to obtain necessary info to determine these types of premiums
What is the loss control department?
Inspects factories, certified boilers, and makes recommendations to insureds as to how risks may be avoided or reduced
What is the agency department?
Works very closely with and directs the operations of the agents who represent the company. Responsibilities include recruiting, appointing, and training.
What is the marketing department?
Helps determine the companies overall marketing strategy
What is the reinsurance department?
Insurance companies purchase insurance to cover their own exposure to loss
What does the National Association of Insurance Commissioners do?
They meet at regular intervals to exchange information and provide coordination of the regulatory measures of each state
What are the four areas of responsibility that a state insurance department has?
Companies, agents, ratification, and enforcement
What is an admitted/authorized insurer?
A company that meets the departments standards and is authorized to do business in the state
What is a domestic company?
An insurance company within its own state
What is a foreign company?
A company in another state
What is an alien company?
A company from another country (my US)
What is an insurance guarantee association?
An association that provides funds for payment of unpaid claims when an insurer becomes insolvent.
What is a fiduciary?
A person who stands in a special relationship of trust to another person.
Agents have fiduciary duties to their clients, especially regarding handling premiums
What is misrepresentation?
Agents amy not misrepresent or falsely advertise the terms or benefits of a policy or the financial condition of the company.
What is twisting?
A form of misrepresentation in which the agent convinces the client to cancel already existing insurance and buy another policy from the agent to the detriment of the insured.
What is rebating?
Giving or offering some benefits other than those specified in the policy, such as cash, gifts, or securities, to induce a customer to buy insurance.
What is unfair discrimination?
Agents can be in violation of the law if they unfairly discriminate against the insureds.
What is ratification?
The approval of the policy forms, endorsements, and rates by companies doing business in their states.
What are prior approval states?
Insurance company must obtain official approval before using new forms and rates
What are file and use states?
Commonly may begin using forms as soon as they’ve been filing and the state eventually officially accepts or rejects it
What are use and file states?
Insurers must file rates and forms within a certain period after they are first used.
What are open competition states?
Allow the companies to openly compete with the forms and rates they select subject only to the adequacy on non discrimination
What are rates?
The basic charges an insurance company sets for various types of insurance
What are the central service bureaus?
Made up of several individual insurance companies, they gather, pool, and analyze statistics from all of the member companies.
What are the loss costs calculated by the central service bureau?
Represents the buy component of an insurance rate- how much a company needs to collect to cover expected losses
What is the Federal Violent Crime and Law Enforcement Act?
Prohibits anyone who has been convicted of a state or federal felony involving dishonesty, or breach of trust from engaging in the insurance business with out a consent waiver from the commissioner.
- no statute of limitations
- prohibits fraud, embezzlement, falsification of company records, or coercion in insurance transaction in interstate commerce
- penalties range from $5000-$10000, imprisonment from 10-15 years, or both fine and imprisonment.
What is the USA Patriot Act?
Gives the federal government broad power to curtail attempts to launder money and finance terrorist activities including the following:
- Stronger anti money laundering provisions
- broad enforcement discretion to government officials
- guidance to us financial institutions
- forfeiture of laundered assets
- appropriate regulation across the financial services industry
- stronger ability of financial institutions to maintain integrity of employees
- requirement of reports of potential money laundering transactions to authorities.
- prevention of use of US financial system for personal gain by corrupt non us political figures and officials
- almost all financial institutions are subject to review
What is the National Do Not Call Registry?
A list of phone numbers from consumers who have indicated their preference to limit the telemarketing calls they receive
