Insurance Company Organization And Regulation Flashcards
Describe the most common types of insurance companies
1: Stock
2: Mutual… Insureds are also owners…they can vote, they receive dividends or reductions in future premiums
2a: Assessment (form of mutual): providing primarily fire or windstorm insurance for small towns and farmers. Assessment mutuals charge members a pro rata share of losses at the end of each policy period.
3: Reciprocals and Lloyd’s associations: The word “reciprocate” means to give and take.
A member of the reciprocal agrees to share the insurance responsibilities with all other members of the unincorporated group. A reciprocal is managed by an attorney-in-fact who is empowered to handle all of the business of the reciprocal.
3a: Lloyds associates: Lloyds of London is not an insurance company. It is a voluntary association of individuals, or groups of individuals, who agreed to share in insurance contracts. Each individual, or “syndicate”, is individually responsible for the amounts of insurance they write. There are also a limited number of Lloyd’s association’s in the United States.
4: fraternal benefit societies: … Conducted solely for the benefit of its members and their beneficiaries and not for profit. Fraternal’s offer insurance that is available only to their members. Most only wright life and health insurance.
5: risk retention groups and purchasing groups: in 1981, Congress passed the liability risk retention act to give product manufacturers more options when insuring against product liabilitys. To facilitate this process, the act allowed product manufacturers to establish group self – insurance programs or group captive insurance companies, called risk retention group’s (RRGs), to protect them against product liability exposures and to purchase liability insurance on the group basis through purchasing groups (PG’s). The act accomplished this by limiting the states authority to regulate product liability insurance. Risk retention group’s and purchasing groups are regulated in the states where they are domiciled, but they can transact business and all other states. This exempts them from state insurance regulation and guaranteed funds. The liability risk retention act of 1986 amended the 1981 act by giving the rights to form our RRG’s and PG’s to nearly all businesses. They are prohibited from writing Worker’s Compensation and personal lines insurance.
6. Self–insurance.
7. private, government insurers: Insurance companies may be privately owned or operated by the state or federal government. The government sometime steps and to provide insurance that is not ordinarily available for a private insurers. This type of insurance is sometimes called residual market insurance. The federal government provides:
- war risk insurance;
- nuclear energy liability insurance;
- flood insurance; and,
- Federal crop insurance.
At the state level, the govt provides unemployment ins and may provide workers comp benefits through state funds
Define the four broad categories of insurance
- Property: …risks that we will suffer financial loss because something we own is damaged or destroyed.
- Casualty: includes liability risk…
- Life: handle risk of premature death death or the risk that an individual may outlive his or her financial resources
- Health & Disability: designed to handle the risk medical bills and loss of income resulting from injury or sickness
Property (more detailed)
- dwelling
- homeowners
- commercial property
- crime
- inland marine
- Ocean marine
Casualty (more detailed):
- Aviation
- auto
- worker’s Compensation
- surety bonds
Authority
An agency relationship exists when one party, an agent, is authorized to act on behalf of another, a principal.
Principles, or insurance agencies, Grant certain powers, or authority, to their agents, and when agents act under these powers, their ex are considered to be acts of the principal.
Even the knowledge of the agent, as revealed by a potential client, is held to be the knowledge of the principal.
1: Express Authority: specifically given to an agent, either orally or in writing, by the principal.
2: Implied Authority: Authority given by the insurance company to the agent that is not formally expressed or communicated. This implied allows the agent to perform all of the usual unnecessary tasks to sell and service insurance contracts and fully exercise the agents express authority.
3: Apparent Authority: A doctrine that holds that an agent may have whatever authority that a reasonable person would assume the agent has. An agent acting under apparent authority binds the company as fully as under expressed or implied authority.
Explain the difference between commercial and personal insurance
Personal lines are property and casualty coverages that protects an individual or family. Commercial lines are coverages designed for businesses.
Describe the duties an agent has to insureds and insurance companies
Represents the insurance company, is a direct link between the company and the insureds. As such the agent has many responsibilities including:
1: selling insurance;
2; issuing and countersiging and policies;
3; collecting premiums; and,
4: providing a link between the insured and the insurance company.
5: Field underwriting each risk. The agent has a responsibility to seek out quality business.
6; The agent must obtain information on the prospects particular exposures and review existing policies. The agent must analyze the prospects coverage needs and make recommendations as to the amount and type of coverage appropriate for each exposure.
6: complete the details of the application and submit on a timely basis
7: must make sure the client understands the type of coverage been purchased and with the insured’s responsibilities are under the policy, as well as the services that will be provided by the agent and the insurance company. The agent will also be expected to deliver the policy.
8: once the policy is in force, an agent has a continue responsibility toward the insured. At least once a year, the agent should review the clients coverage and evaluate adequacy of the coverage provided.
9: assist the insured with service needs.
10: Agents who are negligent in meeting the responsibilities may be held liable for their inadvertent errors. ..,errors and omissions insurance
11: be loyal to the insurers interests to avoid engaging in any business it to the computer interferes with the insurance business;
12: obey all legal instructions provided by the insurer
13: deposit funds in a separate account
14: perform all duties with the same degree of care and skill that a reasonably prudent person would exercise in the same circumstances; and,
15: keep the insurer informed of all facts related to the agency relationship.
Countersigning means the agent signs each new policy prepared by the company before delivering it to the insured. In most states, the agents counter signatures required to validate the contract.
Chartered property and casualty underwriter CPCU
Accredited advisor in insurance AAI
Associate in personal Insurance API
Describe the major functions of insurance companies, such as underwriting, claims, and loss control
A
Other Insurance Company Functions
1: loss, expense, and combined ratios
An insurance company evaluate its overall book of business for given periods to measure its financial performance during those periods and to look for trends that may have occurred over an extended time. An insurer uses ratios to evaluate its book of business: loss ratio, expense ratio, and combined ratio.
2: underwriting department
3: policy issue and administration: once the underwriter has approved a new application or change to current policy, the application is checked by a policy analyst or screener to make sure all the information is correct and complete. It then goes to an ?? who computes a premium to be charged.
4: Claims Dept…sees that the companies insureds are adequately and then the fight for their losses. Claims adjusters are used to inspect the loss, determine whether there is coverage for loss, estimate indemnification, and, in some cases, pay for the divorce immediately.
4: actuarial and statistical department:
5: investment department
6. Legal department, 7. audit department, 8. loss control department, 9. agency department, 10. marketing department, 11. reinsurance department, 12. support departments.
Loss Ratio
Loss Ratio = incurred losses/earned premiums
Earned premium is the premium company actually earned by providing insurance protection for the designated period. Incurred losses include amounts paid for covered losses and various expenses related to handling claims.
Expense Ratio
The expense ratio indicates the cost of doing business.
Expense Ratio = underwriting expenses/written premium
Underwriting expenses are the costs required to acquire and maintain a book of business. They include expenses for advertising, commissions, salaries, and other administrative costs and regulatory to such as taxes and licensing fees.
Written premium is the gross amount of premium income on the company’s books. It includes both Earned and unearned premium. Premiums for new business, renewals, and policy endorsements make up Written Premium.
Combined Ratio
The combined ratio is the sum of the loss ratio and the expense ratio.
Combined Ratio = loss ratio + expense ratio
Traditionally, 100% is considered to be a breakeven point. A combined ratio of less than 100% indicates that the company had an underwriting profit; ratio greater than 100% indicates a loss.
Domestic, foreign, alien
1: Domestic: Incorporated in the state
2: foreign: inc. in another state
3: alien: inc. outside of the United States
Independent writing services
1: A.M. Best: uses nine alphabetical ratings for Insurers to which it gives an assigned rating and uses of the designations to evaluate financial health
A++, A+ = Superior, strongest position A, A- = Excellent B++, B+ = Very Good B, B- = Good Others: marginal; below min. Standards; Under State Supervision; In Liquidation
Modifiers: g = involving pool of affiliated companies; e = parent co. Rating; w = “watch list” or caution
B+ w = very good, but watch
2: Standard & Poor’s
3:
Identify the four basic distribution systems used to market insurance
1: exclusive, or captive agency system:
2; Direct writer system: agents are employees
3: Direct response system: no agents!
4: independent agency system: agencies that are independent contractors… Independent or nonexclusive agents: in this case, the agent retains rights to active accounts and replace them with another insurance continue to receive commissions
5: Solicitor: sells insurance for the cannot issue or countersign policies – that responsibility can only be handled by an agent. A solicitor usually works with or for an agent and has more limited authority than the agent.
Both agents and solicitors represent the insurance company.
6: A broker, on the other hand, it represents the insured. A broker does not have the authority to bind an insurer to an insurance contract.
7: excess or surplus lines: highly specialized insurance coverages, such as autoracing liability and tuition refund insurance. …and excess or surplus lines agent is an agent licensed by the state to handle the placement of such coverage with nondemented companies, ones are not authorized to conduct business in the state under ordinary circumstances.
8: Producer is a general term used to describe someone who sells insurance, such as an agent, broker, or solicitor.
9: an insurance consultant is someone who, for a fee, offers advice on the benefits, advantages, and disadvantages of various insurance policies. Consultants don’t actually sell insurance; they sell advice.
Describe how the state insurance department regulates the insurance industry and its agents
1: Directors, superintendents, or commissioners of insurance. The commissioners of each of the states combined make up the national Association of insurance commissioners ( NAIC)… Exchange information and provide coordination…
2: admitted (authorized) and unadmitted (unauthorized) companies
A state insurance department has four areas of responsibility:
1: companies: Financial regulation, impose surplus requirements, in many states the public is also protected by one or more insurance guaranty Association’s, which provide funds for payment of claims when an insurer becomes insolvent. When an Insurance company becomes insolvent the insurance department will handle the liquidation.
2: agents
3: ratification
4: enforcement
Explain the rolls of other insurance professionals, such as solicitors, brokers, and consultants
5: Solicitor: sells insurance for the cannot issue or countersign policies – that responsibility ability can only be handled by an agent. A solicitor usually works with or for an agent and has more limited authority than the agent.
Both agents and solicitors represent the insurance company.
6: A broker, on the other hand, it represents the insured. A broker does not have the authority to bind an insurer to an insurance contract.
7: excess or surplus lines: highly specialized insurance coverages, such as autoracing liability and tuition refund insurance. …and excess or surplus lines agent is an agent licensed by the state to handle the placement of such coverage with nondemented companies, ones are not authorized to conduct business in the state under ordinary circumstances.
8: Producer is a general term used to describe someone who sells insurance, such as an agent, broker, or solicitor.
9: and insurance consultant is someone who, for free, offers advice on the benefits, advantages, and disadvantages of various insurance policies. Consultants don’t actually sell insurance; they sell advice.
